1992 (10) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Status of the appellant entities as HUFs or AOPs.
2. Legality of creating multiple HUFs by an act of an individual.
3. Validity of gifts made by the Karta of a Bigger HUF to the smaller HUFs.
4. Assessment of income from the business conducted by the alleged smaller HUFs.
5. Application of the concept of constructive trust.

Detailed Analysis:

1. Status of the appellant entities as HUFs or AOPs:
The appellants challenged the orders of the Dy. CIT(A), Pune, which upheld their status as AOPs instead of HUFs. The Dy. CIT(A) relied on the Supreme Court's decision in Surjit Lal Chhabda v. CIT [1975] 101 ITR 776, which stated that a joint Hindu family is a creature of law and cannot be created by an act of parties. The Tribunal upheld this view, stating that the HUFs in question could not assume the character of HUFs by virtue of the concept of law.

2. Legality of creating multiple HUFs by an act of an individual:
The Tribunal noted that under Hindu Law, an HUF cannot be created by an act of an individual. The creation of HUFs by Mr. Rajkumar B. Agarwal, the Karta of the Bigger HUF, was not recognized as valid. The Tribunal cited the Calcutta High Court's decision in CIT v. P. N. Talukdar [1982] 135 ITR 628, which emphasized that an HUF cannot be created by an act of a Karta.

3. Validity of gifts made by the Karta of a Bigger HUF to the smaller HUFs:
Mr. Rajkumar B. Agarwal gifted Rs. 7,500 to each of the smaller HUFs created by him. The Tribunal found this act invalid, as the gifts were not made for a pious purpose and the entire property was not gifted. The Tribunal held that the act of gifting by the Karta to himself on behalf of other HUFs created by him did not lend support to the creation of valid HUFs.

4. Assessment of income from the business conducted by the alleged smaller HUFs:
The Tribunal observed that the business conducted by the alleged smaller HUFs was actually managed by the same Karta in the business premises of the Bigger HUF. This indicated that the business was not independently conducted by the smaller HUFs. The Tribunal concluded that the income from such business should be assessed in the representative capacity of the Karta, applying the concept of constructive trust.

5. Application of the concept of constructive trust:
The Tribunal applied the principle of constructive trust to the alleged HUFs, stating that the Karta acted in a representative capacity. The Tribunal directed the Assessing Officer to assess the income of the constructive trusts in their representative capacity as per section 94 of the Indian Trust Act, at the maximum marginal rate. This upheld the order of the Dy. CIT(A) on different grounds.

Conclusion:
The Tribunal dismissed the appeals, concluding that the HUFs in question could not be created by an act of an individual, and the income from the business conducted by the alleged smaller HUFs should be assessed in the representative capacity of the constructive trust. The order of the Dy. CIT(A) was upheld, and the status of the appellant entities as AOPs was confirmed.