SANAND PROPERTIES PVT. LTD. vs. JOINT COMMISSIONER OF INCOME TAX RANG-6 AND 2 ORS.

ORAL JUDGMENT (PER DR.D.Y.CHANDRACHUD, J.) : In   these   proceedings   under   Article   226   of   the Constitution, the Petitioner has sought to question a notice under Section 148 of the Income Tax Act, 1961, issued on 11 January 2011,   by   the   Assessing   Officer,   seeking   to   reopen   assessment proceedings for Assessment Year 2008­09. 2. The Petitioner filed a return of income for Assessment Year 2008­09 on 29 September 2008, declaring a total income of Rs.20.33 lakhs.  A revised return of income was filed on 3 October CNR No : HCBM020194832011 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 2 wp1648.11-19.12 2008,   declaring   an   income   of   Rs.19.14     lakhs,   as   depreciation under the Income Tax Rules remained to be reduced from the gross total income.   The Petitioner is a member of an Association of Persons (AOP) by the name of Fortaleza Developers and was in receipt of an amount of Rs.14.18 crores which was claimed to be exempt under Section 86 read with Section 167B.  The Petitioner received from the AOP an amount comprised of 35% of the gross receipts received by the AOP from the sale of flats.  No expenses relating to the business of the AOP were deducted from the share of receipts given to the Petitioner by the AOP.  On 20 July 2010, an assessment order was passed under Section   143(3) determining the income at Rs. 14.42 crores.     Receipts from the AOP of Rs. 14.18   crores   which   were   claimed   to   be   exempt   under   Section 167B came to be disallowed by the Assessing Officer.

VBC 3 wp1648.11-19.12 has  received   consideration   in   the   form   of   a   35%  share   in  the proceeds   of   the   sale   against   development   rights   in   land surrendered by the assessee to the other members of the AOP and finally   to   the   purchasers   of   the   flats/residential   units. Consequently, the  Assessing Officer has stated in his reasons for reopening the assessment that the income received by the assessee from the AOP is not a share of profits, but consideration received against development rights sold/surrendered.   On this basis, the Assessing Officer has recorded that income of Rs.14.18 crores is not exempt income, but is taxable in the hands of assessee, but it had escaped assessment within the meaning of sub clause (iv) of clause (c ) of Explanation 2 to Section 147. Moreover, it has been stated that a survey under Section   133A came to be conducted in the case of the assessee on 23 December 2010 in which a statement of the Director was recorded.  The Director of the assessee stated that development rights being precious, the assessee did not want the returns from its business to be exposed to the inherent risks of business   and   hence,   to   safeguard   those   rights,   a   formula   was devised by which the assessee came to be entitled to 35% of the gross receipts out of the sale of  flats in the AOP. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

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VBC 5 wp1648.11-19.12 the  reopening  that  took  place  for  Assessment   Year 2007­08  as compared to the  reopening in the instant case for Assessment Year 2008­09. In the case of Assessment Year 2007­08, the order of assessment in the case of AOP did not consider the issue as to whether the share of the assessee in the AOP representing 35% of the gross sale proceeds was a profit sharing agreement or a mere revenue sharing agreement.   The claim under Section   80IB(10) was   denied   only   on   the   ground   that   the   assessee   has   not constructed   flats   below   required   area.     Contrariwise   in   the assessment order relating to the AOP for Assessment Year 2008­09, the Assessing Officer has gone into the agreement in a significant amount of detail and has concluded that the agreement under which the assessee received 35% of the  gross sale proceeds of the residential flats is not a profit sharing agreement, but a revenue sharing agreement; (ii)  The Assessing Officer has tangible material on   the   basis   of   which   the   assessment     could   be   reopened   for Assessment Year 2008­09. Under Section   67(2), the share of a member in the income  of an association  of persons,  computed under sub­Section (1) has to be apportioned for the purposes of assessment under  various heads of income in the same manner in Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 6 wp1648.11-19.12 which the income of the association under each head has been determined.     The   profit   and   loss   account   of   the   assessee   for Assessment Year 2008­09, reflected that an amount of Rs.14.18 1 [2010] 320 ITR 561 (SC) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 7 wp1648.11-19.12 material on the basis of which the Assessing Officer comes to the

conclusion   that   income   has   escaped   assessment.     The   issue, therefore, is as to whether there was tangible material before the Assessing Officer to reopen the assessment for Assessment   Year 2008­09. 8. The   assessee   is   in   receipt   of   an   amount   of   Rs.14.18 crores from the AOP for Assessment Year 2008­09. The assessee treated this as a share of profits from the AOP in the Profit and Loss Account.   The Assessing Officer in paragraph 2 of the order of assessment dated 20 July 2010 merely recorded that the assessee is a member of an AOP having a share of 35% in the profits.   The reason   for   reopening   the   assessment   is   what   the   assessee   has received from the AOP is 35% of the gross receipts from the sale of flats against the development rights surrendered by the assessee in land.       The   Assessing   Officer   has   postulated   that   the   income received by the assessee from the AOP is not a share of profits, but consideration

received

against

development

rights sold/surrendered.   Now the order of assessment that has been passed by the Assessing Officer on 29 December 2010 in the case of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 8 wp1648.11-19.12 the AOP forms part of the record of these proceedings.  The order of the Assessing Officer pertaining to the AOP contained a separate

discussion on the sharing of revenue and income.  The Assessing Officer  has noted as follows : “It may be seen from the above that M/s.Sanad Properties Pvt. Ltd. is entitled to 35% of gross sale proceeds of the housing units constructed on land belong to this company. Remaining 65% of the sale proceeds is to be utilized for meeting expenditure of construction, marketing, etc. and the balance, being the profit of business, is the share of M/s.Raviraj Kothari & Co. another member of the AOP. The agreement, therefore, is based on revenue sharing and not income sharing. In the accounts, however, the share of sale proceeds of M/s.Standard Properties Pvt. Ltd. has not been debited. It has been shown as part of the net profit which has been claimed as deduction u/s.80IB. The appropriation account also is not in accordance with the terms and conditions of the agreement wherein an amount of Rs.14,18,52,156/- also been shown as share of M/s.Sanad Properties Pvt. Ltd. and Rs.7,93,77,951/- of M/s.Raviraj Kothari & Company.” (emphasis supplied). The total income of the AOP was computed at Rs.41.50 crores from which the Assessing Officer deducted an expenditure of Rs.19.38 crores giving rise to a surplus transferred to the members as Rs. 22.12 crores.  The AOP in its computation of business income took the   total   income   at   Rs.22.08   crores.   The   Assessing   Officer disallowed the deduction claimed under Section  80IB(10).   In the assessment order, the Assessing Officer noted that the AOP “has Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 9 wp1648.11-19.12 deliberately   tried   to   give   colour   of   profit   to   the   share   of M/s.Sanand Properties Pvt. Ltd.   whereas such share is   share of gross receipt which is not deductible under Section   80IB”.   The Assessing   Officer   noted   that   the   benefit   of   a   deduction   under Section   80IB(10) is available to profits derived from a housing project subject to certain conditions.

VBC 10 wp1648.11-19.12 this Court on 23 September 2011, the petition filed by the assessee questioning the reopening of an assessment for Assessment Year 2007­08 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 2007­08 and the reopening in the present case for Assessment Year 2008­09. A copy of the order of the Assessing Officer in the case of the AOP for Assessment Year 2007­08 has been placed for the perusal of the Court in these proceedings.  Reading the order of the Assessing Officer for Assessment Year 2007­08, 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   2008­09,   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 representing 35% in the gross receipts was not a share in  profits, Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

VBC 11 wp1648.11-19.12 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 2008­09 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. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47

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accordingly stand dismissed.  No order as to costs. ( Dr.D.Y.Chandrachud, J.) ( A.A. Sayed, J. ) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:55:47 Powered by TCPDF (www.tcpdf.org)