India

Bangalore Landowners Win ITAT Ruling on Rental Income from SEZ Development

By TOI Business Desk

Five landowners in Bangalore secured relief from the Income Tax Appellate Tribunal (ITAT) after a dispute over rental income from an IT park they developed with a builder. In 1999 the landowners decided to convert their property into an IT park and SEZ zone and signed a memorandum of understanding with a builder. In 2005 they executed a registered joint development agreement (JDA) and a Power of Attorney (POA) that granted the builder development rights and broad authority over the project. The builder paid the landowners a refundable, interest‑free deposit of Rs 37.25 lakh and retained a 96% stake in a partnership firm that managed the C1 Block, while the landowners held the remaining 4%. After construction, the partnership firm leased the premises to companies and received rent directly into its bank account. The firm filed income‑tax returns and paid tax on the earnings, and the landowners withdrew money from the firm in the usual manner. The C1 Block was completed and allotted to the landowners in assessment year (AY) 2016‑17, and the landowners paid the BBMP tax on the block.

In 2022 the Income Tax Department searched a company linked to the landowners’ family. The department treated the landowners as the actual owners of the property and viewed the partnership firm as a tax‑avoidance structure. The Assessing Officer (AO) argued that the landowners’ withdrawals were not proportionate to their 4% share and that the partnership deed had not been registered, and therefore assessed the rental income directly in the hands of the landowners. The Commissioner of Appeals (CIT(A)) upheld this view.

The landowners appealed to the ITAT Bangalore bench, which ruled in their favour. The tribunal relied on documentary evidence that the partnership firm was a genuine business entity recognised by government authorities, with infrastructure and electricity approvals issued in its name. The firm’s audited accounts reflected the rental earnings and tenants paid rent directly into its bank account. The ITAT rejected the department’s contention that the landowners’ withdrawals proved personal receipt of rental income, noting that such withdrawals are normally recorded as debits to the partners’ capital accounts and do not transfer ownership of the property.

The tribunal also examined a capital‑gains issue arising from the JDA. The AO had proposed taxing gains in AY 2016‑17, arguing that the builder had completed construction and handed over the area to the landowners that year. The landowners contended that the transfer had occurred earlier, when the JDA and POA were executed in March 2005. The ITAT found that the developer had been granted extensive and irrevocable rights from the outset, including access, approvals, design, development, and financing, and therefore concluded that the transfer had taken place in AY 2005‑06. Consequently, the gains could not be treated as occurring in AY 2016‑17.

All disputed additions were deleted and the landowners received a favourable ruling from the Bangalore ITAT on 27 August 2026.