When more than one person owns a property and the said property realizes revenue in the form of rent and interest on loan is involved, direct and indirect tax implications require examination in the light of relevant statutory provisions and judicial precedents.

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CO-OWNERS OF HOUSE PROPERTY – DIRECT & INDIRECT
TAX IMPLICATIONS
K. VAITHEESWARAN,
Advocate
vaithilegal@yahoo.co.in
Background
When more than one person owns a property and the said property realizes
revenue in the form of rent and interest on loan is involved, direct and indirect
tax implications require examination in the light of relevant statutory provisions
and judicial precedents. If the rent for the year, for each co-owner is less than
Rs.10 lakhs per annum, the question that arises is whether each co-owner is
entitled to exemption in terms of Notification No.33/2012. In case, loan has to
be taken jointly and the individual share is not specified in the sale deed, the
question that arises is whether the allowable interest should be equally divided
among the co-owners.
Transfer of Property Act, 1882
Section 45 of the Transfer of Property Act provides that where an immovable
property is transferred for consideration to two or more persons and where the
consideration is paid out of a fund belonging to them in common, they are in
the absence of a contract to the contrary, respectively entitled to interests in
such property, identical as nearly as may be, with the interests to which they
were respectively entitled in the fund. Where such consideration is paid out of
separate funds belonging to them respectively, they are in the absence of a
contract to the contrary, respectively entitled to the interests in such property in
proportion to the shares of the consideration which they respectively advanced.

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In the absence of evidence as to interests in the fund to which they were
respectively entitled, or as to the shares which they respectively advanced, such
persons shall be presumed to be equally interested in the property.
In terms of Section 109 of the Transfer of Property Act, the Lessor can transfer
the property lease or any part thereof or any part of his interest therein to a
transferee and the transferee shall possess all the rights in respect of the
property or part so transferred. Further Section 109 also provides that the
lessor, the transferee and the lessee may determine what proportion of the
premium or rent reserved by the lease is payable in respect of the part so
transferred.
The Supreme Court in the case of Mohar Singh Vs. Devi Charan (AIR 1988
SC 1365) has held that Section 109 provides a statutory exception and enables
an assignee of a part to exercise all the rights of the portion in respect of which
the right is so assigned
Decision under erstwhile Section 230A of the Income Tax Act
The AP High Court has in the case of Samudrala Ganesh Rao Vs. State of AP
(1988) 174 ITR 304 has held that Section 230A(1) of the Income Tax Act
provides that registration cannot be effected unless a certificate is obtained from
the concerned Assessing Officer with regard to the clearance of all the existing
liabilities regarding direct taxes. Sub-section (1) provides that the clearance
certificate is necessary if the valuation exceeds Rs.5,00,000/- [between
01.04.1988 and 30.06.1995 Rs.2,00,000/- and up to 31.03.1988 Rs.50,000/-]
The valuation of Rs.5,00,000/- / Rs.2,00,000/-/ Rs.50,000/- is with reference to
the right, title or interest of any person in the property. The criterion should be
the value of the property or the interest of the person in such property that is
sought to be transferred. It is not permissible to take into consideration the
value of the entire property.
Income from House Property
Under the Income Tax Act, income from house property is computed under
Section 22 and in this context the Supreme Court in the case of CIT Vs. Podar
Cement Pvt. Ltd. (1997) 226 ITR 625 has held that under any law, every owner
is a person who has got valid title legally conveyed to him after complying with
the requirements of law such as Transfer of Property Act, Registration Act etc.
but in the context of Section 22 of the Income Tax Act having regard to the

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ground realities and further having regard to the object of the Income Tax Act,
to tax the income, owner is a person who is entitled to receive income from the
property in his own right. The requirement of registration and sale deed in the
context of Section 22 is not warranted.
The Tribunal in the case of Assistant Commissioner of Income Tax Vs.
S. Prabhakar Kamath (2009) 116 ITD 155 has held that when 4 individuals
purchase a plot of land, construct a commercial complex thereon, each co-
owner has equal undivided share in the entire schedule property. When the part
of the complex is given on rent and each owner has offered the share of rental
income from the house property in their respective individual hands, the said
treatment is correct since income from house property is to be assessed in the
hands of every owner if their shares are ascertainable.
In the case of CIT Vs. Murugesan and Brothers (1969) 72 ITR 696, S
executed a settlement deed leaving life interest in house properties to his four
grandsons and reminder to their children. Shares were also gifted to the
grandsons. The mother acted as a guardian of the minor grandsons and collected
rentals and dividends. The amount was first credited to the joint account of the
grandfather’s firm and at the end of the year the same was divided into 4 equal
shares and credited to the account of each bother. The Supreme Court held that
as per the Income Tax Act, in so far as house property is concerned, each
brother’s share as income has to be assessed individually.
Tax Deduction under Section 194-I
The Rajasthan High Court in the case of Commissioner of Income Tax Vs.
Manager State Bank of India (2010) 323 ITR 93 has held that under Section
194-I of the Act, when there were a number of owners of a property, the limit or
ceiling would apply to each and every owner separately, notwithstanding the
fact that the amount had been paid by crediting the aggregate sum in the joint
account of the owners. The same view has been expressed in the case of
Amalendus Shaoo & Others Vs. Income Tax Officer (2003) 264 ITR 16.
Co-Owners whether AOP?
In the case of CIT Vs. Shivsagar Estates (2002) 257 ITR 59, when the property
was owned by 65 co-owners, the Income Tax Department had contended that it
is to be taxed in the hands of Association of Persons. The Supreme Court held

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that co-owners cannot be considered as ‘AOP’ and the rent from lease should be
separately assessed in the hands of individual co-owners.
The Punjab & Haryana High Court in the case of Sudhir Nagpal Vs. ITO
(2012) 349 ITR 636 has held in para 21 as under:-
“.......in order to assess individuals to be forming 'association of persons',
the individual co-owners should have joined their resources and
thereafter acquired property in the name of association of persons and
the property should have been commonly managed, only then it could be
assessed in the hands of 'association of persons'. Conversely, the mere
accruing of income jointly to more persons than one would not
constitute thereon an association of persons in respect of such income.
In other words, unless the associates have done some acts or performed
some operations together, which have helped to produce the income in
question and have resulted in that income, they cannot be termed as
association of persons. Unless the members combine or join in a
common purpose, it cannot be held that they have formed themselves into
an association of person. In the present case also, the co-owners had
inherited property from their ancestors and there is nothing to show that
they had acted as association of persons. The income was, thus, to be
assessed in the status of “individuals” and the Assessing Officer, the
Commissioner of Income Tax (Appeals) and the Tribunal were not right
in treating the income arising to “association of persons”.........”
Interest deduction under Section 24
The Punjab and Haryana High Court in the case of Priya Mahajan Vs. CIT
(Appeals) – TS-743-HC-2015(P&H) has held that where plot is purchased by
four persons and the housing loan is also taken by the same four persons and the
individual shares are not specified in the sale deed, the logical conclusion is that
everyone had equal share in the property in terms of Section 45 of Transfer of
Property Act. The assessee was entitled to only 25% of the entire interest as a
deduction under Section 24.
Service Tax – Rs.10 lakh exemption
The Mumbai Tribunal in the case of CCE Vs. Deoram Vishrambhai Patel
(2015) TS 519 CESTAT has held that when brothers jointly purchased property

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and entered into lease agreement with various banks in individual capacity, they
are only co-owners and are not jointly or severally liable to service tax under
Renting of Immovable Property Service. Each person is eligible to claim the
benefit of exemption under Notification No. 6/2005 (now Notification
No.33/2012). Since the rents are below the limits each person qualifies for
exemption. Therefore the revenue’s contention that Assessee and his brothers
are ‘association of persons’ who entered into composite contract for renting
entire property is unsustainable.
The Ahmedabad Bench of the Tribunal in the case of Shri Dilip Parikh Vs.
Commissioner of Service Tax (2013-TIOL-739-CESTAT-AHM), at the time of
stay, has held that each co-owner is separate and is entitled to separate small
scale exemption under Notification No.6/2005.
The Ahmedabad Bench of the Tribunal in the case of SMT Chuniben S Jadia
& Others Vs. CST (2012-TIOL-1722-CESTAT-AHM) has observed that since
cheques are received individually by all the assessees and they are co-owners or
joint owners, clubbing of the rent is not permissible.
Any attempt to ignore co-ownership of a house property and to treat all the
owners as an AOP or to treat the aggregate rent as taxable ignoring individual
ownership in rent is not legal per se. Generally, the following parameters
would help demonstrate eligibility for the ten lakh exemption for each co-
owner.
(i) Each owner is entitled to separate rent because of their ownership rights
either through contract or by law.
(ii) Each owner receives separate rent in their own name and returns are filed
by each owner in their individual capacity.
(iii) Each owner files separate income tax returns and offers the share of rental
income subject to income tax applicability.
(iv) Tax is deducted at source on each individual rental payment under Section
194-I of the Income Tax Act subject to applicability.
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