The Supreme Court of India has ruled that a 35% share of gross sale proceeds received by an assessee from an Association of Persons (AOP) constitutes taxable “revenue/income” and not tax-exempt “profit.” The Court further held that the Revenue is justified in reopening assessments when fresh information, such as documents impounded during a survey, prima facie indicates that the true nature of a transaction was not disclosed during original scrutiny proceedings.
Background
The case involved Sanand Properties P. Ltd. (SPPL), which entered into an agreement on April 29, 2003, with M/s. Raviraj Kothari & Co. (RKC) to form an AOP named “Fortaleza Developers” for residential housing projects. SPPL claimed that its 35% share of receipts from the AOP was a “share of profit” and therefore exempt from tax in its hands under Section 167B(2) of the Income Tax (IT) Act, 1961, as the AOP itself was taxable.
The Revenue, following a survey under Section 133A on December 23, 2010, impounded documents including the AOP Agreement. It subsequently issued notices under Section 148 to reopen assessments for Assessment Years (AY) 2007-08 and 2008-09, asserting that the 35% share was actually consideration for development rights and constituted taxable revenue.
The Bombay High Court had previously quashed the reopening for AY 2007-08 but upheld it for AY 2008-09. Regarding the merits, the High Court and the Income Tax Appellate Tribunal (ITAT) had ruled in favor of SPPL, holding the receipts to be “profits.”
Arguments of the Parties
Submissions for the Assessee (SPPL): Senior Counsel Ms. Manisha T. Karia argued that the reopening was a “mere change of opinion” as the AOP Agreement and income disclosures were already part of the original record. She contended that under Section 167B(2), since the AOP was a separate assessable entity, the share of profit could not be taxed again in the hands of the member.
Submissions for the Revenue: Additional Solicitor General (ASG) Mr. Raghavendra P. Shankar argued that Clause 7 of the AOP Agreement allowed SPPL to withdraw 35% of gross receipts “upfront” without any deduction of expenses. He contended this created an “overriding title” and diverted the income before it reached the AOP. He further argued that fresh information from the survey provided “tangible material” for reassessment.
Court’s Analysis
The bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan addressed two primary issues: the validity of the reopening and the interpretation of the sharing clause.
1. Validity of Reopening Assessment: The Court emphasized that “reason to believe” does not require established facts of escapement at the notice stage, but rather a cause or justification. Citing CIT v. Kelvinator of India Ltd., it noted that while “change of opinion” is an inbuilt test against abuse, reopening is valid if based on “tangible material.”
The Court observed:
“The mere production of account books or other evidence before the Assessing Officer does not necessarily amount to ‘disclosure’ within the meaning of the Act… the particular item in the document, i.e. Clause 7 of the AOP Agreement which is at the core of the dispute, was not brought to the fore.”
The Court found that in original assessments, the Revenue had accepted SPPL’s declaration at face value without questioning whether the income was truly “profit.” Therefore, fresh facts from the survey providing insight into the 35% gross sharing formula constituted valid “tangible material.”
2. Interpretation of Clause 7 (Revenue vs. Profit Sharing): The Court analyzed Clause 7, which stated that SPPL was entitled to 35% of gross sale proceeds, while all expenses were to be met from the balance 65%. Applying the “overriding title” principle from CIT v. Sitaldas Tirathdas, the Court held:
“The entitlement of the SPPL is embedded in the very framework of the arrangement… the gross sale receipts to the extent of 35% is intercepted and diverted towards the SPPL before it could have even assumed the character of income in the hands of the AOP.”
The Bench further clarified the accounting principle:
“Profit is the surplus remaining after all expenses have been deducted from gross receipts. Since the SPPL’s share remained insulated from the expenses of the AOP, the amount received by it lacks the essential characteristics of ‘profit’ and is, in pith and substance, a business receipt.”
Decision
The Supreme Court allowed the Revenue’s appeals (Civil Appeal Nos. 744 of 2013 and 19487 of 2017) and dismissed the Assessee’s appeal (Civil Appeal No. 9107 of 2012).
The Court held that:
- The notices for reopening assessments for AY 2007-08 and 2008-09 were valid as they were based on fresh information and not a mere change of opinion.
- The 35% share received by SPPL from the AOP for AY 2008-09 and 2009-10 is taxable in the hands of the assessee as a “business receipt” and not exempt as “profit.”
Case Details:
- Case Title: Sanand Properties P. Ltd. v. Jt. Commr. of I.T. Range 6 and Ors.
- Case No.: Civil Appeal No. 9107 of 2012
- Bench: Justice J.B. Pardiwala, Justice K.V. Viswanathan
- Date: May 12, 2026
