Why disclosure is no longer enough: Sanand Properties ruling reshapes reassessment and income characterization

Introduction

The Hon’ble Supreme Court’s decision in Sanand Properties Pvt. Ltd. v. JCIT[1] revisits two recurring fault lines in tax litigation—when an assessment can be reopened and how income must be characterized when commercial arrangements blur taxation principles. In doing so, the Court clarifies that the true test for reassessment is not whether basic facts/ underlying documents were merely disclosed, but whether their true implication was made known to the assessing authority.

Factual background and controversy

The dispute arose from a real estate development arrangement structured through an Association of Persons (‘AOP’). Sanand Properties Pvt Ltd (‘Assessee’) entered into an agreement with M/s Raviraj Kothari and Co to constitute an AOP titled Fortaleza Developers for developing a residential housing project. For AYs 2007-08 and 2008-09, the Assessee filed its RoI’s, and scrutiny assessments u/s 143(3) of the Income-tax Act, 1961 (‘IT Act, 1961’) were completed.

Subsequently, a survey conducted by the Department u/s 133A of the IT Act brought to light certain documents and statements indicating that the income received by the Assessee from the AOP (35% of the gross sale receipts) was not a share of profit, but in fact share of revenue. The said income was received as consideration against the development rights over the land sold / surrendered by the Assessee, in favour of the AOP. As a result, re-assessment proceedings were initiated on the Assessee for both the years and the Assessing Officer (‘AO’) held that the income received from the AOP is not exempt, as claimed by the Assessee and that the same should be subject to tax. Subsequently, the AO issued Notices u/s 148 of the IT Act. 

The Assessee challenged the reopening before the Hon’ble Bombay High Court. For AY 2007–08, the High Court set aside the reassessment on the ground that it was based on a mere change of opinion, whereas for AY 2008–09, reopening was upheld on the basis of additional material emerging from the Assessment of the AOP. Pursuant to the reopening for AY 2008–09, a reassessment order was passed treating the 35% share of gross sale proceeds as income of the Assessee, after noting that expenses of the project were to be met from the remaining 65%. 

Thus, both the Assessee and the Department preferred appeals against the judgments of the Bombay High Court before the Hon’ble Supreme Court.

In addition, appeals were also filed by the Department before the Supreme Court on the issue of characterization of income (merits).

Parallel to the above proceedings, disputes arose in respect of the assessment of the AOP itself. The Income Tax Appellate Tribunal (‘ITAT’) in Fortaleza Developers v. CIT[2] for AYs 2007-08 and 2008-09 held that the 35% share received by the Assessee constituted a share of profit and not revenue, and allowed the AOP to claim deduction under Section 80IB(10) on the entire project profits. This view was subsequently upheld by the Bombay High Court[3]. 

Arguments placed

Before the Hon’ble Supreme Court, the Assessee submitted that the reassessment is invalid as all material facts were already disclosed during the scrutiny Assessment proceedings, and the reopening amounts to a mere change of opinion. It was further submitted on merits, that the receipts represent share of profit from the AOP and are not taxable again in its hands. 

The Revenue argued that the reassessment is valid as the survey brought out the true nature of the receipts, and that mere disclosure of documents does not amount to full disclosure. It was submitted that the 35% share of gross receipts is in the nature of revenue and is taxable in the hands of the Assessee.

Judgment of the Hon’ble Supreme Court

The Hon’ble Supreme Court considered the submissions made by both parties and held as follows:

1. Validity of Reassessment proceedings 

• Mere production of documents or existence of information on record does not amount to a complete and true disclosure of material facts. Reliance is placed on the decision of this Hon’ble Court in Calcutta Discount Co. Ltd. v. ITO[4] to affirm the same. 
• Mere intimation by the Assessee of a transaction does not preclude the AO from reopening Assessment if there is tangible material to indicate that primary facts regarding the true nature of the transaction had not been brought to the notice of the AO. 
• During the scrutiny proceedings, the Assessee merely informed the Department that certain income accrued to it from the AOP. The copy of the Agreement was submitted to the AO but Clause 7, which is the core of the dispute, was not brought to the fore. 
• On deep examination of the proceedings conducted by the AO, it is clear that he accepted the declaration made by Assessee regarding income derived from AOP at face value itself, without delving into the fundamental nature of the transaction. 
• The AO did not form any specific opinion on the characterization of income during the scrutiny proceedings and thus, when ‘tangible material’ is made available, reasons to believe exist to suggest that income chargeable to tax has escaped Assessment. 
• Reliance is also placed on the decision of this Hon’ble Court in Phool Chand Bajrang Lal v. ITO[5] wherein it was held that reassessment is permissible where fresh or subsequent information reveals that the earlier disclosure did not reflect the true nature of the transaction, and such reopening would not amount to a mere change of opinion but would be based on new and tangible material. Applying the same, when fresh information was acquired in the course of the survey which led the AO to believe that the true nature of income was not profit, but revenue, such reasons cannot be discarded as mere change of opinion.

2. Income characterization

• Interpretation of Clause 7 is a question of law, and prior findings in AOP proceedings are not binding on the Apex Court.
• A plain reading of Clause 7 shows that the Assessee is entitled to 35% of gross sale proceeds upfront, before deduction of any expenses. Expenses of the project are to be met only from the remaining 65%, indicating that the Assessee’s share is insulated from business risks and costs.
• The arrangement reflects an intention to share revenue and not profit, as the Assessee’s entitlement is neither contingent upon nor affected by the profitability of the project.
• Applying the doctrine of diversion by overriding title, the 35% share is diverted at source to the Assessee and never accrues as income of the AOP. Since the Assessee’s share is determined at the level of gross receipts and is not subject to deduction of expenses, it lacks the essential characteristics of ‘profit’. The said receipt is therefore, in substance, a business receipt / share of revenue, and not a share of profit of the AOP.
• Consequently, the amount is taxable in the hands of the Assessee, and the contrary findings of the ITAT and the High Court were set aside.

Conclusion

To sum up, the Hon’ble SC in Sanand Properties builds upon the principles laid down in Calcutta Discount and Phool Chand, both of which recognize that reassessment is permissible where fresh information comes to light suggesting that income has escaped assessment. In this sense, the Court in Sanand Properties continues along the doctrinal path set by these earlier decisions by emphasizing substance over form in disclosure.

However, in the authors’ view, the application of these principles to the present facts raises serious concerns. The agreement forming the basis for the dispute was admittedly placed before the AO during scrutiny proceedings. The issue, therefore, is not one of non-disclosure, but of failure on the part of the AO to properly appreciate the nature and implications of the agreement. The Department is attempting to take umbrage under the fact that ‘no opinion has been formed’ with regard to the AOP agreement to justify the reassessment and the Court has also blessed the said approach. When it has been ascertained that the AO did not consider material in the proper light, then the appropriate remedy would be to invoke revisionary jurisdiction u/s 263 of the IT Act. Permitting reassessment in these circumstances risks blurring the distinction between the two provisions and expanding the scope of reopening beyond its intended scope.

While reassessment should be confined to cases involving genuinely new or previously unarticulated material, revisionary powers are designed to correct errors arising from improper application of mind—subject to the limitation that such correction cannot be undertaken merely because a different view is preferred. The approach adopted in Sanand Properties therefore raises important questions on this boundary, particularly in cases where the material was already on record and the issue turns on its interpretation.

[The authors are Executive Partner, Associate Director and Senior Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]

[1] [TS – 675 – SC – 2026], Civil Appeal Nos. 9107 of 2012, 744 of 2013 and 19487 of 2017.

[2] ITA No. 2648/Mum/2012 for AY 2007-08 and ITA 3686/Mum/2012 for AY 2008-09

[3] Income Tax Appeal No. 1041 of 2013 for AY 2007-08, Income Tax Appeal No. 635 of 2014 for AY 2008-09 and Income Tax Appeal No. 641 of 2014 for 2009-10

[4] (1961) 41 ITR 191 

[5] (1993) 4 SCC 77