Commissioner of Income Tax vs Senior Manager, State Bank of India and Another

R.K. Agrawal, J.—IT Appeal (Defective) Nos. 296, 299, 302, 303, 306, 310 and 319 of 2005 have been filed by the CIT, Muzaffarnagar against a common order dt. 17th Feb., 2005 passed by the Tribunal, New Delhi, in respect of the orders passed under s. 201(1) and 201(1A) of the IT Act, 1961, hereinafter referred to as "the Act", against the Manager, State Bank of India, Hanuman Road, Shamli, District Muzaffarnagar. for the financial years 1995-96 to 2001-02 (asst. yrs. 1996-97 to 2002-03). IT Appeal (Defective) Nos. 295, 298, 301, 305, 308, 309 and 318 of 2005 have been filed against the common order dt. 17th Feb., 2005 passed by the Tribunal, New Delhi in respect of the orders passed under s. 201(1) and 201(1A) of the Act against the Senior Manager, Oriental Bank of Commerce, Hanuman Road, Shamli, District Muzaffarnagar, relating to the financial years 1995-96 to 2001-02 (Asst. yrs. 1996-97 to 2002-03). It may be mentioned here that the Revenue in the memo of appeals have wrongly mentioned Senior Manager, State Bank of India as the respondent in place of Senior Manager, Oriental Bank of Commerce.

All the appeals have been admitted on the following substantial question of law :

Whether the Hon''ble Tribunal is justified in holding that the property was owned by several co-owners having a definite and ascertainable share in the property, the limit of Rs. 1,20,000 would apply to each of the payees /co-owners separately and also holding that the M/s. Atma Ram & Brothers would not constitute an AOP merely on the fact that income accrues jointly to more persons than one, ignoring the fact that s. 194-I cast obligation on the payer to deduct TDS from the payee, which in this case is M/s. Atma Ram & Brothers and not the members of the AOP and also the fact that the property has not been physically divided in between the five succeeding HUFs ?

Briefly stated the facts giving rise to these appeals are as follows :

A plot of land was purchased by late Sri Pyare Lal long back on which a building was constructed, which was numbered as 141/1, Hanuman Road, Ward-3, Shamli, district Muzaffarnagar. The building was constructed in the financial year 1980-82 in which there were, in all, fifteen co-owners, who had made investment in the building. The following persons with their respective shares are the co-owners :

(I) Shri Atma Ram & Sons (HUF), 3/60th Share (GIR No. A-209/S)

(II) Smt Lajwanti. 3/60th Share (GIR No. L-703/ACC)

(III) Shri Suresh Chand, (HUF) 3/60th Share (GIR No. S-282/S)

(IV) Shri Ghanshyam Dass (HUF). 3/60th Share (GIR No. G-203/S)

(V) Shri Parmatma Saran & Sons (HUF), 3/60th Share (GIR No. P-207/S)

(VI) Smt. Padmawati, 3/60th Share (GIR No. P-744/S)

(VII) Shri Jeevan Gupta, (HUF) 3/60th Share (GIR No. J-224/S)

(VIII) Shri Praveen Gupta, (HUF) 3/60th Share (GIR No. P-225/S)

(IX) Shri Ram Kishan and Sons (HUF), 4/60th Share (GIR No. R-214/S)

(X) Shri Ashok Kumar. (HUF) 4/60th Share (GIR No. A-215/S)

(XI) Shri Rakesh Gupta, (HUF) 4/60th Share (GIR No. R-239/S)

(XII) Shri Prem Chand & Sons (HUF), 4/60th Share (GIR No. R-258/S)

(XIII) Shri Rajnesh Kant, (HUF) 4/60th Share (GIR No. R-258/S)

(XIV) Shri Ashish Agarwal, (HUF) 4/60th Share (GIR No. A-247/S)

(XV) Shri Ramesh Chand, 12/60th Share (GIR No. R-8/DOC/MZN)

Each of the fifteen co-owners had shown their investment as also their share in the rental in the building in question in their return filed under the Act and the assessment has also been made by accepting it.

Fourteen persons, including M/s. Atma Ram & Brothers, executed a registered lease deed on 2nd Jan., 1986 giving lease of 6,290 sq. ft covered area on the ground floor of the aforesaid property to the Manager, State Bank of India, Hanuman Road, Shamli, Muzaffarnagar. The Bank was paying monthly rent of Rs. 9,435 including all taxes. After the expiry of the deed a fresh lease deed was executed on 30th May, 1998 which was effective from 1st Dec, 1996. It was entered into by the twelve persons as co-owners of the house property. In the lease deed dt. 30th May, 1998 the shares of twelve co-owners were given. The monthly rental was enhanced to Rs. 25,289 plus water tax at Rs. 2,578. On a letter being written by Sri Rakesh Gupta on behalf of the co-owners on 27th March, 1995 furnishing indemnity bond indemnifying the Bank for the loss if any, the Bank stopped deduction of tax at source under s. 194-I of the Act. It may be mentioned here that after the receipt of the letter, the Bank has been paying rent to all the co-owners as per their respective shares by separate cheques. The ITO initiated proceedings under ss. 201(1) and 201(1A) of the Act on the ground that the Bank was not justified in stopping the deduction of tax at source and vide order dt. 18th Sept., 2002 had held that the Bank was paying rent to AOPs styled as M/s. Atma Ram & Brothers and, therefore, the Manager, State Bank of India, Hanuman Road. Shamli, District Muzaffarnagar was an assessee in default under s. 201(1) for non-deduction of tax at source under s. 194-I of the Act in respect of payment of rent to M/s. Atma Ram and Brothers, AOP, for the period 1st April, 1995 to 31st March, 2002. A demand of Rs. 4,32,373 towards taxes and surcharge and interest of Rs. 2,95.917 was raised. The assessee feeling aggrieved preferred separate appeals before the CIT(A) who vide order dt. 31st Jan., 2003 allowed the appeal and set aside the order passed by the AO. The Revenue feeling aggrieved preferred separate appeals before the Tribunal which vide order dt. 17th Feb., 2005 had dismissed the appeal.

The covered area of 3,287 sq. ft. of the aforesaid property on the ground floor was given to the Senior Manager, Oriental Bank of Commerce vide registered lease deed dt. 17th Oct., 1997, which was valid for 20 years at the monthly rent of Rs. 8,904.50 per month inclusive of house tax and all other taxes with a clause that after every five years there would be an increase of 15 per cent in the rent. In this case on a letter dt. 23rd Jan., 1995, written by Sri Rakesh Gupta, one of the co-owners, the Bank stopped deduction of tax at source under s. 194-I of the Act. After the receipt of the letter the Bank has been paying rent to all the co-owners as per their respective shares by separate cheques. The AO, however, had raised a demand of Rs. 1,88,362 towards tax and surcharge and Rs. 1,10,604 towards interest.

We have heard Sri Shambhu Chopra, learned senior standing counsel, appearing on behalf of the Revenue and Sri Kartikeya Saran, learned counsel holding brief of Sri Vipin Sinha, Advocate, on behalf of the State Bank of India and have perused the orders dt. 17th Feb., 2005 passed by the Tribunal as also the orders passed by the AO and the CIT(A).

Sri Shambhu Chopra, learned counsel, submitted that on a plain reading of s. 194-I of the Act, it is clear that the tax has to be deducted at source on rentals paid to any person if it exceeds Rs. 1,20,000 in a year. According to him, as the premises let out to the Bank had not been divided/partitioned by metes and bounds it cannot be said that any specified portion was let out to the Bank as owned by a particular person so as to enable the Bank to get out of the statutory obligation of deducting tax at source as provided under s. 194-I of the Act. He submitted that the order passed by the AO determining the amount of tax and surcharge which ought to have been deducted as also the interest payable on it was perfectly justified and the CIT(A) as also the Tribunal has erred in holding otherwise.

Sri Kartikeya Saran, learned counsel appearing for the Bank, however, submitted that in the lease deed executed by the owners of the premises there was specific recital that the premises was owned by 15 persons and their shares were also defined. After the receipt of the letter sent by Sri Rakesh Gupta, one of the co-owners, the Bank had been paying rent to each co-owner separately by cheques and the individual amount paid to each co-owner being less than Rs. 1,20,000 in a year, the provisions of s. 194-I was not at all attracted. He also referred to the clarification issued by the CBDT vide Circular No. 715 dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13], particularly to the question No. 21 and its answer, which is to the following effect:

Question 21 : Whether the limit of Rs. 120,000 per annum would apply separately for each co-owner of a property ?

Answer : Under s. 194-I, the tax is deductible from payment by way of rent, if such payment to the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having a definite and ascertainable share in the property, the limit of Rs. 1.20,000 will apply to each of the payees/co-owners separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.

He, therefore, submitted that the Bank was justified in not deducting tax at source on the rentals paid to each co-owner separately and the CIT(A) as also the Tribunal had rightly set aside the order passed by the AO making demand of tax and surcharge which was not deducted at source as also the interest thereon.

We have given our thoughtful consideration to the various pleas raised by the learned counsel for the parties and we and that s. 194-I was inserted by the Finance Act, 1994 w.e.f. 1st June, 1994 which provided deduction of tax at source and an obligation was caused upon any person other than an individual or an HUF, who was paying rent to any person to deduct income tax thereon at the specified rate. Sec. 194-I reads as follows:

Sec. 194-I. Rent--Any person, not being an individual or an HUF, who is responsible for paying to any person any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheques or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of--

(a) fifteen per cent if the payee is an individual or an HUF; and

(b) twenty per cent in other cases;

Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees.

Explanation.--For the purposes of this section.--

(i) ''rent'' means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee;

(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

The scope and effect of the newly inserted s. 194-I has been elaborated by the CBDT vide Circular No. 684 dt. 10th June, 1994 [(1994) 119 CTR (St) 25]. The relevant portion of the aforementioned circular is reproduced below :

Provision for deduction of income tax at source from income by way of rent

An effective method of widening the tax base is to enlarge the scope of deduction of income tax at source. Apart from bringing in more persons in the tax net, it also helps in the reporting of correct incomes. An item of income which needs to be covered within the scope of deduction of income tax at source is the income by way of rent. In a number of countries, such income is subject to deduction of income tax at source.

52.2. The Finance Act, 1994, has, therefore, inserted a new s. 194-I in the IT Act relating to deduction of income tax at source from rent. The new section provides that income tax has to be deducted at source at the rate of twenty per cent on payments of rent beyond one hundred and twenty thousand rupees in a financial year made by any person other than an individual or an HUF. The expression rent'' has been defined in the Explanation to the section, to mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee.

On a reading of the s. 194-I and the scope and effect elaborated by the Board it is clear that s. 194-I was inserted to bring more persons in the tax net and it also helps in the reporting of correct income by way of rent. If the rent which being paid to any person is less than Rs. 1.20,000 per annum there is no necessity of deducting tax at source.

Another section which is relevant for the purposes of these cases is s. 26 of the Act, which deals with the property owned by co-owners''. It is reproduced below :

Sec. 26. Property owned by co-owners.--Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an AOP, but the share of each such person in the income from the property as computed in accordance with ss. 22 to 25 shall be included in his total income.

Explanation.--For the purposes of this section, in applying the provisions of subs.(2) of s. 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section.

It has come on record that each of the co-owners has a definite share in the building. Their shares have already been reproduced hereinbefore. It is not necessary that there should be a physical division of the property by metes and bounds in order to attract the provisions of s. 26 of the Act. It will come into play the moment the share of each co-owner in the property is determined and ascertainable. This Court in the case of Commissioner of Income Tax Vs. N.K. Patni and Others, has held as follows :

From this finding, it is clear that the legal heirs became co-owners of the share of the deceased in the property. Sec. 26 of the Act provides that where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an AOP, but the share of each such person in the income from the property as computed in accordance with ss. 22 to 25 shall be included in his total income. In view of the Hindu Succession Act, 1956, the share of each legal heir is well determined and, therefore, in view of s. 26 of the Act they could not be assessed in the status of an AOP but could be assessed individually in respect of their share.

Similar view has been taken by the Calcutta High Court in the case of Gora Chand Sen Vs. Commissioner of Income Tax, wherein it has been held as follows :

It has not been disputed that the property in dispute was owned by the two Sens in equal shares. Therefore, the shares were definite and ascertainable within the meaning of s. 26 of the IT Act. Sec. 26 provides that ''where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an AOP, but the share of each such person in the income from the property as computed in accordance with ss. 22 to 25 shall be included in his total income''. This statutory provision is mandatory. It positively prohibits assessment in the status of an AOP and directs that the share of such person in the income from the property shall be included in his individual total income. In this view, the ITO in reality had no option in the matter. He had no jurisdiction to assess such persons in the status of an AOP. He could assess them only in their individual status as directed by s. 26. The proceedings for assessment undertaken in the status of an AOP were illegal and without jurisdiction.

The aforesaid decisions lay down that where shares of each legal heir is well determined i.e. it is definite and ascertainable the income from such property is to be assessed in the individual hands of such person and not in the hands of the AOP, if any. The proposition laid down in the aforesaid decisions squarely apply to the facts of the present case also.

It has come on record that after the letter written by one of the co-owners that the premises is owned by 15 co-owners and their shares are definite, the Bank has been paying rent to each co-owner by a separate cheques, the total of which did not exceed Rs. 1,20,000 a year Thus, the amount received by each co-owner is assessable in his hand, separately. This fact also stands established as the rent received by each of the co-owners from the Bank has been assessed separately in their hands in their respective assessments. The clarification issued by the CBDT in Circular No. 715, dt. 8th Aug., 1995 in reply to the Question No. 21 squarely covers the present case as each of the co-owners has received less than Rs. 1,20,000 as rent in a year from the bank. In view of the foregoing discussion we are of the considered opinion that the Tribunal had rightly upheld the order of the CIT(A) setting aside the order passed by the AO creating the demand of tax which was not deducted at source including surcharge and interest in respect of all these years. All the appeals fail and are dismissed. However, in the facts of the case there shall be no order as to costs.