Court Rules Tax Cannot Be Levied Solely on Planning Approval Without Commencement of Construction; Orders Personal Hearing and Lifting of Bank Attachments Upon Deposit
In a significant judgment delivered on October 5, 2026, the Madras High Court, presided over by Mr. Krishnan Ramasamy, J., has set aside a tax demand imposed on M/s. Shree Velu Builders Private Limited. The tax demand, amounting to over Rs. 5.5 crore, was challenged on the ground that it was levied solely on the basis of projected revenue derived from planning approval for Block Nos. 12 and 13, despite construction not having commenced.
The petitioner, M/s. Shree Velu Builders Pvt. Ltd., contended that the tax assessment was improper and unsustainable because the Local Planning Authority's approval did not translate into actual revenue generation since the construction was yet to begin. Moreover, the petitioner argued that the assessment order was passed without granting sufficient opportunity to file a detailed reply, violating principles of natural justice.
The State Tax Officer had raised a total demand of Rs. 5,50,25,100/- based on projected revenue and an additional Rs. 2,40,19,438/- on other liabilities. While the petitioner disputed the entire demand, they expressed willingness to deposit Rs. 50,00,000/- to demonstrate bona fides and sought remand of the matter for fresh consideration.
Upon hearing both parties, the Court observed that levying tax based merely on planning approval without commencement of construction was improper. The Court also found that the petitioner was not given adequate opportunity to present their defense, despite requesting time to file a detailed reply.
Consequently, the Court set aside the impugned order dated March 27, 2026, on the condition that the petitioner deposits Rs. 50,00,000/- within four weeks. Upon such deposit, the petitioner is to file their reply and supporting documents. The respondent State Tax Officer is directed to reconsider the assessment afresh on merits and in accordance with law, after granting a personal hearing to the petitioner.
Furthermore, the Court ordered the lifting of bank account attachments placed on the petitioner and its erstwhile Director upon proof of deposit of the Rs. 50,00,000/-. The respondent is required to issue necessary instructions to the banks for immediate de-freezing. In case of delay, the petitioner has liberty to approach the banks directly with proof of deposit and this order to restore normal operation of their accounts.
This judgment underscores the principle that taxation authorities cannot base tax demands solely on projected or hypothetical revenues without actual business activity or commencement of construction. It also reinforces the necessity of adhering to procedural fairness by affording adequate opportunity to taxpayers before finalizing assessments.
Bottom Line:
Tax cannot be levied on projected revenue merely on the basis of planning approval when construction has not commenced; assessment order passed without sufficient opportunity is liable to be set aside and remanded on condition of deposit.
Statutory provision(s):
Article 226, Constitution of India, 1950
