5 Bengaluru Landowners Get ITAT Relief in Undisclosed Rental Income Tax Case; Here’s Why

Five Bengaluru landowners received relief from the Income Tax Department after the ITAT Bangalore ruled that rental income from a commercial building belonged to a partnership firm rather than the individual landowners. The tribunal found that the firm was genuine, received rent directly from tenants, disclosed the income in its tax returns and had been recognised by government authorities as an SEZ co-developer. The ITAT also ruled that capital gains arising from the joint development agreement could not be taxed in 2016-17 because the relevant transfer had taken place when the JDA and Power of Attorney were executed in 2005.

Written by

Banashree Dutta

19 Sept 2026, 02:05 pm

10 min read5 views

Bengaluru Landowners Get Relief From Undisclosed Rental Income Tax Notice

Five Bengaluru landowners have won relief in a tax dispute involving rental income from a commercial property developed under a joint development agreement (JDA).

The case involved a commercial building known as Block C1, which was developed as part of an IT park and SEZ project. The Income Tax Department had sought to treat rental income from the property as income belonging directly to the individual landowners.

The ITAT Bangalore, however, found substantial documentary evidence showing that the partnership firm associated with the project was genuinely operating the property, receiving rent from tenants and reporting that income in its tax returns.

The tribunal consequently deleted the disputed rental-income additions made in the hands of the individual taxpayers. It also ruled in their favour on a separate dispute concerning the year in which capital gains arising from the JDA should have been taxed.

How the Property Development Arrangement Started

The dispute dates back several years.

According to the Economic Times report, five Bengaluru landowners decided in May 1999 to develop their land for an IT park and SEZ project. They subsequently signed a memorandum of understanding with a builder.

On March 25, 2005, the landowners entered into a registered Joint Development Agreement (JDA) with the builder. They also executed a Power of Attorney giving the developer extensive rights over the property.

The builder paid the landowners an interest-free refundable deposit of Rs 37.25 lakh as part of the arrangement.

The project included construction of a separate C1 Block intended for SEZ purposes.

Partnership Firm Was Created to Develop and Manage the Property

For the C1 Block, a partnership firm was formed in which the builder held a 96% share, while the landowners collectively held a 4% share.

After construction, the partnership firm leased the commercial property to several companies.

Importantly, the tenants deposited rent directly into the partnership firm's bank account.

The firm also:

Recorded the rental receipts in its books.
Filed income-tax returns.
Disclosed the rental income to the Income Tax Department.
Paid tax according to its tax treatment.
Operated the property as part of the SEZ development structure.

The C1 Block was subsequently constructed and allotted to the landowners in AY 2016-17, and the landowners also paid BBMP property tax relating to the building.

Why Did the Income Tax Department Raise the Rental Income Issue?

The dispute arose after an Income Tax Department search operation conducted on June 23, 2022, involving a company linked to the landowner family.

The Assessing Officer took the position that the landowners, rather than the partnership firm, were the real owners of the commercial building.

Based on this interpretation, the tax authorities sought to assess the rental income directly in the hands of the landowners and certain family members.

The department also questioned the withdrawals made by the landowner partners from the partnership firm. According to the assessment, some withdrawals did not correspond with the stated 4% profit-sharing ratio.

The Assessing Officer also raised an issue regarding the registration of the partnership deed.

The CIT(A) subsequently upheld the assessment approach, leading the taxpayers to appeal before the ITAT Bangalore.

Why the ITAT Accepted the Partnership Firm's Position

A major factor in the tribunal's decision was the documentary evidence showing that the partnership firm was not merely a paper arrangement.

According to Chartered Accountant Suresh Surana, as reported by ET Wealth Online, the ITAT found evidence that the firm was recognised by government and statutory authorities as a co-developer of the SEZ.

Approvals relating to infrastructure and electricity were also in the firm's name.

More importantly, the firm's audited accounts recorded the rental income and the tenants deposited rent directly into its bank account.

The Income Tax Department had also assessed the partnership firm in earlier years and accepted the rental income disclosed by it.

This historical tax treatment became an important part of the taxpayers' case.

Rental Income Cannot Simply Be Taxed Twice

The ITAT also rejected the argument that withdrawals made by the landowner partners from the partnership firm automatically represented rental income received personally by them.

A partner's withdrawal from a partnership firm's capital account is not necessarily a separate income receipt.

As explained by Suresh Surana to ET Wealth Online, withdrawals are generally recorded by the partnership firm as debits to the partners' capital accounts. Such withdrawals, by themselves, do not convert the firm's rental receipts into fresh rental income in the partners' hands.

They also do not automatically transfer ownership of the underlying property from the firm to the partners.

This distinction was important because the partnership firm had already recorded and disclosed the rental receipts.

Partnership Firm vs Individual Taxpayer

IssueTax Department's PositionITAT's FindingOwnership/use of C1 BlockLandowners were treated as real ownersEvidence supported the partnership firm's roleRental receiptTaxable in landowners' handsRent was received and recorded by the firmTenant paymentsQuestioned in individual assessmentPayments went directly to firm's bank accountFirm's tax returnsNot sufficient to establish individual ownershipFirm had disclosed rental incomePartner withdrawalsTreated as evidence of personal receiptWithdrawals did not automatically become rental incomeEarlier assessmentsDisputed treatmentFirm had previously disclosed the rental income

One Taxpayer Was Not Even a Partner

The tribunal also considered the position of one of the taxpayers who had been included in the tax proceedings.

According to the report, that taxpayer was not even a partner in the partnership firm and had not received money from it.

This further weakened the argument that the rental income received by the firm should automatically be attributed to all the individual taxpayers involved in the proceedings.

Separate Dispute Over Capital Gains

The case also involved a separate question concerning capital gains arising from the JDA.

The Income Tax Department sought to tax the capital gains in AY 2016-17, when the constructed area was handed over to the landowners.

The landowners argued that the relevant transfer had taken place much earlier, when the registered JDA and Power of Attorney were executed in March 2005.

The ITAT examined the terms of the JDA and the Power of Attorney and considered the extent of rights given to the developer at that time.

What Rights Did the Builder Receive Under the 2005 JDA?

The JDA reportedly gave the builder extensive rights over the project from the beginning.

These included rights to:

Enter the property.
Obtain necessary approvals.
Design and develop the project.
Enter into agreements with purchasers.
Undertake development activities.
Mortgage the property for raising finance.

The registered Power of Attorney also provided the developer with broad powers.

On the basis of these documents, the ITAT concluded that the relevant transfer had already occurred around AY 2005-06, rather than in AY 2016-17 when the constructed area was subsequently handed over.

Why Section 45(5A) Did Not Apply to This 2005 Transaction

Another important aspect concerned Section 45(5A) of the Income-tax Act.

This provision generally deals with capital gains arising from specified joint development agreements involving individuals or Hindu Undivided Families (HUFs).

According to CA Suresh Surana, Section 45(5A) came into effect from April 1, 2018.

Therefore, the provision could not retrospectively govern the 2005 transaction in this case.

The ITAT accordingly rejected the attempt to treat the JDA transfer as having occurred in AY 2016-17 merely because the constructed portion was handed over during that year.

What Evidence Helped the Landowners Win?

The case highlights the importance of maintaining consistent legal and financial documentation when property is developed through a partnership or joint development structure.

The evidence considered by the ITAT included:

Registered JDA executed in 2005.
Power of Attorney granting development rights.
Partnership firm's role in the SEZ project.
Government and statutory approvals in the firm's name.
Infrastructure and electricity approvals associated with the firm.
Tenants depositing rent directly into the firm's bank account.
Rental income recorded in the firm's books.
Rental income disclosed in the firm's income-tax returns.
Earlier assessments in which the firm's rental income had been accepted.
Documentary evidence regarding the rights transferred to the developer under the JDA.

The combination of these records helped the taxpayers challenge the Revenue's assumption that the rental income personally belonged to the landowners.

Does the Partnership Firm Have to Pay Tax Again on the Rental Income?

The ITAT ruling does not mean that rental income becomes completely tax-free.

The key issue was who earned and disclosed the rental income.

In this case, the partnership firm had already recorded the rent in its accounts and disclosed it in its tax return.

Therefore, the same rental receipts could not simply be treated as undisclosed rental income of the individual landowners and taxed again in their hands.

ET Wealth reported that the firm's return had already been assessed and that the firm had claimed the applicable Section 80-IA deduction as an approved SEZ co-developer.

As Surana explained, the firm's ultimate tax liability would depend on the tax treatment already adopted in its assessments and the deductions legally available to it. The ITAT ruling itself did not create a fresh tax liability for the firm merely because the individual landowners were given relief.

What This ITAT Ruling Means for Property Owners

The case offers several practical lessons for landowners who develop commercial property through partnerships, joint ventures or JDAs.

1. Keep Ownership and Income Records Consistent

The legal documents, bank accounts, books of accounts and income-tax returns should consistently reflect the actual arrangement.

If a partnership firm is receiving rent, the lease arrangements, bank receipts and accounting records should support that position.

2. Partnership Withdrawals Are Not Automatically Rental Income

Money withdrawn by a partner from a partnership firm should not automatically be treated as a fresh rental-income receipt.

The accounting treatment and nature of the withdrawal need to be examined.

3. Earlier Tax Assessments Can Matter

The fact that the partnership firm's rental income had been disclosed and assessed in earlier years was relevant to the tribunal's consideration of the case.

Consistent reporting can therefore become important evidence in later disputes.

4. JDA Documents Can Determine the Timing of Taxation

The exact rights transferred under a JDA and Power of Attorney can have significant tax consequences.

In this case, the ITAT considered the rights granted to the builder in 2005 while determining when the transfer had occurred.

5. Tax Rules Cannot Always Be Applied Retrospectively

The tribunal also considered when Section 45(5A) became effective and found that the provision could not be applied retrospectively to the 2005 transaction.

ITAT Bangalore Decision: Key Points

IssueITAT Bangalore's FindingRental income from C1 BlockBelonged to the partnership firm based on the evidenceRent received byPartnership firm's bank accountRental income disclosureReported by the partnership firmPartner withdrawalsDid not automatically become individual rental incomeCapital gains timingTransfer occurred around AY 2005-06AY 2016-17 capital gains additionDeletedIndividual rental-income additionsDeletedSection 45(5A)Could not retrospectively apply to the 2005 transaction

Date of the ITAT Ruling

The landowners won their appeals before the ITAT Bangalore on August 27, 2026, according to the Economic Times report.

The case involved multiple appeals and legal and tax issues arising from the JDA, partnership structure and rental income from the C1 Block.

Why This Case Is Important for JDA Transactions

Joint development agreements can create complicated tax questions because several different rights may be involved, including ownership of land, development rights, floor space index (FSI), construction rights and rights to receive income from the completed property.

The case also illustrates why the actual conduct of the parties needs to match the documentation.

Here, the partnership firm's role was supported by its bank account, books, tax returns, statutory approvals and dealings with tenants.

The ITAT's decision therefore turned substantially on the documentary record rather than simply on who originally owned the land.

Bottom Line

The five Bengaluru landowners received relief from the Income Tax Department's attempt to tax rental income from a commercial building in their individual hands.

The ITAT Bangalore found that the partnership firm was a genuine entity involved in developing and commercially exploiting the C1 Block. The firm received rent directly from tenants, recorded the income in its books and disclosed it in its income-tax returns.

The tribunal also rejected the argument that withdrawals by the landowner partners automatically represented personal rental income.

On the separate capital-gains issue, the ITAT held that the relevant transfer under the JDA had occurred around 2005-06, when the registered JDA and Power of Attorney gave the developer extensive rights and control. The department therefore could not treat the transfer as having occurred in AY 2016-17 merely because the constructed area was later handed over.

The ruling highlights the importance of registered agreements, proper accounting, separate bank transactions, tax-return disclosures and consistency between legal documents and actual conduct in property-development arrangements.