The Customs, Excise and Service Tax Appellate Tribunal, Chennai Bench, has ruled that co-owners of an undivided commercial property leasing it out cannot be treated as an “Association of Persons” (AOP) or “Body of Individuals” for the purpose of levy of Service Tax merely because the property is jointly owned and let out under a common lease deed. The Tribunal held that Service Tax liability has to be determined individually in the hands of each co-owner, based on their respective share of rental income, with separate entitlement to threshold exemption. The ruling was delivered by a Bench comprising Ajayan T.V., Judicial Member, and M. Ajit Kumar, Technical Member, while setting aside multiple orders passed by the Commissioner (Appeals) confirming joint Service Tax demands against groups of co-owners.
The assessees, on the other hand, contended that each co-owner held a clearly identifiable undivided share in the property. Rental income was received separately by each co-owner through account payee cheques strictly in proportion to their ownership share. There was no joint management of the property, no pooling of resources, and no conscious coming together to form any association for earning income. It was argued that the lease deeds merely described the owners collectively as “Lessors” for convenience, without creating any distinct legal entity. The co-owners had discharged Service Tax individually whenever their respective turnover crossed the exemption threshold, and tax was deducted at source separately in individual hands.
After examining the facts and law in detail, the Tribunal framed the central issue as whether co-owners of an undivided commercial property could be deemed to constitute an AOP merely because the property was rented out jointly. The Bench noted that neither the Finance Act, 1994 nor the General Clauses Act defines the expression “Association of Persons”. Relying on long-standing Supreme Court jurisprudence, the Tribunal reiterated that an AOP requires a voluntary coming together of persons with a common intention to carry on a joint enterprise for earning income. Mere co-ownership, inheritance, or indivisibility of property does not satisfy the essential requirement of volition or joint management.
The Tribunal observed that in law, each co-owner owns every part of the property along with others until partition takes place, and the act of renting out property by a co-owner flows from individual ownership rather than collective intent, unless there is material to suggest otherwise. The fact that rent was credited separately to each co-owner was considered a decisive indicator of absence of any association. The Bench also took note of inconsistency in the Department’s own approach, where adjudication orders fastened liability on one noticee while permitting others to “contribute voluntarily”, reflecting uncertainty about the alleged collective entity.
Rejecting the Revenue’s argument that indivisibility of property necessitates collective taxation, the Tribunal held that administrative convenience or perceived difficulty cannot override settled principles of tax law. It further clarified that entering into a single lease deed instead of multiple agreements does not alter the tax status of the co-owners, so long as their conduct and income flow demonstrate individual ownership and assessment.
The Tribunal categorically held that co-owners of rented commercial property do not constitute an Association of Persons merely by virtue of joint ownership or a common lease arrangement. Service Tax liability must be assessed individually on each co-owner’s share of rental income, and threshold exemption is available separately to each co-owner, subject to statutory limits. Accordingly, all impugned orders were set aside, and the appeals were allowed with consequential relief in accordance with law.
Cause Title: Naresh Gopaldas Lund and Eight Others Versus Commissioner of GST & Central Excise
Case No: Service Tax Appeal No. 41598/2015
Coram: Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member)
