2012 (4) TMI 170 - HC - Income Tax

TDS on rental -fifteen co-owners made investment in the building sharing the rental - executed a registered lease to the Bank paying monthly rent including all taxes - co-owners furnished indemnity bond indemnifying the Bank for the loss - the Bank stopped deduction of tax at source under Section 194-I of the Act - Bank has been paying rent to all the co-owners as per their respective shares by separate cheques - ITO initiated proceedings under Sections 201(1) and 201(1A) as Bank was not justified in stopping the deduction of TDS - revenue stated that Section 194-I of the Act mentions 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 - the Bank contested that it had been paying rent to each co-owner separately by cheque and the individual amount paid to each co-owner being less than Rs.1,20,000/- in a year Held that - 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 - each of the co-owners has a definite share in the building - Section 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 association of persons Appeal of Revenue failed

Issues Involved:
1. Whether the property was owned by several co-owners with definite and ascertainable shares.
2. Whether the limit of Rs.1,20,000/- applies to each payee/co-owner separately.
3. Whether M/s. Atma Ram & Brothers constitutes an Association of Persons (AOP).
4. Obligation of the payer to deduct TDS under Section 194-I of the Income-tax Act, 1961.
5. Validity of the orders passed under Section 201(1) and 201(1A) of the Income-tax Act, 1961.

Detailed Analysis:

1. Ownership and Shares of Co-owners:
The property in question was owned by fifteen co-owners with definite and ascertainable shares. Each co-owner had shown their investment and share in the rental income in their individual tax returns, which were accepted by the tax authorities. The co-owners' shares were clearly defined in the lease deeds executed with the banks.

2. Application of Rs.1,20,000/- Limit to Each Co-owner:
The banks paid rent to each co-owner separately by cheques, and the individual payments did not exceed Rs.1,20,000/- per annum. The Central Board of Direct Taxes (CBDT) clarified in Circular No.715 dated 8th August, 1995, that the limit of Rs.1,20,000/- applies separately to each co-owner if their shares are definite and ascertainable. The Tribunal upheld that the limit applies to each co-owner separately, and the rent received by each co-owner was assessed individually.

3. Association of Persons (AOP) Status:
The Income Tax Officer initially treated the co-owners as an AOP, specifically M/s. Atma Ram & Brothers, and held the banks responsible for not deducting TDS. However, Section 26 of the Income-tax Act specifies that if property is owned by multiple persons with definite and ascertainable shares, they should not be assessed as an AOP but individually. The Tribunal and Commissioner of Income Tax (Appeals) found that the co-owners had definite shares, and thus, the income should be assessed individually, not as an AOP.

4. Obligation to Deduct TDS under Section 194-I:
Section 194-I mandates TDS on rent payments exceeding Rs.1,20,000/- per annum to any person. The banks argued that since the rent paid to each co-owner was below this threshold, TDS was not required. The Tribunal agreed, citing the CBDT Circular and Section 26, which support the non-requirement of TDS if individual payments to co-owners do not exceed Rs.1,20,000/-.

5. Validity of Orders under Section 201(1) and 201(1A):
The Assessing Officer's orders under Sections 201(1) and 201(1A), which deemed the banks as assessees in default for not deducting TDS, were set aside by the Commissioner of Income Tax (Appeals). The Tribunal upheld this decision, confirming that the banks were justified in not deducting TDS as the rent paid to each co-owner was below the prescribed limit.

Conclusion:
The Tribunal correctly upheld the Commissioner of Income Tax (Appeals)'s decision, setting aside the Assessing Officer's orders. The banks were not required to deduct TDS as the rent paid to each co-owner was below Rs.1,20,000/- per annum, and the co-owners had definite and ascertainable shares. The appeals were dismissed without any order as to costs.

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