ITO, Gurgaon V. M/s Kec-Delco-Varaha (JV), Gurgaon

ITA 2327/DEL/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0720 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2011-2012
• Appeal Filed On: 28-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G , NEW DELHI BEFORE S H. R.K. PANDA , ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE , JUDICIAL MEMBER ITA NO. 2 327 /DEL/201 6 ASSESSMENT YEAR: 20 11 - 12 INCOME TAX OFFICER, WARD 2 (2), GURGAON VS M/S KEC - DELCO - VRAHA (JV), 1 ST FLOOR, BUILDING NO.9A, DLF CYBER CITY, PHASE - III, GURGAON PAN AABAK0491R (APPELLANT) (RESPONDENT) APPELLANT BY SH. ANOOP SINGH, SR. DR RESPONDENT BY SH. PRAKASH SINHA,CA SH. SACHIN SINHA, CA MS. KAVITA ARORA , CA DATE OF HEARING: 12 /09/2018 DATE OF PRONOUNCEMENT: 18 / 0 9 /2018 ORDER PER R.K. PANDA, AM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 16.02.2016 OF THE CIT (A) - 1, GURGAON RELATING TO A. Y. 2011 - 12. 2. FACTS OF T HE CASE, IN BRIEF , ARE THAT THE ASSESSEE IS AN AO P HAVING 3 MEMBERS NAMELY M/S. KEC INTERNATIONAL LTD M/S. DELCO INFRASTRUCTURE ITA NO. 2 327 /DE L/20 1 6 2 PROJECT LTD. AND M/S VARAHA INFRA LTD AND PROF I T SHARING RATIO AMONG THE MEMBER S IS 60:20:20 RESPECTIVELY. DURING THE YEAR UNDE R CONSIDERATION THE A SSESSEE WAS AWARDED TWO CONTRACTS BY EAST CENTRAL RAILWAY (CONSTRUCTION ORGANIZATION). IT FILED ITS RETURN OF INCOME ON 29.09.2012 DECLARING TOTAL INCOME OF RS.3,20,441/ - . D URING THE FINANCIAL YEAR 2010 - 11, THE JV WAS AWARDED TWO CONT RACTS BY EAST CENTRAL RAILWAY (CONSTRUCTION ORGANISATION) (REFERRED TO AS ECR IN THIS ORDER) WITH THE FOLLOWING SCOPE. I . CIVIL CONSTRUCTION OF MAJOR AND MINOR BRIDGES BOTH IN CASE OF ORIGINAL AND DIVERTED ALIGNMENT ON PILE/WELL FOUNDATION. THE WORK ASSI GNED ALSO INCLUDES CONSTRUCTION OF STATION BUILDINGS AND LEVEL CROSSING BETWEEN SARAIGARH TO FORBESGANJ (BIHAR) FOR A VALUE OF RS.67,63,81,924/ - (TENDER NO.14 OF 2009 - 10(OPEN) AWARDED VIDE LETTER NO.ECR/CAO/CON/16(NORTH)/568 DATED 03.03.2010). II . CIVIL CONS TRUCTION OF MAJOR AND MINOR BRIDGES BOTH IN CASE OF ORIGINAL AND DIVERTED ALIGNMENT ON PILE/WELL FOUNDATION. THE WORK ASSIGNED ALSO INCLUDES CONSTRUCTION OF STATION BUILDINGS AND LEVEL CROSSING BETWEEN SA HARASA TO F O RB ESGANJ (BIHAR) FOR A VALUE OF RS. 18 , 57 , 25 , 992 / - (TENDER NO.14 OF 2009 - 10(OPEN) AWARDED VIDE LETTER NO. ECR/CAO/CON/WT/15/NORTH / 757 DATED 23.03.2010. 3. AS PER THE AGREEMENT, THE PARTIES TO THE JV WERE TO SHARE THE PROFITS ARISING FROM THE JV, IN THE RATIO OF THE SHARE (AS INDICATE ABOVE). THE ASSESSING OFFICER OBSERVED THAT THE JV HAD ENTERED INTO A SUBSEQUENT AGREEMENT WITH M/S KEC INTERNATIONAL LIMITED (REFERRED TO AS KEC HAVING 60 PERCENT SHAREHOLDING AND PROFIT SHARE IN THE JV), WHEREBY THE ABOVE CONSTRUCTION CONTRACTS WERE SUB - CON TRACTED TO KEC ON A BACK TO BACK BASIS FOR A VALUE OF INR 67,54,34,990/ - AND RS.18,54,65,977/ - RESPECTIVELY I.E. @ 99.86% OF THE GROSS RECEIPTS. ITA NO. 2 327 /DE L/20 1 6 3 4. DU RING THE ASSESSMENT PROCEEDINGS , T HE ASSESSING OFFICER NOTICED THAT AS PER THE TAX AUDIT REPORT COL UMN NO.18 FOR PARTICULARS OF THE PAYMENTS MADE TO PERSONS SPECIFIED U/S 40 ( A ) (2) (B) IT WAS MENTIONED AS NIL. HOWEVER, PERUSAL OF THE SUBMISSIONS MADE BY THE ASSESSEE JV, IT WAS NOTICED THAT IT HAS GIVEN SUBCONTRACT TO KEC ON BACK TO BACK BASIS. THE KEC IS ALSO LEAD PARTNER IN THE JV HAVING 60% SHARE OF THE TOTAL SHARES AS PER THE JV AGREEMENT DATED 20.04.2010. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PAYMENTS MADE TO THE PARTIES SHOULD NOT BE COVERED UNDER THE PROVISIONS OF SECTION 40 A (2) (B) WITH RESPECT TO REASONABLENESS. 5. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS THE ASSESSING OFFICER MADE ADDITION OF RS.93,12,189/ - BY COMPUTING THE PROFIT OF JOINT VENTURE AT THE RATE OF 4% OF TH E GROSS RECEIPTS ON THE GROUND THAT THE ASSESSEE HAD GIVEN THE SUBCONTRACT TO PERSONS SPECIFIED U/S 40A (2) (B) OF THE IT ACT . 6. IN APPEAL THE LD. CIT(A) AFTER OBTAINING THE REMAND REPORT FROM THE ASSESSING OFFICER DELETED THE ADDITION BY OBSERVING AS U NDER : - (I) I HAVE GIVEN CAREFUL CONSIDERATION TO THE ARGUMENTS ADVANCED IN THIS REGARD AND FIND THAT THE SUBJECT MATTER IS COVERED BY DECISION IN THE CASE OF CIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD. AND KMC CONSTRUCTIONS P. LTD INCOME TAX ACT, (2 015) 374 ITR 35 (DELHI). IN THIS CASE HON BLE HIGH COURT HAS APPROVED DECISIONS OF HON BLE ITAT (DELHI) HAD RECORDED A FINDING THAT THE JOIN T VENTURE WHICH HAVE BEEN FORMED ONLY TO SECURE THE CONTRACT CANNOT BE SUBJECTED TO TAX AS ASSOCIATION OF PERSON (A OP). THE HON BLE HIGH COURT ELABORATELY DISCUSSED THE CASE OF LINDE AG. LINDE ENGINEERING DIVISION VS. DEPUTY DIRECTOR OF INCOME TAX (2014) 365 ITR 1 (DELHI) TO COME TO THIS CONCLUSION. (II) FURTHER HON BLE HIGH COURT (DELHI) IN INCOME TAX ACT NO.146/2 010 DECIDED ON 11.02.2010 IN TH E CASE OF CIT VS. ORIENTAL STRUCTURE ENGINEERS PVT. LTD. HAS ALSO OBSERVED THAT IN THE CASE OF JV OF SUCH KIND SECTION 40A (2) IS NOT ITA NO. 2 327 /DE L/20 1 6 4 APPLICABLE. THERE ARE OTHER JUDICIAL FINDINGS IN THIS REGARD ARRIVING AT THE SAME CONCLUS ION WHICH ARE REPORTED AS CIT VS. OSE PVT. LTD. 374 ITR 35 (DELHI) HIGH COURT AND CIT VS. SMSL UANRCL (JV) (2015) 372 ITR 425 BOMBAY. IN ALL THE ABOVE CASES, IT HAS BEEN HELD THAT WHERE THE CONSTITUENT PARTICIPANTS MAKE A JV TO SECURE A CONTRACT, WHICH IS MERELY A PASS THROUGH ENTITY WITH MINIMAL EXPENSES, NO TAX LIABILITY CAN BE ATTRIBUTED BY HOLDING THE SUBJECT ENTITY AS AOP. (III) NO NET PROFIT ON % BASIS CAN BE TAXED AS HAS BEEN DOWN IN THIS CASE. IN CONSIDERATION OF SETTLED POSITION OF LAW THE GROUND OF APPEAL IS ALLOWED. 7. AGGRIEVED WITH SUCH ORDER OF CIT (A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE FOLLOWING GROUNDS OF APPEAL : - 1 . WHETHER THE LD. CIT (A) WAS RIGHT ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS.93,12, 189/ - MADE BY THE ASSESSING OFFICER BY COMPUTING THE PROFIT OF THE JOINT VENTURE @ 4% OF THE GROSS RECEIPTS AS THE ASSESSEE HAD GIVEN THE PAYMENT TO THE PERSONS SPECIFIED U/S 40 A (2) (B) OF THE INCOME TAX ACT, 1961. 2 . WHETHER THE LD. CIT (A) WAS RIGHT ON F ACTS AND IN LAW IN STATING THAT JV IS MERELY A PASS THROUGH ENTITY WITH MINIMAL EXPENSES, NO TAX LIABILITY CAN BE ATTRIBUTED TO JV AS AOP. 3 . THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD, DELETE OR AMEND GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEAR ING OF APPEAL. 8 . THE LD. DR HEAVILY RELIED ORDER OF THE ASSESSING OFFICER . T HE LD. COUNSEL FOR THE ASSESSEE , ON THE OTHER HAND , REFERRING TO THE VARIOUS DECISIONS OF THE TRIBUNAL SUBMITTED THAT THE ISSUE HAS BEEN DECIDED IN THE CASE OF OTHER RELATED CON CERN S IN FAVOUR OF THE ASSESSEE. THEREF ORE, THIS BEING A COVERED MATTER THE APPEAL FILED BY THE REVENUE SHOULD BE DISMISSED. 9 . WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH SIDES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THE SMC B ENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S KEC SIDHARTH JV AND IN THE CASE OF ITO VS. M/S. KEC PLR KPIPL JV IN THE CONSOLIDATED ORDER DATED 03.04.2018 ITA NO. 2 327 /DE L/20 1 6 5 HA S DECIDED IDENTICAL ISSUE AND DISMISSED THE APPEAL FILED BY THE REVENUE IN ALL THESE APPEALS BY OB SERVING AS UNDER : - 8 I HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED POSITION THAT THE AO MADE THE ADDITION BY INVOKING THE PROVISIONS OF SECTI ON 40A(2)(B) OF THE ACT WHICH ARE APPLICABLE TO THE EXPENSES CONSIDERED TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS/SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE. HOWEVER, IN THE INSTANT CASE, THE AO ESTIMATED THE PROFIT OF THE ASSESSEE AND DETERMINED THE INCOME, NOWHERE HE DOUBTED THE EXPENSES INCURRED BY THE ASSESSEE. THEREFORE, I AM OF THE CONFIRMED VIEW THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF T HE ACT WHICH ARE APPLICABLE TO THE EXPENDITURE AND NOT TO THE RECEIPTS AND THE LD. CIT(A) RIGHTLY DELETED THE SAME. A SIMILAR ISSUE HAVING IDENTICAL FACTS HAS ALREADY BEEN ADJUDICATED BY THE ITAT DELHI BENCH SMC , NEW DELHI VIDE ORDER DATED 21.11.2016 IN ITA NO. 2326/DEL/2016 FOR THE ASSESSMENT YEAR 2011 - 12 IN THE CASE OF ITO, WARD - 2(2), GURGAON VS KEC - ASIAKOM UB (JV), GURGAON WHEREIN THE RELEVANT FINDINGS ARE GIVEN IN PARAS 5 & 6 OF THE ORDER DATED 21.11.2016 WHICH READ AS UNDER: 5. IT IS NOTICED THAT T HE AO MADE DISALLOWANCE U/S 40A(2)(B) OF THE ACT BY OPINING THAT THE ASSESSEE SHOULD HAVE EARNED INCOME FROM SUBCONTRACTING. AT THIS STAGE, IT IS RELEVANT TO NOTE THE PRESCRIPTION OF THE RELEVANT PART OF SECTION 40A(2), WHICH IS AS UNDER : - 40A(2)(A) WH ERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB - SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS S O CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 6. ON GOING THROUGH THE MANDATE OF THE ABOVE PROVISION, IT IS CLEAR THAT THE DISALLOWANCE UNDER THIS SECTION IS MADE IN RESPECT OF THE EXPENSES INCURRED OR PAYMENTS MADE WHICH ARE NOT DEDUCTIBLE. THIS SECTION HAS NO APPLICATION TO INCOME ASPECT OF THE ASSESSEE. AS THE AO HAS MADE DISALLOWANCE U/S 40A(2)(B) IN RESPECT OF INCOME WHICH THE ASSESSEE IN HIS OPINION OUGHT TO HAVE EARNED RATHER THAN CERTAIN EXPENSES INCURRE D, I AM OF THE CONSIDERED OPINION THAT THE PROVISIONS OF THIS SECTION ARE NOT ATTRACTED. I, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS SCORE DELETING THE DISALLOWANCE. ITA NO. 2 327 /DE L/20 1 6 6 9 . THE AFORESAID ORDER WAS FOLLOWED IN THE ASSESSEE S OWN CASE IN ITA NO. 5943/DEL/ 2016 FOR THE ASSESSMENT YEAR 2012 - 13 VIDE ORDER DATED 28.02.2017 WHEREIN IT HAS BEEN HELD AS UNDER: 4. I HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. ADMITTEDLY, THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SECTION 40A(2)(B) AS THE CONTRACT HAD BEEN GIVEN TO ASSOCIATED PARTY. I FIND THAT UNDER IDENTICAL CIRCUMSTANCES THE TRIBUNAL IN THE CASE OF KEC - ASIAKOM UB (JV) (SUPRA) HAS OBSERVED AS UNDER: - 4. I HAVE HEARD THE LD. AR AND PERUSED THE RELEVANT MATERIA L ON RECORD. NONE IS PRESENT ON BEHALF OF THE REVENUE. IN FACT, THERE IS NO ONE TO ATTEND THE PROCEEDINGS FROM THE SIDE OF THE REVENUE IN ALL THE CASES FIXED BEFORE THE BENCH TODAY. THE LD. AR INSISTED THAT THE APPEAL BE DISPOSED OF. I AM AGREEABLE WITH TH E CONTENTION OF THE LD. AR AND, ACCORDINGLY, PROCEEDING TO DISPOSE OF THE INSTANT APPEAL EX PARTE QUA THE REVENUE. 5. IT IS NOTICED THAT THE AO MADE DISALLOWANCE U/S 40A(2)(B) OF THE ACT BY OPINING THAT THE ASSESSEE SHOULD HAVE EARNED INCOME FROM SUB - CO NTRACTING. AT THIS STAGE, IT IS RELEVANT TO NOTE THE PRESCRIPTION OF THE RELEVANT PART OF SECTION 40A(2), WHICH IS AS UNDER: - 40A(2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRE D TO IN CLAUSE (B) OF THIS SUB - SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE N EEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 6. ON GOING THROUGH THE MANDATE OF THE ABOVE PROVISION, IT IS CLEAR THAT THE DISALLOWANCE UNDER THIS SECTION IS MADE IN RESPECT OF THE EXPENSES INCURRED OR PAYMENTS MADE WHICH ARE NOT DEDUCTIBLE. THIS SECTION HAS NO APPLICATION TO INCOME ASPECT OF THE ASSESSEE. AS THE AO HAS MAD E DISALLOWANCE U/S 40A(2)(B) IN RESPECT OF INCOME WHICH THE ASSESSEE IN HIS OPINION OUGHT TO HAVE EARNED RATHER THAN CERTAIN EXPENSES INCURRED, I AM OF THE CONSIDERED OPINION THAT THE PROVISIONS OF THIS SECTION ARE NOT ATTRACTED. I, THEREFORE, UPHOLD THE I MPUGNED ORDER ON THIS SCORE DELETING THE DISALLOWANCE. 5. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF KEC - ASIAKOM UB (JV) (SUPRA), I ALLOW THE CLAIM OF ASSESSEE. 10. SO, RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO ORDER, I DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTMENT. ITA NO. 2 327 /DE L/20 1 6 7 11. IN ITA NOS. 7045 & 7046/DEL/2017, IDENTICAL ISSUE HAVING SIMILAR FACTS IS INVOLVED, THEREFORE, THE FINDINGS GIVEN IN THE FORMER PART OF THIS ORDER SHALL APPLY MUTATIS MUTANDIS. 12. IN THE RESU LT, THE APPEALS OF THE DEPARTMENT ARE DISMISSED. 10 . SINCE THE ORDER OF THE CIT (A) IS IN CONSONANCE WITH THE DECISION S OF THE TRIBUNAL IN OTHER GROUP CONCERNS, THEREFORE, IN ABSENCE ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE AGAINST THE ORDERS OF THE TRIBUNAL AND CONSIDERING THE FACT THAT THE LD. CIT (A) WHILE DECIDING THE ISSUE HAS FOLLOWED THE DECISIONS OF THE HON BLE HIGH COURT , THEREFORE, WE FIND NO INFIRMITY IN TH E ORDER OF LD. CIT(A). A CCORDINGLY , THE SAME IS UPHELD AND THE GROUND S RAISED BY THE REVENUE ARE DISMISSED. 1 1 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 .09.2018. SD/ - SD/ - ( SUCHITRA KAMBLE ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER *NEHA* DATE: - 18 .0 9 .2018 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(APPEALS) 5 . DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI ITA NO. 2 327 /DE L/20 1 6 8 DATE OF DICTATION 1 2 .09.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 13.09.2018 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS 17.09.2018 DATE ON WHICH THE F AIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 18.09.2018 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 18.09.2018 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 19.09.2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHI CH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER