Partnership firm declared rental income, but landowners were taxed again; ITAT Bangalore rules against double taxation

The tax department cannot tax rental income in the hands of individual landowners if the commercial building was constructed under a joint development agreement (JDA) and the earnings from it have already been disclosed and assessed in the hands of a genuine partnership form, the Income Tax Appellate Tribunal (ITAT) Bangalore has recently ruled.

The tribunal also held that withdrawals by the landowners from the firm’s bank account did not, by themselves, justify taxing the rental income in their hands.

The ruling came in a dispute over rental income from a commercial property developed under a JDA. The income tax department had treated the landowners as the actual owners of the building and apportioned the rent among them, despite the partnership firm having disclosed the rental receipts.

In a judgement pronounced on August 21, however, ITAT Bangalore held that the firm was a genuine legal entity and that taxing the same rental income again in the hands of the landowners would amount to double taxation.

Why did the I-T dept tax landowners?

According to the complaint, the landowners had entered into a JDA with a developer in March, 2005 for development of their land. Subsequently, the landowners and the developer formed a registered partnership firm to construct Block C1 in an Special Economic Zone (SEZ).

The JDA was executed between owners Lakshmamma, her son Late Venkatesh Reddy and five daughters, V. Kothanda Reddy and his father Late Venkataswamy Reddy and the builder Shyamaraju & Company (India) Pvt. Ltd.

After the building was constructed, it was rented out to several companies, with the rent being directly credited to the partnership firm’s bank account.

During a search conducted in June 2022, the tax department decided that the landowners, rather than the partnership firm, were the actual owners of the property. The assessing officer (AO) relied, among other things, on withdrawals made by owner-partners from the firm’s account and the fact that property tax was paid by the landowners.

The rental income was consequently apportioned among the landowners and added to their taxable income under the head “Income from House Property,” which in turn increased their tax liability.

How did the landowners win the case

The landowners contended that the partnership firm was a genuine, registered legal entity, recognised by several government authorities as the co-developer of the SEZ. They maintained that the rental receipts had been recorded in the firm’s books and credited to its bank accounts.

They further argued that the tax department had itself assessed the firm after accepting the rental income declared by it and therefore, could not tax the same income again in their hands.

The ITAT Bangalore agreed with this argument. It accepted 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 out that the tax department had itself assessed the firm on the rental income. After hearing both sides and considering available evidence, the body held that the firm was the owner of Block C1 and had correctly received and disclosed the rental income.

It also 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.

“The Ld.AR (learned authorized representative) submitted that the addition made on the assessee is not warranted since she is neither a partner in the firm nor withdrawn any amount from the firm. The Ld.AR further submitted that the withdrawals at the best could be a liability in the partners’ capital account and not to be treated as income in the hands of the individuals,” the ruling read.

Since the tribunal also noted that there was no concrete corroborative evidence establishing that the landowners were the real owners of Block C1, the landowners ultimately won the case. The tax department was asked to delete the addition of rental income in the hands of the taxpayers and the appeals concerning the undisclosed rental income was thus allowed.