Even if one member of the AOP is taxable at a rate higher than MMR, the entire income of the AOP will be taxed at MMR

AOP’s Taxation for Co-Owned Property Income Remanded for Share Verification

Issue: Whether Section 167B of the Income-tax Act, 1961, which applies the maximum marginal rate (MMR) to AOPs with indeterminate shares, is applicable to an Association of Persons (AOP) managing rental income from co-owned property when the co-ownership agreement specifies the shares of each co-owner.

Facts:

The assessee, an AOP, manages rental income from co-owned immovable property.
The CPC processed the return and applied the MMR under Section 167B, assuming indeterminate shares.
The assessee argued that Section 167B is inapplicable because the co-ownership agreement clearly specifies the shares of each co-owner.

Decision:

The court held that Section 167B is not applicable in this case.
The co-ownership agreement specifies the pre-determined proportions for distributing rental income among co-owners, making their shares ascertainable.
Section 167B applies only when shares are indeterminate or unknown.
However, the court also noted that Section 167B requires applying the MMR if even one co-owner is taxable at a rate higher than the MMR.
Since the tax rates applicable to each co-owner were not conclusively established, the matter was remanded to the Assessing Officer for verification to ensure the correct tax rate is applied.

Key Takeaways:

This case clarifies that Section 167B applies only when the shares of co-owners in an AOP are indeterminate or unknown.
If a co-ownership agreement clearly specifies the shares, Section 167B is not applicable, and income should be taxed under Section 26 in the hands of individual co-owners.
However, even with specified shares, the MMR may still apply if any co-owner’s income is taxable at a higher rate.
This decision emphasizes the importance of examining the co-ownership agreement and verifying the tax rates applicable to each co-owner to ensure accurate tax calculation for AOPs managing co-owned property income.

IN THE ITAT AHMEDABAD BENCH ‘A’

Nam Group Aslali

AO, CPC

Siddhartha Nautiyal, Judicial Member
and MAKARAND V. MAHADEOKAR Accountant Member

IT Appeal Nos.1610 & 1611(Ahd) of 2024
[Assessment Year 2022-23, 2023-24]

JANUARY 28, 2025

P.F. Jain, AR for the Petitioner. B.P. Srivastava, Sr. DR for the Respondent.

ORDER

Makarand V. Mahadeokar Accountant Member. – Both the appeals, filed by the assessee pertain to Assessment Years (AYs) 2022-23 and 2023-24 and arise from the orders passed by the Office of the Commissioner of Income Tax, Appeal, ADDL/JCIT-10 Mumbai [hereinafter referred to as “CIT(A)”] in upholding the levy of surcharge at the maximum marginal rate under Section 167B of the Income Tax Act, 1961 [hereinafter referred to as “the Act”]. The levy of surcharge was determined pursuant to intimations issued by the CPC, Bengaluru under Section 143(1) of the Act. Since the facts and grounds of appeal for both years are identical except for the quantum involved, we are disposing of both the appeals through a combined order for the sake of convenience.

Facts of the Case:

2. The assessee is an Association of Persons (AOP) engaged in managing rental income from co-owned immovable property For both the years under consideration, the assessee filed its return of income and the same were processed by the CPC u/s.143(1) of the Act raising demands in both the years. The demands arose due to the classification of the assessee as an AOP with indeterminate or unknown shares, leading to the application of the maximum marginal rate under Section 167B of the Act. The assessee filed appeal before CIT(A) against the orders u/s.143(1) of the Act and CIT(A) dismissed the appeals upholding the surcharge at maximum marginal rate. The summarized details are tabulated below:

Particulars	A.Y. 2022 23	A.Y. 2023 24
Date of Return Filing	30.07.2022	21.07.2023
Income Declared in Return	Rs.43,46,800	Rs.52,78,770
Date of Intimation u/s 143(1) of the Act	16.03.2023	27.05.2024
Income Assessed in Intimation	Rs.43,46,800	Rs.52,78,770
Demand Raised in Intimation (due to surcharge under Section 167B) of the Act	Rs.5,71,790	Rs.71,840
Date of Order of CIT(A)	26.08.2024	26.08.2024

3. Before the CIT(A), the assessee contended that while it is an AOP, its co-ownership agreement dated 29.04.2006 clearly specifies the shares of the co-owners, and therefore, the income should have been taxed under Section 26 of the Act in the hands of the co-owners. The CIT(A) upheld the CPC’s action for both assessment years, concluding that Section 167B of the Act applies to the income of an AOP where the shares of members are indeterminate.

4. Aggrieved by the orders of the CIT(A), the assessee is in appeal before us with following grounds of appeal(s), which are common for both the AY(s) except the quantum:

The Ld. CIT(A) has erred in law and on facts in upholding the charging of surcharge at Maximum marginal rate as per intimation on the income of Coownership governed by section 26 of the income tax act.

He has erred in law and on facts and observing that the facts of current A.Y. and facts of the appellant for A.Y. 2015-16 are not identical in as much as that the co-ownership having rental income is undisputed and income has been shown in the hand of co-ownership on account of TDS being made in the name of Coownership in which shares of co-owners are specific.

He has erred in law and on facts in applying provision of section 86 and section 67A to the facts of the co-ownership having rental income to be assessed as per section 26 of the Income tax act.

He has grievously erred in law and facts in observing that the decision of Honourable ITAT Kolkata Bench reported in [2001] 79 ITD 539 (Kolkata) in the case of Executors of the estate of Bhagwan Devi Sarogi is not applicable in as much as per decision of ITAT, the assessment is to be made as per special provision of section 26 and section 167B(2) had no application which is a general provision.

On the facts of the assessee, he has erred in law and facts in not appreciating the ratio of decision of Honourable ITAT, Kolkata Bench.

On the facts of the assessee the surcharge ought not to have been levied at Maximum marginal rate but as per provision of applying normal rate r.w.s. 26 of the Income Tax Act.

On the facts of the assessee the surcharge computed at Rs. 52,162/- (For A.Y. 2023-24 Rs. 1,58,363/-) ought to have been accepted without raising further demand of Rs. 5,71,790/- (For A.Y. 2023-24 Rs. 5,85,943/-)

The appellant craves leave to add, to alter and/or to modify any ground of appeal.

5. During the course of hearing before us, the Authorized Representative (AR) of the assessee submitted that the income pertains to rental income from house property, and the co-ownership agreement specifies the specific and determinate shares of the co-owners. The AR further submitted that Under Section 26 of the Act, such income is to be taxed in the hands of co-owners individually, not at the maximum marginal rate applicable to an AOP under Section 167B of the Act. The AR also stated that the CPC incorrectly treated the shares of co-owners as indeterminate and applied the maximum marginal rate under Section 167B of the Act. The AR further stated that the coownership agreement dated 29.04.2006 clearly specifies the shares of the coowners, making Section 167B of the Act inapplicable. The AR placed on records the copy of co-ownership agreement. The AR argued that in the CIT(A)’s orders for earlier assessment years the revenue has accepted that taxed the rental income in the hands of individual co-owners, establishing a consistent principle of taxation under Section 26 of the Act. The AR placed on records copies of CIT(A)’s orders for A.Y. 2013-14 and A.Y. 2015-16. The AR placed on records the copy of order of CIT(A) in case of Aslali Storage House, an AOP where Co-owners of assessee are also co-owners. In that case, as stated by the AR, the CIT(A) gave relief to the assessee. The AR pointed out the relevant clause of the Co-ownership agreement which read as follows:

“(4) The Parties hereto agree that the Income by way of Rents from the tenants of the premises will be appropriated first to pay all taxes.Assessment charges, duties or calls made by Government, Revenue or Local Authorities. The Surplus will be distributed among the co-owners of the premises in the proportions mentioned hereinabove.”

5.1. The AR placed reliance on the decision of Kolkata Bench in case of ACIT v. Executors of the Estate of Bhagwan Devi Sarogi [[2001] 79 ITD 539 (Kolkata) ].

6. The Departmental Representative (DR), on the other hand, relied on the order(s) of CIT(A) and stated that the CIT(A) has distinguished the decision of CIT(A) in assessee’s own case of A.Y. 2015-16 as in the said A.Y. the rental income has been taxed in the hands of respective co-owners and the return of income was filed by the assessee showing NIL income.

7. The AR in rejoinder, stated that the CIT(A) in case of Aslali Store House for A.Y. 2022-2023, has given decision in favour of assessee where the facts are exactly same. The AR also stated that the rental income is shown in the hands of the AOP for claiming TDS credit, but the agreement establishes that the income belongs to the individual co-owners in fixed proportions.

8. We have heard the rival contentions and carefully considered the material on record, including the provisions of the Income Tax Act, the coownership agreement, judicial precedents, and the arguments advanced by both parties. The core issue in dispute is whether the rental income from house property earned by the assessee is to be taxed under Section 26 of the Income Tax Act in the hands of individual co-owners or at the Maximum Marginal Rate (MMR) under Section 167B, as applied by the CPC and upheld by the CIT(A).

8.1. We have gone through the co-ownership agreement dated 29.04.2006, which specifies that the rental income will be distributed among the coowners in specific and pre-determined proportions after meeting all tax and other liabilities. This establishes that the shares of the co-owners are specific and ascertainable, which is a fundamental condition for the application of Section 26. Section 26 mandates that when property is owned jointly by coowners, the income shall be taxed in the hands of the co-owners individually based on their respective shares. Thus, the provisions of Section 167B of the Act, which apply when shares are indeterminate or unknown, are inapplicable in the present case.

8.2. The AR placed reliance on the CIT(A)’s orders for A.Y. 2013-14 and A.Y. 2015-16, wherein the rental income was taxed in the hands of individual co-owners under Section 26 of the Act based on determinate shares. This demonstrates a consistent treatment of income under Section 26 of the Act in the appellant’s own case.

8.3. The DR, relying on the CIT(A)’s order, attempted to distinguish the current assessment years from A.Y. 2015-16, stating that during A.Y. 2015-16, the assessee declared NIL income, and the rental income was taxed in the hands of the co-owners. However, this distinction does not alter the fact that the specific shares of co-owners remain unchanged under the co-ownership agreement, making Section 26 applicable even in the present case.

8.4. The AR brought on record the CIT(A)’s order in the case of Aslali Storage House for A.Y.2022-2023, another AOP where the co-owners of Nam Group Aslali are also co-owners. In that case, the CIT(A) ruled in favor of the assessee, holding that Section 26 governs the taxation of income from coowned property with determinate shares, and the surcharge levied under Section 167B was deleted. The facts of the Aslali Storage House case are identical to the present case, further strengthening the assessee’s position.

8.5. The AR placed reliance on the decision of the ITAT Kolkata Bench in the case of ACIT v. Executors of the Estate of Bhagwan Devi Sarogi [[2001] 79 ITD 539 (Kolkata) ], which held that Section 26, being a special provision, overrides the general provisions of Section 167B and when the shares of co-owners are specific and ascertainable, the income is to be taxed in the hands of individual co-owners, and the levy of surcharge at MMR under Section 167B of the Act is not warranted. This decision is directly applicable to the present case, as the co-ownership agreement clearly establishes specific and determinate shares of the co-owners.

8.6. The AR clarified that the rental income was shown in the hands of the AOP for administrative purposes, such as claiming TDS credit, but the substantive ownership of the income belongs to individual co-owners in specific proportions. While this explanation aligns with Section 26 of the Act, it must be noted that provisions under the Act allow for TDS credit to be passed on to members of an AOP. Resorting to such a practice of filing the return in the hands of the AOP for claiming TDS credit, despite the specific provisions under Section 199 read with Rule 37BA(2) of the Act allowing the credit of TDS to be passed on to the individual members of the AOP, is not in accordance with the procedural framework of the Act. This approach creates ambiguity in the tax treatment of income and compliance with the provisions of Section 26 of the Act, which mandates taxation of rental income in the hands of the co-owners based on their specific and determinate shares.

8.7. As per the provisions of Section 167B of the Act, if even one member of the AOP is taxable at a rate higher than MMR, the entire income of the AOP will be taxed at MMR. Although the co-ownership agreement specifies determinate shares, the record does not conclusively establish the tax rates applicable to each co-owner. It is therefore necessary to verify the taxability of each co-owner to ensure that the correct rate of taxation is applied.

8.8. Based on the facts, the co-ownership agreement, and judicial precedents, it is evident that Section 26 of the Act governs the taxation of the rental income from house property in this case. However, in light of the provisions of Section 167B of the Act, it is essential to ascertain whether any member of the AOP is taxable at a rate higher than MMR. In the interest of justice and to ensure compliance with the Act, the orders of the CIT(A) for both A.Y. 2022-23 and A.Y. 2023-24 are set aside, and the matter is restored to the file of the AO for proper verification.

8.9. The AO is directed to:

(a)

Verify the tax rates applicable to each co-owner based on their individual tax returns.

(b)

If none of the co-owners is taxable at a rate exceeding MMR, the income shall be taxed in the hands of the AOP at normal slab rates applicable to individuals under Section 167B(2) of the Act.

(c)

If any co-owner is taxable at a rate higher than MMR, the income of the AOP shall be taxed at MMR as per the provisions of Section 167B of the Act.

9. In view of the above findings, both the appeals of the Assessee for A.Y. 2022-23 and A.Y. 2023-24 are allowed for statistical purposes.