AOP Member's 35% Share Is Revenue, Not Profit; Reassessment Notices for Both Years Valid, Rules SC

A Division Bench led by Justice J.B. Pardiwala holds that Sanand Properties' 35% share from Fortaleza Developers was gross revenue, not profit, and that both reassessment notices were validly issued.

The Supreme Court has ruled that the 35% share received by Sanand Properties Private Limited (SPPL) from its Association of Persons (AOP), Fortaleza Developers, was a share of gross revenue and not a share of profit, making it taxable in the hands of SPPL for Assessment Years 2008–09 and 2009–10. 

In the same judgment, the Court held that the Revenue's notices for reopening assessment under Section 148 of the Income Tax Act, 1961, for both AY 2007–08 and AY 2008–09 were validly issued, reversing the Bombay High Court's finding that the AY 2007–08 notice was bad in law. The judgment, delivered on 12 May 2026 by Justice J.B. Pardiwala and Justice K.V. Viswanathan, disposes of three civil appeals arising from conflicting High Court orders and ITAT rulings that had produced contradictory outcomes across the same set of facts.

How Three Appeals Reached the Court

SPPL, a private limited company, entered into an agreement dated 29 April 2003 with M/s Raviraj Kothari & Co. (RKC) to constitute the AOP Fortaleza Developers for developing residential housing projects on a parcel of land. SPPL filed returns for AY 2007–08 and AY 2008–09, both of which were taken up for scrutiny assessment under Section 143(3). Assessment orders were passed on 21 December 2009 and 20 July 2010 respectively.

On 11 January 2011, the Revenue issued notices under Section 148 for both years, asserting that income had escaped assessment. The basis was a survey conducted on 23 December 2010 at SPPL's premises under Section 133A, during which six documents were impounded — including the original AOP Agreement, audited financial statements of Fortaleza Developers, books of account, a development agreement, an auditor's letter, and standard sale agreements. The statement of Shri Ashok V. Suratwala, Director of SPPL, was also recorded on oath under Section 131.

SPPL objected to the reopening by letter dated 19 March 2011, arguing that four of the six impounded documents were already part of the assessment record. The Assessing Officer rejected those objections by a speaking order dated 14 July 2011. SPPL then filed two writ petitions before the Bombay High Court.

The High Court's responses diverged. For AY 2007–08, the High Court allowed the writ petition on 23 September 2011, holding that the reopening was a mere change of opinion with no tangible material. For AY 2008–09, the High Court dismissed the writ petition on 19 December 2011, distinguishing the two years on the basis that the AOP's Assessment Order for AY 2008–09 contained a detailed discussion on the revenue-sharing nature of the AOP Agreement — material that was absent in the AOP's Assessment Order for AY 2007–08.

A third strand of litigation arose from the reassessment order for AY 2008–09 and the assessment order for AY 2009–10. The ITAT, in proceedings concerning both SPPL and the AOP separately, held that Clause 7 of the AOP Agreement was a profit-sharing clause and that SPPL's 35% share was exempt in its hands. The Bombay High Court, by order dated 24 March 2017, dismissed the Revenue's appeals, finding no substantial question of law and following a coordinate bench ruling in CIT-15 v. M/s Fortaleza Developers.

All three outcomes — the Revenue's challenge to the AY 2007–08 quashing, SPPL's challenge to the AY 2008–09 upholding, and the Revenue's challenge to the ITAT's profit-sharing interpretation — reached the Supreme Court as Civil Appeal Nos. 744 of 2013, 9107 of 2012, and 19487 of 2017 respectively.

The Reassessment Validity Question: Tangible Material or Change of Opinion?

The Court framed the first issue as whether the reopening of SPPL's assessments for AY 2007–08 and AY 2008–09 were valid. It set out the statutory framework under Section 147 and Section 148 as they stood before the amendments by Act 23 of 2012 and Act 21 of 2006 respectively.

The Court reaffirmed that the expression “reason to believe” means cause or justification, and that the Assessing Officer need not have finally ascertained the facts at the stage of issuing notice. Relying on Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd. [(2008) 14 SCC 208] and Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd. [(2010) 320 ITR 561], the Court restated that post-1 April 1989, the power to reopen is wider but must be grounded in tangible material — not a mere change of opinion. The Assessing Officer has no power to review; reassessment must rest on a live link between the tangible material and the formation of belief.

The Court then addressed the central factual question: had the tangible material relied upon for reopening already been considered and accepted in the original assessment orders? It drew on the Constitution Bench decision in Calcutta Discount Co. Ltd. v. Income Tax Officer [(1961) 41 ITR 191] for the proposition that merely producing account books does not discharge the assessee's duty of disclosure — the assessing authority's attention must be drawn to the particular items or clauses that are relevant. 

It also relied on M/s Phool Chand Bajrang Lal v. Income Tax Officer [(1993) 4 SCC 77] for the distinction between acquiring fresh information that exposes the falsity of a prior statement and merely drawing a different inference from the same facts.

Applying these principles, the Court found that in both the AY 2007–08 and AY 2008–09 assessment orders, the Assessing Officer had accepted SPPL's declaration about AOP income at face value without forming any opinion on the fundamental nature of that income — whether it was profit or revenue. Clause 7 of the AOP Agreement, which was at the core of the dispute, had not been brought to the Assessing Officer's attention even when the agreement was submitted. 

The impounded documents and the director's statement, obtained during the December 2010 survey, therefore constituted fresh information that gave rise to a genuine “reason to believe” that income had escaped assessment. The Court held that this was not a case of change of opinion but of acting on fresh information.

The Court also rejected the Revenue's argument that the outcome of Civil Appeal No. 19487 of 2017 (the taxability question) would determine the validity of the reopening notices. It held that the validity of reopening must be tested solely on the reasons recorded at the time of issuing the Section 148 notice, and the merits of the reopening cannot be used to justify or discredit it.

On the High Court's reasoning for AY 2008–09, the Court found it legally flawed. The High Court had looked beyond the reasons recorded under Section 148 to the AOP's Assessment Order for AY 2008–09 — a document not referred to in the reasons recorded. 

The Court held that a document not mentioned in the recorded reasons cannot be used to justify the validity of reopening, as the assessee must have a fair opportunity to dispute the stated grounds. However, confining the enquiry strictly to the recorded reasons, the Court independently found the AY 2008–09 notice to be valid.

Whether Clause 7 Created a Revenue Share or a Profit Share

The second issue was whether the amount accrued to SPPL from the AOP under Clause 7 of the AOP Agreement dated 29 April 2003 was liable to be taxed in SPPL's hands for AY 2008–09 and AY 2009–10.

The Revenue's case, argued by the learned Additional Solicitor General, was that Clause 7 on its plain terms entitled SPPL to 35% of the AOP's gross sale receipts upfront, before any expenses were deducted. All project expenses were to be met from the remaining 65% share of RKC. The net balance after expenses constituted RKC's revenue share. Since SPPL's entitlement was insulated from the AOP's expenses, the amount it received could not be characterised as profit.

SPPL, through its senior counsel Ms. Manisha T. Karia, argued that the ITAT and the Bombay High Court had consistently held Clause 7 to be a profit-sharing clause, and that the AOP had been assessed as a separate entity eligible for deduction under Section 80IB(10). Since the income had already suffered tax in the hands of the AOP, it could not be taxed again in SPPL's hands by virtue of Section 86 read with Section 67A and Section 167B(2).

The Court held that the interpretation of a contractual clause forming the foundation of a party's rights is a question of law, and it was therefore not bound by the ITAT's or the High Court's interpretation of Clause 7. It proceeded to read the clause afresh.

On a plain and literal reading, the Court found that SPPL was entitled to withdraw 35% of the gross sale proceeds immediately, before any expenses were deducted. All required and relevant expenditure for the AOP's business was to be met from the remaining 65%, and only the net balance after those expenses constituted RKC's share. SPPL's entitlement attached to the gross receipts at the point of their accrual, leaving the AOP no discretion over that 35%. The AOP neither acquired nor retained control over that portion but merely held and disbursed it on SPPL's behalf.

The Court applied the principle from Commissioner of Income Tax v. Sitaldas Tirathdas on the distinction between an obligation to pay from one's own income and a diversion by overriding title. It held that the 35% was intercepted and diverted to SPPL before it could assume the character of income in the AOP's hands. This was a diversion by overriding title, not an application of the AOP's income in discharge of an obligation.

The Court further held that profit, as a matter of accounting and law, is the surplus remaining after all expenses have been deducted from gross receipts. Since SPPL's share was insulated from the AOP's expenses, it lacked the essential characteristics of profit and was, in pith and substance, a business receipt arising from the surrender of development rights or a share of gross revenue.

The Court rejected the argument that the High Court's order dated 3 October 2016 in the AOP's own proceedings — which had become final — foreclosed examination of the issue. It held that a finding in the AOP's proceedings was not determinative of the treatment of the same amount in SPPL's hands, and the question remained open before the Supreme Court.

Outcome

Civil Appeal No. 744 of 2013 (Revenue's appeal against the High Court's quashing of the AY 2007–08 reopening notice) is allowed. The High Court's judgment is set aside. The Section 148 notice dated 11 January 2011 for AY 2007–08 is held to be valid.

Civil Appeal No. 9107 of 2012 (SPPL's appeal against the High Court's upholding of the AY 2008–09 reopening notice) is dismissed. The ultimate conclusion of the High Court — that the AY 2008–09 notice was valid — is upheld, though the reasoning employed by the High Court is found to be flawed.

Civil Appeal No. 19487 of 2017 (Revenue's appeal against the High Court's dismissal of its challenge to the ITAT's profit-sharing interpretation) is allowed. The orders of the High Court and the ITAT holding that SPPL's 35% share was exempt profit are set aside. The 35% share received by SPPL from the AOP for AY 2008–09 and AY 2009–10 is held to be taxable in SPPL's hands as a business receipt, in accordance with the respective assessment orders of the SPPL for those years. Pending applications, if any, stand disposed of.