Bombay High Court
Commissioner Of Income-Tax vs Shiv Sagar Estates (Aop) on 17 December, 1992
Equivalent citations: [1993]201ITR953(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the lease rent from the property Shiv Sagar Estates accrued to the individual co-owners and not to an association of person ?"
2. The controversy in this case relates to the status in which 65 co-owners of an immovable property called "Shiv Sagar Estate" which is owned by them in definite and determinate shares are to be assessed in respect of the rental income therefrom - whether it is to be taxed in the hands of the 65 persons as an "association of persons" or it is to be charged to tax individually in the hands of the different co-owners to the extent of their respective shares. The relevant assessment years are 1967-68, 1968-69 and 1969-70.
3. The facts giving rise to this reference, briefly stated, are as follows :
Sixty-five persons of three prosperous families of Dhanwatay, Patel and D. C. Shah together purchased from the legal heirs of the Maharaja of Gwalior to whom it belonged, as per a registered document dated November 4, 1963, the property called "Samudramahal" which the vendees renamed as "Shiv Sagar Estate" in due deference to the stipulation in the conveyance deed against the use of the original name that was being employed by the vendors. While each of the three families contributed equally to the consideration amount of Rs. 65 lakhs paid for the transfer, it was in the proportion specified in the deed of conveyance that each of the members paid towards the same. The document itself shows that the 65 vendees together purchased the property "for their use for ever as tenants-in-common in the shares mentioned against their respective names in the First Schedule" to the deed of conveyance. These sixty-five persons who were the vendees also jointly covenanted with the vendors not to use the name of "Samudramahal" and also not to demolish a "Samadhi" that existed on a part of the property which the vendors considered sacred and not to prevent them from making occasional visits to the same for the purpose of worship. It is also in record that even while the negotiations for the purchase were going on, the parties got the entire property subdivided by the Municipal Corporation into as many as eight plots 'A' to 'H'. Nothing further was specified in the deed of conveyance as to the subject and purpose of the purchase of the property except, as stated above, that it was for their use for ever as tenants-in-common in the shares mentioned in the deed. However, later, in a suit filed by these 65 persons or eviction of one Amateur Rider's Club from the portion of plot 'G' occupied by it as lessee, it was stated that the property had been purchased by them as promoters of a public limited company intended to be formed thereafter with a view to develop the said property. That, however, did not materialise as is evident from the subsequent developments. Within three days of the purchase of the property, the 65 co-owners who had purchased the property in question gave a contract to Messrs. Anderson Dawn and Company, Engineers and Contractors, to erect a building in one of the plots, viz., plot 'B', as per drawings and specifications which they all had got prepared by an architect. All the 65 co-owners undertook to pay the contractors an amount of Rs. 17.27 lakhs agreed for the contract work in instalments as specified in the agreement and also offered their entire interest in the property for first charge for the amount. They also gave an undertaking not to pledge or mortgage the property or to create any further charge thereon to the detriment of the contractor's lien. In this deed of agreement with the engineers and contractors too, there is reference to the purchase of the Shiv Sagar Estates "by 65 co-owners". This contract, however, did not make any headway and ultimately resulted in termination. The 65 co-owners, thereafter, through their attorneys, entered into a lease agreement with a partnership firm, Messrs. Jeewanlal and Co., in respect of plots 'A' to 'G' as per four documents executed on different dates. The total area of lease covered by these documents was 33.127 sq. yards and the total ground rent fixed therefor was Rs. 9,93,810 per year. The recitals in all these deeds were identical. All the 65 persons together were referred to in these documents as the "lessors". The leases were for a period of 98 years.
The next development which is relevant is incorporation of the company, Shiv Sagar Estate limited. It was done on December 7, 1965. The same 65 co-owners of the aforesaid property were the shareholders, their shareholdings also being in the same proportion in which they had contributed for the purchase of the property in question. These very 65 co-owners, through their three family groups, also formed a partnership under the name and style of Kiran Construction Company. It was done by a deed of partnership dated March 5, 1966. In the said partnership, five partners of Messrs. Jeevanlal and Company were also taken in as partners.
Later, the limited company, viz., Shivsagar Estate Limited, itself enterted into an agreement with the 65 co-owners of the Estate. It was done on April 25, 1966. This agreement was also termed as an agreement of lease. It was prefaced with the statements that the 65 co-owners of the estate, who agreed to grant the lease, were tenants-in-common owning severally specific and determinate shares in the subject-matter contemplated to be leased and that the company had been formed, amongst other things, to take over on lease the Shiv Sagar Estates. By this agreement, the 65 co-owners agreed to grant lease of the entire Shiv Sagar Estates to the limited company for a period of 250 years on an annual rent of Rs. 15 lakhs. As some of the 65 co-owners were minors, necessary sanction of the court was obtained for the lease. By a supplementary agreement dated March 3, 1969, executed between the 65 co-owners and the company, the tenure of lease was reduced from 250 years to 98 years from January 1, 1967. The limited company also granted a sub-lease in respect of plots 'A' to 'F' to one Metropolitans at an annual rent of Rs. 7,50,000. At this stage, the company requested the lessors, the 65 co-owners "to rescind and mutually terminate" the agreement dated April 25, 1966, and the supple mental agreement dated March 3, 1969, and "to absolve the company from the liability of payment of annual rent of Rs. 15 lakhs and the observance and the performance of the various terms and conditions contained therein" and to give direct lease in favour of their sub-lessees or their nominees in respect of the sub-plots 'A' to 'F' on the terms and conditions contained in the agreements of sub-leases dated July 24, 1966, and to grant a direct lease of plot 'H' to the Metropolitans at the annual rent of Rs. 7,80,000. The co-owners of the property had no objection to this request. They, accordingly, entered into direct agreement with Kiran Construction Company and Metropolitans by a deed of agreement dated December 24, 1969 by which it was agreed that the agreement between the co-owners and the company shall stand terminated, determined and rescinded, and that the co-owners shall grant to the company's sub-lessees and Metropolitans direct leases, so however that the rents, if any, payable by them up to March 31, 1969, shall be paid only to the company. The surrender by the company of the plot 'G' which had not been sub-leased was also made and accepted by the co-owners by this agreement. As a result of the withdrawal of the company from the terms of the agreements, the 65 co-owners became the direct lessors and Kiran Construction Company and the Metropolitans, the lessees. For the new arrangement also sanction of the High Court was obtained on behalf of the minor co-owners.
It is also an agreed position that in pursuance of the earlier agreement dated April 25, 1966, the limited company took actual possession of the entire estate and entered into different agreements of sub-leases with different parties as stated above on the basis of which it collected from its sub-tenants in the three years involved in this reference Rs. 75,000, Rs. 3,06,000 and Rs. 5,45,425. As under the terms of the agreement dated April 25, 1966, it had to pay in the three years to its lessors Rs. 64,000, Rs. 2,70,656 and Rs. 4,68,224, the company in its accounts credited to each one of the 65 co-lessors his or her share in the aforesaid amounts, strictly as specified in that agreement.
In the assessments for the relevant assessment years, the Income-tax Officer assessed the receipts from the Shiv Sagar Estates as income that accrued to the 65 co-owners as an "association of persons". It may be pertinent to mention here that the income in these three years comprised income from house property as well as income from lease of land forming part of the same property. So far as the income from house property is concerned, the Income-tax Officer himself divided the income amongst the co-owners, as contemplated by section 26 of the Act. However, so far as the income from the lease rent is concerned, it was assessed in the status of an association of persons under the head "income from other sources".
4. The grievance of the assessee was that the Income-tax Officer was not correct in doing so; that the 65 co-owners did not, at any point of time, form any association of persons, and, as such, the income from the property or any part of it could not be assessed in the status of "association of persons". According to the co-owners, the income from the house property or the lease rent, accrued to each of them as co-owner in proportion to his or her definite and determinate share in the property which was specified in the deed of purchase itself. Hence, an appeal was filed against the orders of assessment passed by the Income-tax Officer for all the three years to the Appellate Assistant Commissioner. The appellate Assistant Commissioner concurred with the finding of the Income-tax Officer and held that the Income-tax Officer was justified in treating the receipt from the lease rent as the income of the 65 co-owners forming an association of persons. Being aggrieved by the findings of the Income-tax Officer and the Appellate Assistant Commissioner in regard to the status in which the 65 co-owners were assessed, second appeals were filed before the Income-tax Appellate Tribunal. The Department also went in appeal challenging some of the other findings of the Appellate Assistant Commissioners with which we are not concerned in this reference. In the Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member. The Judicial Member held against the assessee. According to him, the Income-tax Officer was right in assessing the income treating the 65 co-owners as an association of persons. The Accountant Member held a contrary opinion. The matter was, therefore, referred to a third member of the Tribunal who concurred with the Accountant Member and as a result the Tribunal, by majority, came to the conclusion that the Income-tax Officer was not justified in treating the income from the property in question as the income of an association of persons. According to it, it should have been assessed in the hands of 65 co-owners in proportion to their respective shares in the property. Aggrieved by the finding of the Tribunal, the Revenue applied for a reference under section 256(1) of the Income-tax Act, 1961, and the Tribunal, on being satisfied that a question of law did arise out of its order, has referred the question set out above to this court for opinion.
5. Though the facts set out above are a little cumbersome because of the long history, the question that arises for consideration is simple. It pertains to the status of the 65 persons in respect of the income arising from the property purchased by them as co-owners. Whether these 65 persons can be termed as "an association of persons" and assessed in that status under the Income-tax or they are to be assessed individually in respect of the income the accrued to them in proportion to their respective shares in the property.
6. Before we proceed to examine the law on the point, it may be worthwhile to set out some of the undisputed facts which are relevant for the determination of the controversy in this case. These facts are :
1. The property in question was purchased by the 65 persons by a common registered deed.
2. In the said deed, these 65 persons were shown as vendees who had together purchased the property for their use forever as tenants-in-common in the shares mentioned against their respective shareholdings in the First Schedule to the deed.
3. This position was not changed thereafter as is evident from the fact that all subsequent documents, contracts, agreements, etc., in respect of this property were entered into by or on behalf of these 65 persons describing them as co-owners of the property.
7. These facts can also be seen in the light of some other subsequent developments. These 65 persons formed a company. In that company, they were the only shareholders. Their shareholdings were also in the same proportion in which they had contributed for the purchase of the land. But, on formation of the company, the property in question was not transferred to the company. It continued to vest in the 65 persons as co-owners. On the other hand, these 65 persons in their capacity as co-owners, entered into an agreement of lease with the company, which they themselves had formed. It may also be pertinent to mention that the agreement of lease between the 65 co-owners and the company was prefaced with a clear statement that the 65 co-owners who had agreed to grant the lease were tenants-in-common owning severally, specific and determine shares in the subject-matter contemplated to be leased. This is one important factor which goes to indicate that qua the property in question the 65 persons never changed their position as co-owners.
8. The next relevant development is the formation of a partnership along with some others under the name and style of Kiran Construction Company. While doing so, they did not in any way affect their status qua the property in question. The property was given to the firm on lease by all of them acting as co-owners of the property. The lease rent due to them in pursuance of the agreement was also credited to their separate individual accounts in the same proportion in which they held the property. All these facts clearly go to indicate that qua this property, these 65 persons all throughout maintained their status as co-owners. The fact that they were also working together in some other projects does not militate against their status qua the property. A person or group of persons may work in more than one capacity. The Income-tax Act clearly recognises dual capacity of a person or a group of persons. In respect of the property in question, these persons were co-owners, in the company they were shareholders, in the partnership firm they were partners. They might also have formed an association of persons to carry on any other activity. All these can go on simultaneously. The very same persons may receive income as co-owners, as shareholders, as partners or as members of an association of persons and their status in respect of a particular income will not affect their status in respect of other incomes.
9. Thus, in the instant case, we find that these 65 persons purchased the property not as an association of persons but as co-owners. This is evident from the recitals in the deed of conveyance itself. That there was no change in their status as co-owners qua this property is evident from their subsequent conduct and recitals in various documents executed by them from time to time for lease of the property which have been dealt with at length hereinbefore. There is nothing to suggest that these 65 persons converted themselves from co-owners to an association of persons at any point of time.
10. Learned counsel for the Revenue could not show us any document or indicate any material or evidence from which it can be inferred that the property in question was purchased by these 65 persons not as co-owners but as an association of persons. Reliance was placed on a statement made by these 65 persons in a suit filed for eviction of one of the tenants of a part of the property wherein it was stated that the property had been purchased as promoters of a public limited company intended to be formed thereafter with a view to develop the same. This intention can be given effect to only after the property was purchased. The co-owners were free to transfer the property to the company or to exploit it in any manner. Nothing of this sort was done by them in respect of this property. This is also evident from the following observation of the Income-tax Officer himself made in his order of assessment for the assessment year 1967-68, while disallowing the claim for deduction of salary, etc. :
"In view of the nature of income which was lease rent payable as per legal documents, all this paraphernalia of staff does not appear to be wholly and exclusively utilised to earn this income. In fact, it would appear that from the assessment year 1969-70 all this staff was transferred to Metropolitan Hotel Limited."
11. In view of this observation, only a token amount of Rs. 6,000 was allowed as a deduction from the income from the property in question and the rest of the expenditure was disallowed. Learned counsel for the Revenue also submitted that the mere fact that these 65 persons were termed as co-owners in the deed of conveyance cannot militate against their status as an association of persons. According to him, at the time of purchase, these 65 persons constituted an association of persons and the purchase itself was made in the status of an association of persons though in the deed of purchase it was shown to have been made by the 65 co-owners having determinate shares. Learned counsel submits that the totality of the facts and circumstances of the case clearly goes to show that the property was purchased by the 65 persons who formed an association of persons and they continued to be so thereafter. Reference was made in this connection to the decisions of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546 and N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310; decision of the Kerala High Court in CIT v. C. Karunakaran [1988] 170 ITR 426, the Allahabad High Court in Joti Prasad Agarwal v. ITO [1959] 37 ITR 107 and the Andhra Pradesh High Court in Smt. Parvathi Devi v. CIT [1987] 164 ITR 675.
12. Counsel for the assessee, in reply, submits that the facts of this case are clear. According to him, there is no scope for any dispute or controversy that the property in question was purchased by the 65 persons as co-owners and not as an association of persons. Strong reliance was placed in this connection on the recitals in the deed of sale which, according to him, in the absence of equally strong evidence to show the contrary have to be accepted as true and correct and acted upon. Learned counsel also referred to the subsequent conduct of the assessee and submitted that from a perusal of the various developments which had taken place after the purchase of the land in question, it was clear that the 65 persons who purchased the property as co-owners did never give up that status of theirs so far as this property is concerned and any activity that was undertaken by them thereafter was kept apart and separate from their ownership of the property. They having done so, according to learned counsel, in respect of the income from the property in question, irrespective of the fact whether it is assessable under the head "Income from house property" or " Income from other sources", the status will be that of co-owners and not of association of persons. Learned counsel also placed reliance on the very same decisions of the Supreme Court referred to by learned counsel for the Revenue. He also placed heavy reliance on the decision of the Supreme Court in the case of CGT v. R. Valsala Amma [1971] 82 ITR 828. Reference was also made to a decision of the Andhra Pradesh High Court in Bolla Tirapanna and Sons v. CIT [1969] 71 ITR 209; decision of the Madras High Court in CIT v. K. R. Kanakarathinam [1984] 146 ITR 364, and also the decision of the Kerala High Court in CIT v. Gool C. Dalal and Perin C. Dalal [1990] 184 ITR 248.
13. We have carefully considered the rival submissions. We have already set out the facts of the case and also given our observations in regard thereto at different places. So far as the law is concerned, it is well-settled by the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546. In this case, the Supreme Court considered what constitutes an association of persons. It was held that an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. The Supreme Court, however, made it clear that there is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons. It must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not. The court made it further clear that no test is conclusive or determinative.
14. In the aforesaid case before the Supreme Court, the co-widows of a Hindu inherited his estate which consisted of immovable properties, shares, money lying in deposit and a share in a registered firm. It was found that they had not exercised their right to separate enjoyment and that except for receiving the dividends from the shares and the interest from the deposits jointly, they had done no act which had helped to produce the income. The question was whether the three widows could be assessed in the status of an "association of persons" under the Income-tax Act in regard to the income derived from the properties inherited by them. On a reference, the High Court held that they could not be assessed as an association of persons. On appeal, the Supreme Court, confirming the finding of the High Court, held that as there was no finding that the three widows had combined in a joint enterprise to produce income, it could not be held that they had the status of an association of persons within the meaning of section 3 of the Indian Income-tax Act, 1922 (corresponding to section 4 of the Income-tax Act, 1961).
15. The ratio of this decision is clear that in order to be termed as "an association of persons", it must be shown that the group of persons had combined in a joint enterprise to produce income. If this essential ingredient is not present, it is difficult to hold that a group of persons owning a property together and getting the income thereof together constitute "an association of persons", and can be assessed in the status of association of persons. The same principle has been reiterated by the Supreme Court in G. Murugesan and Brothers v. CIT [1973] 88 ITR 432. In this case also it was held that for forming an "association of persons", the members of the association must join together for the purpose of producing an income. It was further held that an association of persons can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, volition on the part of the members of the association was also held to be an essential ingredient. It was, however, made clear that even a minor can join an "association of persons" if his lawful guardian gives his consent. The income which was the subject-matter of dispute in this case was income from dividend. The shares from which this income was assessed stood in the joint names of a number of persons. The question was whether the dividend income in such a case could be assessed in the hands of the joint owners in the status of an association of persons. The Supreme Court held that in the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two or more shareholders functioned as an "association of persons" from the mere fact that they jointly owned one or more shares, and jointly received the dividends declared. These circumstances do not by themselves go to show that they acted as an association of persons. In this case it was also observed by the Supreme Court that the question whether the assessee functioned as an "association of persons" during the relevant year was best known to them. Where they themselves had specifically stated that they were no more functioning as an association of persons, they could not be held to be an association of persons. Reference may also be made to the decision of the Supreme Court in CGT v. R. Valsala Amma [1971] 82 ITR 828. In this case, the assessee and her sister received under the will of their mother, inter alia, a cinema theatre building with machinery and another building called "police quarters". Each one of them had a half share in the properties. They gifted these buildings to their brother by means of a single gift deed and the question was whether the assessee and her sister should be assessed in respect of the gift as individuals or as an association or a body of individuals. The Supreme Court held as follows (at page 830) :
"Now the question is in what capacity the gift was made by the assessee. Did they do it as an association or as a body of individuals or as individuals. The property received by the assessee under the will of their mother was admittedly received by them as co-tenants. Each one of them had half share in that property. The question whether they divided that property or not is not a material question. In law each one of them had half the right in the property that they gifted to their brother. They were holding that property as tenants-in-common and not as joint tenants. Hence, they made the gift as tenants-in-common and not as joint tenants. Each one must be held to have made a gift of her share of the property though the gift is made through one single document."
16. It was also held by the Supreme Court in this case that (at page 830) :
"The Gift-tax Act did not change the general law relating to the rights of property. It merely seeks to tax a gift of the property owned by a person. As mentioned earlier the property with which we are concerned in this case is a property owned by two persons as tenants-in-common, each one having a definite shares."
17. This observation of the Supreme Court applies proprio vigore to proceedings under the Income-tax Act also.
18. Reference may also be made to a decision of the Andhra Pradesh High Court in Bolla Tirapanna and Sons v. CIT [1969] 71 ITR 209. In this case, on the partition of a Hindu undivided family, one of the properties, viz., rice mill, could not be divided by metes and bounds. In this property all the members had one-seventh share. One of the sharers was a Government servant. The other six persons having interest in the property formed a firm and took the mill on lease from the seven persons including themselves. One-seventh share of the rent paid by the firm was separately credited to the individual accounts of the seven persons. The Income-tax Officer assessed this rent in the hands of the seven persons as an association of persons rejecting the contention of the assessees that they had to be separately assessed on the one-seventh share each. The dispute went to the High Court in a reference. The High Court held that, in view of the fact that the partition took place and also in view of the fact that the rent was being credited to the seven persons separately, the shares of seven persons were definite and ascertainable and they were entitled to be assessed separately on their shares. It was observed (headnote) :
"Merely because the parties entered into a single lease instead of seven separate agreements of lease, the status of the assessee cannot be determined as an association of persons as long as the intention of the parties, which is evidenced by the crediting of rental receipt separately, is otherwise."
19. The facts of this case are very identical to the facts of the case before us. Here also the lease was given by 65 persons who had purchased the property jointly having definite and determinate shares. The lease rent was also being credited to all of them in proportion to their respective shares. The only fact that was used for treating them as an association of persons was that the purchase as well as the lease, etc., all were executed by a single document. The aforesaid decision of the Andhra Pradesh High Court clearly goes to show that in order to bring a number of persons in the category of an association of persons, certain requirements must be fulfilled, and one of the requirements is, as observed by the Supreme Court, that they must act together to produce the income.
20. We may also refer to some of the decision on which reliance was placed by learned counsel for the Revenue. The decision of the Kerala High Court in CIT v. C. Karunakaran [1988] 170 ITR 426, was a case of commercial adventure. In this case also the court observed that enterprise on the part of the co-owners was an essential factor. The facts in Smt. Parvathi Devi v. CIT were also quite different from the facts of the case before us. It was a case where the income sought to be assessed in the hands of the association of persons had arisen from sale and purchase of land. In such circumstances, it was held that it was an adventure in the nature of trade. This was not a case of income from lease rent, where the question of joint management ordinarily does not arise. On the other hand, the decision of the Kerala High Court in CIT v. Gool C. Dalal and Perin C. Dalal [1990] 184 ITR 248 appears to be more apposite. In this case, following the decisions of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546, it was held that in order to acquire the status of an association of persons, the persons must join in a common purpose or action and object of the association must be to produce income. It is not enough that the persons receive the income jointly.
21. In view of the foregoing discussion and applying the ratio of the decisions of the Supreme Court and the various High Courts to the facts of the present case as set out above, we are of the clear opinion that the Tribunal was right in holding that the lease rent from the property "Shiv Sagar Estates" accrued to the individual co-owners and not to any association of persons. In that view of the matter, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue.
22. In the facts and circumstances of the case, there will be no order as to costs.