M/s. KEC- sidhartha (J.V.), Gurgaon V. ITO, Gurgaon

ITA 5943/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6627 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 02-02-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 21-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Assessee Lawyers: PRAKASH SINHA
• Keywords: Fair market value
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH SMC, NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO.5943/DEL/2016 ASSESSMENT YEAR : 2012-13 KEC SIDHARTHA (J.V.), 8 TH FLOOR, BUILDING NO.9A, DLF CYBER CITY, PHASE- 3, GURGAON. VS. ITO, WARD- 11(2), GURGAON. PAN : AABAK 1448 C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PRAKASH SINHA, ADV. RESPONDENT BY : SHRI S. K. JAIN, SR.DR DATE OF HEARING : 02-02-2017 DATE OF PRONOUNCEMENT : 28-02-2017 O R D E R PER S.V. MEHROTRA, A.M : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 15.09.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-1, GURGAON, U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) RELATING TO ASSESSMENT YEAR 2012-13. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA D FILED RETURN DECLARING TOTAL INCOME OF RS.1,05,930/-. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE RE WAS A JOINT VENTURE AGREEMENT BETWEEN M/S KEC INTERNATIONAL LTD. AND M/ S SIDHARTH CONSTRUCTION AND TRADING PVT. LTD. EXECUTED ON 26 TH OCTOBER, 2010 WITH 2 ITA NO.5943/DEL/2016 CERTAIN TERMS AND CONDITIONS FOR CARRYING OUT THE W ORK ALLOCATED TO JV THROUGH TENDER NO.1 OF 10-11 BY EASTERN RAILWAYS (C ONSTRUCTION DIVISION), KOLKATA VIDE OFFICE LETTER NO.CAO/CON/WT/8545 DATED 02 ND SEPTEMBER, 2010 FOR PATULI-KATWA IN THE STATE OF WEST BENGAL. HE FURTHER NOTICED THAT ANOTHER JOINT VENTURE AGREEMENT EXECUTED BETWEEN M/ S KEC INTERNATIONAL LTD. AND M/S SIDHARTH CONSTRUCTION AND TRADING PVT. LTD. ON 09 TH DECEMBER, 2010 WITH CERTAIN TERMS AND CONDITIONS FOR WORK CON TRACT AWARDED BY SOUTH EASTERN CENTRAL RAILWAYS FOR MISCELLANEOUS WORK BET WEEN CHAMPA- JHARSUGUDA. THE ASSESSING OFFICER NOTICED THAT IN BOTH JV AGREEMENTS M/S KEC INTERNATIONAL LTD. WAS THE LEADING PARTNER. TH E PARTICIPATION SHARE WAS 80% FOR LEADING PARTNER AND 20% FOR M/S SIDHARTH CO NSTRUCTION AND TRADING PVT. LTD.. THE WORK CONTRACT WAS AWARDED TO ASSESS EE BY THE RAILWAY AUTHORITIES. THE ASSESSEE FURTHER DIVERTED ITS WOR K CONTRACT BY SIMPLE LETTER DATED 09 TH SEPTEMBER, 2010 FOR PATULI-KATWA IN THE STATE OF W EST BENGAL AND VIDE LETTER DATED 04 TH NOVEMBER, 2010 FOR CHAMPA-JHARSUGUDA STATING THEREIN BACK TO BACK AGREEMENT TO THE LEAD PARTNER I.E. M/S KEC INTERNATIONAL LTD.. HE NOTED THAT SINCE THE WORK A WARDED TO ASSESSEE WAS FINALLY CARRIED OUT BY LEAD PARTNER M/S KEC INTERNA TIONAL LTD. OF JV, HENCE, THE ASSESSEE WAS SHOW-CAUSED AS TO WHY GP SHOULD NO T BE TAKEN @ 4% OF GROSS RECEIPT AS THE WORK CONTRACT HAD BEEN FURTHER GIVEN TO ASSOCIATED PARTY 3 ITA NO.5943/DEL/2016 IN VIEW OF SECTION 40A(2). AFTER CONSIDERING THE A SSESSEES REPLY THE ASSESSING OFFICER ASSESSED THE NET INCOME AT RS.42, 45,054/- BEING 4% OF GROSS RECEIPT OF RS.10,61,26,350/- AS AGAINST THE R ETURNED INCOME OF RS.1,05,930/-. LD. CIT(A) DISMISSED THE ASSESSEES APPEAL. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRI BUNAL AND HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL :- 1. BECAUSE THE LEARNED CIT HAS ERRED IN APPRECIATI NG THAT ARTICLE 265 OF THE CONSTITUTION OF INDIA PROVIDES THAT 'NO TAX SHALL B E LEVIED OR COLLECTED EXCEPT BY AUTHORITY OF LAW' AND THE FUNDAMENTAL RULE OF TAXAT ION IS THAT UNLESS OTHERWISE EXPRESSLY PROVIDED, INCOME CANNOT BE TAXED TWICE. T HIS PRINCIPLE IS WELL SETTLED AND THE SUPREME COURT HAS REITERATED THE SAME IN ITS DE CISION IN THE CASE OF ITO V. BACHU LAL KAPOOR KEWAL RAM [1966] 60 ITR 74 , THE SUPREME COURT SAID THAT 'THE ACT DOES NOT ENVISAGE TAXATION OF THE SAME INCOME TWICE .'THIS VIEW WAS AGAIN REITERATED BY THE SUPREME COURT IN THE CASE OF LAXMIPAT SINGHA NIA V. CIT[1969] 72 ITR 291 , WHERE IT HAS SAID THAT IT IS FUNDAMENTAL RULE OF TH E LAW OF TAXATION THAT UNLESS OTHERWISE EXPRESSLY PROVIDED, INCOME CANNOT BE TAXE D TWICE AND BECAUSE THE KEC HAS ALREADY RETURNED THE SAME INCOME IN THE SAME FI NANCIAL YEAR THE INCOME CAN BE TAXED IN THE HAND OF THE ASSESSEE. 2. BECAUSE THE LEARNED AO HAS FAILED TO APPRECIATE THE CBDT'S INSTRUCTION NO F. NO. 75/19/191/62-ITJ, DATED 24-8-1966 WHICH HAS BEE N ISSUED BY THE CBDT AFTER THE SUPREME COURT JUDGMENT IN THE CASE OF MURLIDHAR JHA WAR & PUMA GINNING & PRESSING FACTORY AND THE CBDT INSTRUCTED THE DEPART MENT AS UNDER: 'THE EFFECT OF THIS DECISION CIT V. MURLIDHAR JHAWAR & PUMA GINNING & PRESSING FACTORY [1966] 60 ITR 95 (SC) IS THAT ONCE THE INCOME TAX OFFICER ASSESSES DIRECTLY AN ASSESSEE'S SHARE OF INCOME FRO M AN ASSOCIATION OF PERSONS OR FIRM, IT IS NOT OPEN TO HIM TO ASSESS TH E SAME INCOME AGAIN IN THE HANDS OF THE ASSOCIATION OF PERSONS OR FIRM. IN OTH ER WORDS, ONCE THE ASSESSMENT OF A PARTNER OR A MEMBER OF AN ASSOCIATI ON HAS BEEN MADE BY TAXING DIRECTLY HIS PROPORTIONATE SHARE FROM THE FI RM OR ASSOCIATION, THE INCOME TAX OFFICER IS PRECLUDED FROM ASSESSING THE FIRM IN THE STATUS OF AN UN-REGISTERED FIRM OR ASSOCIATION OF PERSONS. THUS, ALL THE PARTNERS OF THE FIRM OR MEMBERS OF THE ASSOCIATION WILL HAVE TO BE ASSESSED AS PARTNERS OF A REGISTERED FIRM , EVEN THOUGH WHILE DEALING WITH THE ASSESSMENT OF TH E FIRM, THE INCOME -TAX OFFICER COMES TO CONCLUSION THAT TH E FIRM IS NOT ENTITLED TO REGISTRATION. ALTHOUGH THE SUPREME COURT'S DECISION IS UNDER THE INDIAN INCOME TAX 1922, THE BOARD IS ADVISED THAT IT WILL EQUALLY APPLY TO THE ASSESSMENTS MADE UNDER THE INCOME TAX ACT, 1961. 4 ITA NO.5943/DEL/2016 IN VIEW OF THE ABOVE DECISION, THE INCOME TAX OFFIC ERS ASSESSING THE PARTNERS OF A FIRM SHOULD NOT NORMALLY COMPLETE THE REGULAR ASSESSMENTS OF THE PARTNERS BY INCLUDING THEIR SHARE FROM THE FIRM UNL ESS THE ASSESSMENT OF THE FIRM HAS ALREADY BEEN MADE. THE INCOME TAX OFFICERS ASSESSING THE FIRMS MUST GIVE PRIORITY TO THE DISPOSAL OF THE FIRMS ASSESSMENT. THEY SHOULD REA LIZE THAT IF THEY DELAY THE ASSESSMENTS OF THE FIRMS, TH EY WOULD BE RESPONSIBLE FOR THE ASSESSMENTS OF ALL THE PARTNERS BEING HELD UP. IN A N EXCEPTIONAL CASE IF THE INCOME TAX OFFICER ASSESSING THE FIRM FEELS THAT TH E ASSESSMENT OF THE FIRM IS LIKELY TO BE DELAYED SO THAT THERE WOULD BE UNNECESSARY DE LAY IN THE ASSESSMENT OF THE PARTNERS, HE MAY CONSIDER THE FIRM'S CLAIM FOR REGI STRATION AND PASS A SUITABLE ORDER UNDER SECTION 26A OF THE 1922 ACT/SECTIONS 18 4 AND 185 OF THE 1961 ACT EVEN BEFORE PASSING THE ORDER OF ASSESSMENT. AFTER AN ORDER ON THE FIRMS CLAIM FOR REGISTRATION HAS BEEN PASSED BY THE INCOME TAX OFFICER, THE INCOME TAX OFFICER ASSESSING THE PARTNERS CAN PROCEED WITH THEIR ASSES SMENTS AND INCLUDE THEIR SHARE IN THE FIRM, ACCORDINGLY. THE SHARE SO INCLUD ED CAN LATER BE MODIFIED BY THE INCOME TAX OFFICER UNDER SECTION 155 AFTER THE FIRM 'S ASSESSMENT OR REASSESSMENT HAS BEEN MADE. 3. BECAUSE THE LEARNED CIT HAS FAILED TO APPRECIATE THE PROVISION OF SECTION 5 WITH SECTION 28 OF THE INCOME TAX ACT WHICH SAYS THAT TH E PROFIT AND GAIN SHOULD BE TAXED TO THE ASSESSEE THAT ARISES FROM THE BUSINESS 'CARR IED ON BY THE ASSESSEE '. THE WORD CARRIED ON BY THE ASSESSEE DRAWS THE LEGISLATIVE IN TENT OF TAXATION OF REAL INCOME IN THE HANDS OF APPROPRIATE ASSESSEE. HERE WHEN THE KE C WHO HAS CARRIED ON ALL THE BUSINESS OF CIVIL CONSTRUCTION HAS ALREADY RETURNED ITS INCOME AND CONSIDERED ITS RECEIPTS FROM THIS PROJECT OF ER & SER THEN THE JOI NT VENTURE (JV) WHICH WAS JUST A SPECIAL PURPOSE VEHICLE (SPV) FOR THE PURPOSE OF GE TTING QUALIFIED FOR THE BID AND THEREAFTER BIDDING CANNOT CONSIDERED AS AN ASSESSEE WHO CARRIES ON THE BUSINESS OF THE CIVIL CONSTRUCTION. 4. BECAUSE THE LEARNED AO AND CIT (A) HAS FAILED TO APPRECIATE THE PRESS RELEASE DATED 08/03/2016 ISSUED BY CBDT WHEREIN THE ISSUE OF ASSESSMENT OF A OP HAS BEEN THOROUGHLY DISCUSSED IN THE LIGHT OF CIRCULAR NO - 07/2016 DATED 07/03/2016 AND BASED UPON THIS THE CBDT HAS WITHDRAWN THE SLP FILED AGAI NST THE ORDER OF THE HIGH COURT OF DELHI IN THE CASE OF LINDE. THE SLP WAS DISMISSE D BY THE SUPREME COURT AS THE CBDT HAD WITHDRAWN THE CASE FILED AGAINST THE LINDE ORDER OF DELHI HIGH COURT. THE DISMISSAL ORDER WAS REPORTED IN 2016] 73 TAXMAN N.COM 212 (SC)/ [2016] 242 TAXMAN 371 (SC). THE COPY OF THE ORDER ENCLOSED. TH E DELHI HIGH COURT WAS REPORTED IN [2014] 44 TAXMANN.COM 244 (DELHI) 5. BECAUSE THE LEARNED CIT (A) HAS FAILED TO APPREC IATE THE THAT THE APPELLANT FACTS WERE LIKE THE CASE OF CIT VS ORIENTAL STRUCTU RES AS REPORTED IN 374 ITR 35 WHEREIN IT WAS HELD BY THE HONOURABLE DELHI HIGH CO URT THAT THE CONSORTIUM OF THE TWO OR MORE COMPANIES WHICH HAS COME TOGETHER FOR T HE SPECIFIC PURPOSE OF BIDDING THE INFRASTRUCTURE CONTRACT CANNOT BE COVERED UNDER THE TERM AOP CONSEQUENTLY THE INCOME CANNOT BE TAXED IN THE HANDS OF THE JV. 6. BECAUSE THE LEARNED CIT (A) FAILED TO APPRECIATE THE FACTS THAT THE JV WAS JUST A PASS-THROUGH ENTITY AND ALL THE INCOME RECEIVED BY THE KEC THROUGH THIS JV HAS 5 ITA NO.5943/DEL/2016 ALREADY BEEN TAXED IN THE HANDS OF THE KEC AS IT HA S ALREADY FILED THE ITR CONSIDERING THE ABOVE SAID INCOME AND HAS ALREADY B EEN ASSESSED. 7. THAT THE APPELLANT CRAPES LEAVE OF THIS HON'BLE TO ARGUE ANY OTHER GROUND AT THE TIME OF HEARING. PRAYER- 1. UNDER THE CIRCUMSTANCES IT IS MORE RESPECTFULLY PRAYED THAT THIS HON'BLE COURT MAY BE PLEASE TO - A. SET ASIDE THE ORDER IN ORIGINAL NO 215/15-16 DATED 15/09/2016 PASSED BY COMMISSIONER OF INCOME TAX (APPEAL) GURGAON AND B. PASS ANY OTHER ORDER AS THIS HON'BLE COURT MAY D EEM FIT UNDER THE CIRCUMSTANCES. 3. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASSE SSEE FILED A COPY OF THE DECISION OF ITAT, DELHI BENCHES, NEW DELHI IN THE C ASE OF ITO VS. KEC- ASIAKOM UB (JV) IN ITA NO.2326/DEL/2016, ORDER DATE D 21.11.2016, WHEREIN, THE TRIBUNAL HAS HELD THAT THE DISALLOWANC E MADE U/S 40A(2)(B) OF THE ACT WAS NOT JUSTIFIED. LD. COUNSEL EXPLAINED T HAT VARIOUS JVS WERE ENTERED INTO FOR GETTING VARIOUS CONTRACTS. LD. DR RELIED ON THE ORDER OF CIT(A) AND REFERRED TO PARA 3.3 OF HIS ORDER, WHICH IS REPRODUCED HEREUNDER :- 3.3 I HAVE CAREFULLY CONSIDERED THE APPELLANT'S SU BMISSION. I HAVE ALSO PERUSED THE DOCUMENTS FILED BY THE APPELLANT IN SUP PORT OF ITS CONTENTIONS. IT IS EVIDENT FROM THE FACTS DISCUSSED ABOVE THAT THE APP ELLANT JV WAS AWARDED WORK CONTRACTS AMOUNTING TO MORE THAN RS. 29 CRORES BY T HE RAILWAY AUTHORITIES DURING THE YEAR. SUCH CONTRACT AMOUNT HAS THE ELEME NT OF PROFIT EMBEDDED IN IT WHICH IS NORMALLY 4-12% OF THE CONTRACT VALUE. THE APPELLANT WAS RIGHTLY ENTITLED TO THESE PROFITS AFTER HAVING SECURED THE TENDERS. THE APPELLANT, HOWEVER, OPTED TO SHARE THE PROFITS WITH A RELATED PARTY. IT IS EVIDE NT FROM THE DOCUMENTS FILED BY THE APPELLANT THAT THE LIABILITY TO START THE WORK WITH IN STIPULATED TIME WAS WITH THE APPELLANT. IT IS ALSO EVIDENT FROM THE FACTS THAT A LL THE LIABILITIES AND ACCOUNTABILITY WITH REGARD TO THE EXECUTION OF THE WORK CONTRACTS FOR RAILWAY WAS WITH THE APPELLANT JV. IN THESE CIRCUMSTANCES PAYMENT OF MORE THAN 99% OF THE 6 ITA NO.5943/DEL/2016 REVENUE TO A SUB-CONTRACTOR WHO IS A RELATED PARTY U/S 40A(2) IS CLEARLY EXCESSIVE AS COMPARED TO THE MARKET RATE. AS PER THE MARKET N ORMS AND BUSINESS PRACTICES A CONTRACTOR WOULD CHARGE A MINIMUM PROFIT OF 4 TO 8% FROM THE SUB-CONTRACTOR IN LIEU OF THE RESPONSIBILITIES BORNE BY IT. THE A. O. WAS MORE THAN FAIR AND REASONABLE IN ESTIMATING THE PROFITS OF THE APPELLA NT JB @ 4%. THE ADDITION MADE BY THE A.O. IS ACCORDINGLY CONFIRMED. THE GROUND OF APPEAL IS DISMISSED. 4. I HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PA RTIES AND PERUSED THE RECORD OF THE CASE. ADMITTEDLY, THE ASSESSING OFFI CER HAS INVOKED THE PROVISIONS OF SECTION 40A(2)(B) AS THE CONTRACT HAD BEEN GIVEN TO ASSOCIATED PARTY. I FIND THAT UNDER IDENTICAL CIRCUMSTANCES T HE TRIBUNAL IN THE CASE OF KEC-ASIAKOM UB (JV) (SUPRA) HAS OBSERVED AS UNDER : - 4. I HAVE HEARD THE LD. AR AND PERUSED THE RELEVAN T MATERIAL 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 DISP OSED OF. I AM AGREEABLE WITH THE CONTENTION OF THE LD. AR AND, ACCORDINGLY, PROC EEDING 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-CONTRACTING. 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 EXPENDITUR E IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERS ON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSESSIN G OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREA SONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVI CES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEE DS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITU RE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE S HALL NOT BE ALLOWED AS A DEDUCTION. 6. ON GOING THROUGH THE MANDATE OF THE ABOVE PROVIS ION, 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 SECTI ON HAS NO APPLICATION TO INCOME ASPECT OF THE ASSESSEE. AS THE AO HAS MADE DISALLOWANCE U/S 40A(2)(B) 7 ITA NO.5943/DEL/2016 IN RESPECT OF INCOME WHICH THE ASSESSEE IN HIS OPIN ION 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, TH EREFORE, UPHOLD THE IMPUGNED ORDER ON THIS SCORE DELETING THE DISALLOWANCE. 5. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL IN THE CASE OF KEC-ASIAKOM UB (JV) (SUPRA), I ALLOW THE CLAIM OF A SSESSEE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF FEBRUARY, 2017. SD/- (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED : 28-02-2017. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT 4) THE CIT(A) 5) THE DR, I.T.A.T., NEW DELHI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI