The Supreme Court has held that mere disclosure of the existence of a transaction, or mere production of books and agreements during original assessment, does not bar reopening under Sections 147/148 if later material or information reveals that the true primary facts relevant to the nature of the receipt were not brought to the Assessing Officer’s notice, and if the original assessment did not involve any formed opinion on that specific issue.
In such a case, reopening is based on fresh information and not on mere change of opinion. Further, the validity of reopening must be tested strictly on the basis of the reasons recorded under Section 148, and cannot be supported by extraneous material not forming part of those reasons, added the Court.
The Apex Court further held that where, under the terms of an AOP agreement, a member is entitled to a fixed percentage of gross sale receipts upfront, without bearing project expenses and without waiting for computation of net surplus, such receipt is not a share of profit of the AOP.
The Court explained that it is revenue/business income in the member’s hands, arising by diversion at source through overriding title. Profit, in law and accounting, arises only after deduction of expenses; therefore, a receipt carved out of gross receipts and insulated from expenses cannot be treated as profit merely because the parties describe it as “revenue/income” or “profit” in accounts.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan restated that under Section 147 the Assessing Officer must have “reason to believe” that income chargeable to tax has escaped assessment, and that such belief must be founded on tangible material. The Bench held that, although SPPL had disclosed the existence of the AOP and submitted the AOP Agreement during original assessment, it had not brought to the fore the crucial primary fact arising from Clause 7, that the amount claimed as share of “profit” was structured as 35% of gross sale receipts. The original assessment orders had not examined the true nature of this receipt; they had only proceeded on the assumption that it was profit. Therefore, the material gathered during survey and the director’s statement constituted fresh information giving rise to a bona fide reason to believe that taxable income had escaped assessment.
The Bench accordingly held that reopening was valid for both AY 2007-08 and AY 2008-09. However, it clarified that the High Court’s reasoning in upholding reopening for AY 2008-09 was flawed because validity of reopening must be tested only on the basis of reasons recorded under Section 148, and not on extraneous material such as the AOP’s assessment orders if they were not referred to in the recorded reasons. The Bench emphasized that the statutory requirement of recording reasons serves the purpose of informing the assessee of the precise grounds for reopening and preserving the assessee’s right to file meaningful objections.
On the merits of taxability, the Bench examined Clause 7 of the AOP Agreement and reproduced its terms. Clause 7 provided that all sale proceeds of residential units would be received in the AOP’s name, that SPPL would be entitled to 35% of such receipts “as its share of revenue/income” and could withdraw that amount from time to time, and that out of the remaining 65%, all business expenditure of the AOP would be met, with the balance thereafter constituting the share of RKC. The Bench observed that, on a plain reading, SPPL’s entitlement attached to the gross sale proceeds at the point of receipt and was not contingent on deduction of project expenses or determination of net surplus. The entire burden of business expenditure was placed on the remaining 65% share.
The Bench held that SPPL’s 35% represented income diverted at source by overriding title, because the AOP had no discretion over that portion and merely received and disbursed it on SPPL’s behalf. Since SPPL’s share was insulated from project expenses and was payable out of gross receipts upfront, it lacked the essential characteristic of “profit,” which is the surplus remaining after deduction of expenses. The Bench therefore characterized the receipt as revenue/business income in SPPL’s hands, including as a business receipt arising from the surrender of development rights or a share of gross revenue. Accordingly, the Bench concluded that the 35% share received by SPPL from the AOP for AY 2008-09 and AY 2009-10 was taxable in SPPL’s hands as a business receipt and not exempt as share of profit from the AOP.
Briefly, a member of an AOP called Fortaleza Developers, constituted under an agreement with M/s Raviraj Kothari & Co. for development of a residential housing project. The SPPL had originally filed returns for AY 2007-08 and AY 2008-09, both of which were scrutinized under Section 143(3), but notices under Section 148 were later issued after a survey under Section 133A led to impounding of the AOP Agreement, financial statements, books, auditor correspondence and other documents, and after recording the statement of SPPL’s director.
The reasons recorded for reopening stated that the material gathered during survey indicated that SPPL was receiving 35% of the gross sale proceeds from sale of residential units, and not a share of the profits of the AOP. According to the Revenue, this amount represented consideration for development rights over land and was therefore taxable in SPPL’s hands; the reopening was justified on the basis that income chargeable to tax had escaped assessment.
SPPL objected that most of the relied-on material had already been placed before the Assessing Officer during original scrutiny and that the reopening amounted merely to a change of opinion. The Bombay High Court accepted this contention for AY 2007-08 and quashed the reopening, but upheld reopening for AY 2008-09 by treating the AOP’s assessment order for AY 2008-09 as tangible material.
Appearances:
Anil Katiyar, AOR, Manisha T Karia, Sr. Adv., Anita Bafna, AOR, Shreya Gupta, Adv., Ananya Arora, Adv. Deepin Sahni, Adv., Vishal Navale, Adv., Varun Khetwani, Adv., for Appellants
Manisha T Karia, Sr. Adv., Shreya Gupta, Adv., Ananya Arora, Adv., Vishal Navale, Adv., Deepin Sahni, Adv., Varun Khetwani, Adv., Anita Bafna, AOR, Raghavendra P Shankar, A.S.G., Raj Bahadur Yadav, AOR, Karan Lahiri, Adv., Navanjay Mahapatra, Adv., Sarthak Karol, Adv., Priyanka Terdal, Adv., Manisha T. Karia, Sr. Adv., Vipin Kumar, AOR, Deepin Deepak Sahni, Adv., Shreya Gupta, Adv., Ananya Arora, Adv., Varun Khetwani, Adv., for Respondents
