Dmt 1 wp1647-11 IN THE HIGH COURT JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1647 OF 2011 Sanand Properties Pvt. Ltd., .... Petitioner. vs. Joint Commissioner of Income Tax Range – 6 & Ors. .... Respondents. Mr. J.D. Mistry with Mr. B.V. Jhaveri for the Petitioner. Mr. Vimal Gupta for the Respondents. CORAM : DR. D.Y. CHANDRACHUD & A.A. SAYED, JJ. DATE : 23 SEPTEMBER 2011. ORAL JUDGMENT (PER DR. D.Y. CHANDRACHUD, J.) : Rule, by consent returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal. Dmt 2 wp1647-11 2. The challenge in these proceedings under Article 226 of the Constitution is to a notice dated 11 January 2011 issued under Section 148 of the Income Tax Act, 1961 by which the assessment for the assessment year 2007-08 is sought to be reopened. 3. The Petitioner filed its return of income for assessment year 2007-08. The income from business was computed after deducting an amount of Rs. 3.49 crores which was the profit from an Association of Persons (AOP) exempt under Section 167B(2). A note was appended to the return of income stating that the Assessee is a member of an AOP doing business under the name and style of Fortaleza Developers and that since the tax on the income of the AOP was payable in the case of the AOP itself under Section 167B(2), no tax is payable by the assessee in respect of its share of income from the AOP. In the profit and loss account, the Assessee showed its share of profit from the AOP as Rs. 3.49 crores. In the balance- sheet as of 31-03-2007 the capital contribution of the Assessee with the AOP was disclosed. In the notes to the accounts, under the head of “Revenue Recognition” it was stated that profit from investment in the AOP was accounted for on an accrual basis. Dmt 3 wp1647-11 4. On 6 October 2009 the Assessing Officer issued a notice to the Assessee calling upon the Assessee to disclose information, inter alia, relating to the ledger extract of the Assessee’s capital account with the AOP and the objects for which the Assessee had used the fund drawn from the account. The Assessee responded by its reply dated 24 October 2009. In response to a further query at a hearing before the Assessing Officer, the Assessee by its letter dated 6 November 2009 enclosed copies of (i) A joint venture agreement between the Assessee and a developer, Raviraj Kothari Associates executed on 26 August 2002; and (ii) An agreement pertaining to the AOP. The Assessee disclosed that it had contributed land by way of capital to the AOP. An itemwise account of the capital contribution and the amount withdrawn from the AOP were enclosed. 3. On 21 December 2009, an assessment order was passed under Section 143 (3). The assessement order notes in para 4 that the Assessee had earned income of Rs. 349.19 lacs in the form of profits from the AOP. The assessment order noted that under the agreement dated 26 August 1992, the gross sale proceeds of units were to be shared between the Assessee and Raviraj Kothari Associates in the proportion of 35 : 65. 4. On 11 January 2011, a notice was issued to the Assessee Dmt 4 wp1647-11 under Section 148 on the ground that the Assessing Officer had reason to believe that the income tax in respect of which the Assessee was chargeable to tax for assessment year 2007-8 had escaped assessment within the meaning of Section 147. In response to a request by the Assessee, reasons were disclosed on 7 February 2007. The reasons on the basis of which the Assessing Officer has formed an opinion that income had escaped assessment are that the Assessee had received an amount of Rs. 3.49 crores from an AOP of which the Assessee is a member and of which M/s. Raviraj Kothari Associates is another member. This amount was claimed by the Assessee as exempt income for the reason that this represented its share of profit from the AOP, Fortaleza Developers. The reasons recorded state that a survey took place under Section 133A at the business premises of the Assessee on 23 December 2010 and the material impounded included the following. ● Original copy of the A O P agreement dated 28.04.2003. ● 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 Dmt 5 wp1647-11 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. According to the Assessing Officer, the evidence indicated that the Assessee had received a share of 35% from gross receipts on the sale of residential units in the AOP. According to the Assessing Officer, the Assessee had not received its share out of the profits of the AOP and when a director of the Assessee was confronted with this, he had stated that in order to safeguard the development rights of the Assessee over the land, it had entered into an agreement under which it was entitled to 35% of the gross receipts out of the sales of flats in the AOP. The basis on which the Assessing Officer has sought to reopen the assessment is that the Assessee had received its share from gross sale proceeds and not from the share of profits against the surrender of development rights in the land. In view of this, according to the Assessing Officer, the income received by the Assessee from the AOP is not a share of profits but consideration received Dmt 6 wp1647-11 against development rights sold/surrendered. 5. The Assessee furnished its objections to the reopening of assessment by its letter dated 19 March 2011. In so far as is material, the Assessee contended that the documentary material on the basis of which the assessment was sought to be reopened was already a part of the record of the Assessing Officer for finalizing the assessment for the years 2007-08 and 2008-09. The relevant part of the reply reads as follows: “(a) Under para 4 on page 1 of your reasons recorded, you have noted that the following books of accounts and documents were found and impounded during the course of survey u/s. 133A of the I.T. Act. (i) Original copy of the AOP agreement dated 28.4.2003 (ii) Copy of the audited financial statements of M/s Fortaleza Developers for FY 2007-08. (iii) Books of account of assessee company showing the treatment of land in its accounts since inception. (iv) Copy of the development agreement between Assessee company and M/s. Yerawada Stud Farm and Dmt 7 wp1647-11 Agriculture. (v) Letter written by Auditor dated 19-06-2008 indicating working of the amount to be received from Fortaleza Developers. (vi) Standard agreements in respect of sale of residential units in Fortaleza complex. With reference to the above, we wish to point out that the documents referred to at Sr. no. (i) to (iv) above were duly submitted on record during the course of the assessment proceedings and the same were also examined by the learned Assessing Officer finalizing such assessment proceedings, both for A.Y.s 2007-08 and 2008-09. As regard the document at Sr. No. (v) above, the same is merely an internal audit note, which bears no significance with the reasoning arrived at by you for reopening the assessment. As regards Sr. No. vi the same is just standard agreement of sale of Residential unit of Fortaleza Developers.” (emphasis supplied) The objections submitted by the Assessee have been rejected by an order Dmt 8 wp1647-11 dated 14 July 2011 passed by the Assessing Officer. 6. Learned Counsel appearing on behalf of the Assessee submitted that (i) The Assessing Officer has sought to reopen the assessment merely on the basis of a change of opinion; (ii) The Assessee had submitted full information to the Assessing Officer pertaining to the AOP and the Assessing Officer was aware of the fact that the amount of Rs. 3.49 crores received by the Assessee from the AOP during the assessment year 2007-08 represented 35% of the gross sale receipts; (iii) There was no tangible material on the basis of which the Assessing Officer could come to the conclusion that income had escaped assessment; (iv) Admittedly, the AOP has been brought to tax and an order of assessment had been passed on the basis that there is a valid AOP in existence; and (v) Once the AOP has been assessed as such, and has been brought to tax at the maximum marginal rate of tax, no Assessing Officer properly instructed in law could have come to the conclusion that tax had escaped assessment at the hands of the Assessee. In view of the provisions of Section 86 and Section 167B of the Income Tax Act, 1961, there is no occasion whatsoever to tax the amount received by the Assessee as a member of the AOP. Dmt 9 wp1647-11 7. On the other hand, it has been urged on behalf of the Revenue that (i) The order of the Assessing Officer makes a reference to an agreement dated 26 August 2002 and not to the agreement dated 29 April 2003; (ii) Though the AOP has been assessed separately to tax, that would not preclude the Assessing Officer from determining in these proceedings as to whether the AOP is a genuine activity or otherwise. 8. In view of the decision of the Supreme Court in the case of Commissioner of Income-Tax v. Kelvinator of India Ltd, 1 the law in regard to the power of the Assessing Officer to reopen an assessment is now well settled. After 1 April 1989, the power of the Assessing Officer to reopen an assessment under Section 148 is much wider than was the position prior to the amendment which was brought about by the Direct Tax Laws (Amendment) Act, 1987. Yet, at the same time, the Supreme Court has held that the power to reopen an assessment is conditional on the existence of a reason to believe that income has escaped assessment. The Assessing Officer has no power to review his assessment nor can an assessment be reopened merely on the basis of a change of opinion. Hence, after 1 April 1989 before the Assessing Officer can 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. Unless 1 [2010] 320 ITR 561 (SC) Dmt 10 wp1647-11 these conditions were to be enforced, the exercise of the power to reopen assessments would be rendered arbitrary. The safeguard against the power to reopen an assessment is that the Assessing Officer is not permitted to do so merely on the basis of a change in opinion but can in law take recourse to the power where there is tangible material which forms the basis of a reason to believe that income has escaped assessment. 9. In the present case, the assessment has been sought to be reopened within a period of four years of the end of the relevant assessment year. The material on record would indicate that the return of income by the Assessee contains a disclosure of the profits received by the Assessee from the AOP and which the Assessee claims to be exempt under Section 167B (2). The note appended to the return of income tax explained the nature of the receipts. The profit and loss account similarly contained a disclosure of the share of profits in the amount of Rs. 3.49 crores from the AOP. The Assessing Officer called for a disclosure of a ledger extract of the Assessee’s capital account with the AOP which was disclosed to the Assessing Officer, in reply. During the course of hearing, the Assessee filed a copy of the joint venture agreement dated 26 August 2002 and a copy of the agreement pertaining to the AOP by its letter dated 6 November 2009. On these facts, it is necessary for the Court to now advert to the Dmt 11 wp1647-11 basis on which the assessment was sought to be reopened. 10. The Assessing Officer has adverted to the receipts of Rs. 3.49 crores in para 4 of the assessment order as being the share of profits of the Assessee from the AOP. The assessment order also contains a statement reflecting the awareness of the Assessing Officer of the fact that the gross sale proceeds were liable to be shared between the Assessee and its collaborator in the proportion of 35% and 65%. This statement is undoubtedly made in the context of the agreement dated 26 August 2002 which finds reflection in the order of assessment. The order of assessment however significantly demonstrates that (i) The Assessing Officer was aware of the fact that the Assessee had returned an income of Rs. 3.49 crores in the form of a share of profit by the AOP; and (ii) Under the terms of the agreement the Assessee was to have a share in the gross sale proceeds. 11. Now, the basis on which the assessment is sought to be reopened is that during the course of a survey under Section 133A certain material had emerged. More specifically, the reasons disclosed six documents upon which the Department sought to place reliance. In its reply dated 19 March 2011 the Assessee stated that four of the six Dmt 12 wp1647-11 documents upon which the Department sought to place reliance for reopening the assessment had been duly submitted on the records during the course of the assessment proceedings. The other two documents (an internal audit note and a standard sale agreement) did not carry the matter further. The order passed by the Assessing Officer on 14 July 2011 does not dispute the factual position that the material was in fact submitted during the course of the assessment proceedings. This is evident from para 19 of the order dated 14 July 2011 which reads as follows :- “It is also relevant to mention that a detail available to a A.O. in the papers already filed before does not become an item of information by its mere availability. But it is transformed into an item of information when its existence is realized and implications are recognized. The awareness of the A.O. subsequent to completion of the original assessment would constitute “information”. Therefore, it is abundantly clear that the case of the Assessing Officer was not that the material was not available when the original order of assessment was passed, but, that it would transform itself into an item of information only when its existence was subsequently realized. The Dmt 13 wp1647-11 return of income, the nature of the queries raised by the Assessing Officer, the response of the Assessee were all before the Assessing Officer when he passed an order of assessment treating the amount of Rs. 3.49 crores as a share of profits from the AOP, which would not be liable to tax in view of the provisions of Section 167B(2). 12. The AOP filed a return of income tax for the assessment year 2007-08 disclosing a gross total income of Rs. 14.58 crores. The surplus transferred to the members of the AOP was disclosed in the profit and loss account to be 14.25 crores. The share of the Assessee was disclosed at Rs. 3.49 crores which corresponds to what is reflected in the return of income correspondingly filed by the Assessee. The working out of the distribution of profits is reflected in the accounts of the AOP; the computation there shows that the share of the Assessee representing 35% of the basic flats’ cost has been computed at Rs. 15.11 crores and after deducting an amount of Rs. 11.62 crores as capital investment and PMC charges, the Assessee’s share of profit is shown at Rs. 3.49 crores. The Assessing Officer passed an order on 18 December 2009 under Section 143 (3) in relation to the AOP. The Assessing Officer denied the benefits of Section 80IB(10) to the AOP and an amount of Rs. 14.63 crores was brought to tax. In appeal the CIT (Appeals) by an order 25 March 2010 Dmt 14 wp1647-11 granted the benefit of a deduction under Section 80IB(10) to the AOP. The Court is informed by learned Counsel that the Revenue has filed an appeal against the grant of a deduction under Section 80IB (10) to the A.O.P. The point, to be noted is that the AOP has been duly assessed and has been subjected to an order of assessment. The existence or validity of the A.O.P. is not questioned. Section 86 of the Income Tax Act, 1961 provides that where the Assessee is a member of an Association of Persons, income tax shall not be payable by the Assessee in respect of his share in the income of the association computed in the manner provided in Section 67A. Section 167B provides that where the individual shares of the members of an association of persons in the whole or any part of the income of such association are indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate. Sub-section (2) of Section 167B stipulates that in a case which does not fall under Sub- section (1), where the total income of any member of an association of persons, exceeds the maximum amount which is not chargeable to tax in the case of that member, tax shall be charged on the total income of the association or body at the maximum marginal rate. The Revenue has evidently treated the AOP as a valid entity in law and has brought it to tax in the order of assessment for A.Y. 2007-08. Once there is an AOP, the income has to be assessed in the hands of AOP. The AOP has been Dmt 15 wp1647-11 assessed as such and it is on that basis that the Department has pursued the assessment proceedings pertaining to the AOP. In this view of the matter, we are inclined to accept the contention of the Petitioner that the Assessing Officer properly instructed in law could not possibly have come to the conclusion that there was any escapement of tax. It must be emphasized that the assessment of the AOP is not sought to be reopened. Hence, the Assessing Officer has purported to reopen the assessment of the assessee for Assessment Year 2007-08 purely on the basis of a change in opinion and there was no valid or tangible material on the basis of which this could have been done. 13. For these reasons, we make the Rule absolute by setting aside the impugned notice dated 11 January 2011. There shall be no order as to costs. (A.A. SAYED, J.) (DR. D.Y. CHANDRACHUD, J.)