Fixed Share from AOP Taxed as Income if Not Linked to Profit

Source: Supreme Court

Why in News?

A Division Bench of the Supreme Court of India, comprising Justice JB Pardiwala and Justice KV Viswanathan, in Commissioner of Income Tax III v. M/s. Sanand Properties Pvt. Ltd. (2026), held that a member of an Association of Persons (AOP) receiving a fixed percentage of gross receipts — without bearing any share of business expenses or losses — cannot treat such receipts as an exempt "share of profit" under Section 86 read with Section 167B(2) of the Income Tax Act, 1961 (ITA). 

• The Court held that for a receipt to qualify as a "share of profit," it must be contingent upon the AOP's actual profit after deduction of expenses. A fixed entitlement embedded in gross receipts, insulated from the AOP's expenses, constitutes a business receipt and is taxable as income in the hands of the member.

What was the Background of Commissioner of Income Tax III v. M/s. Sanand Properties Pvt. Ltd. (2026) Case? 

• The dispute arose from an AOP agreement dated April 29, 2003, between Sanand Properties Private Limited (SPPL) and Raviraj Kothari & Co. for the joint development of a housing project. 
• Clause 7 of the agreement provided that all sale proceeds received from flat purchasers would first be collected in the name of the AOP. Out of those receipts, SPPL would immediately become entitled to 35% of the gross collections, while the remaining 65% would be retained by the AOP to meet all project-related expenses.  
• Only the balance remaining after such expenses would ultimately accrue to the other member. 
• The Income Tax Department contended that SPPL's entitlement was not linked to the actual profits of the AOP but was instead a fixed share of gross revenue, making it taxable in SPPL's hands.  
• However, the Income Tax Appellate Tribunal (ITAT) and the Bombay High Court had earlier accepted SPPL's argument that the amount represented an exempt "share of profit" from the AOP, prompting the Department to appeal to the Supreme Court.

What were the Court's Observations? 

• On the Nature of SPPL's Entitlement: The Court held that SPPL's 35% share was not contingent upon the AOP's profit. The entitlement was embedded in the very framework of Clause 7 of the AOP Agreement and attached directly to gross receipts at the point of their accrual. The AOP neither acquired nor retained any control over this portion of the receipts but merely held and disbursed the same on behalf of SPPL. 
• On the Doctrine of Diversion of Income by Overriding Title: The Court relied on CIT v. Sitaldas Tirathdas, (1961), and applied the doctrine of diversion of income by overriding title. It held that where income is diverted at source before it becomes part of the taxable income of an entity, such amount cannot be treated as the entity's own profit. Since SPPL's 35% share was intercepted and diverted before it could assume the character of income in the hands of the AOP, the AOP never truly acquired control over it. 
• On the Essential Characteristics of "Profit": The Court held that for a receipt to qualify as a "share of profit" under Section 86 read with Section 167B(2) of the ITA, expenses must necessarily be deducted from the member's share. Since SPPL's share was calculated before any deduction of expenses and remained entirely insulated from the AOP's losses or liabilities, it lacked the essential characteristics of profit and constituted a taxable business receipt. 
• On Taxability of SPPL's Share: The Court held that the 35% share received by SPPL from the AOP for Assessment Years 2008–09 and 2009–10 is taxable in the hands of the assessee as a business receipt. The receipt, in pith and substance, arose from the surrender of development rights or a share of gross revenue, and not from participation in the profits of the AOP.

What is Section 167B(2) of the Income Tax Act, 1961? 

Section 167B — Charge of Tax Where Shares of Members in AOP/BOI are Unknown: 

Applicability: 

• Applies to an Association of Persons (AOP) or Body of Individuals (BOI). 
• Does not apply to a company, co-operative society, or society registered under the Societies Registration Act, 1860.

Section 167B(1) — Indeterminate or Unknown Shares: 

• Where the individual shares of members in the whole or any part of the income of the AOP/BOI are indeterminate or unknown, the entire income of the AOP/BOI is taxed at the maximum marginal rate (MMR). 
• Proviso: If any member's total income is chargeable at a rate higher than MMR, the AOP/BOI's total income shall be taxed at such higher rate.

Section 167B(2) — Determinate Shares but High-Income Members: 

• Applies where shares of members are known/determinate (i.e., Section 167B(1) does not apply), but either of the following conditions is met: 
• Sub-section 2(i): If any member's total income (excluding their share from the AOP/BOI) exceeds the basic exemption limit under the Finance Act of the relevant year — the entire income of the AOP/BOI is taxed at MMR. 
• Sub-section 2(ii): If any member is individually chargeable to tax at a rate higher than MMR — that portion of the AOP/BOI's income relatable to such member's share is taxed at that higher rate, and the remaining income of the AOP/BOI is taxed at MMR.

Explanation — When Shares are Deemed Indeterminate: 

• Shares of members shall be deemed indeterminate or unknown if they are indeterminate either on the date of formation of the AOP/BOI or at any time thereafter. 

The Income Tax Act 1961 

• The Income Tax Act 1961 is a comprehensive legislation in India that governs the taxation of income for individuals and businesses.  
• It came into effect on April 1, 1962, and provides the framework for calculating, levying, and collecting income tax and super-tax in the country.  
• The Act defines important concepts like the previous year (when income is earned) and assessment year (when income is taxed) and establishes the structure for tax authorities, assessments, and appeals to higher courts.