1967 (7) TMI 57 - HC - Income Tax

Income from the leasing out of the mill building and machinery - asessability - respective shares of the 7 co-owners in the mill are definite and ascertainable - therefore, they come within the purview of section 9 (3)- they were entitled to be assessed separately on their shares, and not assessable in hands of an association of persons

Issues Involved:
1. Assessment of income from leasing out the mill building and machinery.
2. Classification of income as income from property or income from business.

Issue-Wise Detailed Analysis:

1. Assessment of Income from Leasing Out the Mill Building and Machinery:

Relevant Question: Whether the income from leasing out the mill building and machinery was rightly assessed in the hands of an association of persons.

Facts and Circumstances:
- The assessment year was 1958-59, with the accounting period ending on December 31, 1957.
- Originally, a Hindu undivided family (HUF) consisting of a father and six sons owned the mill.
- A partition occurred on December 10, 1955, resulting in each family member owning a 1/7th share of the mill.
- The mill was leased to a firm constituted by the father and five sons (excluding one son who was a government servant), with rent paid to each co-owner separately.

Contentions:
- Assessee: The income should be assessed individually in the hands of the seven co-owners, as their shares are definite and ascertainable.
- Department: The income should be assessed as an association of persons, arguing that the co-owners joined in a common purpose to produce income.

Legal Provisions:
- Section 3 of the Indian Income-tax Act, 1922: Defines the entities liable to income tax, including individuals and associations of persons.
- Section 9(1) of the Act: Relates to income from property, specifying that tax is payable on the bona fide annual value of property owned.
- Section 9(3) of the Act: States that co-owners with definite and ascertainable shares should not be assessed as an association of persons.

Court's Analysis:
- The court emphasized that Section 9(3) applies when co-owners have definite and ascertainable shares, and such co-owners should be assessed individually.
- The Tribunal found that each of the seven co-owners had a 1/7th share in the mill, making their shares definite and ascertainable.
- The court referenced the Supreme Court decision in Commissioner of Income-tax v. Indira Balkrishna, which held that co-heirs with equal shares in inherited property should not be assessed as an association of persons unless they engage in a joint enterprise to produce income.
- The court concluded that the seven co-owners did not form an association of persons as their leasing of the mill was an act of ownership, not a joint enterprise.

Conclusion: The income from leasing out the mill building and machinery should not be assessed in the hands of an association of persons. Each co-owner should be assessed individually based on their 1/7th share.

2. Classification of Income as Income from Property or Income from Business:

Contention: The department argued that the income derived from leasing out the mill should be classified as income from business under Section 10 of the Act, not income from property under Section 9.

Legal Provisions:
- Section 9(1) of the Act: Income from property.
- Section 10(1) of the Act: Profits and gains of business, profession, or vocation.

Court's Analysis:
- The court examined whether the leasing out of the mill constituted a business activity.
- Referenced the Supreme Court's decision in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, which defined "business" as a systematic and organized course of activity with a profit motive.
- The court also cited Tripurasundari Cotton Press Co. Ltd. v. Commissioner of Income-tax, where income from leasing out ceased business assets was classified as income from property.

Conclusion: The income from leasing out the mill is to be assessed as income from property under Section 9 of the Act, not as income from business under Section 10.

Final Judgment:
The court answered the reference in the negative, ruling that the income from leasing out the mill building and machinery cannot be assessed in the hands of an association of persons. The income is to be assessed individually for each co-owner under Section 9 of the Act, as income from property. The court awarded costs to the assessee, with an advocate's fee of Rs. 250.

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