Share of gross revenue received under an overriding title is taxable as business income, not exempt as profit.

Sanand Properties P. Ltd. (“Assessee”) entered into an Association of Persons (“AOP”) agreement with Raviraj Kothari Co. to develop residential projects.

For AY 2007-08 and 2008-09, the Assessee claimed that its 35% share of receipts from the AOP was a "share of profit" and thus exempt from tax under Section 167B(2) of the IT Act.

Scrutiny assessments were initially completed under Section 143(3).

Following a survey under Section 133A, the Revenue issued notices under Section 148 to reopen assessments, alleging that the 35% share was actually a "share of revenue" (consideration for development rights) and not "profit".

The Bombay High Court quashed the reopening for AY 2007-08 on the grounds of "change of opinion" but upheld the reopening for AY 2008-09.

On the merits of the assessment, the ITAT and High Court ruled in favor of the Assessee, holding the receipts were profit-sharing.

The Revenue and Assessee filed cross-appeals.

1. Whether the reopening of assessments for AY 2007-08 and AY 2008-09 under Sections 147 and 148 was valid or constituted a mere change of opinion.

2. Whether the 35% share received by the Assessee from the AOP per Clause 7 of the Agreement is a "share of profit" (exempt) or a "share of revenue" (taxable).

The Court applied Section 147 of the IT Act, which permits reassessment if the Assessing Officer has "reason to believe" income has escaped assessment, provided there is "tangible material" and not a "mere change of opinion," as established in CIT v. Kelvinator of India Ltd.

It relied on Calcutta Discount Co. Ltd. v. ITO and Phool Chand Bajrang Lal v. ITO, holding that an Assessee's duty is to disclose primary facts; mere production of books does not protect against reopening if fresh information exposes the falsity of previous claims.

Regarding the interpretation of Clause 7, the Court applied the "overriding title" doctrine from CIT v. Sitaldas Tirathdas, which distinguishes between an application of income and a diversion of income by overriding title.

Finally, it applied Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning Mfg. Co. Ltd., establishing that the construction of a contract is a question of law.

The Court found that the Assessing Officer had not formed a conscious opinion on the nature of the AOP receipts during original assessments; the AY 2007-08 order erroneously referred to a different Joint Venture agreement for commercial units, not the AOP agreement in question.

Therefore, information from the Section 133A survey—specifically the AOP agreement and Director’s statement—constituted "tangible material" rather than a change of opinion.

On the merits, the Court interpreted Clause 7 of the AOP Agreement, noting that the Assessee was entitled to 35% of gross sale proceeds immediately, while all expenses were borne by the other member's 65% share.

This insulation from expenses meant the receipt lacked the essential character of "profit" (which is surplus after expenses).

Applying the Sitaldas Tirathdas test, the Court held that Clause 7 created an "overriding title" that diverted 35% of the revenue to the Assessee at source, making it a taxable business receipt in the Assessee’s hands rather than a distribution of the AOP’s taxed profits.

The 35% share received by the Assessee was a "share of revenue" / business receipt and not a "share of profit," making it taxable in the hands of the Assessee.

The Supreme Court allowed the Revenue's appeals (C.A. No. 744/2013 and C.A. No. 19487/2017) and dismissed the Assessee’s appeal (C.A. No. 9107/2012). Lower court orders holding the income to be profit-sharing were set aside.