2012 (4) TMI 124 - HC - Income Tax

Assessee in default - TDS u/s 194I - Central Board of Direct Taxes in Circular No.715 dated 8th August, 1995 - 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 - Fourteen persons, including M/s. Atma Ram and Brothers, executed a registered lease deed on 2nd January, 1986 giving lease of 6290 sq.ft covered area on the ground floor of the aforesaid property to the Manager, State Bank of India, Hanuman Road, Shamli, Muzaffarnagar - The covered area of 3287 sq.ft of the aforesaid property on the ground floor was given to the Senior Manager, Oriental Bank of Commerce vide registered lease deed dated 17.10.1997, which was valid for 20 years at the monthly rent of Rs.8904.50 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% in the rent - On a reading of the Section 194-I and the scope and effect elaborated by the Board it is clear that Section 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 - It has come on record that after the letter written by one of the coowners 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 cheque, the total of which did not exceed Rs.1,20,000/- a year - Decided in favor of the assessee

Issues Involved
1. Applicability of Section 194-I of the Income-tax Act, 1961 regarding TDS on rent paid to co-owners.
2. Determination of whether the co-owners constitute an Association of Persons (AOP).
3. Interpretation of Section 26 of the Income-tax Act concerning property owned by co-owners.
4. Validity of the Assessing Officer's demand for tax, surcharge, and interest under Sections 201(1) and 201(1A).

Detailed Analysis

1. Applicability of Section 194-I of the Income-tax Act, 1961
The primary issue was whether the provisions of Section 194-I, which mandates the deduction of tax at source (TDS) on rental payments exceeding Rs. 1,20,000 per annum, were applicable to the rent paid to the co-owners of the property.

Arguments Presented:
- Revenue's Argument: The Revenue contended that since the property was not physically divided among the co-owners, the entire rental income should be considered as paid to an Association of Persons (AOP), necessitating TDS.
- Assessee's Argument: The assessee argued that the property was owned by 15 co-owners with definite and ascertainable shares, and rent was paid to each co-owner separately. Each co-owner's share of the rent did not exceed Rs. 1,20,000 per annum, thus not attracting the provisions of Section 194-I.

Judgment:
The court held that Section 194-I was not applicable as each co-owner received less than Rs. 1,20,000 per annum. The court referred to Circular No. 715 issued by the Central Board of Direct Taxes, which clarified that the limit of Rs. 1,20,000 would apply separately to each co-owner.

2. Determination of whether the co-owners constitute an Association of Persons (AOP)
The court needed to determine if the co-owners could be treated as an AOP for tax purposes, which would affect the applicability of TDS provisions.

Arguments Presented:
- Revenue's Argument: The Revenue argued that the co-owners should be treated as an AOP since the property was not physically divided.
- Assessee's Argument: The assessee contended that the co-owners had definite and ascertainable shares, and hence could not be treated as an AOP.

Judgment:
The court ruled that the co-owners did not constitute an AOP. It emphasized that under Section 26 of the Act, where property is owned by two or more persons with definite and ascertainable shares, they should not be assessed as an AOP but individually.

3. Interpretation of Section 26 of the Income-tax Act
The court examined Section 26, which deals with property owned by co-owners, to determine how the rental income should be assessed.

Arguments Presented:
- The court noted that Section 26 specifies that co-owners with definite and ascertainable shares should be assessed individually and not as an AOP.

Judgment:
The court found that the shares of the co-owners were definite and ascertainable, and hence each co-owner should be assessed individually. The court cited previous judgments, including Commissioner of Income Tax vs. N K Patni and others, to support this interpretation.

4. Validity of the Assessing Officer's demand for tax, surcharge, and interest
The court reviewed the orders of the Assessing Officer, who had raised a demand for tax, surcharge, and interest on the grounds of non-deduction of TDS.

Arguments Presented:
- Revenue's Argument: The Revenue supported the Assessing Officer's demand, arguing that the entire rental income should be subject to TDS.
- Assessee's Argument: The assessee argued that the demand was invalid as the TDS provisions were not applicable to individual co-owners receiving less than Rs. 1,20,000 per annum.

Judgment:
The court upheld the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, which had set aside the Assessing Officer's demand. The court concluded that the demand for tax, surcharge, and interest was unjustified as the provisions of Section 194-I were not applicable.

Conclusion
The court dismissed all the appeals, ruling that the Tribunal had rightly upheld the Commissioner of Income Tax (Appeals) decision to set aside the Assessing Officer's order. The court confirmed that the rent paid to each co-owner did not exceed the threshold for TDS under Section 194-I and that the co-owners should be assessed individually, not as an AOP. There was no order as to costs.

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