In a recent ruling, landowners from Bangalore managed to get relief from income tax regarding undisclosed rental notice by demonstrating that their partnership firm owns the building, receives rent in the firm’s bank account, files ITR and pays tax accordingly.
To understand how the landowners won this case, it’s important to know the background, which dates back to May 1, 1999. On that day, five landowners from Bangalore made the decision to develop their land into an IT park and SEZ zone, leading them to sign a MOU with a reputable builder.
Then on March 25, 2005, they entered into a registered joint development agreement (JDA) with the same builder, granting him development rights and executing a Power of Attorney (POA) for various purposes. The builder paid the landowners an interest free refundable deposit of Rs 37.25 lakh .
For this project, the builder agreed to construct a separate C1 Block for SEZ purposes. To manage this C1 Block, the builder formed a partnership firm where he (the builder) had 96% share while the landowners had 4%. After construction work was done, the partnership firm leased the property to many companies and received the rental income directly into their bank account. The partnership firm filed ITR and paid taxes on its income while the landowners withdrew money from the partnership firm as they normally would.
The C1 Block was constructed and allotted to the landowners in AY 2016-17 and they also paid the BBMP tax for the C1 Block.
Everything was running smoothly until June 23, 2022, when the Income Tax Department carried out a search operation in a company linked to the landowner family. This search led to several disputes arising from the findings.
The main issue at hand was a commercial building located in Block C1, that was constructed under the 2005 JDA. As mentioned earlier, Block C1 was rented out and the money went straight into the partnership firms’ bank account.
The Income Tax Department Assessing Officer (AO) assumed that the landowners were the actual owners of the building and not the partnership firm. Based on this assumption, the AO from Central Circle, Bangalore, took the view that the partnership firm was effectively a structure created to avoid tax and that the landowners were the real owners of Block C1.
One of the reasons the AO reached this conclusion was because the landlord families withdrew money from the firm that did not align with the stated profit-sharing ratio (4%) and it was claimed that the partnership deed was unregistered too.
So, the AO sought to tax the rental income from Block C1 directly in the hands of the landowners and their family members. The Commissioner of Appeals (CIT(A)) upheld this approach. So, the landowners filed an appeal at the ITAT Bangalore.
There was also another dispute over capital gains. The Income Tax Department wanted to tax the gains in 2016-17, when the constructed area was handed over to the landowners.
However, the ITAT Bangalore held that the transfer had actually taken place in 2005-06 when the registered JDA and Power of Attorney gave the builder effective control of the land.
In the end, the taxpayers won all the appeals and the disputed additions were deleted. On August 27, 2026, the landowners won the case in the ITAT Bangalore. Advocates T.M. Shivakumar, Ms. Sanjana, Ms. Laxmi Pundir, Advocate, Ms. Palak Kumari, and CA Harsha K M represented the landowners in ITAT Bangalore.
Mihir Tanna, associate director, S.K Patodia LLP, told ET Wealth Online that the substance of the activities have to match the form of the documentation. Rights in land and FSI on land are two different capital assets.
Tanna says that by retaining ownership of the land, FSI can be transferred. Once construction is done, the rights of property are with the person who constructed the said property. He says: “Thus, rental income is taxable in the hands of the owner of the property which is the partnership firm in the given case.”
Share in profit and withdrawal of capital are two different aspects. Tanna says a partner doesn’t have to take out profits every year. The capital brought into the firm grows through the partner’s share in the firm and any additional earnings like interest on capital (if any). It decreases according to the amount withdrawn from the firm.
Tanna says: “As profit is taxed in the hands of the firm, share of profit and withdrawal of the same is not taxable in the hands of partners.”
Development agreements play an important role while deciding on certain legal and taxation aspects. Tanna says that till March 2018, once a person entered into a JDA, it became a taxable transfer. From April 2018, it is taxable in the year in which the completion certificate is received. In both cases, market value on the date of transfer is deemed as sale consideration.
How did the landowners win the case in ITAT Bangalore?
Chartered Accountant Suresh Surana said to ET Wealth Online that the ITAT Bangalore found substantial evidence showing that the partnership firm was genuine and recognised by the government and the statutory authorities as a co-developer of the SEZ, approvals for infrastructure and electricity stood in its name, its audited accounts recorded the rental income, and tenants deposited rent directly into the firm's bank account.
Surana pointed out that the Income-tax Department itself had assessed the said partnership firm in earlier years and accepted the rental income disclosed by it.
The ITAT Bangalore also rejected the Income Tax Department's argument that withdrawals by the landowner partners proved that they personally received the rental income.
The ITAT Bangalore explained that when partners withdraw money from a partnership firm, the firm normally records the withdrawal as a debit to their capital accounts.
Surana says: “Such withdrawals do not, merely for that reason, become fresh rental income in the partners' hands, nor do they transfer ownership of the underlying property from the firm to the partners.”
The ITAT Bangalore also noted that one of the taxpayers implicated in this case herself was not even a partner in the firm and had not received money from it.
The ITAT Bangalore separately considered the capital gains arising from the JDA. The AO had sought to tax the gains in AY 2016-17 on the grounds that the builder completed and handed over the constructed area to the landowners during that period.
The landowners argued that the taxable transfer had occurred much earlier, when they executed the registered JDA and the Power of Attorney in March 2005 and gave the builder effective control over the property.
The ITAT examined the JDA and found that it gave the builder extensive and irrevocable rights from the outset, including the right to enter the property, obtain approvals, design and develop the project, enter into agreements with purchasers and even mortgage the property for raising finance. The registered Power of Attorney (POA) also granted wide powers to the developer.
Thus the ITAT Bangalore observed that the transfer had already happened in AY 2005-2006 around which time the JDA and POA were also executed, so it would be wrong to conclude that this happened in AY 2016-17 when the constructed area was subsequently handed over.
According to Surana, the ITAT Bangalore also clarified that Section 45(5A), which generally shifts taxation of capital gains under specified JDAs for individuals/HUFs to the year in which the completion certificate is issued, came into effect only from April 1, 2018; thus, it could not retrospectively govern this 2005 transaction.
Surana says: “Accordingly, the Income Tax Department could not tax the same JDA transaction as capital gains in AY 2016-17.”
The taxpayers succeeded because the documentary and legal record contradicted the Revenue's central assumptions. The evidence showed that the partnership firm genuinely owned and commercially exploited Block C1, received the rent and disclosed it to the department. Similarly, the registered JDA and Power of Attorney showed that effective rights and control over the underlying land had already passed to the developer in 2005. The ITAT therefore deleted both the relevant rental-income additions and the capital-gains additions for AY 2016-17.
Is the firm required to pay the tax on such rental income?
Since the ITAT Bangalore tax tribunal has held that the rental income belonged to the firm, who had already recorded the receipt of this rent in its booksof accounts and also filed its ITR disclosing such rental income, and the ITR is assessed too so it can't be taxed again.
Surana says: “Therefore, the same rental receipts could not again be treated as undisclosed rental income of the individual taxpayers. However, this does not necessarily mean that the firm must now pay additional tax merely because of this judgment.”
ITAT Bangalore recorded that the firm had already offered the rental income in its tax filings. It also noted that, as an approved SEZ co-developer, the firm had claimed the applicable Section 80-IA deduction.
Surana says: “Thus, the firm's ultimate tax liability would depend upon the tax treatment already adopted in its assessments and the deductions lawfully available to it, and the judgment itself does not create a fresh tax liability for the firm.”
