Rental income tax relief for landowners: ITAT

Landowners in Bangalore successfully avoided paying income tax on rental income from a building constructed under a 2005 joint development agreement. The case began in May 1999 when five landowners decided to develop their land into an IT park and Special Economic Zone (SEZ) zone. They signed a memorandum of understanding (MOU) and later a registered joint development agreement (JDA) with a builder, granting him development rights. In exchange, the builder paid a refundable deposit of Rs 37.25 lakh.

The builder formed a partnership firm, with the landowners owning 4% of the firm and the builder holding 96%. The partnership firm leased the property to various companies, receiving rental income directly into its bank account. The firm filed income tax returns (ITR) and paid taxes on its income. The landowners withdrew money from the partnership firm as they would normally do.

However, on June 23, 2022, the Income Tax Department conducted a search operation in a company linked to the landowner family, leading to disputes over the ownership of the building. The Income Tax Department Assessing Officer (AO) argued that the partnership firm was a tax avoidance scheme and that the landowners were the actual owners of the building. The AO claimed that the partnership firm was created to avoid tax and that the landowners were the real owners of Block C1.

The case reached the Commissioner of Appeals (CIT(A)), which upheld the AO's assessment. The landowners appealed to the ITAT Bangalore, where they claimed that the construction was completed in 2005-06, not 2016-17, as the partnership firm owned the building and filed ITR. The ITAT Bangalore agreed, ruling that the transfer of ownership had taken place in 2005-06.

The landowners won all appeals in ITAT Bangalore, and the disputed additions were deleted on August 27, 2026. Advocates T.M. Shivakumar and others represented the landowners in the ITAT Bangalore. The case highlights the importance of maintaining proper documentation and ensuring that the rights in land and FSI (floor space index) are accurately reflected in the documentation.