ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an appeal filed by the assessee for assessment year 1983-84 against the order of Dy. Commissioner (Appeals), Visakhapatnam dated 27-6-1988.
2. The assessee is a rice mill in Ullamparru village, West Godavari District. From a very long time it used to be the common property held by 6 persons. The names of the six co-owners and the interest which they possessed in the rice mill, the machinery fitted therein and the godowns constructed in the said premises are the following:–
1. Penmetsa Gopalakrishnamraju Rs. 0-1Q ps. in the rupee
2. Penmetsa Bangaru Raju Rs. 0-20 ps. in the rupee
3. Penmetsa Lakshmipathlraju Rs. 0-20 ps. in the rupee
4. Penmetsa Subba Raju Rs. 0 20 ps. in the rupee
5. Penmetsa Suryanarayana Raju Rs. 0-20 ps. in the rupee
6. Penmetsa Ramachandra Raju Rs. 0-10 ps. in the rupee
Total : Re. 1-00
The premises, rice mill and the godowns together with all machinery fitted in which constitute the joint property of the above persons were all divided by a registered partition deed dated 11-10-1974. Copy of the registered partition deed which was in Telugu was furnished to us. The partition deed was executed on 11-10-1974. The co-owners agreed to enjoy their separate share in the mill, machinery, godowns as well as in the mill premises by paying his part of the tax etc. It is specifically stated that if the mill requires any repairs, the cost of the repairs should be borne proportionately by all the co-owners in proportion to their respective shares. If some of the co-owners do not co-operate, the co-owner who undertook the job of repairs is entitled to recover the proportionate share of the cost of repairs from the defaulting co-owner along with interest at Re. 1 per month. The schedule of the deed of partition is mentioned as the premises in which the rice mill is situated, the machinery, paddy godowns and fixtures. The site of the mill was mentioned as 4,350 sq. yds. This common property was let out by all the co-owners for a period of 4 years to one Ravuri Ranga Rao under the registered lease deed dated 5-11-1980. ‘The lease period was from 1-11-1980 to 31-10-1984. The lease agreed upon was Rs. 41,000 per annum. The total lease amount should be paid in 8 instalments to Penmetsa Suryanarayana Raju for and on behalf of all the co-owners and a valid receipt should be obtained from him on behalf of all the co-owners. Sri Penmetsa Suryanarayana Raju is obliged to distribute the lease amount among the co-owners according to their proportionate interest in the mill. The ITO while making an assessment for 1983-84 considered all the co-owners as an association of persons and brought the yearly lease amount of Rs. 41.000 to tax in the hands of the association of persons. The ITO completed the assessment on 31-3-1986 under Section 143(3). The status of the assessee was taken as association of persons. It is the case of the revenue that the leasing of the mill was possible only because of the joint activity of the co-owners and, therefore, they were rightly assessed as an association of persons. According to the assessee, the lease amount was distributed in proportion to respective share of each co-owner, they did not form part of association of persons. In simply leasing the mill there is no common activity among the co-owners which make them an association of persons. They did not carry on any common activity. Since the share of each of the co-owner is separate and distinct from out of the yearly lease amount, the individual share of each of the co-owner should be brought to tax in his hands as an individual. The whole of the lease amount should not be brought to tax in the hands of all of them that too making them as an association of persons.
3. We have heard Sri Ch. Pullayya, learned Chartered Accountant for the assessee and Sri V. Narasirnha Rao, learned Departmental Representative. After hearing both of them and after going through the whole record including the paper compilation filed on behalf of the assessee before us, we are of the view that the lower authorities went wrong in considering the status of the assessee as an association of persons and in bringing the whole of the lease amount as the income of an association of persons. Simply because all the co-owners join together in leasing out the property, does not make them association of persons even though the asset leased out, was a commercial asset. In this connection the decision of the Madras High Court reported in CIT v. K.R. Kanakarathinam [1984[146 ITR 364 is apposite, to be taken into account. The facts of that Madras High Court decision are quite akin and bear near similarity to the facts of the case before us. In that case a cinema house called Opera House at Bangalore was purchased by the husband and wife. The husband purchased 5/8 share in the property, whereas the wife purchased 3/8 share in the property from different persons. The cinema theatre was leased out on a monthly rent of Rs. 950 for the building and Rs. 550 for the machinery and furniture i.e., totalling to Rs. 1,500 per month. The ITO in that case, took the view that the letting of the building is inseparable from the letting of the machinery and furniture. He held that income from letting of the building was chargeable as income from other sources. He also determined the status of the assessee as the association of persons consisting of the husband and wife, i.e., Kanakarathinam and Yeshodammal. The AAC confirmed the status of the persons as association of persons and he held that leasing out of theatre was Joint operation of both the co owners. He held that co-owners were not acting in unison with each other, the leasing of the theatre would not have been possible, and thus, leasing was a joint venture which was rightly treated as an assessable unit and described as an association of persons. When the matter was carried in second appeal before the Tribunal, the Tribunal held that leasing of cinema theater was only a convenient method of earning the rental income from the property consisting of the building, machinery, furniture, etc., it also held that the income derived from the cinema theatre was liable to be separately assessed in the hands of the two co-owners who were only tenants-in -common of the property. In that case the Madras High Court had to consider whether the leasing of the theatre by the co-owners would amount to a joint operation for making profit and whether they had got common purpose in leasing out a property and while leasing out the property whether co-owners constitute themselves as association of persons. The Madras High Court had to consider whether husband and wife in the case before them can be considered as association of persons within the meaning of the ratio of the Hon’ble Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546 which is the following:–
Therefore ‘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 Madras High Court ultimately held that the lease income derived from the two assessees, husband and wife, should be assessed separately and not in the status of association of persons. The following reasoning was given at page 367 by the Madras High Court for coming to the above mentioned conclusion:–
Thus under the document as executed in the present case it is clear that the rent was separately payable to the respective co-owners. The two co-owners could have executed separate lease deeds, but as it was a single property with some furniture, etc., they should have thought it more convenient to execute a common lease deed. The conditions stipulated in respect of the rent payable were separately set out so as to show that the transaction was being entered into by each individual co-owner separately with the lessee. Thus, taking into account the peculiar facts of this case, it has to be held that the income by way of rent accrued separately in respect of the 5/8ths and 3/8ths share to Kanakarathinam and Yeshodarnmal respectively. Further, it would appear that at the time when the purchase was separately effected by these two individuals from their vendors, the two vendors to the two individuals had themselves a separate and distinct share in the property and they purchased only such a separate share. It appears that Kanakarathinam purchased from the executors of one Rangamma who had died executing a will in respect of her 5/8ths share. Similarly, Yashodammal purchased it from her father who was originally a co-owner with a 3/8ths share along with Rangamma in respect of this very property.
As in the above case, each of the co-owners in the case before us could have executed separate lease deeds agreeing for separate rent, but since the property was a single property with common plant and machinery and godowns, the co-owners should have thought it fit or more convenient to execute a common lease deed along with other co-owners. As regards receipts of rent is concerned, Sri P. Suryanarayana Raju was acting only as an agent to each co-owner. The lease amount stipulated was Rs. 41,000 per year. The lease was for a period of four years, the lease amount is to be paid in 8 instalments. It is clearly stipulated in the lease deed that after realising the total rent, Sri P. Suryanarayana Raju has to distribute the same in proportion to the share of each co-owner held in the common property. Therefore, the co-owners did not act in unison or did not join in a common purpose. Simply because all of them let out their respective shares in common property it does not amount to common action. The lease deed was executed for the convenience of all the co-owners. The mere execution of lease deed would not amount to common action. It only exhibited a convenient action on the part of the co-owners. Each of the co-owners could have separately executed lease deeds in favour of the lessee and could have realised the lease amount separately for his share, since each of them have got a definite proportionate share in the common property. Simply because they join in an execution of common lease deed, no common purpose or common action can be inferred, since Sri P. Suryanarayana Raju after realising the lease amount, is obliged to distribute it in proportion to the respective share held by each co-owner. In our opinion, the ratio of the Madras High Court decision equally applies to the facts of this case and applying the same, we have to hold that the whole of the lease amount cannot be taxed commonly in the hands of all the co-owners holding the status to be that of an association of persons. On the other hand, the lease amount should be distributed according to the definite shares held by each of the co-owners and the respective share of the lease amount should be taxed in the individual hands of each co-owner.
4. Thus, the appeal filed by the assessee, is allowed.