The Bangalore Income Tax Appellate Tribunal (ITAT) has ruled in favour of taxpayers in a dispute over rental income from a commercial building developed under a joint development agreement (JDA). The Tribunal held that rental income received and disclosed by a genuine partnership firm could not be taxed again in the hands of individual landowners merely because they withdrew money from the firm’s account.
What is the case?
The case relates to the taxability of rental income from a commercial building constructed under a joint development arrangement (JDA). The landowners had entered into a JDA with a developer in 2005 for development of their land. Subsequently, the landowners and developer formed a registered partnership firm to construct Block C1 in an Special Economic Zone (SEZ). The building was later rented out to various companies, with the rent being directly credited to the partnership firm’s bank account.
During a search conducted in June 2022, the Income Tax Department took the view that the landowners, rather than the partnership firm, were the real owners of Block C1. The Assessing Officer relied, among other things, on the fact that amounts were withdrawn from the firm’s account by the owner-partners and that property tax was paid by the landowners. The rental income was therefore apportioned among the landowners and added to their taxable income under the head “Income from House Property.”
The taxpayers argued that the partnership firm was a genuine, registered legal entity and that several government authorities had recognised it as the co-developer of the SEZ. They also pointed out that the firm had recorded the rental receipts in its books and bank accounts and that the Income Tax Department itself had assessed the firm after accepting the rental income declared by it. Therefore, taxing the same rental income again in the hands of the landowners would effectively result in double taxation.
The Bangalore ITAT agreed with this position. It noted that the partnership firm was a legal entity, its partnership deed was registered, and the building was rented out with the rent directly credited to the firm’s bank account. The Tribunal also found that the Department had itself assessed the firm on the rental income. On the evidence available, the Tribunal held that the firm was the owner of Block C1 and had correctly received and disclosed the rental income.
The Tribunal further held that withdrawals from the firm’s account by partners could not, by themselves, be treated as rental income in their hands. Such withdrawals were recorded as debits to the partners’ capital accounts and did not transfer ownership of the building from the firm to the partners. It also noted that there was no concrete corroborative evidence establishing that the landowners were the real owners of Block C1.
Accordingly, the ITAT deleted the addition of rental income in the hands of the taxpayers and allowed the appeals concerning the undisclosed rental income.
What did the ITAT say about the JDA and capital gains?
The Tribunal also examined a separate issue concerning the year in which capital gains arising from the JDA were taxable. The Assessing Officer had treated the transfer as taking place in assessment year 2016-17, when the constructed area was handed over to the landowners.
The ITAT, however, examined the registered JDA and power of attorney executed in 2005. It noted that these documents gave the developer wide powers over the property, including the ability to enter the property, undertake construction, obtain approvals, enter into agreements with prospective purchasers and mortgage the property. The Tribunal therefore held that effective control over the property had been given to the developer in 2005-06 itself.
Accordingly, the Tribunal held that the transfer took place in assessment year 2005-06, when the JDA was executed, and not in 2016-17 when the constructed area was handed over.
“Development agreement plays an important role in deciding taxation aspects. Till March 2018, once a person enters into a JDA agreement, it will be taxable transfer. From April 2018, it is taxable in the year in which completion certificate is received. In both case market value on the date of transfer is deemed as sale consideration,” an tax expert said.
The ruling highlights the importance of establishing who legally owns a property and who actually receives and reports its rental income. In this case, the ITAT found that the partnership firm was the owner of Block C1, had received the rent directly and had disclosed the rental income to the tax authorities. Therefore, the same rental income could not be attributed to the landowners merely because of withdrawals from the firm’s accounts.
