1. These three appeals are preferred by the assessee against the common order dated 7-12-1981 passed by the Commissioner, Delhi-V, whereby he had directed the ITO to include the assessed income of K.C. Khanna & Sons, HUF, for the assessment years 1977-78, 1978-79 and 1979-80 as part of the income of Shri K.C. Khanna for each of these assessment years, enhancing the individual assessments of Shri K.C. Khanna suitably.
Shri K.C. Khanna, his wife Smt. Pushpa Rani, his minor son Sundeep and his two unmarried daughters, according to the assessee, constitute his family of which he is the karta. Prior to the assessment year 1977-78, his family was not assessed to tax.
However, both Shri K.C. Khanna and wife Smt. Pushpa Rani are assessees in their individual capacities and their permanent account numbers are 22-003 ; Dx-4390/DLI/I (1) and 22-024/PQ-2685/DLI (2).
Right from the assessment year 1964-65, Shri K.C. Khanna is earning income as a broker in wholesale cloth business. However, for the period from 1-4-1974 to 31-3-1976, i.e., for the assessment years 1975-76 and 1976-77, Shri K.C. Khanna, besides earning commission in his brokerage business also started a wholesale cloth business. His turnover for the assessment year 1975-76 as a wholesale cloth merchant was Rs. 3,23,107 and for the assessment years 1976-77 it was Rs. 7,02,101. In the assessment year 1976-77, the total returned income both from brokerage as well as from cloth business of Shri K.C. Khanna was Rs. 38,460, Shri K.C. Khanna had no business premises of his own and he had carried on the wholesale cloth business in a rented premises. It is the case of the assessee that he closed down his wholesale cloth business on 31-3-1976 by stopping any further purchases and sales, which used to be on credit basis.
It is the case of the assessee that from 1-4-1976, the family of Shri K. C. Khanna started the wholesale business in cloth. The family had no business premises of its own nor any telephone facility. Its purchases and sales were all on credit basis. On 15-4-1976, bank account was opened in the name of the HUF in the Mercantile Bank Ltd. The purchases and sales were made in the name of the HUF. The family had raised loans from some of its members and paid them interest. Separate set of accounts were maintained for business carried on by the HUF. At page 12 of the paper book, the details of interest receipts and payments for the assessments year 1977-78 are furnished. According to those details, Shri K.C. Khanna was paid interest of Rs. 3,800 in the assessment year 1977-78 from out of the HUF's business. So also, as per the details furnished at page 13 of the paper compilation, Shri K.C. Khanna was given Rs. 8,341,88 and Smt. Pushpa Rani was given Rs. 1,800 as interest by the HUF in the assessment year 1978-79. It is the case of the assessee that these interest amounts were duly shown in the individual' returns of Shri K.C. Khanna and Smt. Pushpa Rani and they were accepted by the department. The assessee further submits that no doubt, the HUF had no property and had not possessed any ancestral nucleus but nothing prevents the HUF under law to start a business or to secure credit from others for purposes of business. Simply because, the assessee's case continues, that Shri K.C. Khanna, Smt.
Pushpa Rani, Shri Ram Sahai Mal Sehgal and Smt. Madhu had given certain loans and simply because the assessee's family utilised those funds for purposes of its business, the creditors of the HUF cannot become the real owners of the business. Shri K.C. Khanna is both an individual and a manager of the HUF. Under law, Shri K.C. Khanna is entitled to carry on the business as a wholesale cloth merchant on behalf of his HUF from 1-4-1976. Simply because from 1-4-1974 to 31-3-1976, he carried on wholesale cloth business in his own name does not make the subsequent business carried on by the HUF as the individual business of Shri K.C. Khanna, especially when it is not a continuation of the old business taut it is altogether a new business in the name of the HUF. It is submitted before us that Mrs. Madhu is the married daughter of Shri K.C. Khanna, Shri Ram Sahai Mai Sehgal is his father-in-law and Khanna Trading is the sole proprietary concern looked after by Smt. Pushpa Rani herself. For the assessment year 1977-78, the assessed income of the HUF stood at Rs. 25,670. For the assessment year 1978-79, the same stood at Rs. 8,250. The individual assessments of Shri K.C. Khanna for 1977-78, 1978-79 and 1979-80 were already completed. The assessments of the HUF were completed on protective basis. The Commissioner gave a notice dated 26-11-1981 proposing either to enhance the income of Shri K.C. Khanna for each of the assessment years 1977-78, 1978-79 and 1979-80 or to set aside his individual assessments for those three assessment years under Section 263 of the Income-tax Act, 1961 ("the Act"). The assessee filed his objections on 4-12-1981 before the Commissioner. A copy of the objections are now furnished at pages 3 to 10 of the paper compilation. The learned Commissioner, after hearing the assessee and his objections, held that the business of the HUF, K.C. Khanna & Sons, had not been inherited. No ancestral funds were available and, therefore, the property is not acquired with the aid of ancestral funds and for this reason also it cannot be considered as a joint family property. He further held that it is not a case where the business is being carried on through the joint efforts by the members of the family because the business in question is being carried on by the efforts of Shri K.C. Khanna, individually. Therefore, he held that the income earned from this business could not be treated as belonged to the joint family and the business could not have the character of joint family property.
3. Aggrieved by the order of the Commissioner under Section 263, at present three appeals are filed before us and thus the matters stand for our consideration.
4. We have heard Shri G.R. Agnihotri, learned counsel for the assessee, and Shri C.V. Gupte, learned representative for the department. On behalf of the assessee, a paper compilation comprising 23 pages is filed. Shri Agnihotri contended before us that the Commissioner ought not to have passed the impugned order under Section 263 as the interests of the revenue never suffered in any of the three assessment years now under consideration. It is only the HUF which had carried on the business as a wholesale cloth merchant and the income earned in that business has been rightly assessed by the ITO, Distt. I (3), Delhi, in the name of the HUF. The order of the Commissioner that the wholesale business is being carried on only by Shri K.C. Khanna and no other member of the joint family contributed his or her joint efforts in the business venture, that his further finding that for purposes of business, the HUF also raised loans from the market which would be apparently on the personal security of Shri K.C. Khanna, individual, because he had been in the market for a very long time, are based on mere conjectures and there is no credible evidence, worth the name on record, to come to those conclusions. It is further argued that the absence of declaration on the part of Shri K.C. Khanna, impressing this cloth business with the character of HUF property and the fact that loans were advanced for the HUF's business by Shri K.C. Khanna and his wife Smt. Pushpa Rani Khanna were taken as circumstances in favour of the department to conclude that the business of the HUF is, in fact, the business of Shri K.C. Khanna individual. According to the assessee, this conclusion should not have flown from the facts formed by him. It is contended that there is no question of Shri K.C. Khanna, impressing this business with the character of HUF property and declaring it to be that of HUF property. There is no occasion for invoking the provision of Section 64(2) as there was no declaration and no impression by Shri K.C. Khanna. The definite case of the assessee was that his individual business was closed on 31-3-1976 and the HUF's business started on 1-4-1976. Both the above businesses are different entities. Under Section 2(3), the joint family is one of the specified entities assessable under the Income-tax Act. When that is so, it is erroneous on the part of the Commissioner to presume that K.C. Khanna & Sons cannot carry on its business unless Shri K.C. Khanna makes a declaration and impresses the business carried on by him with the character of the HUF. As against this, the learned departmental representative relies upon the Commissioner's order and steadfastly maintains that the impugned order is quite correct, legal, just and, hence, there are no grounds to interfere with that order.
5. We have considered these rival contentions and all the ramifications. The primary question to be decided is whether it is the HUF or the individual who carried on the business as a wholesale cloth merchant from 1-4-1976 onwards, for all the three assessment years under consideration. It is not the case of the department that the business premises in which Shri K.C. Khanna carried on his wholesale cloth business was the same premises where his HUF also carried on its business. Admittedly, Shri K.C. Khanna or his HUF have no independent business premises of their own nor have they got telephones in their names. It is not controverted by the department that from 1-4-1976, separate account books were opened in the name of the HUF and in those account books, neither the stock nor the capital nor the debts of the erstwhile business were brought forward. So there is no live link established by the department to prove that the present business is only a continuation of the business carried on prior to 1-4-1976. It is not controverted on behalf of the department that the HUF opened .a separate bank account in its name with Mercantile Bank Ltd. It is no doubt true that loans were advanced by Shri K.C. Khanna. and Smt.
Pushpa Rani to the HUF business on which interest was charged and when interest was paid, the amounts of interest received by them were shown in their individual assessments. The question is whether starting the business with the funds advanced by some of the joint family members would turn the business carried on by the HUF to be that of the individual business of the creditor members of the family. This is fairly covered by the decision of the Delhi High Court in L. Bansi Dhar & Sons v. CIT  123 ITR 58. In that case, two of the joint family members took loans from the HUF funds and purchased shares. The question arose whether the dividends earned thereon became the income of the HUF or the income of the individual members who had taken loan from the HUF funds. The Delhi High Court at page 67 of the reported decision, held as follows : For, such property is acquired with the aid and assistance or at the detriment of the HUF funds. A fortiori this would be so if no interest is charged on the loan given to the individual member of the HUF. In our view, this decision and the reasoning would not apply to our case because Tilak Kumar and Smt. Urmila did not use the funds of the HUF as such. The ownership of the money vested in Tilak Kumar and Smt. Urmila as soon as loans were granted to them by the HUF. The very essence of the loan is to create a relationship of creditor and debtor and pass the title of money from the creditor to the debtor. Therefore, acquisition of property by the debtor with the help of such money would not be for the creditor but for the debtor himself. The shares thus became the individual property of Tilak Kumar and Smt. Urmila. The loans were subsequently repaid by them. This further supports the finding given by the Tribunal that the money with which the shares were purchased amounted to loans and, therefore, shares in the hands of Tilak Kumar and Smt. Urmila were their individual property and not the property of the HUF. It follows that the income obtained by them had the same character being the individual property of Tilak Kumar and Smt. Urmila and not the property of the HUF. This is our answer to Question No. 3.
6. Following the above decision and also the decision of the Hon'ble Supreme Court in N.V. Narendranath v. CWT  74 ITR 190, we hold that simply because Shri K.C. Khanna and Smt. Pushpa Rani lent amounts to the HUF and realised interest on their loans does not make them, the real owners of the wholesale cloth business carried on by the HUF. It is significant that both of them derived interest on their loans. At page 12 of the paper book for the assessment year 1977-78, Shri K.C.Khanna received Rs. 3,800 towards interest and, at page 13, during the assessment year 1978-79 he received interest of Rs. 8,341.88. The very fact that they are receiving interest from the HUF make them creditors of the HUF and the amounts they lent, as soon as they are borrowed, would become the funds of the HUF. The business carried on with those funds would become that of HUF and the income derived therefrom can never be considered as the income derived by either Shri K.C. Khanna or his wife Smt. Pushpa Rani. Further, we hold that no material whatsoever was gathered by the department to hold or to sustain the finding that the business was in fact carried on by Shri K.C. Khanna. The account books, sale and purchase bills and vouchers all stand in the name of HUF. None of the outside creditors were examined by the department, and there is no evidence on record to conclude that on the personal security of Shri K.C. Khanna, all the debts were secured by the HUF for conducting business. No creditor of the business came forward to depose that he lent money to Shri K.C. Khanna but not to his HUF. In these circumstances, all that is apparent must be taken to be real, unless and until contrary is proved. As the contrary was not proved, we should hold that it was the HUF which was carrying on the business. Further it is a mere conjecture on the part of the learned Commissioner to hold that it is in fact Shri K.C. Khanna who was running the wholesale cloth business. We were told that Khanna Trading is the sole proprietary concern of Smt. Pushpa Rani. We were also told that she carries on wholesale cloth business in that concern. This is not controverted by the department. Therefore, we can safely conclude that there is at least one other member in this family who knows to run the wholesale cloth business. Therefore, unless it is fully established by the department that Shri K.C. Khanna alone was running the wholesale shop, we must presume that the joint effort of Smt. Pushpa Rani was also available for the running of the said business. Under the circumstances, the finding of the Commissioner that the wholesale cloth business is run by Shri K.C. Khanna and joint effort of any other member of the family was not available to him, is vitiated by wrong appreciation of facts and dearth of evidence. We also hold that no ancestral nucleus is necessary for HUF's starting the business. There is no presumption that the HUF must have property. Just like a person without capital can start a business, a HUF without funds can equally start a business. The main point to be seen is as to who conducted the business Is it the individual or the HUF headed by him The preponderance of evidence on record makes us to hold that it is the HUF who conducted the business and not Shri K.C. Khanna as an individual.
7. Therefore, we are of the opinion that the income derived from out of the wholesale business was already rightly assessed in the hands of the HUF by the ITO, Distt. 1(3), Delhi, for the assessment years 1977-78, 1978-79. In our opinion, the orders of the learned Commissioner were quite unsustainable and erroneous in law and, therefore, we set aside the same and restore the assessment of the ITO, Distt. 1(3), New Delhi, for the assessment years 1977-78 and 1978-79 dated 26-2-1980 and 25-3-1981. A copy of the assessment order finalised by the ITO, Distt.
1(3), New Delhi, for the assessment year 1979-80 is not put in the paper compilation and so we are not giving the date of the assessment order for the assessment year 1979-80 which is confirmed. However, we should be taken to have held that the assessment order of the ITO, Distt. 1(3), New Delhi, for the assessment year 1979-80 made against the HUF, whatever its date may be, should be taken to have been confirmed.