INCOME-TAX OFFICER, WARD - 6(3),, PUNE vs. SUBHASH & B.T. PATIL & SONS & N.V.KHAROTE CONSTRUCTIONS PVT.LTD,, PUNE

(a) Subhash Projects & Marketing Ltd. Rs. NIL (b) B.T. Patil & Sons Belgaum Construction Pvt. Ltd. Rs. 16,67,86,491 (c) N.V. Kharote Construction Pvt. Ltd. Rs. 13,12,82,581 ----------------------- Rs. 29,80,69,072 4. It has been seen from the profit and loss account of the assessee that payments are made to its member companies; however, TDS have not been deducted. The assessee had assigned the work allotted to it, to its member companies and as such the agreement between the entities was nothing but a contract and the assessee being a firm was liable to deduct tax at source u/s 194C of the Act on payments made towards the sub contract charges to its member companies. The issue was confronted to the ld. A.R and requested to explain as to why the amounts paid to the members companies on account of sub-contract charges should not be disallowed u/s 40(a)(iv) of the Act. In response, the ld. .A.R stated that the members of assessee joint venture executed their respective share of work indepe4ndently bearing their respective expenditure and retain its profit by carrying own investment risk and that the Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 profit earned by the members of the assessee JV was offered to tax in their respective return of income. The l. AR further stated that the assessee JV did not execute any work and therefore the question of earning income by assessee does not arise and the assessee JV merely acted as a conduit between its members to acquire and share the work. Further for A.Y. 2010-11, 2011-12, 2012-13 and 2013-14, the appeals of the assessee had been allowed by the ld. ICIT(A) and deleted the additions made by the AO on account of disallowance of expenditure i.e. contract charges paid to member companies u/s 40(a)(ia) of the Act on which TDS was not deducted.

5. The submission of the assessee was considered by the A.O but was not accepted due to following reasons: (a) The assessee is a separate entity and the works contract orders issued were in the name of the assessee, payments were credited to the assessee‟s account and as such reallocation of these contracts among the members of the assessee would amount to sub-contracting of work. (b) The liability of the execution of work lies with the assessee and the liability of execution of work by the partners is limited to the work allotted to them. (c) The contractual liability of the assessee firm with the Executive Engineers passed on to the partners in their individual capacity is limited to the work assigned to them. Thus, there is a contractual liability of the partners with the firm from execution of work in performance of the contract and when there is a contractual liability of the partners with the firm either orally or in writing, the work allocation must be treated as sub contract and therefore, the assessee firm is liable to deduct TDS and offer income on total

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 contract receipts for taxation and the profits can be shared by the member companies as per the sharing ratios. (d) The payments made by the assessee to its members were clearly towards sub contract and hence tax is deductible from such payments u/s 194C of the Act. (e) The assessee had failed to deduct tax from the payments made to its members the provision of section 40(a)(ia) of the Act would apply.

6. the A.O further held that the assessee had claimed TDS of Rs. 59,58,556/- in its return of income on total contract receipts, however no income was offered for taxation for the year under consideration. The decisions of Ld. CIT(A) for A.Y. 2010-11, 2011-12, 2012-13 and 2013-14 have not been accepted by the department and appeals have been filed before the Tribunal for these assessment years. Based on the above facts, the amount of Rs. 29,80,69,070/- was added to the total income of the assessee.

7. The assessee further took this matter before the ld. CIT(A) and filed detailed written submissions which are incorporated from para 5.2 onwards in the ld. CIT(A)‟s order and is not repeated again herein for the sake of brevity. The most relevant part in the submission that it was submitted on the same subject matter the Pune Tribunal in assessee‟s own case in and 114/PUN/2015 dated 9-8-2017 for A.Y. 2010-11 & 2011-12 has dismissed the Revenue‟s appeal. That after considering the detailed written submissions of the assessee and the assessment order, the ld. CIT(A) held as follows: “I have perused the assessment order and the submission made by the appellant as above carefully. My ld. Predecessors had allowed appeals in the appellant’s own case vide orders No. PN/CIT(A)/82/2016-17/43 dated 6-2-2017 for A.Y. 2013- 14, No. PN/CIT(A)-3/ITO Wd-3(2)Pn/870/2014-15 dt. 12-11-2015 for 2012-13, No. PN/(CIT(A)-II/ITO Wd 3(1)/250/2013-14 & PN/CIT(A)-II 7 PN/CIT(A)-II/ITO Wd- 3(1)/630/2013-14 dt. 10-11-2014 for A.Y. 2010-11 & 2011-12. Since the factual

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 matrix and the legal position of the issue involved is pari materia the same as in the case of Swapnali RDS Joint Venture also relied upon by the appellant, following the decisions of my predecessors and the subsequent decision of Hon’ble ITAT Pune in appellant’s own case vide for A.Y. 2012-13, the disallowance u/s 40(a)(ia) made by the AO is held to be not sustainable and it is accordingly deleted. Grounds 1 to 5 of the appeal raised by the appellant are allowed for the year under consideration.”

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 was explained that the contract account and the Balance Sheet of the joint venture reveals nothing but apportionment of contract receipts, assets and liabilities between the members. There was no expenditure booked in the contract account nor any Profit and Loss Account prepared for the purpose since there did not arise any profit or loss to the assessee per se. The Joint venture transferred not only the gross revenue but also the corresponding TDS to its members in the ratio of their work done by individual members for which the appointment certificate was duly issued every year by the Assessing Officer. In this background it was submitted that there was no relationship of contractor and sub-contractor between the joint venture and its two members. Therefore, there was no question of applicability of TDS provisions u/s.194C of the Act. The assessee also explained why returns were filed by the joint venture as AOP. It was explained that it was done to pass on the credit of TDS to the members on the basis of tax apportionment certificates who have accounted for the corresponding contract revenue in their respective returns. It was also submitted that 'Nil' income arising in the hands of the AOP is confirmed by the action of the Assessing Officer in not assessing any profit/income arising from the contract apart from this disallowance u/s. 40(a)(ia) of the Act. The assessee vide its submissions dated 26.03.2010 and 06.09.2010, explained the difference between revenue sharing arrangement entered into by the joint venture visa-vis sub- contract. It was explained on behalf of the assessee that in the case of sub-contract, there was a relationship of principal and agent whereas in the situation of revenue sharing, it was on a principal to principal basis. Further, in sub-contracting, the contractor retains his share of profit alongwith the TDS and only the balance is passed on to sub- contractor. But in joint venture, assessees did not retain any share in the revenue with it and has passed the entire gross revenue alongwith TDS apportioned for them. It was submitted that the Department has also issued tax apportionment certificates every year during the past eight years to enable the two members to claim the TDS credits in their respective cases. Even in the current assessment year, it was noticed that tax apportionment certificate was issued by the Department vide letter No.Pn/Wd.3(4)/TC/07-08 dated 26.11.2008 of the Assessing Officer in which the Assessing Officer has allowed apportionment of entire TDS of Rs.9,26,588/- during the year to M/s.Gammon India Ltd., since entire work during the year was carried out by it. Similarly, there has been apportionment to either of the two companies or to both the companies in the earlier years also by the Assessing Officer for enabling them to claim TDS in respective cases. The assessee, vide its submission dated 22.04.2010, furnished the details which revealed that gross revenue from this contract receipts by joint venture was accounted for in case of either or both of the two companies who were members of the joint venture in all assessment years 2001-02 to 2008-09. It was further explained by the assessee that revenue sharing was not exactly 60:40 in each year since it depends on the relative work done in the particular year. Having explained the difference between cases of contract/subcontract, in the background of clauses of the agreement, the assessee relied on the decision of Hon'ble Himachal Pradesh High Court in the case of CIT vs. Ambuja Darla

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 Kashlog Mangu Transport Cooperative Society (2009) 227 CTR 299 (HP).

8. Further, the assessee, vide its submission dated 06.09.2010, made comparison of the tax rates applicable to domestic companies, being joint venture partner in their individual capacity and the tax rates applicable to the AOP. However, in submission dated 21.10.2010, it was explained that tax rates in the case of domestic company and the AOP would be the same in this case. This was due to applicability of section 167B of the Act. The assessee also filed details of the returns of income of the two corporate entities being joint venture members, alongwith acknowledgements of their I.T. returns, which revealed that both of them had huge positive returned incomes every year. For this payment the stand of the assessee was that the method of apportionment of revenue to the members was not to take any undue benefit of losses incurred by them. Therefore, it was stated that there was no loss to the revenue as a result of this method adopted by the assessee of sharing the gross revenue by its members, which was taxed in their hands. However, this explanation of the assessee did not find favour from the Assessing Officer. The assessee has also raised the issue of consistency stating that the same method was being accepted by the Department in the past 8 to 10 years including A.Y. 2007- 08 in which tax apportionment certificate was also being issued. It was contended that this aspect has not been considered in the assessment order u/s.143(3) for A.Y. 2007-08. On the principle of consistency, the Ld. Authorised Representative relied on the decision of Hon'ble Bombay High Court in the case of Gopal Purohit (2010) 228 CTR 582 (Bom.) and assessee also relied on the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) wherein it was observed that strictly speaking the principle of res judicata does not apply to income tax proceedings since each assessment year was a separate unit in itself and what is decided in one year may not apply in the following year. It was further contended that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. It was also contended that Hon'ble Kerala High Court in the case of Manjunath Motor Service and Canara Public Conveyances, 197 ITR 321 (Kar.) observed that method adopted by the Assessing Officer would result in double taxation of the same income since gross receipts distributed amongst the two joint venture partners was included as receipts in their respective cases and Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15

the joint venture partners had also utilised the TDS credits on the basis of apportionment certificate issued by the Assessing Officer. In view of the above discussion, CIT(A) was justified in holding that in absence of any contract or subcontract work by joint venture to its member companies, provisions of section 194C were not applicable for the purpose of TDS. The two corporate entities forming joint venture were already being assessed since A.Y. 2000-01 onwards on their respective shares and TDS apportionment certificates were also issued by the Assessing Officer every year for these eight years including the current assessment year to enable them to claim the same in their own cases. Moreover, there was no Profit and Loss Account in the assessee's case and there was no claim of any expenditure. Therefore, there was no question of any disallowance under the provisions of section 40(a)(ia)of the Act. Moreover, disallowance u/s. 40(a)(ia) made by the Assessing Officer cannot be sustained. In effect, the method adopted by the Assessing Officer will also result in double taxation of the same contract revenue which is in violation of the Karnataka High Court decision reported in 197 ITR 321 (Kar.). This view is fortified by the decision of the ITAT Pune Bench in ITO vs. Rajdeep & PMCC Infrastructure, wherein the Tribunal has observed as under: "6. We have noted that it is an admitted position that no work is carried out by the AOP, it has acted as a conduit between the MSRDC and the two persons constituting this AOP so far as their separate, and neatly identified, work areas are concerned. A mere existence of an AOP cannot lead to taxability in the hands of the AOP unless the AOP receives monies in its own right. We have noted that Hon'ble Authority of Advance Rulings was in seisin of a materially identical situation in the case of Van Oord ACZ BV In Re(248 ITR 399) in which two contractors joined hands for carrying out neatly identified separate work which was a part of composite contract awarded to the AOP, but the taxability of income from such contract was held to be taxable in the hands of the respective contractors. While holding so Hon'ble Authority for Advance Ruling observed as follows: "7. So far as question Nos. 1 and 2 are concerned the parties have specifically ruled out constitution of any partnership between them. There is no sharing of profits or loss. They have specifically provided in the agreement that each party will bear its own loss and retain its profits as and when such profits or loss arise. Having regard to the agreement we are of the view that the applicant cannot be treated as a partnership which can only be created by an agreement. Nor can it be treated as an AOP. In order to constitute an AOP there will have to be common purpose or common action and the object of the association must be to produce income jointly. It is not enough that the persons receive the income jointly. In the instant case, each of the two parties has agreed to bear its own loss or retain its own profit separately. Both have agreed to execute the job together for better cooperation in their relationship with the Chennai Port Trust. The intention was not to carry out any business in common, only a part of the job will be done by VOACZ according to its technical skill and capability.

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15 The other part of the contract will be executed by HCC. The total value of the contract was Rs. 2,62,01,03,120. the applicant's share of work was valued at Rs. 44,52,78,920 (17 per cent of total value). The association with the HCC was not with the object of earning this income but for coordination in executing the contract so that HCC could also make its own profit. HHC's work and income arising therefrom was quite separate and independent of the applicant's work and income. If the cost incurred by the HCC or the applicant was more than their income, each party will have to bear its loss without any adjustment from the other party. The association of the petitioner company with HCC was undoubtedly for mutual benefit but such association will not make them a single assessable unit and liable to tax as an AOP. For example, a building contractor may associate with a plumber and an electrician to execute a building project. All these persons are driven by profit-making motive. But that by itself will not make the three persons liable to be taxed as an AOP if each one has a designed and independent role to play in the building project. In the instant case, the applicant has stated that the applicant has made its own arrangement for execution of work independent from that of HCC. There is no control or connection between the work done by the applicant and HCC."

8. On the facts hereinabove, the applicant and HCC cannot be treated as an AOOP for the purpose of levy of income-tax. The applicant will be liable to be taxed as a separate and independent entity. The question No.1 is answered accordingly."

7. We are in considered agreement with the views so expressed by the Hon'ble Authority for Advance Ruling. We adopt the reasoning of the Hon'ble AAR and, respectfully following the same, approve the conclusion arrived at by the CIT(A) and decline to interfere in the matter." In view of the above discussion, we are not inclined to interfere in the finding of the CIT(A) who has directed the Assessing Officer to delete the addition. The same is upheld.

3. Nothing contrary was brought to our knowledge on behalf of Revenue.

raised by the Revenue are dismissed.

12. The facts and the issue in and 943/PN/2013, are identical to the facts and issue in ITA no.944/PN/2013 and our decision in ITA no.944/PN/2013, shall apply mutatis mutandis to ITA no.942 and 943/PN/2013.

Subhash & B.T. Patil & Sons and N.V. Kharote A.Y. 2014-15

Order pronounced in the open Court on this 13th day of May 2022.