Ashwin S. Mehta (HUF) v. Assistant Commissioner of Income-tax

R.P. TOLANI, J.M. :

These six appeals filed by the above two assessees pertain to asst. yrs. 1990‑91 to 1992-93. As the issues are common, for the sake of convenience, these are disposed of by this consolidated order.

2. The common issue raised in all the above appeals pertain to the issue of adoption of status as HUF and the assessment of income thereof.

3. The appeals are filed later. In the case of Ashwin S. Mehta, the appeals are late by 110 days and in the case of Hitesh Mehta also by 110 days. The learned counsel for the assessees contended that they were members of Harshad Mehta family. The assessees were declared as "notified person" along with other members of the family and other entities under the Special Court Act, 1992, on 8th June, 1992. Prior to the notification, they had large infrastructure, qualified staff of about 200 persons and they could avail services of competent professionals. Due to notification and freezing of our bank accounts and multiple raids by Government agencies like CBI, IT Department, they had skeleton of staff as most of the staff deserted the assessees out of fear and/or due to non‑payment of salaries. Even professionals were reluctant to accept our cases after the notification out of fear and due to uncertainty of payment of their fees. This is also evident from the order of the Hon'ble Special Court in Misc. Appln. No. 270 of 1993 wherein after prolonged efforts, even the custodian found it difficult to obtain the firm of chartered accountants to carry out audit work and that of other related entities. The relevant observations of the Hon'ble Special Court in the said application are extracted as below.

"After these orders were passed, the custodian reported to Court that a number of firms had been approached for the purpose of ascertaining whether they were willing to prepare the accounts of the respondents 1 to 9. It would appear that all the firms were refusing to undertake the task. The custodian requested the Court to help in convincing a firm to undertake this task. Mr. Jethmalani stated that respondents 1 to 9 have no objection on this ground. He however complained that the fees were exorbitant. To Court also it appeared that the fees quoted were high. However, the difficulty was that nobody else was willing."

It was contended that this precarious situation lead to non‑availability of professional help and initiation of multiple proceedings right from notices, replies, compliances, appearance before the Court, arrests, bails; etc. It was contended that under these circumstances, the appeals could not be filed in time and they were delayed. Reliance was placed in the case of Collector of Land Acquisition v. Mst. Kattiji & Ors (1987) 167 ITR 471 (SC). It was further contended that on similar grounds in the case of Growmore Research & Assets Management Ltd., a group concern in ITA No. 438/Bom/1996 for asst. yr. 1989‑90, the delay was condoned. The learned Departmental Representative is heard.

4. After hearing the rival submissions and on perusing the material available on record, we are of the view that the assessee was prevented by a sufficient cause in filing the appeal due to above handicaps. Consequently, we condone the delay in filing the appeals and proceed to hear the appeals on merits.

5. Briefly stated the facts are that the assessees filed their returns of income declaring the status as 'HUF'. The AO found that the family of both the persons did not have any ancestral property. The HUF of both the assessees received a cash gift of Rs. 25,001 from Smt. Rasila H. Mehta, mother of both the Kartas of HUFs on 19th April, 1989. It was claimed that out of this gift, the HUF earned income, and, therefore, the income so earned was declared in the hands of the assessees‑HUFs. The AO however, rejected the claim of status as HUF on the ground that the assessees had not inherited any property on partition of any HUF. He, therefore, held that income arising from the gift of the matter was, in fact, income of both the assessees as gift and was liable to tax as such. The AO however, accepted the income in the hands of HUFs on protective basis and added the same on substantive basis in the hands of the individual assessees.

6. Aggrieved, the assessees preferred first appeal. The CIT(A) held that at the time of gifts, the HUF had not come into existence. The assessee did not have any issue much less a male issue and the husband and wife alone did not constitute HUF for the purpose of assessment and, therefore, the denial of status as HUF was upheld. He further held that under the Hindu law, the wife is not a coparcener as she is entitled to be maintained by her husband from his income. Not being coparcener of the assessees‑HUF, she has neither a right by birth in the property nor the right to demand its partition. She cannot even restrain the assessees‑HUF from alienating the property for any purpose whatsoever. The assessee being sole coparcener, can deal with the property as full owner not restrained by considerations of legal necessity on behalf of self. Consequently, he held that both the assessees enjoyed absolute right to deal with the gifted property in any manner, they liked. Reliance was placed on the Supreme Court judgment in the case of Surjit Lal Chhabda v. Commissioner Of Income Tax, Bombay (1975) 101 1TR 776 (SC) to the effect that without a male issue, the joint Hindu family in assessees cannot come into existence. On these observations, the assessees' appeals were dismissed.

7. The learned counsel for the assessees contended that the HUF is a creature of law and cannot be constituted by any other mode. Both the assessees were married. Consequently, the joint family consisting of husband and wife existed in the eyes of law, irrespective of the gift or otherwise. As by the operation of law, an HUF is presumed to exist the only other consideration from income‑tax point of view is the source or capital of the HUF which is called a nucleus also. The lower authorities harboured under the notion that the nucleus on joint family property or partition of a larger joint family property and no other means. It was contended that the gifts made by Smt. Rasila S. Mehta have been accepted as made to HUFs by the gift‑tax assessment under s. 15(3) passed on 26th March, 1993, in her case. A similar question arose in the case of Harshad S. Mehta, HUF and in ITA No. 1060/Mum/1996 for asst. yr. 1990‑91, the Tribunal held that the gift of Rs. 25,001 by Smt. Rasila Mehta on 19th April, 1989 to Shri Harshad Mehta, HUF, by itself constitutes a nucleus for the said HUF and the HUF has to be assessed separately on the income arising from the nucleus. All the three gifts were made by Smt. Rasila Mehta on 19th April, 1989. The Tribunal in the case of Harshad Mehta HUF while giving its decision has relied on the decision of Madras High Court in the case of Commissioner Of Income-Tax, Tamil Nadu-I v. M. Balasubramaniam (1990) 182 ITR 117 (Mad) and Supreme Court in the case of Surjeet Lal Chhabda (supra). In the case of Harshad Mehta, HUF there was a male son in his family at the time of gift, the aspect which will be dealt later. But as far as the question of any gift specifically given for the sole enjoyment of HUF could form the nucleus of HUF stands favourably answered by the above Tribunal judgment in the case of the group cases. Consequently, as far as the finding of the lower authorities on the nucleus aspect is concerned, stands covered in favour of the assessee on similar set of facts and by similar gifts by the same mother.

8. Adverting to the issue whether a Hindu joint family with a nucleus is in existence with a husband and wife or modes so whether the presence of two male members in a Hindu joint family is mandatory, the learned counsel relied on the decision in the case Surjeet Chhabda (supra). Besides, reliance was placed in the case of Premkumar v. CIT (1980) 121 ITR 347 (All) in the case of Ashok Kumar Ratanchand v. CIT (1990) 186 ITR 475 (AP), Commissioner Of Income-Tax, M.P-I v. Krishna Kumar (1983) 143 ITR 462 (MP) (FB) and Madras High Court Full Bench decision in the case of Commissioner Of Income-Tax, Tamil Nadu-I v. M. Balasubramaniam (supra). The facts and decision of this Madras High Court judgment are as under:

"In June, 1966, the assessee's father gave him a cheque for Rs. 10,000/‑ and cash of Rs. 100. Contemporaneously, he gave him a letter stating that the benefit of these sums should go to his wife and children when he got married and that he should enjoy it as an HUF. The gift was accepted by the assessee. The assessee was a bachelor at the time of the gift. Subsequently, he married and during the relevant assessment year, namely, 1972‑73, he had a wife and daughter. The Revenue wanted to treat the income from the sums gifted as individual income under the IT Act and the sums and accretions thereto as individual properties under the WT Act. The assessee claimed that the properties and income therefrom were assessable as belonging to his HUF. His claim was accepted by the Tribunal. On a reference:

Held, (i) that the income from the gifted properties arose to the HUF and could not be clubbed with the assessee's individual income;

(ii) that for purposes of wealth‑tax, the sum of Rs. 2,61,136 belonged to the HUF and was not assessable in the hands of the assessee in his individual capacity."

The Honourable Court further observed as under:

"Where property is gifted by a Hindu father to his son, the intention of the donor is important. If there are express provisions to the effect in the deed of gift or will that the son would take the property for the benefit of the family, that is decisive. The donor or testator dealing with self‑acquired property may, by evincing the appropriate intention, render to the property gifted the character of a joint family property or, as the case may be, a separate property in the hands of the donee vis‑a‑vis his male issue."

9. The learned counsel further contended that the Supreme Court judgment in Surjeet Lal Chabda (supra) has been misplaced by the lower authorities. In this case, the assessee had a wife and a daughter and threw his own property into the common hotchpotch of the joint family. In this peculiar fact, the Supreme Court held that the income from this property should be treated as individual income of the assessee. The judgment establishes that there can be a joint family without two male members. To this extent, the assessee's case is favourably supported by Surjeet Lal Chhabda's case that presence of two male members is not essential for joint Hindu family. This aspect also has been succinctly dealt by the above Full Bench decision of the Madras High Court, which is as under:

"The case in Surjit Lal Chhabda v. Commissioner Of Income Tax, Bombay (1975) 101 ITR 776 (SC) is clearly distinguishable on facts. That was a case where the assessee had a wife and an unmarried daughter and he made a declaration that he had thrown the immovable property, which was his self‑acquisition, into the joint family hotchpotch in order to impress that property with the character of joint family property and he further declared that he would be holding the property as the Karta of the joint Hindu family consisting of himself, his wife and his unmarried daughter. Dealing with the facts of that case and expressing the view that until the birth of a son the personal law of the assessee governed, it was held that the income was chargeable to income‑tax in the hands of the assessee as his individual income and not that of the family. To the facts of the present case, the primary rule of intention of the donor should be applied, and if so done, in our view, the Tribunal did the right thing when it accepted the case of the assessee. In the light of our above discussion, we approve the view taken in Satyendra Kumar v. CIT (1983) 140 ITR 840 (Mad) and CIT v. Radhambal Ammal (1985) 153 ITR 440 (Mad) and we are not able to approve the view in the pronouncement in Commissioner Of Income-Tax, Tamil Nadu-I v. M. Balasubramaniam (1981) 132 ITR 529 (Mad). The result is that the questions referred in both the tax cases are answered against the Revenue and in favour of the assessee. We make no order as to costs ".

In the assessee's case also, the intention of donor should be applied. The donor being third party, once the assessee accepts the gift with clear stipulations to hold the same for the HUF, the judgment of Madras High Court is clearly applicable to the assessee's case. Further, reliance was placed on Mumbai Tribunal judgment in the case of Bakul Jain v. ITO (1990) 34 1TD 221 (Mumbai). In this case, the assessee received gifts at the time of marriage and the same were claimed to have been received by the assessee in his status as Karta of HUF comprising himself and his wife. The income thereon was claimed as HUF income, which was denied by the lower authorities. The Tribunal held that the genuineness of the gift was not doubted. The intentions of the donors have been duly evidenced by latter's expressing the desire that the amount was given for and on account of HUF consisting of himself and his wife, the family into which future children will be added. Relying on the above Madras High Court judgment, the Tribunal held that the gifted property could not be assessed as the income of the HUF. In this case, the case of Gowli Budhanna v. CIT (1996) 60 ITR 293 (SC) has also been considered.

10. In fine, the learned counsel contended that in one of the assessee's family members it has been clearly held that the gift by mother specifically to HUF duly received by Karta of HUF, the income therefrom has to be treated as income of HUF and not the individual. Regarding the essentiality of two male members to constitute an HUF, the above Full Bench Madras High Court judgment and Surjit R. Chhabda's case (supra) help the assessee's case that it is not essential that to hold an HUF, two male members are essential and husband and wife can constitute HUF.

11. The learned Departmental Representative relied on the orders of the lower authorities.

12. We have heard the rival submissions and perused the material available on record. The facts and detailed arguments and analysis of case laws has been summarised above. As far as the first aspect that an external gift specifically given to HUF can form the nucleus of the HUF stands decided in favour of the assessee by Bombay Tribunal judgment in the case of Harshad Mehta, HUF (supra).

13. Coming to the issue that a husband and wife can constitute an HUF and presence of the minimum two male members for constitution of HUF is mandatory, the Full Bench of the Madras High Court in the case of M. Balasubramaniam (supra) clearly holds that the intention of the donor is essential and two male members are not essential and in a way the case of Shri Surjeet Lal Chhabda (supra) also supports this view as in that case the assessee was not having a male member and still, there was HUF in which the assessee threw his property into common hotchpotch. Our view is further fortified by the Bombay Tribunal judgment in the case of Bakul Jain (supra). Under these circumstances, we hold that the assessees are entitled to the status of HUF and the income therefrom shall be treated as the income of HUF and not the individual.

14. In the result, appeals of the assessee are followed.