4 Person purchased land and sold part of it after construction. Whether its an income of an AOP or Individuals?
We the four friends have purchased a piece of land. On the piece of land, we have constructed 12 shops out of which in the current year we will be selling 4 shops and balance 8 shops are still under constructions. Whether the profit on sale of shops will be capital gain income in the hands of the individuals or it will be treated as income of the AOP? We don’t have any partnership deed as such and the property incorporated the name of we all 4 person as co-owners. If we don’t sale the remaining 8 shops and let it out then whether the rental income would be AOP’s income or individual income in equal proportion of all the co-owners?
- Your case resembles to the observation in the case of Smt. Parvathi Devi & Ors. vs. CIT (1987) 64 CTR (AP) 217 wherein also four persons purchased land in a developed area with the intention to sell it as house building sites. There was evidence to show that the four persons had purchased the property jointly with the purpose of selling it and making a profit. They were, therefore, assessable as an AOP.
2. In CIT vs. Indira Balakrishna (1960) 39 ITR 546 (SC) and G. Murugesan & Bros. vs. CIT 1973 CTR (SC) 279 : (1973) 88 ITR 432 (SC), has explained that an AOP must be one in which two or more persons join in for a common purpose action and must be one with the object of earning income or profits and gains. The members of the AOP cannot be individually made liable to pay tax on its income, as stated in ITO vs. Ch. Atchaih (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC).
3. It appears that all of you have jointed for the purpose of the making the profit.
4.You have purchased the land and thereon constructing 12 shops.
5. The profit earned by the all the 4 co-owners will likely to be assessed as an AOP and it will be subject to the rates prescribed under s. 167B and not to be individually assessed.
6.Protection provided under section 26 may not be available to you as it is only in respect of income from house property income.
7. If two or more persons come together for the acquisition of property which is intended to be used for the purpose of producing income then profit or gains fall within the words ‘other association of individuals’ [Laxmidas Deividas & Vasanji Ruttonsey vs. CIT 10 ITC 414 (Bom)].
8. A commercial adventure of co-owners of assets with a view to obtaining and dividing the profits amongst them ordinarily assumes the characteristics of a partnership and is generally so regarded in law. If, however, their relationship falls short of a partnership by reason of any legal infirmity or for whatever cause, their activities in the pursuit of profit may still assume, albeit not in the strictly legal sense, some of the attributes of a firm or partnership, and they will be treated as an AOP for the purpose of assessment.
9. Further, wherever individuals employ their assets in a joint enterprise with a view to earn profit though not as partners, they constitute an AOP by reason of their common purpose or common action
[CIT vs. Karunakaran & Ors. (1988) 68 CTR (Ker) 131 : (1988) 170 ITR 426 (Ker)].
10. There are contrary view in the case of CIT vs. Smt. Saraswati Bai (1982) 137 ITR 656 (P&H) and also in Rama Devi Agarwalla & Ors. vs. CIT (1979) 117 ITR 256 (Cal). However, therein there was no evidence on record that the co-owners joined with a specific purpose. A similar view was also taken in Sheikh Zainuddin Ahmad & Ors. vs. CIT (1956) 30 ITR 36 (Pat).
In view of above, I am of the considered opinion that the assessment would be done by the AO as an AOP and not as Individuals.