Commissioner of Income Tax vs Baba Estates

Janarthanam, J.—The assessee--Baba Estates, Madras, filed its return of income for the assessment year 1977-78 on December 1, 1977,

disclosing an income of Rs. 1,14,120 in the status of ""association of persons"".

The assessment was later completed on September 19, 1980, u/s 143(3) read with Section 144B of the Income Tax Act, 1961 (Act No. 43 of

1961--for short ""the I. T. Act""), determining the total income at Rs. 1,57,550 and the tax being worked out at Rs. 17,595 in the status of

association of persons"".

During the course of assessment proceedings, the assessee contended that since it did not carry on any business activity, but only let out its

storage sheds and rooms and as the investments were made by nine members, in the capacity of ""co-owners"", the provisions of Section 26 of the

I. T. Act would apply and the income determined in the status of ""association of persons"" has to be allocated to the respective ""co-owners"" and tax

has to be levied in the individual hands.

The Income Tax Officer, City Circle-VII(9), Madras, however, held that the assessee''s conduct had to be necessarily taken as an ""adventure in

the nature of trade"" and, consequently, the assessee''s contention had been rejected and treated the assessee''s income from business in the status

of ""association of persons"".

On appeal, the Commissioner of Income Tax (Appeals)-III Madras, placing reliance on his earlier order for the assessment year 1976-77 in the

assessee''s own case, directed the Income Tax Officer to allocate the income in the respective co-owner''s hands, applying the provisions of

Section 26 of the I. T. Act.

On further appeal, the Tribunal, agreeing with the reasonings of the Commissioner of Income Tax (Appeals), dismissed the appeal preferred by

the Revenue.

The Tribunal, on the foregoing facts, referred to this court for its opinion u/s 256(2) of the I. T. Act, the following questions of law :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding and had valid materials to hold that

the income determined in the case of association of persons should be allocated to the co-owners and taxed separately applying the provisions of

Section 26 of the Income Tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the provisions of Section

26 would be applicable in cases of persons whose status is taken as association of persons ?

Mr. S. V; Subramaniam, learned senior counsel representing Mr. C. V. Rajan, learned junior standing counsel for Income Tax cases appearing

for the Revenue would, with all vehemence and force, contend that, on the facts and in the circumstances of the case, the activity carried on by the

assessee in constructing sheds and godowns for purposes of leasing out them and deriving rental income therefrom on the lands taken out on lease

must be construed, as an ""adventure in the nature of trade"" and the income derived from such trade cannot be any other than income from

business, in the status of ""association of persons"" and in such state of affairs, to say that the income derived by the assessee from leasing out the

godowns and sheds, constructed by them, has to be assessed as one in the individual hands of ""association of persons"", according to the

proportion of their shares, pursuant to the salient provisions adumbrated u/s 26 of the Income Tax Act, cannot at all be expected to commend

acceptance at the hands of this court.

On the contrary, Mr. P. H. Aravind Pandian, learned counsel representing Mr. P. P. S. Janarthana Raja, learned counsel appearing for the

assessee would, apart from striking a discordant note to such a submission, as projected by learned senior counsel representing the Revenue,

vehemently contended that since the properties consisting of sheds and godowns constructed by the association of persons as co-owners were in

proportion to a specified share on lands taken out on lease, the rental income derived from such sheds and godowns must be assessed in the

individual hands of ""association of persons"" in proportion to their share, according to the salient provisions adumbrated u/s 26 of the Income Tax

Act and in that view of the matter, he would say, the order passed by the Tribunal, applying the provision of Section 26 of the I. T. Act, cannot at

all be stated to be not sustainable in law.

The central issue in both the questions under reference is as to whether the order of the Tribunal was right in holding that the income derived

from the sheds and godowns belonging to the ""association of persons"", as ""co-owners"" should be allocated to such ""co-owners"", in accordance

with their share of tax, separately applying the provisions of Section 26 of the Income Tax Act, on the facts and in the circumstances of the case.

We are mainly concerned with the deed of co-ownership dated January 7, 1975. According to the said deed, nine parties therein took on

lease some lands belonging to a third party to construct sheds and godowns thereon by contributing money in specified proportions and thereafter

to let out such godowns and sheds and share the rental income from them, in proportion to their share of contribution. Pursuant to the agreement, it

appears, godowns and sheds had been constructed and such godowns and sheds had been leased out and the rental income derived therefrom

had been shared. The problem came in relation to the assessment of such rental income for the assessment year, 1977-78.

As to whether such rental income is to be treated as income from business or to be treated as income from property held by ""association of

persons"" as ""co-owners"" we are of the view, on the facts and circumstances of the case, that the income derived by leasing out of the sheds and

godowns can be treated as only income from property held by ""association of persons"" as ""co-owners"" and not as income derived from any

business '' activity"" carried on by the assessee.

To bring home this point, by way of reiteration, we may state that ""association of persons"" built up the structure, that is to say, sheds and

godowns on the lands taken on lease from third parties. The further fact is that each of them contributed their mite for the construction of the

superstructure. Such being the case, they are the ""co-owners"" of the superstructure. If the superstructure is held to be belonging to them in the

capacity of ""co-owners"" Section 26 of the Income Tax Act would get attracted, in the sense of levying tax on each of the nine co-owners, in

proportion to their share of income. The treatment of the rental income, as derived from the sheds and godowns by the Tribunal as the income of

association of persons"", in their capacity as ""co-owners"", on the facts and in the circumstances of the case, cannot at all be stated to be not

sustainable in law.

Further, the intention of ""association of persons"" to treat the income derived from leasing of the sheds and godowns as ""business income"" is not

at all getting reflected in the co-ownership deed dated January 7, 1975 ; nor is there any material placed on record, in proof of the same. In such

state of affairs, we have no hesitation in coming to the conclusion that the income derived from leasing of the sheds and godowns by the assessee--

association of persons--has to be treated as income from property by co-owners--association of persons and is to be taxed in their individual

hands in proportion to their shares, pursuant to the salient provisions adumbrated u/s 26 of the Income Tax Act.

In this view of the matter, both the questions are to be answered in favour of the assessee and against the Revenue and we accordingly answer

them.

This tax case (reference) is thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.