Definite co-ownership shares prevent association-of-persons taxation; isolated leasing of property remains income from property, not business income.
Where co-owners hold definite and ascertainable shares in leased property, rental income cannot be assessed as income of an association of persons merely because the lease was created by a common act; it is assessable separately in the hands of the individual co-owners. The isolated letting of a mill building and machinery was treated as an exercise of ownership, not a systematic business activity, so the income fell under the head of income from property and not business income. The stated ratio is that joint leasing alone does not create a taxable association or convert passive rental receipts into business profits.
Issues: (i) Whether the rental income from the leased mill building and machinery could be assessed in the hands of an association of persons. (ii) Whether the income from leasing out the mill was income from business under section 10 or income from property under section 9.
Issue (i): Whether the rental income from the leased mill building and machinery could be assessed in the hands of an association of persons.
Analysis: The co-owners had obtained a recognised partition, each held a definite 1/7th share, and the rent was separately credited in proportion to those shares. Section 9(3) of the Indian Income-tax Act, 1922, specifically excludes assessment as an association of persons where property is owned by two or more persons and their shares are definite and ascertainable. The mere fact that the property was leased by a single act did not create a joint enterprise for producing income.
Conclusion: The rental income could not be assessed in the hands of an association of persons and was assessable separately in the hands of the co-owners.
Issue (ii): Whether the income from leasing out the mill was income from business under section 10 or income from property under section 9.
Analysis: The letting out of the mill was an isolated exercise of ownership and not a systematic or organised business activity. The property consisted of buildings and machinery let out for rent after the partition, and no business, profession or vocation was carried on by the co-owners. The income therefore fell within the head of income from property and not business income.
Conclusion: The income was assessable as income from property under section 9 and not as income from business under section 10.
Final Conclusion: The reference was answered against the Revenue and the rental income from the leased mill was held to be taxable only in the hands of the individual co-owners as income from property.
Ratio Decidendi: Where co-owners have definite and ascertainable shares in property, rental income from that property cannot be assessed as income of an association of persons merely because the property was leased by a common act; isolated letting of property does not constitute a business.
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AI Drafter ✕
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