Do Revenue-Sharing and Income-Assignment Structures on Leasehold Property Survive Tax Scrutiny?

Consider a common structuring exercise. Mr. X holds a lease of commercial property. He signs a Business Operation Agreement (BOA) allowing Company A to run its business from the premises against revenue-sharing payments. He then assigns his right to receive those payments to Partnership Firm B, in which he is a partner, and Firm B raises invoices on Company A with tax deducted at source. Property law, contract law and partnership law each bless the individual steps. Yet the combined structure is highly vulnerable to tax challenge, because the law asks a different question at the end: whose income is this really?

Step One: Is the Operation Agreement a Licence or a Sublease?

Section 108(j) of the Transfer of Property Act, 1882 permits a lessee to transfer, mortgage or sublease the whole or any part of his interest, while remaining liable under the head lease:

"the lessee may transfer absolutely or by way of mortgage or sub-lease the whole or any part of his interest in the property... The lessee shall not, by reason only of such transfer, cease to be subject to any of the liabilities attaching to the lease."

That statutory permission is subject to the lease itself, and most commercial leases restrict or prohibit subletting. The characterisation of the BOA therefore matters. A lease transfers an interest in property, typically with exclusive possession, and is governed by Sections 105 to 117 of the Transfer of Property Act; a licence is bare permission to use, transferring no proprietary interest. Courts apply a substance-over-form test, following the Associated Hotels principle: the label on the document does not decide the question.

A BOA that confers non-exclusive operational rights is likely a licence, which ordinarily does not amount to subletting. If it grants exclusive possession, it risks being read as a sublease, engaging Section 108(j) and any consent requirements in the head lease. Either way, the head lease must be reviewed, and the lessor's consent obtained where its terms so require, before operational rights are granted.

Step Two: Can the Right to the Money Be Assigned?

The Indian Contract Act, 1872 does not expressly deal with assignment, but the judicial position is settled. In Kapilaben v. Ashok Kumar Jayantilal Sheth (Supreme Court, 25 November 2019), the Court held:

"Rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the contract itself or under any law for the time being in force... The contractual rights for the payment of money or to building work, for e.g., do not involve personal considerations."

A right to receive money is the paradigm assignable right: it makes no difference to Company A whether it pays Mr. X or Firm B. On pure contract principles, the assignment is prima facie valid, provided the BOA itself contains no bar on assignment of payment rights and only rights, not obligations, are transferred.

The formalities are where such arrangements routinely stumble. Under Section 130 of the Transfer of Property Act, an actionable claim, which includes a right to receive money, must be assigned in writing. Notice should be given to the obligor, Company A, so that payments flow to the assignee. Most importantly, an assignment of an actionable claim is a separately dutiable instrument under the Indian Stamp Act, 1899, with duty calculated on the value of the assigned claim at state-specific rates. Unpaid or short-paid stamp duty is a common compliance gap, and it exposes the assignment to invalidity against third parties, stamp penalties, and adverse tax consequences if the deed is treated as ineffective. Registration, by contrast, is not mandatory for assignment of an actionable claim.

The Partnership Dimension

There is no bar under the Indian Partnership Act, 1932 on a firm receiving income from rights assigned to it, including by one of its own partners. But a partner dealing with his own firm engages fiduciary duties: the dealing should be at arm's length, disclosed, and formally approved by the other partners. The assignment should be supported by adequate consideration; a gratuitous transfer of an income stream to a firm in which the assignor is a partner invites the inference of a disguised income-shifting device. The partnership records should document the approval, the valuation of the assigned rights and the rationale.

The Central Weakness: Diversion of Income Versus Application of Income

The decisive doctrine is diversion of income by overriding title. If income is diverted at source, before it ever reaches the assessee, the assessee is not taxable on it. If income first accrues to the assessee and is then redirected, that is merely an application of income, and the tax liability has already crystallised in the assessee's hands.

The Supreme Court drew the line in Commissioner of Income Tax, Punjab v. Thakar Das Bhargava (1960), where an advocate arranged for his professional fee to be paid towards a charitable trust he would create. The fee was held taxable as his professional income: unless the money was earmarked ab initio, its later dedication was an application of income already earned. In Provat Kumar Mitter v. Commissioner of Income Tax (1961), dividends on shares assigned by an assessee remained taxable in his hands, because the income accrued to him first and was then distributed.

Closest to the present structure is Pr. Commissioner of Income Tax v. Chamundi Winery and Distillery (Karnataka High Court, 25 September 2018). Chamundi held the excise licence to manufacture and sell liquor, agreed to manufacture branded products for Diageo, retained Rs. 45 per case as bottling charges, and paid the entire surplus to Diageo. The High Court held the whole income taxable in Chamundi's hands, because the licence, the source of the income, stood in Chamundi's name and control, and the surplus passed to Diageo only after accrual:

"Such 'distributable surplus' made over by the Respondent Assessee CHAMUNDI to DIAGEO is neither an 'allowable expenditure' under Section 37 of the Act nor a 'trade loss' allowable as a deduction... but is merely an 'application of income'."

Apply that logic here. The BOA is between Company A and Mr. X personally. The right to payment therefore accrues to Mr. X; the assignment to Firm B comes afterwards. The Revenue's argument writes itself: the income accrues to Mr. X, the assignment is a post-accrual redirection, and the whole revenue stream remains taxable in Mr. X's individual assessment. Section 60 of the Income Tax Act, 1961 reinforces the point: where an income stream is transferred without transferring the asset from which it arises, the income is charged as that of the transferor. Mr. X assigns the payments but keeps the leasehold, the very asset that generates them. An assignment of income that leaves the income-producing asset behind is the classic fact pattern the clubbing principle exists to catch.

Which TDS Section Applies?

When Company A pays, it must deduct tax at source, and the applicable section follows the characterisation of the BOA. The candidates:

Since the core consideration is the right to operate from commercial property, with payment computed as a share of revenue or a minimum guarantee, the most probable characterisation is rent under Section 194-I. There is, however, genuine ambiguity. GST circulars (Circulars 109 and 148) recognise that revenue-sharing arrangements can be principal-to-principal arrangements not involving a supply of services, but the Income Tax Act offers no equivalent clarity. Getting it wrong is not costless: interest accrues under Section 201(1A), and Company A faces disallowance of the expense under Section 40(a)(ia). The BOA should state the nature of the consideration expressly, carry a TDS clause, and the parties should consider seeking an advance clarification before the first payment. One transitional caveat: the Income Tax Act 2025, effective 1 April 2026, consolidates TDS provisions under Section 393 with new numeric codes, so the section mapping should be verified against the current statute.

GST: The Invoice Must Match the Contract

Granting a company the right to operate its business from commercial premises for revenue-based payments is most naturally a renting of immovable property service, taxable under GST at the applicable rate. GST registration is required once turnover, including the BOA payments, crosses Rs. 20 lakh (Rs. 10 lakh for certain states and categories), and Company A can claim input tax credit only on a correctly raised invoice.

Here lies a structural defect in the proposal: the contract is between Mr. X and Company A, yet Firm B is to raise the invoices. Under GST, the supplier is the person making the supply under the contract. If Firm B invoices without being the supplier under the BOA, the supplier is misdescribed, exposing Company A to ITC denial and demands, and Firm B to penalties for incorrect invoicing. Either the BOA must be amended to make Firm B the service provider, or the invoicing chain must be restructured, for instance Mr. X invoicing Company A and Firm B invoicing Mr. X, which adds a further GST layer of its own.

GAAR: The Arrangement's Shape Is the Problem

Chapter X-A (Sections 95 to 102) of the Income Tax Act, in force from assessment year 2018-19, lets the Revenue disregard an "impermissible avoidance arrangement". Section 96 defines it as an arrangement whose main purpose, or one of whose main purposes, is to obtain a tax benefit and which misuses the Act's provisions, lacks commercial substance, or defeats the object of the statute. In Tiger Global International II Holdings v. Authority for Advance Rulings (Supreme Court, 15 January 2026), the Court confirmed that Chapter X-A is not confined to passive investments but extends to business structures and arrangements lacking commercial substance.

This arrangement carries several GAAR markers: the BOA is signed with Mr. X but invoicing shifts to Firm B; the assignment follows the agreement rather than preceding it; and Mr. X sits on both sides as assignor and partner. If Firm B provides no service, assumes no risk and contributes nothing beyond receiving the payments, the tax benefit is the arrangement's only visible purpose. Mitigation is possible but must be real: Firm B should actually manage the BOA relationship, the non-tax business reasons should be documented, the valuation of the assigned rights should be at arm's length, and advance clearance can be sought before implementation.

The Overall Verdict

Each component is individually valid: a lessee may grant operational rights subject to the head lease, payment rights are assignable, and a firm may receive assigned rights. As a tax structure, however, the arrangement as proposed is more likely than not to be challenged, principally on diversion-of-income grounds (taxing the full revenue in Mr. X's hands), TDS misclassification, and GST invoicing irregularities, with GAAR available as a backstop. The clean fix is structural: have Company A contract directly with Firm B from inception, so that the income accrues to the firm as original obligee. An assignment bolted on after the event is precisely what the case law refuses to respect.

Practical Takeaways

• Restructure so that Firm B is the original contracting party under the BOA; a post-agreement assignment invites recharacterisation as application of Mr. X's income.
• If the assignment route is retained, execute a written, properly stamped assignment deed covering rights only, give formal notice to Company A, and confirm the BOA contains no anti-assignment clause.
• Obtain an advance ruling (Section 245-Q) on the diversion question, the applicable TDS section and GST treatment before the first payment.
• State the nature of the consideration in the BOA, include an express TDS clause, and align the GST invoicing entity with the contracting party.
• Check the head lease for subletting or licensing restrictions and obtain the lessor's consent where required; draft the BOA as a non-exclusive licence if a licence is intended.
• Document partner approvals, arm's-length valuation of the assigned rights, and genuine commercial reasons for routing payments through the firm.

Key Authorities

1. Transfer of Property Act, 1882, Section 108(j) — lessee's power to sublease or transfer, subject to the lease. Source
2. Kapilaben v. Ashok Kumar Jayantilal Sheth, Supreme Court, 25 November 2019 — contractual rights to payment are assignable absent a personal element or express bar. Source
3. Commissioner of Income Tax, Punjab v. Thakar Das Bhargava, Supreme Court, 1960 — income not earmarked ab initio is taxable in the earner's hands; later dedication is application of income.
4. Provat Kumar Mitter v. Commissioner of Income Tax, Supreme Court, 1961 (41 ITR 624) — dividends on assigned shares taxed in the assignor's hands; assignment of income alone does not shift the charge.
5. Pr. Commissioner of Income Tax v. Chamundi Winery and Distillery, Karnataka High Court, 25 September 2018 — revenue-sharing surplus paid over by the licence holder is application of income, not diversion at source. Source
6. Income Tax Act, 1961, Sections 60-61 — transfer of income without transfer of the underlying asset is charged as the transferor's income.
7. Income Tax Act, 1961, Section 96 (GAAR) — impermissible avoidance arrangements. Source
8. Tiger Global International II Holdings v. Authority for Advance Rulings, Supreme Court, 15 January 2026 — GAAR extends to business structures lacking commercial substance.
9. Indian Stamp Act, 1899 and Transfer of Property Act, 1882, Section 130 — assignment of an actionable claim requires a written, duly stamped instrument.

This analysis reflects the law as at July 2026. It is published for general information and does not constitute legal advice.