ACIT, CHENNAI V. M/s, Mecon-Gea Energy System (India) Ltd.(JV), CHENNAI

ITA 267/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64629 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 22-11-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 18-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N SANKARAN
• Assessee Lawyers: M BALAGANESH
• Keywords: Diversion of income; Advance ruling
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 267/MDS/2011 (ASSESSMENT YEAR : 2005-06) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE XV, CHENNAI - 600 034. (APPELLANT) V. M/S MECON-GEO ENERGY SYSTEM (INDIA) LTD. (JV), NO.443, GUNA BUILDINGS, ANNA SALAI, TEYNAMPET, CHENNAI - 600 018. PAN : AAAAM4502A (RESPONDENT) APPELLANT BY : SHRI N. SANKARAN, CIT-DR RESPONDENT BY : SHRI M. BALAGANES H, CA DATE OF HEARING : 22.11.2012 DATE OF PRONOUNCEMENT : 06.12.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST AN ORDER DATED 29.11.2010 OF COMMISSIONER OF INCOME TAX (APP EALS) - XII, CHENNAI. GROUNDS TAKEN BY THE REVENUE ASSA IL THE ORDER OF I.T.A. NO. 267/MDS/11 2 CIT(APPEALS) DELETING AN ADDITION OF ` 1,68,15,760/-. 2. FACTS APROPOS ARE THAT ASSESSEE, AN ASSOCIATION OF PERSON (AOP), CONSTITUTED THROUGH A JOINT VENTURE AGREEMEN T BETWEEN M/S MECON INDIA LIMITED (MIL), WHICH IS A GOVERNMENT OF INDIA UNDERTAKING AND M/S GEA ENERGY SYSTEMS (INDIA) LTD . (GEASIL), A DOMESTIC CONCERN, HAD FILED ITS RETURN FOR THE IMPU GNED ASSESSMENT YEAR DECLARING A LOSS OF ` 91,371/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS EXPLAINED BY THE ASSESSEE THAT THE JOINT VENTURE WAS ENTERED BETWEEN M/S MECON INDIA LIMITED AND M/S GEA ENERGY SYSTEMS (INDIA) LTD., FOR A SPECIFIC PURPOSE OF EXECUTING INFRASTRUCTURE PROJECTS. THE AOP RESULTING OUT OF THE JOINT VENTURE WAS EXECUTING TWO WORKS DURING THE RELEVANT PREVIOUS YE AR, WHICH WERE FOUR-LANING OF TIRUNELVELI TUTICORIN ROAD AND WID ENING THE CARRIAGE WAY OF NH-47, INCLUDING BRIDGES. THE A.O., AFTER G OING THROUGH THE JOINT VENTURE AGREEMENT, WAS OF THE OPINION THAT BO TH THE PARTIES WERE JOINTLY AND SEVERALLY RESPONSIBLE FOR DUE PERFORMAN CE OF THE CONTRACTS. AS PER THE A.O., THE ENTIRE CONTRACT RECEIPTS WERE RECEIVED BY THE AOP. A.O. FOUND FROM THE PROFIT & LOSS ACCOUNT THA T ASSESSEE HAD SHOWN CONTRACT RECEIPTS OF ` 16,81,57,587/-, AGAINST WHICH, SAME I.T.A. NO. 267/MDS/11 3 AMOUNT OF CONTRACT EXPENSES WAS ALSO BOOKED. AS PE R THE A.O., SUCH CONTRACT EXPENSES WERE AMOUNTS PAID TO M/S MIL AND M/S GEASIL, THE TWO MEMBERS OF THE AOP, FOR THE PURPOSE OF EXECUTING THE WORK. IN OTHER WORDS, A.O. WAS OF THE OPINION THAT THE WHOLE OF CONTRACT AMOUNTS RECEIVED WERE TRANSFERRED BY THE A OP TO ITS PARTNERS, WITHOUT LEAVING ANY AMOUNT TO MEET THE IN CIDENTAL EXPENSES OF JOINT VENTURE. THIS, IN HIS OPINION, WAS A DEVI CE ADOPTED BY THE ASSESSEE TO AVOID SCRUTINY OF THE EXPENDITURE RELAT ING TO CONTRACT WORK UNDERTAKEN BY THE JOINT VENTURE. ACCORDING TO HIM, THE JOINT VENTURE WAS RESPONSIBLE FOR EXECUTION OF THE WORK A ND THEREFORE, INCOME RESULTING OUT OF SUCH EXECUTION WAS TO BE CO NSIDERED IN THE HANDS OF THE JOINT VENTURE AOP. HE HELD THAT IN TH E CIRCUMSTANCES MENTIONED ABOVE, EXPENSES OF THE AOP COULD NOT BE V ERIFIED. HE, THEREFORE, CONSIDERED 10% OF THE CONTRACT RECEIPTS OF ` 16,81,57,587/- AS INCOME OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR. FOR ADOPTING 10% RATE, THE A.O. TOOK CUE FROM SECTION 4 4AD OF INCOME- TAX ACT, 1961 (IN SHORT 'THE ACT') WHICH, ACCORDING TO HIM, STIPULATED 8% OF THE GROSS RECEIPTS AS INCOME OF A CONTRACTOR WHERE RECEIPTS I.T.A. NO. 267/MDS/11 4 WERE LESS THAN ` 40 LAKHS. ASSESSMENT WAS ACCORDINGLY COMPLETED CONSIDERING ASSESSEES INCOME AS ` 1,68,15,760/-. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT IT HAD MAINTAINED PROPER BOOKS OF ACCOUNTS FOR THE RELEVANT PREVIOUS YEAR. THEREFORE, APPLICATION OF SECTION 4 4AD WAS UNWARRANTED. AS PER THE ASSESSEE, BY SHOWING EXPEN SES EQUAL TO THE CONTRACT RECEIPTS, IT HAD NO INTENTION TO AVOID SCRUTINY OF SUCH EXPENSES. FURTHER, ACCORDING TO ASSESSEE, M/S GEAS IL WAS MAKING PURCHASE OF ALL MATERIAL REQUIRED FOR EXECUTION OF WORKS. THEREFORE, IT WAS INCUMBENT UPON THE ASSESSEE TO PAY M/S GEASIL T HE EXPENSES INCURRED BY IT. SUCH PAYMENTS TO M/S GEASIL FOR PU RCHASE OF MATERIAL WERE REJECTED BY THE A.O., THOUGH PROPERLY SHOWN IN THE PROFIT & LOSS ACCOUNT. 4. CIT(APPEALS) WAS APPRECIATIVE OF THE CONTENTIONS OF THE ASSESSEE. ACCORDING TO HIM, M/S GEASIL HAD TAKEN U P THE PROJECT CONSTRUCTION ON BEHALF OF THE JOINT VENTURE AND THE OTHER COMPANY, NAMELY, M/S MIL WAS TO DEPLOY ENGINEERS AND PROVIDE D FOR THE DESIGN AND PROJECT MANAGEMENT. SUCH AMOUNTS, WHICH WERE R ECEIVED BY I.T.A. NO. 267/MDS/11 5 THE ASSESSEE, AND GIVEN TO M/S GEASIL WERE SHOWN BY M/S GEASIL IN ITS BOOKS AND THEY HAD RETURNED NET PROFITS EXCE EDING 10% OF THEIR TURNOVER. AS PER CIT(APPEALS), ASSESSEE HAD MADE T HE PAYMENTS TO M/S GEASIL AS AGREED IN THE JOINT VENTURE AGREEMENT AND ASSESSEES ROLE WAS NOTHING BUT ONLY THAT OF A FACI LITATOR. ACCORDING TO HIM, ASSESSEE BEING ONLY A FACILITATOR, COULD NOT C LAIM A LOSS ON ACCOUNT OF ITS OPERATIONS NOR COULD IT BE BURDENED WITH ANY INCOME FROM THE CONTRACT RECEIPTS. HE, THEREFORE, HELD TH AT ADDITION OF 10% OF GROSS RECEIPTS WAS NOT WARRANTED AND SUCH ADDITION WAS DELETED. 5. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT ASSESSEE ADMITTEDLY WA S A CONTRACTOR FOR THE WORK TENDERED BY NATIONAL HIGHWAYS AUTHORIT Y OF INDIA (NHAI). PAYMENT WAS MADE BY NHAI TO ASSESSEE. ASSESSEE HAD CLAIMED IN ITS RETURN, CREDIT FOR THE TAX DEDUCTED AT SOURCE. THEREFORE, IT CANNOT RUN AWAY FROM ITS DUTY TO SHOW THE INCOME THAT AROS E TO IT, OUT OF SUCH TRANSACTION. JUST BECAUSE ONE OF THE PROMOTER MEMB ERS OF AOP WAS MAKING THE PURCHASE AND THEN DOING THE WORK, WOULD NOT MEAN THAT ASSESSEE WAS NOT GETTING ANY BENEFIT FROM THE CONTR ACT. RELYING ON SECTION 199 OF THE ACT, LEARNED D.R. SUBMITTED THAT IT WAS INCUMBENT I.T.A. NO. 267/MDS/11 6 ON THE PERSON FROM WHOM INCOME-TAX WAS DEDUCTED AT SOURCE, TO RETURN SUCH INCOME IN ITS RETURN OF INCOME. ASSESS EE HERE HAD NOT DONE THAT, BUT HAD ONLY TRANSFERRED THE AMOUNT RECE IVED BY IT TO ONE OF THE JOINT VENTURE PARTNERS, NAMELY, M/S GEASIL. IT WAS NOT DIVERSION OF INCOME BY ANY OVERRIDING TITLE. THE C ONTRACT HAVING BEEN ALLOTTED TO AOP, THE AOP COULD NOT RUN AWAY FROM IT S LIABILITY TO PAY TAX ON ITS INCOME. JUST BY TRANSFERRING WHOLE OF T HE AMOUNT TO ONE OF THE MEMBERS OF AOP, IT COULD NOT STATE THAT THE EXP ENSES WERE EVIDENCED AND IT HAD NO INCOME. RELIANCE WAS PLACE D ON THE DECISIONS OF AUTHORITY FOR ADVANCE RULINGS IN THE C ASE OF ABC, IN RE (345 ITR 119) AND GEOCONSULT ZT GMBH., IN RE (304 ITR 283). 6. PER CONTRA, LEARNED A.R., STRONGLY SUPPORTING TH E ORDER OF CIT(APPEALS), SUBMITTED THAT THE AOP HAD FILED DULY AUDITED ACCOUNTS, INCLUDING TAX AUDIT REPORT, UNDER SECTION 44AB OF THE ACT. THE AOP HAD CREDITED ALL THE CONTRACT RECEIPTS RECE IVED FROM NHAI IN THE PROFIT & LOSS ACCOUNT. IT MIGHT BE TRUE THAT A N EQUAL AMOUNT WAS SHOWN AS EXPENSES. NEVERTHELESS, AUDITED ACCOUNTS COULD NOT HAVE BEEN REJECTED WITHOUT GIVING ANY REASON. INCOME CA N BE ESTIMATED ONLY WHERE ACCOUNTS WERE REJECTED OR BOOKS OF ACCOU NTS WERE I.T.A. NO. 267/MDS/11 7 DEFECTIVE. HERE, THERE WAS NO SUCH FINDING BY THE A.O. ACCORDING TO HIM, ASSESSEE WAS BOUND BY THE JOINT VENTURE AGREEM ENT TO PAY FOR THE PURCHASE MADE BY M/S GEASIL FOR EXECUTION OF WO RK. WHOLE OF THE PAYMENT WAS MADE FOR SUCH PURCHASE AND WITHOUT VERIFYING THE GENUINENESS OF THE PAYMENTS, ADDITION WAS MADE. TH ERE WAS NO MALAFIDE INTENTION BY THE ASSESSEE NOR ANY ATTEMPT TO RUN AWAY FROM ITS TAX LIABILITY. LEARNED A.R. POINTED OUT THAT M /S GEASIL IN THEIR RETURN FOR IMPUGNED ASSESSMENT YEAR HAD CLEARLY SHO WN RECEIPTS FROM THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT AND ALSO PAID TAX ON ITS INCOME. THEREFORE, CIT(APPEALS) WAS ABSOLUTELY JUS TIFIED IN DELETING THE ADDITION MADE BY THE A.O. AS FOR THE RELIANCE PLACED BY LEARNED D.R. ON THE DECISIONS OF AUTHORITY FOR ADVANCE RULI NGS (SUPRA), LEARNED A.R. SUBMITTED THAT IN SUCH CASES, THE PAYM ENTS WERE MADE DIRECTLY TO THE JOINT VENTURE PARTNERS AND THEREFOR E, HAD NO RELEVANCE ON FACTS HERE. LEARNED A.R. FILED A PAPER-BOOK CON TAINING COPIES OF JOINT VENTURE AGREEMENT AND PARTICIPATION AGREEMENT ENTERED BETWEEN MIL AND GEASIL AS ALSO THE PROFIT & LOSS AC COUNT OF GEASIL FOR THE RELEVANT PREVIOUS YEAR. ASSESSMENT ORDERS OF I.T.A. NO. 267/MDS/11 8 GEASIL FOR IMPUGNED ASSESSMENT YEAR AS WELL AS SUBS EQUENT ASSESSMENT YEAR WERE ALSO FILED. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IT IS NOT DISPUTED THAT THE ASSESSEE HAD FILED ITS RETURN ALONG WITH AUDITED ACCOUNTS INCLUDING AUDIT REPORT AS REQUIRED UNDER SECTION 44AB OF THE ACT. THE SAID AUDIT REPORT FILED IN FO RM NO.3CB CLEARLY MENTIONS THAT ASSESSEE HAD MAINTAINED BOOKS OF ACCO UNTS FOR THE RELEVANT PREVIOUS YEAR. IT IS ALSO MENTIONED THAT ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. ASSESSE E HAD ALSO FILED AUDITED PROFIT & LOSS ACCOUNT ALONG WITH ITS RETURN , A COPY OF WHICH HAS ALSO BEEN FILED BEFORE US. IN SUCH AUDITED PRO FIT & LOSS ACCOUNT, ASSESSEE HAD CREDITED A SUM OF ` 16,81,57,587/- RECEIVED BY IT AS CONTRACT INCOME. AGAINST THIS, IT HAS SHOWN CONTRA CT EXPENSES OF SAME AMOUNT OF ` 16,81,57,587/-. OTHER EXPENSES CLAIMED WERE LIKE BANK CHARGES, ELECTRICITY CHARGES, ETC. ALTOGETHER COMING TO A SUM OF ` 91,371/-. SUCH EXPENSES WERE CLAIMED AS LOSS BY T HE ASSESSEE IN ITS RETURN OF INCOME. IN OUR OPINION, ONCE AN ASSE SSEE IS CONSIDERED A SEPARATE PERSON AND ASSESSED IN A STATUS OF AOP , AND WHEN IT FILED ITS RETURN OF INCOME ALONG WITH AUDITED ACCOU NTS AND AUDIT I.T.A. NO. 267/MDS/11 9 REPORT, IT WAS THE ARDENT DUTY OF THE A.O. TO VERIF Y SUCH BOOKS OF ACCOUNTS. NO DOUBT, THE A.O. COULD HAVE REJECTED T HE BOOKS AND COULD HAVE ESTIMATED ITS INCOME IF BOOKS WERE FOUND DEFECTIVE OR FOR ANY OTHER VALID REASON. HE COULD NOT HAVE JUST BRU SHED ASIDE SUCH BOOKS AND REACHED A CONCLUSION THAT THE JOINT VENTU RE AOP WAS ONLY A CONDUIT FOR AVOIDING OF TAX. ONE OF THE PROMOTER S OF THE JOINT VENTURE, NAMELY, M/S GEASIL, HAD FILED ITS RETURN F OR THE IMPUGNED ASSESSMENT YEAR AND A COPY OF ITS ASSESSMENT ORDER HAS ALSO BEEN PLACED ON RECORD AT PAPER-BOOK PAGES 34 TO 36. THE SAID ASSESSEE HAD RETURNED AN INCOME OF ` 8,35,75,050/-. THERE IS NO CASE FOR THE REVENUE THAT THE SAID ASSESSEE HAD NOT INCLUDED IN ITS CONTRACT RECEIPTS THE AMOUNT RECEIVED FROM ASSESSEE-AOP. TH E QUESTION WHETHER THE PAYMENTS MADE BY THE ASSESSEE TO M/S GE ASIL WERE CONTRACT EXPENSES, WHICH COULD BE CLAIMED AS DEDUCT ION UNDER SECTION 37 OR ANY OTHER PROVISIONS OF THE ACT, HAS NOT BEEN VERIFIED BY THE A.O. CIT(APPEALS) SIMPLY WENT BY THE JOINT VEN TURE AGREEMENT AND ACCEPTED THE CLAIM OF THE ASSESSEE THAT IT WAS ONLY A FACILITATOR AND HAD NO ROLE IN THE ENTIRE PROCESS. BOTH THE AU THORITIES FAILED TO EXAMINE WHETHER THE WORK WAS DONE BY JOINT VENTURE PARTNERS ON I.T.A. NO. 267/MDS/11 10 BEHALF OF THE AOP. IN OUR OPINION, LOWER AUTHORITI ES FAILED TO VERIFY THE ACTUAL COMMERCIAL OPERATIONS CARRIED ON BY ASSESSEE AND SCRUTINIZE ITS BOOKS TO FIND WHETHER THEIR CLAIM OF EXPENSES W ERE GENUINE OR NOT. IN THESE CIRCUMSTANCES, THE MATTER REQUIRES A REVIS IT BY THE ASSESSING OFFICER. WE, THEREFORE, SET ASIDE THE ORDERS OF AU THORITIES BELOW AND REMIT THE MATTER BACK TO THE FILE OF A.O. FOR CONSI DERATION AFRESH AND DISPOSAL IN ACCORDANCE WITH LAW. ASSESSEE SHALL BE GIVEN AN OPPORTUNITY FOR JUSTIFYING ITS CASE. 8. IN THE RESULT, APPEAL FILED BY THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE SIXTH OF DECEMBER, 2012, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH DECEMBER, 2012. KRI. I.T.A. NO. 267/MDS/11 11 COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-XII, CHENNAI-34 (4) CIT, CHENNAI-X, CHENNAI (5) D.R. (6) GUARD FILE