TMI Blog1992 (12) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent of their respective shares. The relevant assessment years are 1967-68, 1968-69 and 1969-70. 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 " Samu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 entered 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 Act or they are to be assessed individually in respect of the income that accrued to them in proportion to their respective shares in the property. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wners, 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. 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. 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and the Andhra Pradesh High Court in Smt. Parvathi Devi v. CIT [1987] 164 ITR 675. 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 assessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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, and as they had done no act which had helped to produce the 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 ). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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 share. " This observation of the Supreme Court applies proprio vigore to proceedings under the Income-tax Act also. Referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [1987] 164 ITR 675 (AP) 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 decision 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 the object of the association must be to produce income. It is not enough that the persons receive the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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