Co-owners of immovable property must be separate assessee for all purposes including service tax -reverse charge method can be more effective in relation to renting of properties. Co-owners of building In case of properties acquired from deceased members of family or other persons through will or inheritance etc. co-ownership of properties is a popular and common feature. Even in case of fresh acquisition acquiring a property in joint names of family members or other associates is a common practice. This phenomenon happens for financial, administrative and family reasons. In such cases a property may be divided by metes and bounds or there can be proportionate ownership of each owner. In case of division by metes and bound, the owner can enter into agreements for each part owned by respective owner, and in that case a portion is owned by one person but entire property is owned by joint owners in divided manner. Owners are called joint owners or co-owners. When property is not divided by metes and bound and each co-owner has some share or proportionate share in property there is case of joint ownership or co-owners. Provisions of Income-tax Act,1961 (ITA) We find relevant provisions in section 26 of the ITA. The section is reproduced below with highlights for analysis and easy understanding Property owned by co-owners. 26. Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income. Explanation. mdash For the purposes of this section, in applying the provisions of sub-section (2) of section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section. Assessment and relief as individual From above provision we find that in case of jointly owned properties where share of each joint owner is definite and ascertainable, each joint owner is assessed separately for his share and he is also eligible for any relief as an individual owner of his respective share. Thus in case of individuals each individual will be entitled to basic exemption up to threshold limit and other exemptions for self occupied property or any other deductions in respect of property as may be applicable. The Annual value is not clubbed. Capital gains In case joint owners sell property, each joint owner will have to compute his capital gains and he can claim admissible deductions and incentives for re-investment of capital gains. Wealth-tax Similarly under the provisions of the Wealth Tax Act, also value of share of each co-owner is to be considered while computing taxable wealth. The entire property is not assessed as a property of AOP. It is worth to note that in the ITA Association of Persons (AOP) and Body of Individuals (BOI) are specifically considered as persons and different type of assessee besides individual , HUF firm, company etc. Therefore, joint owners were not considered as an AOP or BOI. This is for the reason that just for joint ownership of a property and AOP or BOI is not formed. For purpose of AOP some other common purposes are essential aspects of the group of persons to be regarded as AOP. Receiving payment of rent is an administrative aspect In case of jointly owned properties payment of rent may be received separately by each owner. This is preferable method. However, some times when there are many owners and tenant want to deal with few person or one of lead person, for administrative convenience, payment may be received by one person (by cash or by cheque) which is deposited in account of one of joint owners and then amount is divided / distributed or credited amongst joint owners as may be convenient. In such situation the person who receives payment for entire property is acting as an agent for collection of rent for other joint owners the rent so collected by him belongs to all joint owners. Thus even receiving of payment of rent by one of joint owner on his own behalf and on behalf of all other joint owners will not make any difference and rental income shall belong and assessable on account of joint owners as per law. Definition of person In many articles written by the author he had pointed out the need of specific definition of lsquo person rsquo for the purposes of service tax. Earlier there was no definition of person in the FA 1994. Therefore, as per author, it was a disputed issue whether definition of person as per the General Clauses Act , can be adopted for the purposes of Service Tax? Author had expressed his views that government cannot be regarded as a person. Assuming that the definition as per the General Clauses Act was applicable the term person could be considered as per definition found in the General Clauses Act, that is person includes, any company or an association or body of individuals, whether incorporated or not. In view of this definition, author had expressed his view that government cannot be regarded a person. After amendments vide the FA 2007 a definition of lsquo person rsquo has been provided vide clause (37) of section 65B of the Finance Act, 1994 w.e.f. 1-7-2012. As per said clause person includes, mdash (i) an individual, (ii) a Hindu undivided family,(iii)a company, (iv)a society,(v)a limited liability partnership,(vi)a firm,(vii)an association of persons or body of individuals, whether incorporated or not,(viii)Government,(ix)a local authority, or(x)every artificial juridical person, not falling within any of the preceding sub-clauses. Joint ownership and service tax As noted above there is clear provision under the ITA for assessment of respective share of each joint owner in his hands. However, in relation to provisions of service tax there is no clarity on this aspect and therefore disputes are taking place. We find some judgments of Tribunal in relation to dispensing with requirement of pre-deposit. The Tribunal has found that there is prima facie case that each joint owner is a separate service provider and is eligible for threshold limit of exemption. The following are two such reported cases SMT. BHAVNA R SHAH and SHRI N. G. SHAH Versus COMMISSIONER OF SERVICE TAX. AHMEDABAD 2013 (1) TMI 578 - CESTAT AHMEDABAD Dinesh K. Patwa Versus Commissioner of Service Tax 2012 (10) TMI 67 - CESTAT AHMEDABAD In these cases show cause notices and demands were issued to various co-owners demanding service tax, by considering that total rent received by each co-owner of property in totality is to be considered and taking view that each co-owner is not eligible for separate exemption but full amount of rent is to be considered as rent received by AOP or BOI. The Tribunal has taken view that there is prima facie case that each joint owner is entitled to exemption of thresh hold limit and therefore pre deposit has been dispensed with. Service and owner of property A landlord simply provide his property to tenant for possession and use and in consideration receives rent. The landlord does not provide any service, he provide property. The element of service, if at all is created by tenant when he renders some services by using the let out property and other facilities he has. Therefore there is no service at all. However, as per provisions it has been declared that even letting out of property is a deemed service. Therefore, now question arises is who provide service? Depending on facts the answers can be Each joint owner provide deemed services All joint owners provide deemed services There is a firm, AOP or BOI constituted by various joint owners to provide deemed service by letting out of property jointly to tenant. If we consider the provisions of the ITA it can only be said that only each of joint owner can be considered as separate person who can be deemed to have provide deemed service because letting out of property for commerce is deemed to be service. Thus if property is owned by two persons A and B, share of rent of A and B cannot be clubbed together to find out whether A or B or A and B are liable to pay service tax. Amount received by A and B have to be considered separately as both are deemed to have provided services by letting out the property. The decisions of CESTAT are reproduced below with highlights for analysis SMT. BHAVNA R SHAH and SHRI N. G. SHAH Versus COMMISSIONER OF SERVICETAX.AHMEDABAD 2013 (1) TMI 578 - CESTAT AHMEDABAD No. - ST/151-152/2012 Order No. - S/1889-1890/WZB/AHD/2012 Dated - 30 August 2012 Dinesh K. Patwa Versus Commissioner of Service Tax 2012 (10) TMI 67 - CESTAT AHMEDABAD Dated - 21 June 2012- in this case also the facts, pleadings and decision are of same nature and on similar lines therefore the same are not reproduced for sake of brevity. A clarification is desirable Co-owners of immovable properties are separate assessee under I.T.Act and same rule must be applied in context of Service tax about exemption for each owner as separate small service providers- clarification is desired to avoid disputes.We find that in both reported cases the amount involved is not very high, however, disputes are taking place. Reverse charge method is desirable As suggested by the author in some earlier articles, the author again suggest that renting of property for commercial purposes can be more effectively placed under category or mechanism of reverse charge method where service receiver (that is tenant) will be liable to pay service tax. In that case units of basic exemption will also reduce and there will be more tax collection. - Author - CA DEV KUMAR KOTHARI
More...