THE HCC L & T PURULIA JOINT VENTURE, MUMBAI V. M/S. JT. CIT RG. -23(1), MUMBAI

ITA 5134/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1450 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 31-05-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 12-08-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KESHAV SAXENA
• Assessee Lawyers: H P MAHAJANI
• Keywords: Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI R.K. PANDA (AM) AND SMT. ASHA VIJAYARA GHAVAN (JM) ITA NO.5134/MUM/2008 ASSESSMENT YEAR-2005-06 M/S. HCC-L&T PURULIA JOINT VENTURE, HINCON HOUSE, L.B.S. MARG, VIKHROLI (W), MUMBAI-400 083 PAN-AAAAH0710K VS. THE JCIT, RANGE-23(1), PRATYAKSHA KAR BHAVAN, BANDRA-KURLA COMPLEX, MUMBAI-400 051 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI H.P. MAHAJANI RESPONDENT BY: SHRI KESHAV SAXENA O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DT. 25.01.2008 PASSED BY THE LD. CIT(A)-XXIII, MUMB AI FOR THE ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE A JOINT VENTURE OF HINDUSTAN CONSTR UCTION CO. LTD AND LARSEN & TOUBRO LTD. (AOP) AND HAS ENTERED INTO SUB-CONTRACT AGREEMENT WITH TAISEI CORPN. THE ASSESSEE HAS UNDE RTAKEN SUB- CONTRACT WORK FOR CIVIL CONSTRUCTION OF PURULIA PUM PED STORAGE PROJECT FROM THE MAIN CONTRACTORS M/S. TAISEI CORPORATION. WHILE PERUSING THE ENCLOSURES FILED ALONGWITH RETURN OF INCOME SUCH AS BALANCE SHEET AND P&L ACCOUNT, IT WAS OBSERVED BY THE AO THAT ASSESSE E HAS MADE PAYMENTS TO PARTIES COVERED U/S. 40A(2)(B). THE AS SESSEE VIDE ORDER SHEET NOTING DT. 13.12.2007 WAS ASKED TO GIVE JUSTI FICATION FOR PAYMENTS MADE TO PERSONS REFERRED TO U/S. 40A(2)(B). FROM T HE NOTES FORMING PART OF THE ACCOUNTS NOTE NO. 8, IT IS SEEN THAT THE ASS ESSEE HAD PAID FOLLOWING AMOUNTS TO PARTIES REFERRED TO U/S. 40A(2)(B). ITA NO.5134 /M/08 2 HCC LTD. MACHINERY HIRE CHARGES RS. 195.75 LAKHS PURCHASE OF MATERIAL RS. 25.30 LAKHS L&T LTD MACHINERY HIRE CHARGES RS. 182.19 LAKHS REPAIRS OF CRUSHER RS. 238 LAKHS PURCHASE OF MATERIAL RS. 4.40 LAKHS 3. IN RESPONSE TO THIS THE ASSESSEE VIDE ITS LETTER DT. 19.12.2007 HAS GIVEN EXPLANATION IN RESPECT OF PURCHASES OF MATERI AL MADE FROM HCC LTD AND L&T LTD. 4. THE ASSESSING OFFICER HELD THAT AS FAR AS THE OT HER PAYMENTS ARE CONCERNED, THE ASSESSEE HAS NOT GIVEN ANY DETAIL RE GARDING TYPE OF MACHINERIES HIRED, NATURE OF TRANSACTIONS, PERIOD O F SUCH HIRING OR JUSTIFICATION REGARDING AMOUNT CHARGED AS HIRE CHAR GES OR FOR THAT MATTER DETAILS REGARDING REPAIRS OF CRUSHERS. 5. THE AO FURTHER HELD AS FOLLOWS: IT IS UNDISPUTED FACT THAT THE TRANSACTION IN THE I NSTANCE CASE ARE NOT IN ARMS LENGTH AND IN THE ABSENCE OF ANY JUSTIF ICATION PROVIDED BY THE ASSESSEE. SINCE ASSESSEE HAS NOT SUBMITTED ANY JUS TIFICATION WITH REGARD TO HIRING OF MACHINERY AND REPAIR OF CRUSHER TO REL ATED PARTIES, THE EXPENSES CLAIMED BY THE ASSESSEE ARE ON HIGHER SIDE AND THEREFORE CONSIDERING THE OVERALL FACT, 15% OF THE FOLLOWING EXPENSES WHICH COMES TO RS. 92,39,100/- I.E. (6,15,94,000X15/100) IS DIS ALLOWED AND ADDED BACK INTO THE TOTAL INCOME OF THE ASSESSEE. HCC LTD. MACHINERY HIRE CHARGES RS. 195.75 LAKHS L&T LTD MACHINERY HIRE CHARGES RS. 182.19 LAKHS REPAIRS OF CRUSHER RS. 238 LAKHS ---------------------- TOTAL RS. 615.94 LAKHS ============== ITA NO.5134 /M/08 3 6. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE LD. CIT(A). 7. THE LD. CIT(A) HELD AS FOLLOWS: IT WAS CONTENDED BEFORE ME THAT MAJORITY OF THE EQU IPMENT WERE SPECIALIZED CONSTRUCTION EQUIPMENT AND HAD NO READY HIRING MARKET. THEREFORE, IT WAS FURTHER ARGUED BY HIM TH AT, A DECISION HAD BEEN TAKEN TO HIRE THE SAID EQUIPMENTS FROM THE MEMBERS. THE PROCUREMENT OPTION HAD NOT BEEN FOUND TO BE PRACTIC ABLE ACCORDING TO HIM AS IT INVOLVED HIGH LEAD TIME FOR DELIVERY AT SITE THEREBY IT WOULD HAVE DELAYED THE PROJECT MOBILIZATION. THUS, THE EQUIPMENTS AVAILABLE WITH THE MEMBERS HAD BEEN TAKEN ON HIRE C ALCULATED AT 3% OF THE COST PER MONTH, WHICH WAS CLAIMED TO BE A GE NERAL PRACTICE. I FIND THAT DESPITE THE ABOVE GENERAL CLAIM, NO EVI DENCE FOR THE COST PER MONTH ANALYSIS HAS BEEN PROVIDED BEFORE ME TO ACCEPT IT AS REASONABLE. I AM THEREFORE CONVINCED THAT THE APPE LLANT JV HAS JUMPED FROM ONE EVASIVE CLAIM (OF INADVERTENT MIX U P) TO ANOTHER (THAT HIRING CHARGES HAD BEEN FIXED AT KEEPING IN V IEW SOME PARTICULAR MARKET DRIVEN FORMULA). I FIND IT DIFFI CULT TO ACCEPT THE APPELLANT JVS CLAIM-LEFT UNSUBSTANTIATED AND UNEST ABLISHED. THEREFORE, I UPHOLD THE AOS DECISION WHICH I FIND WAS THE MOST REASONABLE ONE UNDER THE GIVEN CIRCUMSTANCES. THE APPELLANT JV HAS DONE PRECIOUS LITTLE TO REBUT THE SAME. I D ISMISS THE GROUND TAKEN. 8. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE U S. THE LD. COUNSEL FOR THE ASSESSEE SHRI H.P. MAHAJANI SUBMITT ED AS FOLLOWS: IT IS RESPECTFULLY SUBMITTED THAT THE REPRESENTATIV ES OF THE APPELLANT MISREAD THE QUERY RAISED BY THE AO DURING THE COURS E OF ASSESSMENT PROCEEDINGS CALLING FOR JUSTIFICATION FOR PAYMENTS MADE TO 40A(2)(B) PARTIES. ACTING UNDER THE IMPRESSION THAT THE REFERENCE WAS TO THE SAID ANNEXURE VI OF THE TAX AUDIT REPORT ONLY, THE REPRESENTATIVE S OF THE ASSESSEE DULY COMPLIED WITH THE REQUIREMENTS OF THE AO AND THE EX PLANATION OFFERED WAS ALSO ACCEPTED BY THE AO. UNFORTUNATELY, THE INADVE RTENT OMISSION OF THESE ADDITIONAL PAYMENTS IN THE SAID ANNEXURE TO THE TAX AUDIT REPORT WAS NOT NOTICED BY THE REPRESENTATIVES OF THE APPELLANT. T HEY THEREFORE DID NOT OFFER ANY EXPLANATION BY WAY OF JUSTIFICATION FOR T HESE OTHER PAYMENTS. IT WAS ONLY ON RECEIPT OF THE ASSESSMENT ORDER THAT TH IS INADVERTENT OMISSION WAS NOTICED. ITA NO.5134 /M/08 4 WHILE CONCEDING THAT THERE OUGHT TO HAVE BEEN NO DI FFERENCE BETWEEN THE FIGURES AS APPEARING IN THE AUDITED ACC OUNTS UNDER PAYMENTS TO RELATED PARTIES AND THAT IN THE ANNEXURE TO THE TAX AUDIT REPORT DEALING WITH PAYMENTS TO 40A(2)(B) ENTITIES, IT IS SUBMITTE D THAT THIS WAS AN UNINTENTIONAL ERROR WHICH HAS HAPPENED. THE PAYMENTS IN QUESTION HAVE BEEN MADE IN THE NORM AL COURSE OF CARRYING ON OF THE BUSINESS OF THE JV. IT MAY BE N OTED THAT THIS JV WAS FORMED FOR THE SINGLE PROJECT REFERRED TO ABOVE AND THEREFORE THE JV PARTNERS DID NOT DEEM IT COMMERCIALLY CORRECT TO PU RCHASE COSTLY AND SOPHISTICATED EQUIPMENT SPECIFICALLY REQUIRED FOR T HE PROJECT. ALL THE EQUIPMENT REQUIRED ARE GENERALLY SOPHISTICATED FOR THIS PROJECT. IT WILL BE APPRECIATED THAT SINCE IT IS A SINGLE VENTURE JV, A T THE END OF THE VENTURE THE EQUIPMENT WOULD HAVE TO BE NECESSARILY SOLD AND THE RESALE VALUE OF ANY SUCH EQUIPMENT WOULD GENERALLY BE MUCH LOWER TH AN ITS COST ENTAILING AN AVOIDABLE LOSS. IT WAS IN THESE CIRCUMSTANCES THAT THE APPELLANT HA S BEEN PAYING HIRE CHARGES TO HCC AND L&T BOTH OF WHICH COMPANIES ARE GIANTS IN THE FIELD OF ENGINEERING AND CIVIL CONSTRUCTION. SUCH PAYMENTS HAVE BEEN MADE SINCE THE START OF THE CONTRACT AND NO DISALLO WANCE HAS EVER BEEN MADE ON THIS ACCOUNT IN THE EARLIER YEARS. . 9. THE LD. DEPARTMENTAL REPRESENTATIVE SHRI KESHAV SAXENA CONTENDED THAT THE BASIC DETAILS HAVE NOT BEEN FILE D BY THE ASSESSEE. FURTHER THE SPECIFIC QUERY WAS RAISED BY THE AO NAM ELY QUERY NO. 4 WHICH READS AS FOLLOWS: EXPLAIN WHY PAYMENTS MADE TO PERSONS REFERRED TO IN SEC. 40A(2)(B) AND WHY IT SHOULD NOT BE DISALLOWED. 10. THE ASSESSEES REPLY TO THE QUERY WAS EVASIVE. THE ASSESSEE CONCEDED THERE OUGHT TO HAVE BEEN NO DIFFERENCE BET WEEN THE FIGURES AS APPEARING IN THE AUDITED ACCOUNTS UNDER PAYMENTS T O RELATED PARTIES AND THAT IN THE ANNEXURE TO THE TAX AUDIT REPORT DE ALING WITH PAYMENTS TO 40A(2)(B) ENTITIES, AND SUBMITTED THAT THIS WAS AN UNINTENTIONAL ERROR WHICH HAD OCCURRED. 11. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE CIRC ULAR NO. 6P DT. 6.7.1968 WHEREIN IT HAS BEEN HELD AS FOLLOWS: ITA NO.5134 /M/08 5 EXPENDITURE INCURRED IN BUSINESS AND PROFESSIONS I NVOLVING PAYMENT TO RELATIVES AND ASSOCIATE CONCERNS 72. THE FINANCE ACT, 1968 HAS INTRODUCED NEW SECTION 40A WITH EFFECT FRO M 1, APRIL, 1968. UNDER SUB-SECTION (2) OF NEW SECTION 40A, EX PENDITURE INCURRED IN A BUSINESS OR PROFESSION FOR WHICH PAYM ENT HAS BEEN OR IS TO BE MADE TO THE TAXPAYERS RELATIVES OR ASSOCI ATE CONCERNS IS LIABLE TO BE DISALLOWED IN COMPUTING THE PROFITS OF THE BUSINESS OR PROFESSION TO THE EXTENT THE EXPENDITURE IS CONSIDE RED TO BE EXCESSIVE OR UNREASONABLE. THE REASONABLENESS OF ANY EXPENDI TURE IS TO BE JUDGED HAVING REGARD TO THE FAIR MARKET VALUE OF TH E GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OR THE BENEFIT DERIVE D BY, OR ACCRUING TO, THE TAXPAYER FROM THE EXPENDITURE. SUCH PORTIO N OF THE EXPENDITURE WHICH IN THE OPINION OF THE INCOME TAX OFFICER (NOW ASSESSING OFFICER), IS EXCESSIVE OR REASONABLE ACCO RDING TO THESE CRITERIA IS TO BE DISALLOWED IN COMPUTING THE PROFI TS OF THE BUSINESS OR PROFESSIONS. 12. WE HEARD BOTH THE PARTIES. SINCE THERE IS DIFF ERENCE WITH RESPECT TO PAYMENTS MADE TO RELATED PARTIES IN THE AUDITED AC COUNTS AND THE ANNEXURE TO THE TAX AUDIT REPORT DEALING WITH PAYME NT TO 40A(2)(B) ENTITIES, IT IS NECESSARY TO VERIFY THIS FACTUAL AS PECT WITH RESPECT TO DIFFERENCE BETWEEN THE FIGURES, AND THEREFORE WE S ET ASIDE THIS ISSUE TO THE FILE OF THE AO TO EXAMINE THE ACCOUNTS AND DEC IDE THE ISSUE IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE TO PROVIDE THE DETAILS. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 18 TH DAY OF JUNE, 2010 SD/- SD/- (R.K. PANDA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 18 TH JUNE, 2010 RJ ITA NO.5134 /M/08 6 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR H BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO.5134 /M/08 7 DATE INITIALS 1 DRAFT DICTATED ON: 14.6.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 16 . 6 .2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______