2026 INSC 472

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 9107 OF 2012

[Arising out of Special Leave Petition (Civil) No. 22613 of 2012]

SANAND PROPERTIES P. LTD. …APPELLANT

VERSUS

JT. COMMR. OF I.T. RANGE 6 AND ORS. …RESPONDENT (S)

WITH

CIVIL APPEAL NO. 744 OF 2013

[Arising out of Special Leave Petition (Civil) No. 17029 of 2012]

AND

CIVIL APPEAL NO. 19487 OF 2017

J U D G M E N T

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 1 of 68

J.B. PARDIWALA, J.

For the convenience of exposition, this judgment is divided into the following parts:

INDEX

A. FACTUAL MATRIX: ....................................................................................... 5

(i) The Impugned Order in Civil Appeal No. 744 of 2013: .................................. 7

(ii) The Impugned Order in Civil Appeal No. 9107 of 2012: .............................. 10

(iii) The Impugned Order in Civil Appeal 19487 of 2017 .................................... 12

B. SUBMISSIONS ON BEHALF OF THE PARTIES ..................................... 16

(i) Submissions on behalf of the Assessee: ........................................................... 16

(ii) Submissions on behalf of the Revenue: .......................................................... 21

C. ISSUES TO BE DETERMINED ................................................................... 26

D. ANALYSIS ...................................................................................................... 27

(i) Whether the reopening of assessments of the SPPL for the AY 2007-08 and the

AY 2008-09, respectively, were valid? ................................................................. 27

(a) Statutory Framework Governing Reassessment under Section 147 and

Section 148 of the IT Act, 1961 respectively: .................................................. 27

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 2 of 68

(b) Meaning and scope of “reason to believe” under Section 147 of the IT Act,

1961: ................................................................................................................. 32

(c) Whether the Assessing Officer had any tangible material or were the

reopening of assessments on mere change of opinion? .................................... 36

(ii) Whether the amount accrued to the SPPL from the AOP, based on Clause 7 of

the AOP Agreement dated 29.04.2003, is liable to be taxed in the hands of the

SPPL for the AY 2008-09 and the AY 2009-10, respectively? .............................. 54

E. CONCLUSION ............................................................................................... 62

(i) Civil Appeal No. 744 of 2013 and Civil Appeal No. 9107 of 2012: ................ 62

(ii) Civil Appeal No. 19487 of 2017 ..................................................................... 65

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 3 of 68

1. Since the issues raised in all the three captioned civil appeals arise out of the

same set of facts and the parties are also the same, those were heard

analogously and are being disposed of by this common judgment and order.

2. We shall treat the Civil Appeal No. 9107 of 2012 as the lead matter. The

same has been preferred by the Sanand Properties P. Ltd. (hereinafter

referred to as “the SPPL”).

3. Civil Appeal Nos. 744 of 2013 and 19487 of 2017, respectively on the other

hand, have been preferred by the Revenue.

4. The central issue involved in these appeals pertains to the validity of

reopening of assessment and taxability of the income accrued to the SPPL

from the Association of Persons named Fortaleza Developers (hereinafter

referred to as “the AOP”), being one of the members of the AOP.

5. Civil Appeal No. 744 of 2013, arises from Writ Petition (C) No. 1647 of

2011 filed by the SPPL before the Bombay High Court, seeking to challenge

the reopening of assessment for the AY 2007-08. The High Court, vide its

impugned judgment & order dated 23.09.2011, allowed the writ petition and

quashed the notice for reopening of assessment for the AY 2007-08, holding

that the Assessing Officer had sought to reopen the assessment on mere

change of opinion. The High Court held that the Assessing Officer could not

have done so, in the absence of any tangible material to justify such

reopening. Aggrieved by the judgment & order of the High Court dated

23.09.2011, the Revenue preferred SLP(C) No. 17029 of 2012 before this

Court, which culminated in Civil Appeal No. 744 of 2013.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 4 of 68

6. Civil Appeal No. 9107 of 2012, arises from Writ Petition (C) No. 1648 of

2011, filed by the SPPL before the Bombay High Court, seeking to challenge

the reopening of assessment for the AY 2008-09. The High Court, vide its

impugned judgment & order dated 19.12.2011, dismissed the writ petition

and thereby upheld the validity of the notice of reopening of assessment by

distinguishing between the AY 2007-08 and AY 2008-09 respectively on the

basis of information derived from the Assessment Order of the AOP for the

AY 2008-09. Aggrieved by the judgment & order of the High Court dated

19.12.2011, the SPPL preferred SLP(C) No. 22613 of 2012 before this

Court, which culminated in Civil Appeal No. 9107 of 2012.

7. Civil Appeal 19487 of 2017, arises from the Income Tax Appeal No. 1837

of 2014 and Income Tax Appeal no. 1865 of 2014 respectively preferred at

the instance of the Revenue before the Bombay High Court seeking to

challenge the common judgment & order dated 21.03.2014, passed by the

Income Tax Appellate Tribunal (“ITAT”) with respect to the assessment

orders of the AY 2008-09 and AY 2009-10 respectively. By the said order, the

ITAT had held that the income received by the SPPL from the AOP, was not

liable to be taxed in the hands of the SPPL, as it was a share of the AOP’s

profit and not its revenue. The High Court, vide its common judgment &

order dated 24.03.2017, dismissed the appeals observing that no substantial

question of law was involved and besides the issue raised therein had already

been decided by a Coordinate Bench vide order dated 09.04.2015 in Income

Tax Appeal No. 1041 of 2013 titled The Commissioner of Income Tax-15 v.

M/s Fortaleza Developers which pertained to the AOP.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 5 of 68

A. FACTUAL MATRIX:

8. The SPPL is a private limited company. The company had entered into an

agreement dated 29.04.2003, with one M/s. Raviraj Kothari & Co.

(hereinafter referred to as “RKC”) to constitute the Association of Persons

titled Fortaleza Developers, for the purpose of developing a parcel of land

in the form of residential housing projects.

9. The SPPL had duly filed its return of income for the AY 2007-08 and 2008-

09, respectively within the statutory time period. Both the returns came to

be selected for scrutiny assessment under Section 143(3) of the Income Tax

Act, 1961 (hereafter referred to as “the IT Act”) and respective orders of

assessment were passed dated 21.12.2009 and 20.07.2010 respectively.

10. However, on 11.01.2011, the Revenue issued two notices under Section 148

of the Income Tax Act, 1961, for the purpose of reopening of assessment for

the AY 2007-08 and 2008-09 respectively, on the ground that the Assessing

Officer had reason to believe that income assessable/chargeable to tax had

escaped assessment within the meaning of Section 147 of the IT Act. The

reasons for reopening of assessment for the AY 2007-08 and 2008-09

respectively although separately recorded, were nearly identical, except for

the numerical figures for the respective AYs.

11. The reasons recorded stated that a Survey under Section 133A of the IT Act

had been carried out at the business premises of the SPPL on 23.12.2010

during which the books of account and the following six documents were

seized and impounded:

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 6 of 68

§ Original copy of the AOP Agreement dated 29.04.2003.

§ Copy of the audited financial statements of M/s Fortaleza Developers

for FY 2007-08.

§ Books of account of the assessee company showing the treatment of

land in its accounts since inception.

§ Copy of the development agreement between the Assessee Company

and M/s. Yerawada Stud Farm and Agriculture.

§ Letter written by Auditor Shri Suresh C. Shah to the Assessee

Company dated 19.06.2008, indicating the working of the amount that

has to be received by the assessee from M/s Fortaleza Developers.

§ Standard agreements in respect of sale of residential units in Fortaleza

Complex.

12. Moreover, statement of one Shri Ashok V. Suratwala, Director of the SPPL,

was also recorded on oath under Section 131 of the IT Act. According to the

‘reasons recorded’ under Section 148 of the IT Act, all these materials

indicated that the income received by the SPPL from the AOP was not a

share of its profit but a share of its revenue, for it was a consideration

received against the development rights over the land sold/surrendered by

the SPPL in favour of the AOP. The AOP had shown such amount given to

the SPPL as a part of its profit to claim it as a deduction under Section

80IB(10) of the IT Act. The SPPL had claimed in its return of income that

tax on the income of the AOP being payable in the case of the AOP itself

under Section 167B(2) of the IT Act, no tax is liable to be paid by the SPPL

in respect of its share of profit from the AOP. However, the Assessing Officer

in his ‘reasons recorded’ concluded that the income received by the SPPL

from the AOP being a 35% share of the gross sale receipts and not its profit,

is not exempt income but rather taxable in the hands of the SPPL. Such

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 7 of 68

income having escaped assessment within the meaning of sub-clause (iv) of

clause (c) of Explanation 2 to Section 147 of the IT Act, the Revenue was

justified in reopening the assessment under Section 148 of the IT Act.

13. In response, the SPPL, vide letter dated 19.03.2011, filed its objections to

the reopening of assessment, contending that four out of the six documents

impounded during the Section 133A Survey, on the basis of which the

assessments were sought to be reopened were already part of the record of

the Assessing Officer for finalizing the assessment for the AY 2007-08 and

the AY 2008-09, respectively. However, such objections submitted by the

SPPL, were dismissed by the Assessing Officer vide a speaking order dated

14.07.2011 holding that the reopening of assessments for the AY 2007-08

and the AY 2008-09 were validly initiated.

14. Aggrieved by the Order dated 14.07.2011, the SPPL challenged the

reopening of assessment by filing Writ Petition (C) No. 1647 of 2011 and

Writ Petition (C) No. 1648 of 2011 respectively before the Bombay High

Court, for the AY 2007-08 and the AY 2008-09 respectively.

15. While the High Court set aside the notice of reopening the assessment for the

AY 2007-08 as invalid, it upheld the notice of reopening the assessment for

the AY 2008-09 as valid.

(i) The Impugned Order in Civil Appeal No. 744 of 2013:

16. With respect to the AY 2007-08, the High Court while referring to this Court’s

decision in Commissioner of Income Tax, Delhi v. Kelvinator of India

Limited [(2010)320ITR561] observed that although the power of the

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 8 of 68

Assessing Officer to reopen assessment under Section 148 is much wider

than the position which existed prior to the amendment brought about by the

Direct Tax Laws (Amendment) Act, 1987, yet the power to reopen an

assessment is conditional on the existence of a reason to believe that income

has escaped assessment. Post the Direct Tax Laws (Amendment) Act, 1989,

the Assessing Officer has no power to review his assessment, nor can an

assessment be reopened merely on the basis of change of opinion. For the

Assessing Officer to validly reopen an assessment in law, there must be

tangible material on the basis of which he comes to the conclusion that

income has escaped assessment.

17. The High Court then went on to observe that the material on record indicates

that the return of income by the SPPL contains a disclosure of the profits

received by the SPPL from the AOP and which the SPPL claims to be exempt

in light of Section 167B(2) of the IT Act. The High Court placed reliance on

the note appended to the return of income as well as the profit and loss

account and ledger extract of the SPPL’s capital account with the AOP, which

contained a disclosure of the share of profits received from the AOP.

18. More particularly, the High Court focused on two points in the Section 143(3)

Assessment Order dated 21.12.2009: first, that paragraph 4 of the Assessment

Order stated that the SPPL had earned an income of INR 3.49 Crore in the

form of profits from the AOP; and secondly, the Assessment Order contained

a statement reflecting the awareness of the Assessing Officer of the fact that

the gross sale proceeds were liable to be shared between the SPPL and its

collaborator in the proportion of 35% and 65% respectively. Although the

High Court clearly observed that the Assessment Order had made reference

to the 35:65 proportion of dividing the gross sale proceeds with respect to a

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 9 of 68

Joint Venture agreement dated 26.08.2002 between the SPPL and one M/s

Raviraj Kothari and Associates (hereinafter referred to as “RKA”), and not

with respect to the AOP Agreement dated 29.04.2003, yet such statements ,

according to the High Court, significantly demonstrated that the Assessing

Officer was aware of the fact that (i) the SPPL had returned an income of

INR. 3.49 Crore in the form of a share of profit by the AOP; and (ii) under

the terms of the agreement, the SPPL was to have a 35% share in the gross

sale proceeds.

19. The High Court went on to further note that the order dated 14.07.2011,

passed by the Assessing Order, rejecting the objections filed by the SPPL, did

not dispute the factual position that except for the two documents (i.e. an

internal audit note and a standard sale agreement, both of which, according

to the High Court did not carry the matter further), the material was in fact

submitted during the course of the assessment proceedings.

20. The High Court further observed that since the AOP had been duly assessed

and the same had been subjected to an order of assessment where the

existence or validity of the AOP was not questioned, the SPPL was not liable

to pay income tax with respect to its share in the income of the AOP as per

Section 86 read with Section 67A and Section 167B of the IT Act,

respectively.

21. In the aforesaid view of the matter, the High Court held that the Assessing

Officer had purported to reopen the assessment for the AY 2007-08, in the

absence of any valid or tangible material and the same was nothing but a

mere change in opinion. In such circumstances, the High Court quashed the

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 10 of 68

Section 148 notice dated 11.01.2011, with respect to the reopening of

assessment for the AY 2007-08.

(ii) The Impugned Order in Civil Appeal No. 9107 of 2012:

22. Thereafter, when the writ petition challenging the reopening of assessment

for the AY 2008-09 came up for hearing before the High Court, the SPPL

argued that since the grounds of reopening assessment were substantially

similar to those of the AY 2007-08 and that there were no material differences

in the factual matrix between the two AYs, the notice of reassessment for the

AY 2008-09 should similarly be set aside.

23. However, with respect to the reopening of assessment for the AY 2008-09

respectively, the High Court reached a conclusion different from that of the

AY 2007-08. This time around, the High Court held that the Section 148

notice seeking reopening of assessment for the AY 2008-09 was valid.

24. The High Court distinguished between the AY 2007-08 and the AY 2008-09

respectively on the basis of the Assessment Orders passed in the case of the

AOP for the AY 2007-08 and the AY 2008-09 respectively. The High Court

laid emphasis on the following three points with respect to its decision taken

for the AY 2007-08: (i) the Assessment Order of the AOP for the AY 2007-

08, contained no discussion with respect to the nature of the receipt accrued

to the SPPL, (ii) the High Court in its order dated 23.09.2011 with respect to

the AY 2007-08 had noted that the existence or validity of the AOP was not

questioned and (iii) that the Revenue had not sought to reopen assessment of

the AOP for the AY 2007-08.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 11 of 68

25. In sharp contrast however, the Assessment Order of the AOP for the AY

2008-09 dated 29.12.2010 contained a detailed elaboration of the nature of

the AOP agreement and a conclusion that the AOP agreement was based on

revenue sharing. Since such detailed observations with regard to the nature

of the AOP agreement were made in the Assessment Order of the AOP for

the AY 2008-09, the High Court in such circumstances held that the

reopening of assessment of the SPPL for the AY 2008-09 was based on

tangible material and dismissed the writ petition accordingly. The relevant

observation of the High Court in its order dated 19.12.2011 in Writ Petition

no. 1648 of 2011 read as follows:

“10. Counsel appearing on behalf of the Assessee has submitted that in

the judgment delivered by the Division Bench of this Court on 23

September 2011, the petition filed by the assessee questioning the

reopening of an assessment for Assessment Year 2007-08 was allowed

and that this Petition is on the same basis. There is merit in the

submission which was urged on behalf of the Revenue by Learned

Counsel that there is a material difference between the reopening that

took place for Assessment Year 2007-08 and the reopening in the

present case for Assessment Year 2008-09. A copy of the order of the

Assessing Officer in the case of the AOP for Assessment Year 2007-08

has been placed for the perusal of the Court in these proceedings.

Reading the order of the Assessing Officer for Assessment Year 2007-

08, it is evident that there was no discussion in that case at all, in

regard to the nature of the receipt which has accrued to the assessee

representing 35% in the share of the gross receipts from the sale of

residential flats. On the contrary, in the case of the AOP for the

Assessment Year in question, Assessment Year 2008-09, the order of

the Assessing Officer dated 29 December 2010 contained a detailed

elaboration of the nature of the agreement and concluded that the

agreement was based on revenue sharing. In other words, the share

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 12 of 68

representing 35% in the gross receipts was not a share in profits, but

a share in revenue. Counsel appearing on behalf of the Assessee

submitted that it is always open to the parties to devise their own

formula or arrangement for determining the manner in which profits

should be distributed. Whether the arrangement is in fact, an

arrangement for distribution of profits or otherwise, is a matter which

will fall for determination of the Assessing Officer on merits after the

reopening takes place, in the course of reassessment proceedings.

However, the point to be noted is that in the judgment of this Court

dated 23 September 2011, the Court had in paragraph 12 noted that the

existence or validity of the AOP is not questioned; the AOP had been

assessed as such and it was on that basis that the Department had

approved the assessment proceedings pertaining to the AOP. The Court

also observed that the assessment of the AOP was not sought to be

reopened. The facts of Assessment Year 2008-09 are materially

different because in the assessment proceedings pertaining to the

AOP, the Assessing Officer has taken note of the nature of the

agreement between the parties. The reopening in the present case is

within a period of four years and is based on tangible material.

11. For these reasons, we do not find it appropriate in the exercise of

our jurisdiction under Article 226 of the Constitution to interfere with

the reopening of the assessment. The Petition shall accordingly stand

dismissed. No order as to costs.”

[Emphasis supplied]

(iii) The Impugned Order in Civil Appeal 19487 of 2017

26. Following the High Court’s decision upholding the reopening of assessment

for the AY 2008-09 as valid, the Assessment Order dated 30.12.2011

(hereinafter referred to as “the Reassessment Order for the AY 2008-09”)

under Section 143(3), read with Section 147 of the IT Act, came to be passed.

The Reassessment Order for the AY 2008-09 stated that from a reading of the

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 13 of 68

AOP agreement as a whole and its Clause 7 in particular, it could be seen that

the SPPL would be entitled to 35% of the gross sale proceeds as its share of

revenue and out of the balance 65%, all the required and relevant expenditure

for the purposes of the business of the AOP would have to be met with. The

net balance that remained thereafter, would constitute the share of

revenue/income of RKC. The deduction on account of income received by

the SPPL from the AOP being a share of revenue, did not figure in the

categories of deductions mentioned under the Explanation to Section 115JB,

which prescribes certain additions and deductions from “Net Profit” to arrive

at “Book Profit” for the purposes of computing minimum alternate tax

(MAT). Moreover, the Assessment Order further stated that the provisions of

Section 167B of the IT Act were not applicable because the shares of the

individual members of the AOP were determinate. Thus, the reassessment

order for the AY 2008-09 concluded on the note that the income received by

the SPPL from the AOP amounting to INR. 14,18,52,156/- was its share of

revenue from the AOP and was not exempt, and thus, the amount was

accordingly added to the total income of the SPPL for the AY 2008-09.

Moreover, penalty proceedings were also initiated for concealment of income

and furnishing of inaccurate particulars of income under Section 271(1)(c) of

the IT Act.

27. In the meantime, the same question whether clause 7 of the AOP Agreement

is a profit sharing clause or a revenue sharing clause emerged in the course

of a parallel set of proceedings between the AOP and the Revenue. On

12.10.2012, the ITAT vide its order in the matter M/s Fortaleza Developers

v. The Commissioner of Income Tax-15, Mumbai [ITA No.

2648/MUM/2012 (A.Y. 2007-08)] held that the AOP had been assessed as a

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 14 of 68

distinct assessable entity and was held to be eligible for deduction of its

profits under Section 80IB(10) of the IT Act. The quantum of deduction under

Section 80IB(10) would depend on the income earned from eligible project

and not upon the mode of distribution of shares amongst the members of the

AOP. The manner in which the AOP distributes its profit has no bearing on

the eligible quantum of deduction under Section 80IB(10) as the eligible

quantum will be gross receipts from the project reduced by expenses incurred

on the project. The ITAT further held that the 35% share received by the SPPL

from the AOP was not in the nature of overriding title to the revenue, but was

only a share of profit of the SPPL. Thus, the ITAT unequivocally held that

the entire quantum of deduction which the AOP sought to deduct under

Section 80IB(10), including the 35% of gross sale receipts accrued to the

SPPL, was the profit of the AOP.

28. Based on this Order of the ITAT dated 12.10.2012 referred to above regarding

the AOP’s Assessment for the AY 2007-08, the ITAT vide order dated

13.09.2013, similarly held with respect to the AOP’s Assessment for the AY

2008-09 that Clause 7 of the AOP Agreement was a profit sharing clause and

not a revenue sharing clause, and that the amount accrued to the SPPL from

the AOP was part of the AOP’s profit.

29. Aggrieved by the ITAT’s Order dated 13.09.2013 with respect to the AOP,

the Revenue preferred Income Tax Appeal No. 635 of 2014 and Income Tax

Appeal No. 641 of 2014 respectively before the Bombay High Court, with

respect to the AOP’s assessment for the AY 2008-09 and the AY 2009-10,

respectively.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 15 of 68

30. However, the High Court, vide order dated 09.04.2015, in Income Tax Appeal

No. 1041 of 2013, affirmed the ITAT’s Order regarding the AOP’s assessment

for the AY 2007-08, upholding the interpretation of Clause 7 given by the

ITAT and affirming the ITAT’s ruling that the income received by the SPPL

from the AOP is a share of the AOP’s profit and not its revenue.

31. Similarly, on 03.10.2016, the High Court dismissed both the appeals filed by

the Revenue with respect to the AOP’s assessment for the AY 2008-09 and

the AY 2009-10, respectively by following its earlier Order dated 09.04.2015

passed with respect to the AOP’s assessment for the AY 2007-08. The High

Court concluded that the appropriate interpretation of clause 7 of the AOP

Agreement would be that the SPPL received 35% of the profit made by the

AOP, by following the finding of fact arrived at by the ITAT in the case of

the AOP for the AY 2008-09 and the AY 2009-10, respectively.

32. In the aforesaid backdrop, the challenge to the reassessment order for the AY

2008-09 and the assessment order for the AY 2009-10 respectively of the

SPPL reached the Bombay High Court in Income Tax Appeal No. 1837 of

2014 and Income Tax Appeal no. 1865 of 2014 respectively. The High Court,

vide its common order dated 24.03.2017, dismissed the appeals filed by the

Revenue and upheld the decision of the ITAT in favour of the SPPL. The

High Court held that since the question with respect to the correct

interpretation of Clause 7 of the AOP Agreement was already decided in the

case of the AOP by a Coordinate Bench with respect to the assessment

matters of the AOP, the two appeals filed by the Revenue in the matter of the

SPPL did not give rise to any substantial question of law that could be

adjudicated upon. The High Court observed that following the finding of fact

arrived at by the ITAT in the case of the AOP for the subject assessment years

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 16 of 68

that there was no surrender of development rights by the SPPL to the AOP

and that the SPPL received only its share of profit, would hold good even in

the present set of appeal because the interpretation of Clause 7 of the AOP

agreement would not change depending upon the assessee concerned.

Observing thus, the High Court upheld the ITAT’s order that the income

accrued to the SPPL from the AOP, on the basis of Clause 7 of the AOP

agreement was not in the nature of overriding title to the revenue generated

by the AOP but only a share of profit of the SPPL in the AOP and accordingly

dismissed the appeals filed by the Revenue. Hence, aggrieved by the High

Court’s order dated 24.03.2017, the Revenue preferred the present Civil

Appeal no. 19487 of 2017 before this court, seeking that the impugned order

of the High Court be set aside and the respective assessment orders be upheld

as having validly computed the income accrued to the SPPL from the AOP.

33. In such circumstances referred to above, the SPPL and the Revenue, are

before this Court by way of three captioned appeals.

B. SUBMISSIONS ON BEHALF OF THE PARTIES

(i) Submissions on behalf of the Assessee:

34. Ms. Manisha T. Karia, the learned senior counsel appearing for the SPPL,

submitted that the reasons recorded for reopening of assessment for both the

AY 2007-08 and the AY 2008-09 respectively, were purely on the basis of

change of opinion since no valid or tangible material existed based on which

the reassessment could have been made. In the absence of such tangible

information, the review was being conducted in the garb of reassessment,

and hence such reopening of assessment is impermissible in law.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 17 of 68

35. To fortify the submission that there was no new and tangible material for

reopening, the learned counsel sought to rely on the fact that the SPPL had

already disclosed about the existence of the AOP and the income derived

from it while filing the return and revised return for the AY 2008-09 on

27.09.2008 and 03.10.2008, respectively through a declaration which reads

thus:

“1. The Assessee is a member in the Association of Persons doing

business under the name and style of “Fortaleza Developers”. The tax

on the income of AOP being payable in the case of the AOP itself under

section 167B(2) of the Act, no tax is payable by the Assessee in respect

of its share of income from the AOP.

2. For computation of book profit u/s. 115JB of the Income-tax, 1961

share of profit from AOP has been considered as a ‘non-income’

category as spelt out in Mumbai Tribunal decision in the case of

Income-tax officer v. Suraj Jewellery India Ltd. As such this income is

deducted from book profit to arrive at profit chargeable under that

section.”

36. Similar disclosures were made by the Assessee in the returns for the AY

2007-08. These disclosures indicated that the Revenue was made aware of

the existence of the AOP and the income derived by the SPPL from the AOP

at the time of filing of return and revised return.

37. The learned counsel further pointed out that during the course of scrutiny

assessment under Section 143(3) of the IT Act for the AY 2008-09, the SPPL

had submitted the AOP Agreement, the books of account including the

appropriation account of the AOP, as well as the ledger extract account of the

AOP which actually represented the share of profit received by the SPPL

from the AOP. Since the Assessment Order under Section 143(3) had been

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 18 of 68

passed after considering such documents, reopening of assessment based on

revisiting the same issue tantamount to review of the assessment order, which

is impermissible in law.

38. With respect to the statement of the SPPL’s director recorded under Section

133A of the Act, the learned counsel submitted that the statement merely

reiterated the existence of the AOP between the SPPL and RKC respectively

for joint development of the said plot of land. The fact relating to sharing of

35% of the gross sale proceeds was within the knowledge of the Assessing

Officer since such information was referred to in the AOP Agreement and

the Auditor’s comments in Form 29B. The same was with the Revenue at

the time of assessment, and hence did not amount to any new and tangible

material at the time of formation of belief with respect to escapement of

income for reopening of assessment. Thus, the belief as formed by the

Assessing Officer with respect to escapement of income was nothing but

mere change of opinion and not tenable in law.

39. As regards the interpretation of clause 7 of the AOP Agreement, the learned

counsel submitted that the same was a subject matter of adjudication in the

case of CIT v. Fortaleza Developers [ITA NO. 1041 of 2013], whereby the

Bombay High Court had upheld the ITAT’s interpretation that the 35% share

received by the SPPL was not in the nature of overriding title to the revenue

but is a share of profit of the SPPL from the AOP. The ITAT had observed

that the AOP is a separate and distinct assessable entity and is entitled to

claim the deductions permitted under the Act, provided it fulfils the

conditions laid down in the relevant provision of the Act. Since the AOP

fulfils the requirements of Section 80IB(10) of the Act and is therefore

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 19 of 68

eligible to claim its profits as deduction under the said provision, the

quantum of the deduction would not depend upon the mode of distribution

of shares amongst the members of the AOP. The eligible quantum of

deduction under Section 80IB(10) will be the gross receipts from the project,

reduced by the expenses incurred on the project.

40. The above interpretation was again relied upon by the High Court in its order

dated 03.10.2016 in CIT-15 v. Fortaleza Developers [ITA no. 635 of 2014

and 641 of 2014] with respect to the AOP’s assessments for the AY 2008-09

and the AY 2009-10, respectively. The High Court’s order dated 03.10.2016

is significant for two reasons: (i) it forms the basis of the impugned order in

the present Civil Appeal No. 19487 of 2017 before this Court with respect to

the Assessment Order for the AY 2008-09 and the AY 2009-10, respectively

and (ii) one of the material circumstances relied upon by the High Court to

uphold the validity of the reopening of the SPPL’s assessment for the AY

2008-09 was the Assessment Order of the AOP dated 18.12.2009. Notably,

this very Assessment Order culminated in the High Court order dated

03.10.2016, wherein it has been held that the income accrued to the SPPL

constitutes a share of profit. The learned counsel argued that since no appeal

has been filed by the Revenue in respect of this order of the High Court dated

03.10.2016, it has become final and thus the basis on which the belief with

respect to escapement of income was formed in the present case does not

survive, rendering the grounds of reopening as illegal and erroneous in law.

41. The learned counsel vehemently argued that there is no difference in the

arrangement between the SPPL and RKC by way of formation of the AOP

between the AY 2007-08 and the AY 2008-09 respectively and that the

reasons recorded for reopening assessments of the SPPL for both the years

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 20 of 68

were the same. Thus, the High Court’s decision of questioning the notice of

reopening assessment for the AY 2007-08 should have also been followed

with respect to the AY 2008-09 and the Section 148 notice of reopening

assessment should have seen quashed.

42. Furthermore, the learned counsel relied upon this Court’s judgment in ITO

v. Atchaiah [(1996) 1 SCC 417], to argue that the income earned by an

association of persons is to be separately assessed in the hands of the AOP

as an independent person. Since the income accrued to the SPPL from the

AOP is a share of the AOP’s profit, such income had already suffered

taxation in the hands of the AOP, albeit as a deduction under Section

80IB(10). Thus, in light of Section 86 read with Section 67A and Section

167B(2) of the IT Act, respectively the said income could not be taxed again

in the hands of the SPPL. In the absence of any income chargeable to tax

having escaped assessment, the assumption of jurisdiction by the Assessing

Officer to reassess the SPPL’s income for the AY 2007-08 and the AY 2008-

09 respectively were illegal. Accordingly, the learned counsel submitted that

the income accrued to the SPPL from the AOP is not to be subjected to tax

liability of SPPL for the AY 2008-09 and the AY 2009-10 respectively.

43. Having put forth the submissions as mentioned hereinabove, the learned

counsel prayed that the impugned order in the captioned Civil Appeal no.

9107 of 2012 be set aside, whereas the impugned orders in the captioned

Civil Appeal no. 744 of 2013 and Civil Appeal no. 19487 of 2017

respectively be upheld, holding the notices of reopening of assessment for

the AY 2007-08 and the AY 2008-09 respectively as invalid, and that the

income accrued to the SPPL from the AOP is not required to be taxed again

at the hands of SPPL.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 21 of 68

(ii) Submissions on behalf of the Revenue:

44. Mr. Raghavendra P Shankar, the learned A.S.G. appearing for the Revenue

submitted that the short issue that falls for consideration in the present case

is the proper construction of Clause 7 of the AOP Agreement and in

particular the nature and character of the amount received by the SPPL from

the AOP. If the amount received by the SPPL from the AOP is in the nature

of share of the revenue/gross receipts of the AOP, such amount is taxable in

the hands of the SPPL. On the other hand, if the amount received by the

SPPL from the AOP is in the nature of a share of the profits of the AOP, such

amount has already suffered tax in the hands of the AOP and cannot be taxed

again in the hands of the SPPL by virtue of Section 86 read with Section 67A

of the Act respectively.

45. The learned ASG argued that the salient features of Clause 7 of the AOP

Agreement are as follows:

i. The housing units were to be sold by the AOP to the purchasers.

All payments were to be received into the account of the AOP.

ii. The assessee was entitled to retain 35% of such receipts of the

AOP and was also entitled to withdraw for its own use an

amount equivalent to 35% of the gross receipts of the AOP.

iii. The balance 65% receipts of the AOP were first to be applied to

defray the expenses incurred by the AOP for the purposes of the

business (construction of flats). The balance would constitute

the revenue share of RKC, which RKC was at liberty to

withdraw for its own use.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 22 of 68

46. The learned ASG argued that on a plain reading of the said Clause 7 of the

AOP Agreement, it is evident that the amount received by the SPPL from the

AOP is in the nature of a revenue share of 35% of the gross receipts of the

AOP from sale of flats to buyers. As such, such amount constitutes taxable

income in the hands of the SPPL.

47. The learned ASG argued that it is not in dispute that the AOP agreement was

actually implemented by the parties in a manner consistent with the above

interpretation of Clause 7 and he pointed out illustrations from the facts on

record. For instance, in the AY 2008-09, the gross receipts of the AOP from

the sale of housing units was an amount of approximately INR 41.26 crore.

As per the AOP agreement, the SPPL was entitled to 35% of the gross

receipts of the AOP during the AY, which is an amount of INR 14.44 crore

approximately (i.e. 35% of INR 41.26 crore). The appropriation account of

the AOP, which is reproduced in the order of the Assessing Officer , as also

in the order of the CIT(A) reflects that the amount actually paid to the SPPL

by the AOP during the AY (albeit under the caption “net profit/loss”), was

an amount of INR 14.18 crore, which approximates its revenue share of 35%

of gross receipts, not profits. Plainly therefore, the amount actually received

by the SPPL from the AOP in each of the AYs in issue was nothing but an

amount corresponding to 35% of the gross receipts of the AOP during that

AY. This factual position emerging from the record, the learned ASG argued,

cannot be altered by the nomenclature adopted by the AOP in characterising

the payment made by it to the SPPL. The substance of this payment,

regardless of its form, is that it is a share of gross receipts and is therefore

taxable in the hands of the SPPL.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 23 of 68

48. The learned ASG further bolstered up his above submission by delving into

the rationale for characterising the payment made by the AOP to the SPPL

as a profit. He submitted that under Section 80IB(10) of the Act, an

undertaking developing and building housing projects approved before a

specified date was entitled, in computing its taxable income, to a deduction

of 100% of the profits derived by it during the previous year relevant to any

assessment year from such housing project, subject to satisfaction of certain

conditions. It was therefore to the benefit of the AOP to declare as large a

profit as possible, so as to avail of maximum benefit under Section 80IB(10).

The case of the Revenue during the assessment of the AOP was that this

method of computation constituted an inflated claim under Section 80IB(10)

since the amount paid by the AOP to the SPPL was an expense in the hands

of the AOP and should have been treated as such in computing the net profit

of the AOP. Had this been done, the deduction under Section 80IB(10) would

have been limited to approximately INR 7.4 crore for the AY 2008-09 (i.e.

gross receipts of approximately INR 41.26 crore minus revenue share paid

to the SPPL of approximately INR 14.44 crore minus construction expenses

of approximately INR 19.38 crore).

49. The learned ASG vehemently reiterated that the primary case of the Revenue

is that effect must be given to the plain language of Clause 7 of the AOP

Agreement, in order to determine the nature of the receipts from the AOP in

the hands of the SPPL. The plain text of the said Clause 7 makes it clear that

the amount received by the SPPL from the AOP was a share of revenue/gross

receipts of the AOP and not a share of the profits of the AOP. He argued that,

this interpretation arrived at by the Assessing Officer, is consistent with how

the parties actually understood and gave effect to the Clause. He submitted

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 24 of 68

that a contrary finding in the proceedings in the case of the AOP is not

determinative of the treatment of this amount in the hands of the SPPL and

at any rate cannot foreclose examination of the issue by this Court. He argued

that the fact that the Bombay High Court has taken a view in favour of the

AOP while during consideration of the assessment proceedings of the AOP,

even if (on demurrer) was binding on a co-ordinate bench of the same court,

does not foreclose examination of the issue by this Court.

50. It was further argued by the learned ASG that since the entire amount paid

by the AOP to the SPPL was reduced from the taxable income of the AOP

by operation of Section 80IB(10), it did not suffer any taxation at all, much

less at the maximum marginal rate applicable to the AOP. Section 86 of the

Act provides that where an AOP is chargeable to tax on its total income at

the maximum marginal rate, the share of a member computed under Section

67A (since the shares of the constituents of the AOP are determinate and

known), shall not be included in the member’s total income. However, as

per Clause (b) of the first proviso to Section 86, ‘in any other case’, the share

of the member shall form part of his total income. He argued that the present

case of the SPPL falls squarely under the second proviso to Clause (b) of

Section 86, in as much as the share of the AOP’s income actually received

by the SPPL had not suffered income tax at all, much less at the maximum

marginal rate applicable to the AOP.

51. In light of the above, the learned ASG submitted that the SPPL must

discharge its liability to pay income tax on the amounts received by it from

the AOP during the AY 2008-09 and the AY 2009-10, respectively and

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 25 of 68

therefore the Civil Appeal No. 19487 of 2017 be allowed and the impugned

order of the High Court set aside.

52. With respect to the issue of reopening of assessment for the AY 2007-08 and

the AY 2008-09 respectively, it has been submitted by the learned ASG that

the outcome of the above-mentioned Civil Appeal No. 19487 of 2017 would

determine the outcome of Civil Appeal no. 744 of 2013 and Civil Appeal No.

9107 of 2012 respectively. He submitted that if the Civil Appeal no. 19487

of 2017 is dismissed on merits, the Civil Appeal No. 744 of 2013 and 9107

of 2012 respectively may be dismissed as infructuous, since the SPPL would

anyway have succeeded in the final order passed in the reassessment

proceedings. Conversely, if this Court were to allow the Civil Appeal no.

19487 of 2017, the sequiter would be that income had escaped assessment

during the original proceedings on account of non-consideration by the

Assessing Officer of tangible material in the form of the AOP Agreement,

which in turn would mean that the reopening of the assessment for the AY

2007-08 and the AY 2008-09 respectively were legally justified and valid.

53. Moreover, with respect to the reopening of assessments, the learned ASG

argued that the High Court’s order dated 23.09.2011 rejecting the reopening

of assessment for the AY 2007-08 does not withstand scrutiny because the

reasons for reopening the assessment under Section 148 for the AY 2007-08

and the AY 2008-09 respectively were identical, and, more relevantly, were

issued by way of a common notice dated 07.02.2011. The primary reason for

reopening the assessment, as disclosed in the common document for both the

AYs was the discovery of the AOP Agreement during the survey action under

Section 133A of the Act, which showed that the SPPL was receiving a share

of the gross receipts of the AOP from the sale of the residential units. Since

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 26 of 68

the very same reasons for reopening assessment were upheld by the High

Court for AY 2008-09 by way of order dated 19.12.2011, it defeats reason to

contend that the same material was found to be tangible and disclosing

escapement of income in the AY 2008-09 were not found to be tangible

material to for the AY 2007-08, more particularly when there was no material

change in the factual position during each of these AYs. Thus, for the reasons

specified by the High Court itself in its order dated 19.12.2011 for the AY

2008-09, the reopening of assessment for the AY 2007-08 should also be held

to be valid.

54. Thus, the learned ASG respectfully prayed that Civil Appeal Nos. 19487 of

2017 and 744 of 2013 filed by the Revenue be allowed and Civil Appeal No.

9107 of 2012 filed by the Assessee be dismissed.

C. ISSUES TO BE DETERMINED

55. Having heard the learned counsel appearing for the parties and having gone

through the materials on record, the following questions fall for our

consideration:

(i) Whether the reopening of assessments of the SPPL for the AY 2007-

08 and the AY 2008-09, respectively, were valid?

(ii) Whether the amount accrued to the SPPL from the AOP, based on

Clause 7 of the AOP Agreement dated 29.04.2003, is liable to be taxed

in the hands of the SPPL for the AY 2008-09 and the AY 2009-10

respectively?

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 27 of 68

D. ANALYSIS

56. We propose to first address the issue whether the reopening of assessments

of the SPPL for the AY 2007-08 and the AY 2008-09 respectively were valid.

Thereafter, we shall proceed to determine the question whether the amount

accrued to the SPPL from the AOP, based on Clause 7 of the AOP Agreement

dated 29.04.2003, is liable to be taxed in the hands of the SPPL for the AY

2008-09 and the AY 2009-10 respectively.

(i) Whether the reopening of assessments of the SPPL for the AY 2007-08

and the AY 2008-09, respectively, were valid?

(a) Statutory Framework Governing Reassessment under Section 147

and Section 148 of the IT Act, 1961 respectively:

57. Before adverting to the rival submissions canvassed on either side, we must

refer to Section 147 and Section 148 of the IT Act, 1961, respectively,

dealing with reopening of assessments, as applicable to the present matter.

58. Section 147 of the IT Act, 1961, prior to the amendment by Act 23 of 2012,

read thus:

“Section 147. Income escaping assessment. If the Assessing Officer,

has reason to believe that any income chargeable to tax has escaped

assessment for any assessment year, he may, subject to the provisions

of Sections 148 to 153, assess or reassess such income and also any

other income chargeable to tax which has escaped assessment and

which comes to his notice subsequently in the course of the proceedings

under this section, or recompute the loss or the depreciation allowance

or any other allowance, as the case may be, for the assessment year

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 28 of 68

concerned (hereafter in this section and in Sections 148 to 153 referred

to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of Section 143

or this section has been made for the relevant assessment year, no

action shall be taken under this section after the expiry of four years

from the end of the relevant assessment year, unless any income

chargeable to tax has escaped assessment for such assessment year by

reason of the failure on the part of the assessee to make a return under

Section 139 or in response to a notice issued under sub-section (1) of

Section 142 or Section 148 or to disclose fully and truly all material

facts necessary for his assessment, for that assessment year:

[Provided further that the Assessing Officer may assess or reassess

such income, other than the income involving matters which are the

subject matters of any appeal, reference or revision, which is

chargeable to tax and has escaped assessment.]

Explanation 1.-Production before the Assessing Officer of account

books or other evidence from which material evidence could with due

diligence have been discovered by the Assessing Officer will not

necessarily amount to disclosure within the meaning of the foregoing

proviso.

Explanation 2.-For the purposes of this section, the following shall also

be deemed to be cases where income chargeable to tax has escaped

assessment, namely:-

(a) where return of income has been furnished by the assessee

although his total income or the total income of any other person

in respect of which he is assessable under this Act during the

previous year exceeded the maximum amount which is not

charge- able to income tax;

(b) where a return of income has been furnished by the assessee

but no assessment has been made and it is noticed by the

Assessing Officer that the assessee has understated the income

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 29 of 68

or has claimed excessive loss, deduction, allowance or relief in

the return;

(c) where an assessment has been made, but-

(i) income chargeable to tax has been underassessed: or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive

relief under this Act; or

(iv) excessive loss or depreciation allowance or any other

allowance under this Act has been computed.

Explanation 3.-For the purpose of assessment or reassessment

under this section, the Assessing Officer may assess or re-assess the

income in respect of any issue, which has escaped assessment, and such

issue comes to his notice subsequently in the course of the proceedings

under this section, notwithstanding that the reasons for such issue have

not been included in the reasons recorded under sub-section (2) of

Section 148.”

59. Section 148 of the IT Act, 1961, prior to the amendment by Act 21 of 2006,

read thus:

“Section 148. Issue of notice where income has escaped assessment.

- (1) Before making the assessment, reassessment or recomputation

under Section 147, the Assessing Officer shall serve on the assessee a

notice requiring him to furnish within such period, as may be specified

in the notice, a return of his income or the income of any other person

in respect of which he is assessable under this Act during the previous

year corresponding to the relevant assessment year, in the prescribed

form and verified in the prescribed manner and setting forth such other

particulars as may be prescribed; and the provisions of this Act shall,

so far as may be, apply accordingly as if such return were a return

required to be furnished under Section 139:

Provided that in a case-

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 30 of 68

(a) where a return has been furnished during the period

commencing on the 1st day of October, 1991 and ending on the

30th day of September, 2005 in response to a notice served under

this section, and

(b) subsequently a notice has been served under sub-section (2)

of Section 143 after the expiry of twelve months specified in the

proviso to sub-section (2) of Section 143, as it stood immediately

before the amendment of said sub-section by the Finance Act,

2002 (20 of 2002) but before the expiry of the time limit for

making the assessment, reassessment or recomputation as

specified in sub-section (2) of Section 153, every such notice

referred to in this clause shall be deemed to be a valid notice:

Provided further that in a case-

(a) where a return has been furnished during the period

commencing on the 1st day of October, 1991 and ending on the

30th day of September, 2005, in response to a notice served under

this section, and

(b) subsequently a notice has been served under clause (ii) of

sub-section (2) of Section 143 after the expiry of twelve months

specified in the proviso to clause (ii) of sub-section (2) of Section

143, but before the expiry of the time limit for making the

assessment, re- assessment or recomputation as specified in sub-

section (2) of Section 153, every such notice referred to in this

clause shall be deemed to be a valid notice.

Explanation.-For the removal of doubts, it is hereby declared that

nothing contained in the first proviso or the second proviso shall apply

to any return which has been furnished on or after the 1st day of

October, 2005 in response to a notice served under this section.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 31 of 68

(2) The Assessing Officer shall, before issuing any notice under this

section, record his reasons for doing so.”

60. Upon a bare reading of Section147 of the IT Act, it is seen that the provision

empowers the Assessing Officer to assess income that escaped assessment in

the relevant assessment year. Subject to the provisions and safeguards in the

section, the Assessing Officer can reassess income for an assessment year

irrespective of whether the original assessment was merely processed under

Section 143(1) or assessed under Section 143(3) of the Act. The power to

reopen assessment is not confined to cases where the assessee has concealed

his income; it also extends to cases where though there has been no

concealment by the assessee, the Assessing Officer has reason to believe, in

consequence of tangible material in his possession, that income has escaped

assessment. The expression “escaped assessment” is not restricted to those

cases only which have not come to the notice of the Assessing Officer at all,

but also applies to those cases where an assessment has been made but (i)

income chargeable to tax has been under-assessed, or (ii) such income has

been assessed at too low a rate, or (iii) such income has been made the subject

of excessive relief under this Act, (iv) excessive loss or depreciation

allowance or any other allowance under this Act has been computed.

61. In the present matter before us, the Section 148 notice of reopening

assessment states that certain income of the SPPL derived from the AOP,

chargeable to tax had escaped assessment within the meaning of sub-clause

(iv) of clause (c) of Explanation (2) to Section 147 of the IT Act. It is the

Revenue’s case that the income accrued to the SPPL from the AOP is not a

share of the AOP’s profit but is a share of revenue and hence should have

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 32 of 68

been taxed at the hands of the SPPL, rather than being exempted as a profit

of the AOP under Section 80IB(10) of the IT Act.

62. The core issue before us is to test the validity of the Section 148 notice issued

to the SPPL for the AY 2007-08 and the AY 2008-09, respectively, on the

anvil of the requirements stated under Section 147 of the Act. The essential

condition precedents to exercise jurisdiction for reopening an assessment

under Section 147 read with Section 148 of the Act are:

a) The Assessing Officer must have ‘reason to believe’ that ‘income’

chargeable to tax has ‘escaped assessment;’ and

b) The Assessing Officer must record reasons for reopening of

assessment before issuing notice under Section 148

(b) Meaning and scope of “reason to believe” under Section 147 of the

IT Act, 1961:

63. The expression “reason to believe” in Section 147 of the IT Act means cause

or justification and there need not be an established fact of assessment at this

stage. The Assessing Officer need not have finally ascertained the facts to

prove escapement of income. The Revenue’s contention that the outcome of

the third connected matter before us, i.e. Civil Appeal No 19487 of 2017,

would determine the outcome of the matters testing the validity of the

reopening of assessment, is not a legally sustainable submission. The validity

of the reopening has to be ascertained by limiting the enquiry to the ‘reasons

recorded’ under Section 148 only, and the merits of the reopening cannot be

looked into to justify or discredit the reopening. In other words, there can be

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 33 of 68

a scenario where the ‘reasons recorded’ by the Revenue would justifiably

give rise to a prima facie belief that income has escaped assessment, even

though upon reopening of assessment, the belief turns out to be unfounded.

In such a scenario, the reopening would remain valid, irrespective of the

outcome arrived at. On the other hand, there can be a scenario where even

though the merits indicate that income had escaped assessment, if the

Revenue failed to record those reasons under Section 148, then the reopening

in such a scenario would be invalid since the reopening cannot be justified

by other reasons gathered subsequently at the merits stage. We must not lose

sight of this Court’s observation in Assistant Commissioner of Income Tax

v. Rajesh Jhaveri Stock Brokers P. Ltd. [(2008) 14 SCC 208], which is of

great relevance in this regard, and it reads thus:

“19. Section 147 authorises and permits the assessing officer to assess

or reassess income chargeable to tax if he has reason to believe that

income for any assessment year has escaped assessment. The word

"reason" in the phrase "reason to believe" would mean cause or

justification. If the assessing officer has cause or justification to know

or suppose that income had escaped assessment, it can be said to have

reason to believe that an income had escaped assessment.The

expression cannot be read to mean that the assessing officer should

have finally ascertained the fact by legal evidence or conclusion. The

function of the assessing officer is to administer the statute with

solicitude for the public exchequer with an inbuilt idea of fairness to

taxpayers.”

[Emphasis supplied]

64. To decide whether the Assessing Officer has a ‘reason to believe’ that

income chargeable to tax has escaped assessment, it is only those materials

which were before the Assessing Officer at the time of initiating proceedings

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 34 of 68

that have to be taken into account, and not any further materials which

subsequently came to light in the course of the proceedings under this

section. The expression “reason to believe” has been interpreted by this

Court to mean that the Assessing Officer must have some ‘tangible material’

in his possession to come to the conclusion that there is escapement of

income from assessment, before assuming jurisdiction under Section 147. In

other words, this tangible material must provide him with the reason to

believe that the income has escaped assessment. This Court in

Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd. [(2010)

320 ITR 561] (hereinafter referred to as “Kelvinator”), has succinctly dealt

with the difference between review and reassessment in the context of

interpreting the expression “reason to believe” through the following

observation:

“5. On going through the changes, quoted above, made to Section 147

of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act,

1987, reopening could be done under the above two conditions and

fulfilment of the said conditions alone conferred jurisdiction on the

assessing officer to make a back assessment, but in Section 147 of the

Act (with effect from 1-4-1989), they are given a go-by and only one

condition has remained viz. that where the assessing officer has reason

to believe that income has escaped assessment, confers jurisdiction to

reopen the assessment. Therefore, post-1-4-1989, power to reopen is

much wider. However, one needs to give a schematic interpretation to

the words “reason to believe” failing which, we are afraid, Section

147 would give arbitrary powers to the assessing officer to reopen

assessments on the basis of “mere change of opinion”, which cannot

be per se reason to reopen.

6. We must also keep in mind the conceptual difference between power

to review and power to reassess. The assessing officer has no power

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 35 of 68

to review; he has the power to reassess. But reassessment has to be

based on fulfilment of certain precondition and if the concept of

“change of opinion” is removed, as contended on behalf of the

Department, then, in the garb of reopening the assessment, review

would take place.

7. One must treat the concept of “change of opinion” as an in-built test

to check abuse of power by the assessing officer. Hence, after 1-4-1989,

the assessing officer has power to reopen, provided there is “tangible

material” to come to the conclusion that there is escapement of

income from assessment. Reasons must have a live link with the

formation of the belief. Our view gets support from the changes made

to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax

Laws (Amendment) Act, 1987, Parliament not only deleted the words

“reason to believe” but also inserted the word “opinion” in Section

147 of the Act. However, on receipt of representations from the

companies against omission of the words “reason to believe”,

Parliament reintroduced the said expression and deleted the word

“opinion” on the ground that it would vest arbitrary powers in the

assessing officer.

8. We quote hereinbelow the relevant portion of Circular No. 549 dated

31-10-1989, which reads as follows:

“7.2. Amendment made by the Amending Act, 1989, to

reintroduce the expression ‘reason to believe’ in Section

147.—A number of representations were received against

the omission of the words ‘reason to believe’ from Section

147 and their substitution by the ‘opinion’ of the Assessing

Officer. It was pointed out that the meaning of the

expression, ‘reason to believe’ had been explained in a

number of court rulings in the past and was well settled

and its omission from Section 147 would give arbitrary

powers to the Assessing Officer to reopen past assessments

on mere change of opinion. To allay these fears, the

Amending Act, 1989, has again amended Section 147 to

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 36 of 68

reintroduce the expression ‘has reason to believe’ in the

place of the words ‘for reasons to be recorded by him in

writing, is of the opinion’. Other provisions of the new

Section 147, however, remain the same.”

[Emphasis supplied]

(c) Whether the Assessing Officer had any tangible material or were

the reopening of assessments on mere change of opinion?

65. In the present matter, the Revenue has sought to reopen assessment on the

basis of books of account and six documents impounded during the survey

dated 23.12.2010, carried out at the premises of the SPPL. Alongside

impounding the above-mentioned documents, the statement of one Shri

Ashok V. Suratwala, Director of the SPPL, was recorded on oath under

Section 131 of the Act. The relevant portion of the reasons recorded under

Section 148, (as found identical for both the AY 2007-08 and the AY 2008-

09), reads as follows:

“4. Survey under section 133A of theAct was carried out in business

premises of the assessee on 23.12.2010. The books of account and

documents were found and impounded during the course of survey. The

impugned materials included the following documents:

• Original copy of the AOP agreement dated 28.04.2003.

• Copy of the audited financial statements of M/s Fortaleza

Developers for F.Y. 2007-08.

• Books of account of assessee company showing the treatment of

land in its accounts since inception.

• Copy of the development agreement between Assessee Company

and M/s Yerawada Stud Farm and Agriculture.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 37 of 68

• Letter written by Auditor Shri Suresh C. Shah to Assessee

Company dated 19.06.2008 indicating the working of the amount

that has to be received by assessee from M/s Fortaleza

Developers.

• Standard agreements in respect of sale of residential units in

Fortaleza Complex

.

The statement of Shri Ashok V. Suratwala, Director of Assessee

Company was recorded on oath under section 131 of the Act.

5. The evidences indicate that the assessee has received a share at 35%

from the gross receipts on sale of residential units in Fortaleza

Complex. The audited financial statements of AOP M/s Fortaleza

Developers show that assessee was given 35% of the gross receipts from

sale of residential units in the said complex. It did not indicate that

assessee has received its share out of the profits of AOP, M/s Fortaleza

Developers. This finding was confronted to Shri Ashok V Suratwala,

Director of Assessee Company. In reply he has stated thus:

The development rights over the land belonged to us which are

precious. Because of many other factors affecting the output of

construction business, the returns that we should have received

from those rights could not be exposed to the inherent risks of

business. In pursuit of this and in order to safeguard the value of

those rights we have devised a formula by which we are entitled

to 35% of the gross receipts out of sales of flats in Fortaleza.

Amount of the sales do not include other incidental charges

charged to the customers like MSEB charges, maintenance

charges, legal charges and administrative charges, etc.

5.1 Thus it is clear that assessee has received its share from the gross

sale proceeds and not the share of profit. Further, following facts came

to notice.

• The assessee is not having any employee on its muster.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 38 of 68

• It does not have any stake in the construction of the said

Fortaleza Complex except the land it has given to the AOP

against which it receives 35% of the sale proceeds of flats.

• It has been stated that the assessee is the owner of the land

and when the land is to be finally transferred to the

society/community that will be formed after all the

residential unit are sold, the assessee company will sign

the conveyance as transferor and AOP as a confirming

party.

• The AOP, M/s Fortaleza Developers has claimed

deduction under Section 80IB(10) of the Act on the profits

and gains of business derived by it from sale of flats in

Fortaleza Complex.

6. Thus, it is found that the assessee is not receiving the share of the

profit from the AOP but is receiving the consideration in the form of

35% share in proceeds of sale, against the development rights in a land

surrendered by it to other member of AOP and finally to the purchaser

of the flat/residential units.

7. In view of this, the income received by Assessee from AOP M/s

Fortaleza Developers is not a share of profit, but consideration

received against the development rights sold/surrendered. Hence the

income of [Rs. 3,49,18,587/- for AY 2007-08 & Rs. 14,18,52,156 for AY

2008-09] is not an exempt income but taxable in the hands of assessee.

Therefore, income of [Rs. 3,49,18,587/- for AY 2007-08 & Rs.

14,18,52,156 for AY 2008-09] chargeable to tax has escaped

assessment within the meaning of sub-clause (iv) of clause (c) of

Explanation 2 to Section 147 of the Act. In order to bring the income

escaped assessment, assessment is reopened under section 148 of the

Act.

Issue notice under section 148 of the Act.”

66. It has been contended by the SPPL that out of the six impounded documents,

four were already with the Revenue at the time of scrutiny assessment under

Section 143(3) and that the remaining two documents did not carry the matter

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 39 of 68

any further. The SPPL also contended that disclosures regarding the AOP and

the income derived from it had been made by the SPPL in its returns for the

AY 2007-08 and the AY 2008-09 respectively, and that the Revenue had even

considered the same in the Assessment Order. Hence, placing reliance on this

Court’s observation in Kelvinator (supra), the SPPL contends that the notice

of reopening is bad in law as the reasons recorded are nothing but a mere

change of opinion since the relevant facts and record had already been duly

considered, appreciated and accepted by the Revenue at the time of original

assessment.

67. On the other hand, the Revenue contends that the books of accounts and the

appropriation account of the AOP were not produced during the relevant

assessment proceedings. These documents came to light after the completion

of the original assessment, and hence, it was contended that the said

information was ‘tangible material’ that led the Assessing Officer to have

‘reason to believe’ that there was income escaping assessment. Moreover, it

was contended that the statement of Shri Suratwala, Director of the SPPL,

was “information” which was not available with the Assessing Officer at the

time of original assessment. Furthermore, it was argued that details available

to an Assessing Officer in the papers already filed before does not become an

item of information by its mere availability, but is transformed into an item

of information when its existence is realized and implications are recognised,

and that the awareness of the Assessing Officer subsequent to the completion

of the original assessment would constitute “information”.

68. In light of the above rival contentions, it is crucial for us to ascertain whether

the ‘tangible material’ that the Revenue sought to rely upon had already been

considered, appreciated and accepted by the Revenue in the original

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 40 of 68

assessment orders. If such ‘tangible material’ had already been relied upon

by the Assessing Officer to form an opinion in the original assessment

orders, then relying upon the same for the purpose of reopening assessment

would amount to review instead of reassessment, and that would not be

permissible in law, as noted by this Court in Kelvinator (supra). However,

if the ‘tangible material’ is extraneous to the original assessment records, or

was present but not considered or acted upon by the Assessing Officer during

the initial proceedings, such information provides a valid jurisdictional basis

for the Revenue to reopen the assessment.

69. It is settled law that mere intimation by an assessee of a transaction does not

preclude the Assessing Officer from reopening assessment if there is tangible

material to prima facie indicate that primary facts regarding the true nature

of the transaction had not been brought to the notice of the Assessing Officer

by the assessee. The observations made by this Court in Calcutta Discount

Co. Ltd. v. Income Tax Officer, Companies District I Calcutta and Anr.

[(1961)41 ITR 191] (hereinafter referred to as “Calcutta Discount”), and in

M/s Phool Chand Bajrang Lal and Another v. Income Tax Officer and

Another [(1993) 4 SCC 77] (hereinafter referred to as “Phool Chand”) are

of crucial significance in this regard.

70. The majority in the Constitution Bench decision of this Court in Calcutta

Discount (supra) had observed that the duty to disclose all the primary facts

relevant to a question before the assessing authority lies on the assessee and

mere production of books of account and documents does not fulfil that

obligation, unless the assessing authority’s attention is brought to particular

items in the account books, or particular portions of the documents which are

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 41 of 68

relevant. The observation made by this Court in Calcutta Discount (supra)

reads thus:

“ 9. There can be no doubt that the duty of disclosing all the primary

facts relevant to the decision of the question before the assessing

authority lies on the assessee. To meet a possible contention that when

some account books or other evidence has been produced, there is no

duty on the assessee to disclose further facts, which on due diligence,

the Income Tax Officer might have discovered, the legislature has put

in the Explanation, which has been set out above. In view of the

Explanation, it will not be open to the assessee to say, for example —

“I have produced the account books and the documents : You, the

assessing officer examine them, and find out the facts necessary for

your purpose : My duty is done with disclosing these account-books

and the documents”. His omission to bring to the assessing authority's

attention these particular items in the account books, or the particular

portions of the documents, which are relevant, amount to “omission to

disclose fully and truly all material facts necessary for his assessment”.

Nor will he be able to contend successfully that by disclosing certain

evidence, he should be deemed to have disclosed other evidence, which

might have been discovered by the assessing authority if he had pursued

investigation on the basis of what has been disclosed. The Explanation

to the section, gives a quietus to all such contentions; and the position

remains that so far as primary facts are concerned, it is the assessee's

duty to disclose all of them — including particular entries in account

books, particular portions of documents and documents, and other

evidence, which could have been discovered by the assessing

authority, from the documents and other evidence disclosed.

10. Does the duty however extend beyond the full and truthful

disclosure of all primary facts? In our opinion, the answer to this

question must be in the negative. Once all the primary facts are before

the assessing authority, he requires no further assistance by way of

disclosure. It is for him to decide what inferences of facts can be

reasonably drawn and what legal inferences have ultimately to be

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 42 of 68

drawn. It is not for somebody else — far less the assessee — to tell the

assessing authority what inferences whether of facts or — law should

be drawn. Indeed, when it is remembered that people often differ as

regards what inferences should be drawn from given facts, it will be

meaningless to demand that the assessee must disclose what inferences

— whether of facts or law he would draw from the primary facts.

11. If from primary facts more inferences than one could be drawn, it

would not be possible to say that the assessee should have drawn any

particular inference and communicated it to the assessing authority.

How could an assessee be charged with failure to communicate an

inference, which he might or might not have drawn?

***

15. Clearly it is the duty of the assessee who wants the court to hold

that jurisdiction was lacking, to establish that the Income Tax Officer

had no material at all before him for believing that there had been such

non disclosure.[…]”

[Emphasis supplied]

71. Moreover, as pithily put by this Court in Phool Chand (supra), one must

understand that acquiring fresh information relating to a concluded

assessment which goes to expose the falsity of a statement made by the

assessee at the time of original assessment is different from drawing a fresh

inference from the same facts and material which was available with the

Assessing Officer at the time of original assessment proceedings. Where the

transaction itself on the basis of subsequent information, is found to be a

bogus transaction, the mere disclosure of that transaction at the time of

original assessment proceedings, cannot be said to be disclosure of the “true”

and “full” facts in the case, and the ITO would have the jurisdiction to reopen

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 43 of 68

the concluded assessment in such a case. The relevant observation of this

Court in Phool Chand (supra) reads thus:

“19. […] Acquiring fresh information, specific in nature and reliable

in character, relating to the concluded assessment which goes to

expose the falsity of the statement made by the assessee at the time of

original assessment is different from drawing a fresh inference from

the same facts and material which was available with the ITO at the

time of original assessment proceedings. The two situations are

distinct and different. Thus, where the transaction itself on the basis

of subsequent information, is found to be a bogus transaction, the

mere disclosure of that transaction at the time of original assessment

proceedings, cannot be said to be disclosure of the "true" and "full"

facts in the case and the ITO would have the jurisdiction to reopen

the concluded assessment in such a case. It is correct that the

assessing authority could have deferred the completion of the original

assessment proceedings for further enquiry and investigation into the

genuineness to the loan transaction but in our opinion his failure to do

so and complete the original assessment proceedings would not take

away his jurisdiction to act under Section 147 of the Act, on receipt of

the information subsequently. The subsequent information on the basis

of which the ITO acquired reasons to believe that income chargeable to

tax had escaped assessment on account of the omission of the assessee

to make a full and true disclosure of the primary facts was relevant,

reliable and specific. It was not at all vague or non-specific.

***

25. From a combined review of the judgments of this Court, it follows

that an Income Tax Officer acquires jurisdiction to reopen assessment

under Section 147(a) read with Section 148 of the Income Tax Act, 1961

only if on the basis of specific, reliable and relevant information coming

to his possession subsequently, he has reasons which he must record, to

believe that by reason of omission or failure on the part of the assessee

to make a true and full disclosure of all material facts necessary for his

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 44 of 68

assessment during the concluded assessment proceedings, any part of

his income, profit or gains chargeable to income tax has escaped

assessment. He may start reassessment proceedings either because

some fresh facts come to light which were not previously disclosed or

some information with regard to the facts previously disclosed comes

into his possession which tends to expose the untruthfulness of those

facts. In such situations, it is not a case of mere change of opinion or

the drawing of a different inference from the same facts as were

earlier available but acting on fresh information. Since, the belief is

that of the Income Tax Officer, the sufficiency of reasons for forming the

belief, is not for the Court to judge but it is open to an assessee to

establish that there in fact existed no belief or that the belief was not at

all a bona fide one or was based on vague, irrelevant and non-specific

information. To that limited extent, the Court may look into the

conclusion arrived at by the Income Tax Officer and examine whether

there was any material available on the record from which the requisite

belief could be formed by the Income Tax Officer and further whether

that material had any rational connection or a live link for the

formation of the requisite belief. It would be immaterial whether the

Income Tax Officer at the time of making the original assessment could

or, could not have found by further enquiry or investigation, whether

the transaction was genuine or not, if on the basis of subsequent

information, the Income Tax Officer arrives at a conclusion, after

satisfying the twin conditions prescribed in Section 147(a) of the Act,

that the assessee had not made a full and true disclosure of the material

facts at the time of original assessment and therefore income

chargeable to tax had escaped assessment. The High Courts which have

interpreted Burlop Dealer case as laying down law to the contrary fell

in error and did not appreciate the import of that judgment correctly.

26. We are not persuaded to accept the argument of Mr Sharma that the

question regarding truthfulness or falsehood of the transactions

reflected in the return can only be examined during the original

assessment proceedings and not at any stage subsequent thereto. The

argument is too broad and general in nature and does violence to the

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 45 of 68

plain phraseology Sections 147(a) and 148 of the Act and is against the

settled law by this Court. We have to look to the purpose and intent of

the provisions. One of the purposes of Section 147, appears to us to

be, to ensure that a party cannot get away by wilfully making a false

or untrue statement at the time of original assessment and when that

falsity comes to notice, to turn around and say “you accepted my lie,

now your hands are tied and you can do nothing”. It would be travesty

of justice to allow the assessee that latitude.”

[Emphasis supplied]

72. Before proceeding further, it is pertinent to clarify at this stage that in the

matter before us, since the notice for reopening assessment under Section

148 was served upon the SPPL within four years from the end of the relevant

assessment years, the first proviso to Section 147 is not attracted.

Consequently, the Revenue is not required to establish a failure on the part

of the assessee to disclose fully and truly all material facts. However, the

Explanation 1 to Section 147 remains highly relevant to the present matter

for the interpretative guidance it provides to what amounts to disclosure and

the relevance of the information that remains buried in the books of account

or other evidence from which material evidence could with due diligence

have been discovered by the Assessing Officer. The Explanation 1 to Section

147 clarifies the statutory objective that 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. Thus, even in the

absence of the higher threshold of ‘failure to disclose’, the interpretative

standards of what constitutes a ‘true and full disclosure’ remains applicable.

In other words, the meaning attributable to what amounts to such disclosure

remains equally relevant to the contention raised by the assessee that the

‘tangible material’ based on which the reassessment is stated to be done had

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 46 of 68

already been provided to the Revenue. As a result, it is important to analyse

in detail the manner in which such information was furnished by the assessee

and the extent to which the Revenue had engaged with the information in

the assessment order in order to reflect whether an opinion has been formed

on this issue.

73. In the present matter, the learned counsel for the SPPL drew our attention to

the following statement made by the SPPL in its return of income for the

relevant AYs to impress upon the fact that the Assessing Officer was aware

of the income accrued to the SPPL from the AOP:

“1. The Assessee is a member in the Association of Persons doing

business under the name and style of “Fortaleza Developers”. The tax

on the income of AOP being payable in the case of the AOP itself under

section 167B(2) of the Act, no tax is payable by the Assessee in respect

of its share of income from the AOP.

2. For computation of book profit u/s. 115JB of the Income-tax, 1961

share of profit from AOP has been considered as a ‘non-income’

category as spelt out in Mumbai Tribunal decision in the case of

Income-tax officer v. Suraj Jewellery India Ltd. As such this income is

deducted from book profit to arrive at profit chargeable under that

section.”

74. On a perusal of the materials on record, we also find that a copy of the AOP

Agreement was indeed submitted by the SPPL to the Assessing Officer at the

time of scrutiny assessment for both, i.e. the AY 2007-08 and the AY 2008-

09 respectively. The SPPL had submitted a copy of the AOP Agreement,

alongside other documents with its letter dated 06.11.2009, in the course of

scrutiny assessment for the year. On another occasion, the SPPL had

submitted a copy of the AOP Agreement attached with its letter dated

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 47 of 68

01.07.2010, during the course of correspondence with respect to the AY

2008-09.

75. However, it is crucial to note that the materials on record indicate that the

SPPL had not shed light on the primary fact that the income which it declared

as a share of the ‘profit’ of the AOP, was a 35% share of the gross sale receipts

of the residential units sold by the AOP. When the information gathered in

the form of the impounded documents and the SPPL’s director’s statement

came to the Revenue’s knowledge, the true purport of the transaction between

the SPPL and the AOP was revealed.

76. In light of the position of law as explained in Calcutta Discount (supra) and

Phool Chand (supra), the mere disclosure of the existence of the AOP and

the quantum of income derived by the SPPL from the AOP at the time of

original assessment, does not preclude the Assessing Officer from reopening

assessment where fresh information emerges which prima facie indicates that

certain income has escaped assessment. The statements made by the SPPL

regarding the AOP in its return of income or in the course of the original

assessment do not amount to discharging its duty to provide the assessing

officer with the primary facts relevant to determining the issue in dispute. A

perusal of the materials on record would indicate that SPPL had merely

informed the Revenue that certain income is accrued to it from the profit of

the AOP. Even when a copy of the AOP Agreement was submitted to the

Assessing Officer, the particular item in the document, i.e. Paragraph 7 of the

AOP Agreement which is at the core of the dispute, was not brought to the

fore.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 48 of 68

77. Upon a detailed reading of the assessment orders for the AY 2007-08 and the

AY 2008-09, respectively it is evident that the Revenue had accepted the

SPPL’s declaration regarding the income derived from the AOP at face

value, without delving into the fundamental nature of the income itself, i.e.

the Revenue had proceeded with the assessment without questioning

whether the subject income is indeed a share of the profit of the AOP. While

the Assessment Orders are not entirely silent on this income, the existing

discussion pertained to entirely different issues. Therefore, it is crucial that

we deal with the discussion on the income accrued to SPPL from the AOP

in the Assessment Orders for the AY 2007-08 and the AY 2008-09

respectively in greater detail.

78. In the Assessment Order of the SPPL dated 21.12.2009, for the AY 2007-08,

the income accrued to the SPPL from the AOP has been mentioned only

fleetingly in paragraph no. 4. Before analysing further, it is necessary to

reproduce the relevant portion of that paragraph from the Assessment Order

of the AY 2007-08 as follows:

“4. As per the agreement the assessee company received 333.56 lacs,

i.e. 35% of the sales proceeds from Raviraj Kothari & Associates.

Assessee has also earned Income of Rs. 349.19 lacs in the form of

share of profit from AOP i.e.M/s Fortaleza Developers.”

[Emphasis supplied]

79. Crucially, the ‘agreement’ referred to in the above-mentioned paragraph no.

4 is the Joint Venture Agreement dated 26.08.2002 (hereinafter referred to

as “the JV Agreement”), between SPPL and RKA respectively and not the

AOP Agreement dated 29.04.2003 between the SPPL and RKC respectively.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 49 of 68

While the Assessment Order examined the JV Agreement in great detail, it

offers no discussion on the AOP agreement beyond the lone sentence in the

above-mentioned paragraph no. 4. This peripheral reference to the income

derived from the AOP clearly demonstrates that the Assessing Officer never

formed an opinion on whether such income was a share of the AOP’s profit

or its revenue. The High Court, however, erroneously conflated the

references to the 35:65 gross receipt sharing arrangement found in Clause

11 of the JV Agreement with Clause 7 of the AOP Agreement. We must

clarify that despite the superficial resemblance between these two clauses

regarding the 35:65 ratio of dividing sale proceeds between the respective

parties, the Assessing Officer’s analysis of the JV Agreement cannot be

construed as an opinion on Clause 7 of the AOP Agreement or the nature of

the income accrued from the AOP. The Joint Venture (JV) Agreement

between RKA and the SPPL was specifically directed towards the

development of commercial units for the project "Victoria Complex." On

the other hand, the AOP Agreement between RKC and the SPPL, which is

central to the matter before us, pertained to the development of a wholly

different project for residential units. These are two legally distinct

agreements involving different contracting parties and separate subject

matters. The Joint Venture (JV) Agreement between RKA and the SPPL was

specifically directed toward the development of commercial units. On the

other hand, the AOP Agreement between RKC and the SPPL pertained to

the development of a wholly different project for residential units. These are

two legally distinct agreements involving different contracting parties and

separate subject matters. The mere fact that the Assessment Order contains

a reference to a 35:65 sale-proceeds sharing arrangement, derived from two

wholly different agreements involving different parties, it cannot be

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 50 of 68

construed as a finding on the income derived from the AOP. To constitute a

"change of opinion," there must first be a conscious application of mind and

a formation of an opinion during the original assessment proceedings.

80. In the present case, the Assessing Officer’s discussion in the Assessment

Order for the AY 2007-08 was confined to the JV Agreement. There is

perceptible lack of any inquiry or adjudication regarding the specific terms

of the AOP Agreement, particularly the nature of income under Clause 7. In

the absence of such an initial inquiry, the plea of "change of opinion" is

legally untenable. A change of opinion presupposes the existence of a

previously formed opinion. Where no such opinion was formed in the first

instance, the Revenue is not precluded from reopening the assessment upon

the discovery of facts suggesting that income has escaped assessment. Thus,

it can be concluded that since the Revenue had not formed any opinion on

the fundamental nature of the income accrued to the SPPL from the AOP as

to whether it is a share of profit or revenue, the Revenue retains the authority

to reassess the income upon coming across information which prima facie

indicates that the income is tax-liable revenue and not tax-exempt profit.

81. Coming to the assessment order for the AY 2008-09, we find that there was

some discussion on the income accrued to the SPPL from the AOP, but on

an issue wholly different from the reasons for reopening assessment. The

issue which was discussed pertained to whether the income, despite being a

share of profit of the AOP, would nevertheless be excluded from its net

profit to arrive at its book profit under Section 115JB of the Act. The

Assessment Order indicated that the assessment had proceeded on the

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 51 of 68

assumption that the subject income was profit, without verifying whether it

was indeed so or not.

82. Thus, we find that in the assessment orders for both, i.e. the AY 2007-08

and the AY 2008-09, the Assessing Officer had not formed any opinion on

what the fundamental nature of the income was, which accrued to the SPPL

from the AOP. Hence, when ‘tangible material’ in the form of the

impounded documents and the director’s statement shed light on the manner

in which the SPPL received its income from the AOP, it gave rise to ‘reasons

to believe’ that income liable to tax has escaped assessment. As observed by

this Court in Phool Chand (supra), it would be immaterial whether the

Income Tax Officer at the time of making the original assessment could or,

could not have found by further enquiry or investigation, whether the

transaction was genuine or not, if on the basis of subsequent information,

the Income Tax Officer has reasons to believe that income chargeable to tax

had escaped assessment. He may start reassessment proceedings either

because some fresh facts come to light which were not previously disclosed

or some information with regard to the facts previously disclosed comes into

his possession which tends to expose the untruthfulness of those facts. In

such situations, it is not a case of mere change of opinion or the drawing of

a different inference from the same facts as were earlier available but acting

on fresh information. Applying the principle as laid down by this Court in

Phool Chand (supra), when fresh information was acquired in the course of

the survey dated 23.12.2010 which prima facie led the Assessing Officer to

believe that the true nature of the income was not profit but revenue which

had escaped assessment, such reasons cannot be discarded as mere change

of opinion.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 52 of 68

83. Thus, we find that the notices for reopening of the SPPL’s assessment for

both, i.e. the AY 2007-08 and the AY 2008-09 respectively were a result of

the Revenue acting on fresh information and not merely change of opinion.

84. Therefore, the impugned judgment of the High Court in Civil Appeal No.

744 of 2013 is set aside and the notice of reopening assessment for the AY

2007-08 is held to be valid. However, we would like to clarify that the

validity of the reopening of assessment does not have a bearing on the merits

of the assessment order that would be the outcome upon completion of the

reopening proceedings.

85. With regards to Civil Appeal no. 9107 of 2012, while we uphold the ultimate

conclusion reached by the High Court regarding the validity of the reopening

of assessment for the AY 2008-09, we find the reasoning employed by the

High Court to be flawed. To ascertain the validity of the reassessment

proceedings, the High Court had erroneously traversed beyond the reasons

recorded under Section 148, by relying on the Assessment Order of the AOP

for the AY 2008-09 and the AY 2007-08 respectively. In our opinion, such

an approach taken by the High Court, defeats the principles of natural justice

and the statutory objective of recording reasons, and is impermissible in law.

The High Court relied on the fact that a copy of the AOP’s Assessment

Orders for the AY 2007-08 and the AY 2008-09 respectively had been

placed before the Court. In doing so, the High Court lost sight of the fact

that the reasons recorded under Section 148 serve a crucial purpose of

informing the assessee of the grounds for reopening assessment so that they

may file meaningful objections accordingly.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 53 of 68

86. As established by this Court in GKN Driveshafts (India) Ltd. v. ITO [(2003)

1 SCC 72] (hereinafter referred to as “GKN Driveshafts”), the Assessing

Officer is bound to furnish reasons, and the assessee is entitled to a speaking

order disposing of their objections before the assessment is validly reopened.

This Court in GKN Driveshafts (supra) noted thus:

“5. We see no justifiable reason to interfere with the order under

challenge. However, we clarify that when a notice under Section 148

of the Income Tax Act is issued, the proper course of action for the

noticee is to file return and if he so desires, to seek reasons for issuing

notices. The assessing officer is bound to furnish reasons within a

reasonable time. On receipt of reasons, the noticee is entitled to file

objections to issuance of notice and the assessing officer is bound to

dispose of the same by passing a speaking order. In the instant case,

as the reasons have been disclosed in these proceedings, the assessing

officer has to dispose of the objections, if filed, by passing a speaking

order, before proceeding with the assessment in respect of the abovesaid

five assessment years.”

[Emphasis supplied]

87. Thus, it is settled law that the validity of a reopening must be tested solely on

the basis of the reasons recorded at the time of issuing the notice under

Section 148. A document not referred to in those reasons recorded under

Section 148 cannot be used to justify the validity of the reopening, as the

assessee must not be deprived of a fair opportunity to dispute such grounds.

In the present matter, while we exclude the extraneous documents relied upon

by the High Court, our inquiry into the reassessment’s validity, when tested

strictly against the reasons recorded, reveals existence of ‘tangible material’

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 54 of 68

to form a bona fide belief that income has escaped assessment. Accordingly,

Civil Appeal No. 9107 of 2012 stands dismissed.

(ii) Whether the amount accrued to the SPPL from the AOP, based on

Clause 7 of the AOP Agreement dated 29.04.2003, is liable to be taxed in

the hands of the SPPL for the AY 2008-09 and the AY 2009-10,

respectively?

88. We shall now proceed to consider Civil Appeal No. 19487 of 2017. When

the assessment orders of the SPPL for the AY 2008-09 and the AY 2009-10

respectively were challenged by the assessee and the challenge reached the

ITAT, the ITAT framed the following point for determination, as noted in its

order dated 21.03.2014:

“7. […] Therefore, the point for determination in the present case is as

to whether the amount received by the assessee from the AOP

representing 35% of gross sale proceeds was a profit-sharing

arrangement as claimed by the assessee or it is a mere consideration in

lieu of surrender of development rights in the land to RKC as observed

by the Assessing Officer.”

89. To address the above issue, the ITAT in its order dated 21.03.2014, relied on

its own order dated 12.10.2012 in ITA no. 2648/2012 between the AOP and

the respective ITO, and held that:

“Since the Mumbai Bench of the Tribunal in the case of the AOP has

categorically held that 35% share received by SPPL was not in the

nature of overriding title to the revenue but is only share of profit of

SPPL, therefore, respectfully following the above and in absence of any

contrary material brought to notice against the order of the Tribunal

the grounds raised by the assessee have to be allowed. We accordingly

set-aside the order of the CIT(A) and allow the grounds raised by the

assessee.”

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 55 of 68

90. When the issue reached the Bombay High Court, the High Court in its

impugned order dated 24.03.2017 upheld the ITAT’s order dated 21.03.2014

and observed that:

“8. […] Following the finding of fact arrived at by the Tribunal in the

case of M/s Fortaleza Developers (AOP) for the subject assessment

years that there was no surrender of development rights by the

respondent assessee to it and that respondent assessee herein received

only its share of profits would hold good even in the present appeal.

This is so as the finding of fact and the interpretation of clause 7 of the

Agreement dated 29

th

April, 2003 will not change depending upon the

assessee concerned. In fact, the High Court in its order dated 3

rd

October, 2016 placed reliance upon its earlier order dated 9

th

April,

2015 in appeal filed by the Revenue from the order of the order of the

Tribunal for Assessment Year 2007-08 in respect of M/s Fortaleza

Developers (AOP), which was dismissed by this Court on 9

th

April,

2015.

9. Thus, in the above facts, the question as proposed being already

decided in case of M/s Fortaleza Developers (AOP) by this Court, does

not give rise to any substantial question of law. Thus, not entertained.

10. Accordingly, both the appeals are dismissed. No order as to costs.”

91. Aggrieved by the impugned order of the High Court dated 24.03.2017, the

Revenue has preferred this present Civil Appeal no. 19487 of 2017, by raising

the following two questions of law:

a. Whether on the facts and in circumstances of the case, the ITAT was

correct in holding that 35% share received by the SPPL was not in the

nature of overriding title to the revenue generated by the AOP but only

a share of profit of the SPPL in the AOP?

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 56 of 68

b. Whether on the facts and in the circumstances of the case and in law,

the High Court erred in upholding the order of the ITAT relying on its

own decision in the case of the AOP for the AY 2007-08 and holding

that no substantial question of law arises in the case of assessee?

92. In light of the two questions referred to above, the core issue before us is

whether the amount accrued to the SPPL from the AOP, based on Clause 7 of

the AOP Agreement dated 29.04.2003, is liable to be taxed in the hands of

the SPPL for the AY 2008-09 and the AY 2009-10, respectively?

93. It is settled law that interpretation of a particular clause of an agreement is a

question of law and not a question of fact. In order words, construction of a

document constitutes a question of law. This Court in Sir Chunilal V. Mehta

and Sons Ltd. v. Century Spinning. & Manufacturing Co. Ltd. [AIR 1962

SC 1314] (hereinafter referred to as “Chunilal Mehta”) had observed that:

“ 2. It is not disputed before us that the question raised by the appellant

in the appeal is one of law because what the appellant is challenging is

the interpretation placed upon certain clauses of the managing agency

agreement which are the foundation of the claim in suit. Indeed, it is

well settled that the construction of a document of title or of a

document which is the foundation of the rights of parties necessarily

raises a question of law.”

[Emphasis supplied]

94. Thus, the interpretation of Clause 7 of the AOP agreement being a question

of law, we find merit in the Revenue’s argument that the interpretation

adopted by the High Court based on a finding of its Coordinate Bench, would

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 57 of 68

not act as a bar against this Court deciding on the correct interpretation of the

Clause.

95. It is not the case of the SPPL that the actual manner of deducting expenses

from the gross sale receipts was any different from how Clause 7 indicated.

It has been the case of the SPPL all throughout that the income accrued to the

SPPL from the AOP was strictly in accordance with Clause 7 of the AOP

agreement. Therefore, a correct interpretation of the said clause is crucial in

order to determine whether the income accrued to the SPPL from the AOP is

a share of its profit or revenue.

96. In order to decide this issue, it is essential that we reproduce the subject

Clause 7 of the AOP Agreement which is in contention:

“7. Sharing of revenue and Income: All Agreement for sale of

residential units in the housing project undertaking by the AOP shall be

entered into only between the authorized signatories of the AOP and

the respective purchasers of the housing units. The members of the AOP

hereby agree that neither of them, will during the validity of this

Agreement execute any independent or separate Agreement on their

own with any prospective Purchaser. All payments receivable from the

Purchasers towards the above shall be received only in the name of the

AOP, i.e. Fortaleza Developers and the said amounts received from

purchasers of the housing units as aforesaid shall be deposited only in

the bank account in the name of the AOP, i.e. Fortaleza Developers.

Out of the aforesaid amounts received from the Purchasers of the

housing units (representing the gross sale proceeds of the Units

inclusive of the value of land) SPPL, shall be entitled to as its share of

revenue/income an amount comprising of 35% of such Receipts. It is

hereby agreed and understood between the parties hereto, that SPPL

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 58 of 68

may actually withdraw such share of revenue/income to which it is

entitled as per the understanding between the parties, from time to time.

Out of the balance 65% of the aforesaid Receipts representing the

gross sale proceeds), all required and relevant expenditure for the

purpose of the business of the AOP shall be met with and whatever

net balance remains thereafter, shall be determined as the share of

revenue/income of RKC. RKC will be liberty to actually withdraw its

share of revenue/income as worked out hereinabove, from time to time.

The above arrangement of sharing of revenue and income is restricted

to the present housing Project developed by A.O.P. on land

admeasuring 31026.90 sq. Mtrs. (approx 7.76 acres) on final plot no.

72, Yerawada TPS and hearing S.No.210 (part) situated at village

Yerawards, Taluka Haveli, Dist. Pune. However, for any other project

to be developed by this AOP in future the sharing of revenue and income

shall be decided mutually by the parties hereto from time to time."

[Emphasis supplied]

97. Upon a plain reading of Clause 7 of the AOP Agreement, it is clear that the

SPPL was entitled to withdraw a share of 35% of the gross sale proceeds

rightaway, even before the expenses were deducted from the gross sale

proceeds. It is from the remaining 65% that “all required and relevant

expenditure for the purpose of the business of the AOP” was to be met with

and the net balance that remained, were to be the share of revenue/income of

RKC. This, in our opinion, clearly indicates that the 35% received by SPPL

was an income in the hands of the SPPL and a diversion for the AOP due to

overriding title on the said 35%, created by Clause 7 of the AOP Agreement.

98. In the aforesaid context we may refer to and rely upon the decision of this

Court in Commissioner of Income Tax, Bombay City II, Bombay v. Shri

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 59 of 68

Sitaldas Tirathdas, Bombay [(1961) 41 ITR 367] (hereinafter referred to as

“Sitaldas Tirathdas”), wherein this Court succinctly explained the

distinction between an obligation to pay a portion of one’s own income and

a case where an amount is merely collected and diverted to the person on

whose behalf it is received. The relevant portion of Court’s observation in

Sitaldas Tirathdas (supra) reads thus:

“[…] In our opinion, the true test is whether the amount sought to be

deducted, in truth, never reached the assessee as his income.

Obligations, no doubt, there are in every case, but it is the nature of the

obligation which is the decisive fact. There is a difference between an

amount which a person is obliged to apply out of his income and an

amount which by the nature of the obligation cannot be said to be a

part of the income of the assessee. Whereby the obligation income is

diverted before it reaches the assessee, it is deductible; but where the

income is required to be applied to discharge an obligation after such

income reaches the assessee, the same consequence, in law, does not

follow. It is the first kind of payment which can truly be excused and

not the second. The second payment is merely an obligation to pay

another a portion of one's own income, which has been received and

is since applied. The first is a case in which the income never reaches

the assessee, who even if he were to collect it, does so, not as part of

his income, but for and on behalf of the person to whom it is

payable.[…]”

[Emphasis supplied]

99. Upon analysing Clause 7 of the AOP Agreement in light of the above-

mentioned observation of this Court in Sitaldas Tirathdas (supra), we are

certain that accrual of the SPPL’s share, i.e. 35% of gross sale receipts of the

AOP, was not contingent on the AOP’s profit and the SPPL could withdraw

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 60 of 68

such amount immediately. The entitlement of the SPPL is embedded in the

very framework of the arrangement of Clause 7 of the AOP Agreement and

attaches to the gross receipts at the point of their accrual, leaving no

discretion with the AOP in the matter. To that extent, the AOP neither

acquires nor retains any control over such portion of the receipts but merely

holds and disburses the same on behalf of the SPPL. This is not a case of the

AOP applying its income in discharge of an obligation; rather, it is a case

where, by reason of a pre-existing and enforceable right created by the

overriding title under Clause 7 of the AOP Agreement, 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.

Consequently, within the meaning of the principle enunciated in Sitaldas

Tirathdas (supra), the subject 35% share attributable to SPPL has to be taxed

at the hands of the SPPL itself, and not the AOP, since it is an income in the

hands of the SPPL and a diversion for the AOP.

100. The statement given by the SPPL’s director under Section 131, is also

pertinent in this regard. He clearly stated therein that as there are multiple

inherent risks involved in the business of construction and with a view to

safeguard the SPPL’s precious ‘development rights’ over the land, a

particular formula was devised whereby 35% of the gross receipts out of the

sale of the flats would straightaway go to the SPPL.

101. Therefore, it is clear that no expenses were to be deducted from the share of

income accrued to the SPPL from the AOP. Since all expenses were to be

paid out of RKC’s share, the SPPL’s share, i.e. 35% of gross sale receipts of

the AOP, remains unaltered.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 61 of 68

102. When no expense is being deducted from the SPPL’s share and the expenses

are being wholly borne out of RKC’s share, it is clear that the income

accrued to the SPPL from the AOP is merely revenue and not profit.

Moreover, even the words used in the clause itself are “share of

revenue/income”, and not “share of profit”. Hence, it would defy logic to

say that the SPPL’s income from the AOP is a share of its profit and not

merely a share of its revenue.

103. It is a well-settled principle of accounting and law that profit is the surplus

that remains after all the expenses have been deducted from the 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 arising from the surrender of

development rights or a share of gross revenue.

104. Therefore, since the amount received by the SPPL from the AOP is not a

share of its profit but a share of revenue, the impugned order of the High

Court and the ITAT which incorrectly held otherwise, are liable to be set

aside.

105. Thus, we hereby allow the Civil Appeal no. 19487 of 2017 and hold that

since the amount received by the SPPL from the AOP is not a share of its

profit, the amount accrued to the SPPL from the AOP would be liable to be

taxed in the hands of the assessee as a business receipt, in accordance with

the respective Assessment Orders of the SPPL for the AY 2008-09 and the

AY 2009-10 respectively.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 62 of 68

E. CONCLUSION

(i) Civil Appeal No. 744 of 2013 and Civil Appeal No. 9107 of 2012:

106. It is settled law that mere intimation by an assessee of a transaction does not

preclude the Assessing Officer from reopening assessment if there is

tangible material to prima facie indicate that primary facts regarding the true

nature of the transaction had not been brought to the notice of the Assessing

Officer by the assessee.

107. The majority in the Constitution Bench decision of this Court in Calcutta

Discount (supra) had observed that the duty of disclosing all the primary

facts relevant to a question before the assessing authority lies with the

assessee and merely producing account books and documents does not fulfil

that obligation, unless the assessing authority’s attention is brought to

particular items in the account books, or particular portions of the documents

which are relevant.

108. The statements made by the SPPL regarding the AOP in its return of income

or in the course of the original assessment do not amount to discharging its

duty to provide the assessing officer with the primary facts relevant to

determining the issue in dispute. A perusal of the materials on record would

indicate that the SPPL had merely informed the Revenue that certain income

is accrued to it from the AOP out of its share of profit. Even when a copy of

the AOP Agreement was submitted to the Assessing Officer, 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.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 63 of 68

109. Upon a close reading of the assessment orders for the AY 2007-08 and the

AY 2008-09, respectively, it is evident that the Revenue had accepted the

SPPL’s declaration regarding the income derived from the AOP at face value,

without delving into the fundamental nature of the income itself, i.e. the

Revenue had proceeded with the assessment without questioning whether the

subject income is indeed a share of the profit of the AOP.

110. Thus, we find that in the assessment orders for both the AY 2007-08 and the

AY 2008-09, respectively, the Assessing Officer had not formed any opinion

on what was the fundamental nature of the income which accrued to the

SPPL from the AOP. Therefore, when ‘tangible material’ in the form of the

impounded documents and the director’s statement shed light on the manner

in which the SPPL received its income from the AOP, it gave rise to ‘reasons

to believe’ that income liable to tax has escaped assessment.

111. As observed by this Court in Phool Chand (supra), it would be immaterial

whether the Income Tax Officer at the time of making the original assessment

could or, could not have found by further enquiry or investigation, whether

the transaction was genuine or not, if on the basis of subsequent information,

the Income Tax Officer has reasons to believe that income chargeable to tax

had escaped assessment. He may start reassessment proceedings either

because some fresh facts come to light which were not previously disclosed

or some information with regard to the facts previously disclosed comes into

his possession which tends to expose the untruthfulness of those facts. In such

situations, it is not a case of mere change of opinion or the drawing of a

different inference from the same facts as were earlier available but acting on

fresh information.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 64 of 68

112. Applying the principle as laid down by this Court in Phool Chand (supra),

when fresh information was acquired in the course of the survey dated

23.12.2010 which prima facie led the Assessing Officer to believe that the

true nature of the income was not profit but revenue which had escaped

assessment, such reasons cannot be discarded as mere change of opinion.

113. Thus, we find that the notices for reopening of the SPPL’s assessment for

both the AY 2007-08 and the AY 2008-09 were a result of the Revenue acting

on fresh information and not merely change of opinion.

114. Therefore, for the foregoing reasons, Civil Appeal no. 744 of 2013 is

hereby allowed. The impugned judgment of the High Court is set aside, and

the notice for reopening of assessment for the AY 2007-08 is held to be valid.

115. Similarly, for the reasons recorded hereinabove, Civil Appeal no. 9107 of

2012 is hereby dismissed. While we uphold the ultimate conclusion reached

by the High Court regarding the validity of the reopening of assessment for

the AY 2008-09, we find the reasoning employed by the High Court to be

flawed.

116. To ascertain the validity of the reassessment proceedings, the High Court

had erroneously traversed beyond the reasons recorded under Section 148,

to look at the AOP’s Assessment Orders for the AY 2008-09 and the AY

2007-08. In light of this Court’s observation in GKN Driveshafts (supra),

the Assessing Officer is bound to furnish reasons, and the assessee is entitled

to a speaking order disposing of their objections before the assessment is

validly reopened.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 65 of 68

117. It is settled law that the validity of a reopening must be tested solely on the

basis of the reasons recorded at the time of issuing the notice under Section

148. A document not referred to in those reasons recorded under Section 148

cannot be used to justify the validity of the reopening, as the assessee must

not be deprived of a fair opportunity to dispute such grounds. Thus, the High

Court’s approach, in our opinion is bad in law.

118. However, in the present matter, even when we excluded the extraneous

documents relied upon by the High Court, and confined our enquiry strictly

to the reasons recorded, the notice of reopening assessment for the AY 2008-

09 is found to be valid. Accordingly, Civil Appeal No. 9107 of 2012 stands

dismissed.

(ii) Civil Appeal No. 19487 of 2017

119. In the foregoing analysis, we find that the High Court and the ITAT erred in

treating the ITAT’s interpretation of Clause 7 of the AOP Agreement in a set

of parallel proceedings between the ITO and the AOP as a final finding of

fact. In light of this Court’s observation in Chunilal Mehta (supra) it is

settled law that the interpretation of a contractual clause, which forms the

foundation of a party’s rights, constitutes a question of law and hence, this

Court is not bound by the interpretation of Clause 7 of the AOP Agreement

which has been adopted by the adjudicatory forums below.

120. It is not the SPPL’s case that the actual manner of the subtracting expenses

from the gross sale receipts was any different from how Clause 7 indicated.

It has been the case of the SPPL all throughout that the income accrued to

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 66 of 68

the SPPL from the AOP was in strict accordance with Clause 7 of the AOP

agreement. Therefore, a correct interpretation of the said clause is crucial in

order to determine whether the income accrued to the SPPL from the AOP

is a share of its profit or revenue, which in turn forms the basis of whether

such income is to be taxed in the hands of the SPPL or not.

121. A plain and literal reading of Clause 7, supported by the statement of the

SPPL’s Director under Section 131, leads to the inescapable conclusion that

the parties to the AOP Agreement intended to share revenue, not profits. As

per the mandate of Clause 7 of the AOP Agreement, the SPPL was entitled to

35% of the gross sale proceeds upfront, while the entirety of the project’s

expenses was burdened upon the remaining 65% share of RKC.

122. Upon a plain reading of Clause 7 of the AOP Agreement, it is clear that the

SPPL was entitled to withdraw a share of 35% of the gross sale proceeds

rightaway, even before the expenses were deducted from the gross sale

proceeds. It is from the remaining 65% that “all required and relevant

expenditure for the purpose of the business of the AOP” was to be met with

and the net balance that remained, were to be the share of revenue/income of

RKC. This, in our opinion, clearly indicates that the 35% received by SPPL

was an income in the hands of the SPPL and a diversion for the AOP due to

overriding title on the said 35%, created by Clause 7 of the AOP Agreement.

123. In Sitaldas Tirathdas (supra), this Court succinctly explained the distinction

between an obligation to pay a portion of one’s own income and a case where

an amount is merely collected and diverted to the person on whose behalf it

is received.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 67 of 68

124. Upon analysing Clause 7 of the AOP Agreement in light of this Court’s

observation in Sitaldas Tirathdas (supra), we are certain that accrual of the

SPPL’s share, i.e. 35% of gross sale receipts of the AOP, was not contingent

on the AOP’s profit and the SPPL could withdraw such amount immediately.

The entitlement of the SPPL is embedded in the very framework of the

arrangement of Clause 7 of the AOP Agreement and attaches to the gross

receipts at the point of their accrual, leaving no discretion with the AOP in

the matter. To that extent, the AOP neither acquires nor retains any control

over such portion of the receipts but merely holds and disburses the same on

behalf of the SPPL. This is not a case of the AOP applying its income in

discharge of an obligation; rather, it is a case where, by reason of a pre-

existing and enforceable right created by the overriding title under Clause 7

of the AOP Agreement, 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. Consequently, within the

meaning of the principle enunciated in Sitaldas Tirathdas (supra), the subject

35% share attributable to SPPL has to be taxed at the hands of the SPPL itself,

and not the AOP, since it is an income in the hands of the SPPL and a

diversion for the AOP.

125. Moreover, it is a well-settled principle of accounting and law that 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 arising from the surrender of

development rights or a share of gross revenue.

Civil Appeal Nos. 9107 of 2012, 744 of 2013 & 19487 of 2017 Page 68 of 68

126. Therefore, since the amount received by the SPPL from the AOP is not a

share of its profit but a share of its revenue, the impugned order of the High

Court and the ITAT which incorrectly held otherwise, are hereby set aside.

127. For all the foregoing reasons, we hold that the 35% share received by the

SPPL from the AOP for Assessment Years 2008-09 and 2009-10 is taxable in

the hands of the assessee as a business receipt. Thus, Civil Appeal No. 19487

of 2017 filed by the Revenue is hereby allowed.

128. Pending application(s), if any, shall stand disposed of.

…………………… ……………… J.

(J.B. PARDIWALA)

…………………………………… J.

(K.V. VISWANATHAN)

NEW DELHI;

MAY 12, 2026.