Capital gain vs aop

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2014 A,B,C,D,E five friends purchased a plot in common registry as five owner..say for 10 lac,
without declaring there share in registry documents..
but have paid equal share in cash as per der books of accounts..say 2 lac each.
used same for agriculture purpose for more den 2 years..
after 25 month of purchase ..dey all decided to sell d same.. say for 30 lac again without showing der individual shares in registry doc. but dey mutually knows dey r equal partner.. n same is written in pre registry doc.too..
n purchase new agriculture land in individual name.. claiming ded. U/s 54

Mr.A , Mr.B, Mr.C filed der income tax return shwing capital gain n ded. U/s54

Now ma Ques. is ..
is the treatement is correct.

AO is of view dat as share of all friends is not declared in registry doc. it is not taxable in individual hand n it is taxable as AOP n no such deduction as claimed in U/s54 in der individual income tax return stands valid..

Plz guide with relivent caselaws, section etc..
waiting for ur kind n early response

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2014 Waiting for early reply

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 In the scenario you've described, where five friends jointly purchased a plot without declaring their individual shares in the registry documents but have maintained accounts showing equal ownership, there are implications related to the taxation of capital gains and claiming deductions under Section 54 for purchase of a new agricultural land. Let's address the key points and considerations:

### Joint Ownership and Capital Gains Taxation

1. **Joint Ownership vs. Association of Persons (AOP):**
- Joint ownership of property by individuals without specifying their shares in the registry does not automatically make them an Association of Persons (AOP) for tax purposes.
- The Income Tax Act defines an AOP as a group of two or more persons who come together for a common purpose and contribute money, property, or effort for a joint venture or business.
- Merely holding a property jointly without specifying shares does not necessarily establish an AOP if there is no business or joint venture intention.

2. **Taxation of Capital Gains:**
- When the plot is sold, capital gains arise based on the difference between the sale consideration and the indexed cost of acquisition.
- Each individual should calculate capital gains based on their actual share in the property, which can be evidenced by their accounts and mutual understanding, even if not specified in the registry.
- Capital gains should ideally be computed based on the proportionate share of each owner, as reflected in their accounts.

3. **Claiming Deduction under Section 54:**
- Section 54 of the Income Tax Act allows individuals to claim an exemption from long-term capital gains tax if the sale proceeds are reinvested in a new residential house property within a specified period.
- The reinvestment must be in the individual's name to claim the deduction.

### Relevant Considerations and Case Law

1. **Legal Position on Joint Ownership and AOP:**
- In the case of **CIT vs. Indravadan Jain (1981)**, the Supreme Court held that mere joint ownership of property by family members without any intention to carry on a business or joint venture does not constitute an AOP.
- Therefore, if the five friends jointly owned the plot for personal use or investment and not for any joint business venture, they are treated as individual owners for tax purposes.

2. **Documentation and Evidence:**
- The primary concern of the Assessing Officer (AO) seems to be the lack of declaration of individual shares in the registry documents. However, the Supreme Court in various cases has upheld that oral agreements or other documents indicating the intent and actual ownership can be considered for taxation purposes.

### Recommendations

1. **Provide Evidence:**
- It would be beneficial to provide documentary evidence such as bank statements showing contributions, agreements among friends, or other corroborating evidence to establish the proportionate ownership of each individual.

2. **Consultation with Tax Advisor:**
- Given the complexity and the AO's stance, it's advisable to consult a tax advisor or chartered accountant who can review the specific facts and documents and provide tailored advice.
- They can also assist in responding to the AO's queries and providing the necessary documentation to support the individual taxation and deduction claims under Section 54.

In conclusion, while joint ownership without specified shares in registry documents can raise questions, it does not automatically classify the transaction as an AOP. Each individual should compute capital gains based on their actual share, supported by evidence, and can claim deductions under Section 54 if the reinvestment is made in their individual capacity. Professional advice and supporting documentation will be crucial in resolving any disputes with the tax authorities.

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