In an important ruling on reassessment under the Income Tax Act, the Supreme Court examined whether completed assessments can be reopened merely on a different interpretation of material already available on record. The dispute concerned the taxability of amounts received by a company from an AOP formed for a housing development project and whether such receipts were profit share or revenue share.
Brief Facts :
The Assessee company had formed an AOP with another entity for development of residential projects and filed returns for the relevant assessment years, which were scrutinized under Section 143(3). Later, the Revenue issued reassessment notices under Section 148 after a survey under Section 133A, alleging that the assessee’s 35% share from the AOP was actually a share in gross revenue and had escaped assessment. The Assessee objected, arguing that all relevant documents and disclosures were already before the Assessing Officer during the original assessment proceedings. While the High Court quashed reopening for one assessment year, it upheld reopening for another year on the ground that subsequent assessment orders of the AOP constituted tangible material.
Contentions of the Appellant :
The counsel for the Appellant argued that reassessment was based merely on a change of opinion since the AOP agreement, books of accounts, and details of the profit-sharing arrangement had already been disclosed during the original scrutiny proceedings. It was contended that reopening on the same material amounted to an impermissible review. The Appellant further submitted that the amount received from the AOP was a share of profit and not revenue, and therefore could not be taxed again in its hands once the AOP itself had already been assessed separately.
Contentions of the Respondent :
The Respondent argued that Clause 7 of the AOP agreement clearly showed that the Assessee was entitled to 35% of the gross receipts from sale of flats, making the amount taxable revenue in its hands. According to the Respondent, the actual conduct of the parties also demonstrated that the payments were linked to gross receipts and not profits. It was further contended that the reassessment notices were justified because tangible material discovered during the survey indicated escapement of taxable income.
Observation of the Court :
The Supreme Court extensively discussed the scope of reassessment under Sections 147 and 148 of the Income Tax Act and reiterated that reassessment cannot be permitted merely on account of a “change of opinion.” The Court emphasised that the Assessing Officer must possess fresh “tangible material” before reopening a completed assessment.
Relying upon Kelvinator of India Ltd., the Court observed that “The assessing officer has no power 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.”
The Court further quoted that “One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the assessing officer.” While explaining the expression “reason to believe,” the Court stated that “The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification.”
The Court also clarified that the legality of reopening must be judged only on the basis of reasons recorded at the time of issuing notice and not on subsequent justifications that “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.”
On the issue of taxability, the Court agreed with the findings of the Tribunal and High Court that the amount received from the AOP constituted profit share and not revenue share. It accepted that the AOP had already been assessed as a separate taxable entity and therefore the same income could not again be taxed in the hands of its member.
Decision of the Court :
The Supreme Court held that reassessment proceedings initiated merely on change of opinion are unsustainable in law. The Court further held that the amount received from the AOP was a share of profit and not taxable revenue in the hands of the assessee. Accordingly, the appeals preferred by the Revenue were dismissed and the Assessee succeeded in the matter.
Case Title: Sanand Properties P. Ltd. v. Jt. Commr. of I.T. Range 6 & Ors.
Case No.: Civil Appeal No. 9107 of 2012 along with Civil Appeal No. 744 of 2013 and Civil Appeal No. 19487 of 2017
Coram: Hon’ble Mr. Justice J.B. Pardiwala and Hon’ble Mr. Justice R. Mahadevan
Advocate for the Appellant: Mrs. Anil Katiyar, AOR; Ms. Manisha T. Karia, Sr. Adv.; Ms. Anita Bafna, AOR; Ms. Shreya Gupta, Adv.; Ms. Ananya Arora, Adv.; Mr. Deepin Sahni, Adv.; Mr. Vishal Navale, Adv.; Mr. Varun Khetwani, Adv.; Mr. Vipin Kumar, AOR; Mr. Deepin Deepak Sahni, Adv.
Advocate for the Respondent: Mr. Raghavendra P. Shankar, ASG; Mr. Raj Bahadur Yadav, AOR; Mr. Karan Lahiri, Adv.; Mr. Navanjay Mahapatra, Adv.; Mr. Sarthak Karol, Adv.; Mr. Priyanka Terdal, Adv.
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