The Income Tax Appellate Tribunal (ITAT) Bangalore has ruled that rental income from a commercial property under a joint development agreement cannot be taxed again in the hands of individual landowners, as it was already disclosed and assessed in the partnership firm. According to reports from Mint, the tribunal held that the firm was a genuine legal entity and that taxing the same rental income again in the hands of the landowners would amount to double taxation. The ruling came in a dispute over rental income from a commercial property developed under a joint development agreement, where the income tax department had treated the landowners as the actual owners of the building despite the partnership firm having disclosed the rental receipts.
The dispute arose from a joint development agreement executed in March 2005 between landowners Lakshmamma, her son Late Venkatesh Reddy and five daughters, V. Kothanda Reddy and his father Late Venkataswamy Reddy, and builder Shyamaraju & Company (India) Pvt. Ltd. According to Mint reports, the landowners and the developer formed a registered partnership firm to construct Block C1 in an Special Economic Zone (SEZ). After the building was constructed, it was rented out to several companies, with the rent being directly credited to the partnership firm's bank account. During a search conducted in June 2022, the tax department decided that the landowners, rather than the partnership firm, were the actual owners of the property.
The assessing officer relied on several factors to justify taxing the landowners, including withdrawals made by owner-partners from the firm's account and the fact that property tax was paid by the landowners. As reported by Mint, the rental income was consequently apportioned among the landowners and added to their taxable income under the head "Income from House Property," which in turn increased their tax liability. The tax department's argument was that these withdrawals by partners constituted rental income in their hands, despite being recorded as debits to the partners' capital accounts.
The landowners contended that the partnership firm was a genuine, registered legal entity, recognised by several government authorities as the co-developer of the SEZ. According to Mint reports, they maintained that the rental receipts had been recorded in the firm's books and credited to its bank accounts. The ITAT Bangalore agreed with this argument, accepting that the partnership firm was a legal entity with a registered partnership deed and that the building was rented out with the rent directly credited to the firm's bank account. The tribunal found that withdrawals from the firm's account by partners could not be treated as rental income in their hands, as such withdrawals were recorded as debits to the partners' capital accounts and did not transfer ownership of the building from the firm to the partners. The tribunal also noted that there was no concrete corroborative evidence establishing that the landowners were the real owners of Block C1.
Since the tribunal noted that there was no concrete corroborative evidence establishing that the landowners were the real owners of Block C1, the landowners ultimately won the case. As reported by Mint, the tax department was asked to delete the addition of rental income in the hands of the taxpayers and the appeals concerning the undisclosed rental income were allowed. The ruling establishes important precedent for joint development agreements, clarifying that rental income from commercial properties developed under such arrangements cannot be taxed again in the hands of individual landowners if it has already been disclosed and assessed in a genuine partnership form. The tribunal also examined a separate issue concerning the year in which capital gains arising from the JDA were taxable, with the Assessing Officer having treated the transfer as taking place in assessment year 2016-17, but the tribunal held that the transfer took place in assessment year 2005-06 when the JDA was executed.
