Sanand Properties P. Ltd. Vs Jt. Commr. of I.T. Range 6 And Ors. (Supreme Court of India)
Reopening of Assessment Valid Because Survey Unearthed Fresh Tangible Material: SC; 35% Share Taxable as Revenue Since Expenses Never Reduced Entitlement: SC; Receipts Linked to Gross Sales Held Taxable as Business Income, Not Profit Share; Assessment Reopening Sustained Because Original Orders Never Examined Real Character of Income; AOP Member’s Receipt Taxable Where Clause Created Revenue Sharing Arrangement: SC; Survey Findings Defeat Change-of-Opinion Argument in Reassessment Dispute; Share of Gross Receipts Not Equivalent to Share of Profit, Rules Supreme Court; Income Diverted by Overriding Title Taxable in Recipient’s Hands, Holds SC; Reassessment Notice Survives Because Fresh Information Emerged After Original Assessment; Clause Granting Fixed Percentage of Gross Receipts Treated as Revenue Sharing: SC; SC Sets Aside Profit-Sharing View Because Entitlement Arose From Gross Receipts.
Background of the Appeals
The Supreme Court dealt with three connected civil appeals arising from the same factual background and involving the same parties. Since the issues were interconnected, all three appeals were heard together and disposed of through a common judgment.
The principal controversy concerned:
- The validity of reopening completed income-tax assessments for Assessment Years (AYs) 2007-08 and 2008-09.
- The tax treatment of amounts received by a member of an Association of Persons (AOP) from the AOP.
- Whether the amount received represented a share of profits of the AOP or a share of revenue/gross receipts.
- Whether such receipts were taxable in the hands of the member.
The assessee company had entered into an agreement with another entity to form an AOP known as Fortaleza Developers for developing a residential housing project.
The assessee filed returns for AYs 2007-08 and 2008-09, which were subjected to scrutiny assessments under Section 143(3) of the Income-tax Act, 1961.
Subsequently, notices under Section 148 were issued seeking reopening of assessments on the ground that income chargeable to tax had escaped assessment.
The litigation ultimately reached the Supreme Court through separate appeals by both the assessee and the Revenue.
Formation and Structure of the AOP
The assessee company entered into an agreement dated 29 April 2003 with another party for constituting an AOP named Fortaleza Developers.
The purpose of the AOP was to develop a parcel of land through residential housing projects.
The central dispute revolved around Clause 7 of the AOP Agreement, which governed distribution of receipts arising from the housing project.
The interpretation of this clause became the foundation of all subsequent proceedings.
According to the Revenue, Clause 7 provided for sharing of gross revenue.
According to the assessee, Clause 7 merely prescribed a mechanism for sharing profits.
The characterization of the receipts under Clause 7 determined whether the amount was taxable in the hands of the assessee.
Original Assessments
The assessee filed returns for AY 2007-08 and AY 2008-09 within the prescribed time.
Both returns were selected for scrutiny.
Assessment orders under Section 143(3) were passed on:
