ACIT 25(2), MUMBAI vs. ITD ITD CEM JV, MUMBAI

This ground raised by the revenue relates to challenging the order of Ld. CIT(A) in deleting the disallowance the administrative expenses of Rs. 1,58,53,457/- u/s 40(a)(ia) and 40(ba) of the I.T. Act.

At the very outset, Ld. AR appearing on behalf of the assessee submitted before us that the identical ground has already been decided on merits in favour of assessee by the order of the Coordinate Bench of ITAT in ITA No. 1244 & 1245/Mum/15 for AY 2010-11 & 2011-12 in assessee’s own case.

On the other hand, Ld. DR relied upon the orders passed by AO.

We have heard counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground has already been decided by the Coordinate Bench of Hon’ble

The revenue has raised following grounds;- (1) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs.1 ,44,77,018/- - u/s. 40(a)(ia) of the I. T. Act by holding that there is no contract at all between assessee &. JV Partners, therefore, there is no requirement of deduction of tax at source on reimbursement of expenditure incurred by JV Partners; unless tax was required to be deducted at source by virtue of the nature of receipt in the hands of the ultimate recipient, and such tax has not been deducted by the assessee without appreciating the facts:

We have heard the Ld. AR as well as Ld. OR and considered the relevant material on record. We note that an identical issue was considered and decided by the co-ordinate bench of this Tribunal in the case of joint venture partner (supra) of the assessee vide order dated 9.4.2014 in para 18 to 23 as under:- "

We have heard the detailed arguments, perused the evidences placed in APB and the written submissions, placed before us. 19.In so far as provision of section 40(a)(ia) is concerned, it is virtually accepted by the AO in remand proceedings, wherein, the AO submitted, "the debit notes raised by the ITO Cementation India Ltd were test checked and the amount of expenditure claimed by the assessee was verified and genuineness of the same has been proved by the assessee". In such circumstance, we do not find any reason to sustain the disallowance u/s 40(a)(ia) for non deduction of TAS, as the payments made by the assessee to ITD Cementation was' 'only on account of salaries and related expenses incurred by the company.

The facts are that the assessee is a Joint Venture AOP between ITD Cementation an Italian Company, formed for rehabilitation and upgrading of 35 KM highway in the state of Madhya Pradesh on NH25 and construction of bypass ak Kota in Rajasthan on NH76, being a part of east-west-corridor. 6. The business and construction activity is being carried on and

The assessee contended the addition before the CIT(A) and also placed certain fresh evidence to support its contentions. The CIT(A) sought further comments from the AO, who submitted his remand report vide letter dated 31.01.2012.

In the remand proceedings, the assessee submitted that it reimbursed the expenses pertaining to salaries to ITD Cementation India Pvt Ltd, who had paid the employees of the assessee and later on claimed the same by raising debit notes. These facts were checked and verified by the AO and found the same to be correct. The AO, however, left the decision to be taken by the CIT(A) as the AO had failed to deduct TAS.

The assessee also submitted that section 40(ba) could not invoked because there was no employer employee relationship. Both the entities of part of the JV and therefore the payments on account of salary cannot come within the parameters of section 40(ba).

The CIT(A), after considering the remand report and the detailed arguments by the assessee,

Similar observations were made to take the decision to sustain the disallowance made on expense booked on account of payment of commission.

Aggrieved, the assessee is before the ITAT.

Before us, the AR contended that no disallowance has been made in assessment years 2006-07 and 2007- 08, which were framed u/s 143(3). Therefore, according to the AR to carry on a consistent stand, no disallowance is called for, as the same work and similar treatment to accounts and assessment were carried on in the two immediate preceding years.

In any case, the AO in the remand proceedings has accepted the fact that ITD Cementation India Ltd. paid salaries to employees

On the issue of disallowance u/s 40(ba), the DR referred to the remand report sent by the AO that in case of any payment is made by the AO to its member, in such a case, the amount shall be disallowed.

The AR also submitted a written submission, which was duly forwarded to the DR, wherein the AR, further clarified the stand taken by the assessee.

On the other hand, the DR placed reliance on the decision of the revenue authorities and justified the disallowance of Rs. 4,99,19,593/- on account of salary and related expenses.

We have heard the detailed arguments, perused the evidences placed in APB and the written submissions, placed before us.

In so far as provision of section 40(a)(ia) is concerned, it is virtually accepted by the AO in remand proceedings, wherein, the AO submitted,

Now we divert our attention to the provision of section 40(ba)

The provision is very specific, because it calls for disallowance of payment of any kind by the AOP to its member. We would have accepted the arguments of the DR/AO/CIT(A), had the member of the assessee were an individual, because, the provision has the enrichment of members through back door. But here is the case of a company, which is a separate juridical person, distinct from its shareholders/directors. In the instant case, the payment has been made on account of reimbursement of an expense made by the company. Here the question of enrichment of a

In such a circumstance, provision of section 40(ba) does not get attracted.

We, therefore, set aside the order of the CIT(A) and direct the AO to allow the claim

In the course of assessment proceedings, the AO noticed that the assessee had not deducted TAS for payments made by it on account bank guarantee taken by the ITDCIL on behalf of the assessee JV. The payment of commission related to the bank guarantee commission, paid by the JV to ITD Cementation India Ltd. According to the AO, therefore, the payments were hit by the provisions of section 40(a)(ia) and thus disallowable. The AO further held that even u/s 40(ba) salary and related expenses and commission expense shall not be allowed, because if in case of an AOP, any payment of salary or remuneration or whatever named called (herein commission) shall not be allowable.

The assessee contended the disallowance made on addition before the CIT(A) and also placed certain fresh evidence to support its

In the remand proceedings, the assessee submitted that it reimbursed the expenses pertaining to bank guarantee commission, paid by ITD Cementation India Ltd., on behalf of the assessee JV and later on claimed the same by raising debit notes. These facts were checked and verified by the AO and found the same to be correct. The AO, however, left the decision to be taken by the CIT(A) as the AO had failed to deduct TAS.

The assessee also submitted that section 40(ba) could not be invoked because there was no employeremployee relationship. Both the entities of part of the JV and therefore the payments on account of salary cannot come within the parameters of section 40(ba).

The CIT(A), after considering the remand report and the detailed arguments by the assessee, sustained the disallowance, both on account of non deduction of TAS u/s 40(a)(ia) and also u/s 40(ba). According to the CIT(A), “… in case of AOP any payment of interest, salary, bonus,

The CIT(A), therefore, sustained the disallowance made on expense booked on account of payment of commission.

Aggrieved, the assessee is before the ITAT.

Before us, the AR contended that no disallowance has been made in assessment years 2006-07 and 2007- 08, which were framed u/s 143(3). Therefore, according to the AR to carry on a consistent stand, no disallowance is called for, as similar treatment to accounts and assessment were accorded on in the two immediate preceding years.

In any case, the AO in the remand proceedings has accepted the fact that the payments made to ITD Cementation India Ltd. were on account of commission and moreover, this amount is also not an expense as per provision of sec. 40(ba) wherein it is stipulated that in case of association of person, any payment of interest, salary, bonus, commission or

On the issue of disallowance u/s 40(ba), the DR referred to the remand report sent by the AO that in case of any payment is made by the AO to its member, in such a case, the amount shall be disallowed.

The AR also submitted a written submission, which was duly forwarded to the DR, wherein the

On the other hand, the DR placed reliance on the decision of the revenue authorities and justified the disallowance of commission of Rs. 45,80,658/- on account of commission as bank guarantee expenses.

We have heard the detailed arguments, perused the evidences placed in APB and the written submissions, placed before us.

In so far as provision of section 40(a)(ia) is concerned, it is virtually accepted by the AO in remand proceedings, wherein, the AO submitted, “the debit notes raised by the ITD Cementation India Ltd were test checked and the amount of expenditure claimed by the assessee was verified and genuineness of the same has been proved by the assessee”. In such circumstance, we do not find any reason to sustain the disallowance u/s 40(a)(ia) for non deduction of TAS, as the payments made by the assessee to ITD Cementation was only on account of reimbursement of commission for the purpose of taking bank guarantee, incurred by ITDCIL.

Ground 4 relates to reimbursement of administrative expenses of Rs. 2,39,64,463/- for none deduction of TDS u/s 40(a)(ia).

In the course of assessment proceedings, the AO noticed that the assessee had not deducted TAS for payments made by it on account of administrative expenses, paid by the JV to ITD Cementation India Ltd. According to the AO, therefore, the payments were hit by the provisions of section 40(a)(ia) and thus disallowable. The AO further held that even u/s 40(ba) the expense shall not be allowed, because if in case of an AOP, any payment of salary or remuneration or whatever named called (in the present context, administration expenses) shall not be allowable.

The assessee contended the addition before the CIT(A) and also placed certain fresh evidence to support its contentions. The CIT(A) sought further comments from the AO, who submitted his remand report vide letter dated 31.01.2012.

The assessee also submitted that section 40(ba) could not invoked because there was no employeremployee relationship. Both the entities of part of the JV and therefore the payments on account of salary cannot come within the parameters of section 40(ba).

The CIT(A), after considering the remand report and the detailed arguments by the assessee, sustained the disallowance, on account of non deduction of TAS u/s 40(a)(ia). According to the CIT(A), “… in case of AOP any payment of interest, salary, bonus, commission or remuneration by whatsoever name called, made by such association to a member of such association shall not be allowed as deductible expenditure”. The CIT(A), therefore, sustained

Before us, the AR contended that no disallowance has been made in assessment years 2006-07 and 2007- 08, which were framed u/s 143(3). Therefore, according to the AR to carry on a consistent stand, no disallowance is called for, similar treatment to accounts and assessment were accorded on in the two immediate preceding years.

In any case, the AO in the remand proceedings has accepted the fact that the payments made to ITD Cementation India Ltd. were on account of administrative expenses incurred by the assessee for which debit notes were raised by ITD Cementation India Ltd were test checked and the amount of expenditure claimed on account of administrative expenses by the assessee was verified and genuineness of the same has been proved by the assessee. It is pertinent to note here that this detail was not given by the auditors in the related party transactions in the Audit report submitted during

The DR referred to the remand report sent by the AO that in case of any payment is made by the AO to its member, in such a case, the amount shall be disallowed.

The AR also submitted a written submission, which was duly forwarded to the DR, wherein the AR, further clarified the stand taken by the assessee.

On the other hand, the DR placed reliance on the decision of the revenue authorities and justified the disallowance of Rs. 2,39,64,463/- on account of administrative and related expenses.

We have heard the detailed arguments, perused the evidences placed in APB and the written submissions, placed before us.

In so far as provision of section 40(a)(ia) is concerned, it is virtually accepted by the AO in remand proceedings, wherein, the AO submitted,

We, therefore, set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee and delete the disallowance of administrative expenses at Rs. 2,39,64,463/-.”

This ground raised by the revenue relates to challenging the order of Ld. CIT(A) in deleting the disallowance of professional fee/salary paid of Rs. 4,17,538/- u/s 40(ba) of the I.T. Act.

At the very outset, Ld. AR appearing on behalf of the assessee submitted before us that the identical ground has already been decided on merits in favour of assessee by the order of the Coordinate Bench of ITAT in ITA No. 4225/Mum/12 for AY 2008-09 in assessee’s own case.

On the other hand, Ld. DR relied upon the orders passed by AO.

We have heard counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground

Brief facts leading to the issue for adjudication are that the assessee is an “Association of person”, formed under Joint Venture agreement entered between ITD Cementation India Ltd. (an Indian Company) and Thai Development Public Company Ltd. (an Italian Company). The assessee is in the business of development of Highway Projects. The assessee was undertaking the construction of By-pass road on National Highway No. 76 at Kota (Rajasthan) on East West Corridor and also undertook rehabilitation and upgrading of 35 kms of highway on NH 25 in the State of Madhyapradesh. There was no material change in the business of assessee during the relevant financial year. In the return of income, the assessee, inter alia, claimed deduction of salary related expenses paid to employees of ITD Cementation India Ltd., aggregating to Rs.4,99,19,593/-. The assessee deducted tax at source from the above said payments by treating the same as Contract payments covered by sec.194C of the Act. The argument of the assessee was that these

Hence, the issue that requires to be adjudicated is whether the tax authorities are justified in invoking the provisions of sec.40(ba) of the Act to the payment of Salary and related expenses of Rs.499.19 lakhs made to one of its member M/s ITD Cementation Ltd (ITDCL). We have heard the Ld. Authorized Representative (AR) of the assessee and Ld. Departmental Representative (DR) for the Revenue and carefully gone through the orders of the authorities below and the records of the case.

Before adjudicating this issue, we feel it pertinent to deliberate on the scope of the provisions of sec.40(ba) of the Act. For the sake of convenience, we extract below the provisions of sec. 40(ba) of the Act:-

The issue under consideration related to payment of “salary and other related expenses”. There should not be any doubt that the “Salary, bonus, remuneration” is paid for services rendered, which are usually personal in nature. There should not also by any doubt that such kind of services can be provided only by “individuals”. However, in the instant case, the members of the

The Ld A.R also submitted that the nature of payments mentioned in sec. 40(ba) are “interest, salary, bonus, commission and remuneration and such payments should acquire the character of income in the hands of the recipients also. He submitted that the member of the assessee M/s ITDCL has not received any salary, which is assessable in its hands in the nature of share of income from AOP. In this regard, he invited our attention to the provisions of sec.67A of the Act, which provides methodology of computation of share income of a member of Association of Persons. He submitted that, as per the provisions of sec.67A of the Act, the aggregate amount of interest, salary etc., paid to the members shall be deducted from the Net profit and the remaining profit so arrived at shall be distributed between the members in the profit sharing ratio. There after the interest, salary etc., amount shall be added in the hands of respective member and the amount so arrived at shall be assessed as share income of the respective member. He submitted that the provisions of sec.67A make it clear that the “salary payment” contemplated in sec. 40(ba) is the payment

In the instant case, the submission of the assessee is that the employees of ITDCL were deputed to the assessee-AOP. The ITDCL has directly paid salaries and other related expenses to its employees and since the assessee has used the services of those employees, it has recovered the same from the assessee. Hence in the hands of the assessee, what was paid to M/s ITDCL was reimbursement of expenses.

We find considerable force in the arguments of the assessee. We have examined the provisions of sec. 40(ba) of the Act and the ld A.R also invited our attention to sec. 67A of the Act. A combined reading of both the sections would make it very clear that the payments contemplated in sec. 40(ba) should constitute “Share income from AOP” in the hands of the recipient member. In the instant case, the payments made by the assessee to M/s ITDCL do not constitute “Share income” in the hands of M/s ITDCL, but it merely offsets the expenditure incurred by it, i.e., the money has been received by M/s ITDCL towards reimbursement of expenses incurred by it on its employees on behalf of the assessee. At this stage, the bench specifically asked Ld A.R as to whether M/s

In view of the foregoing discussions, we are of the view that the provisions of sec. 40(ba) shall not apply to the payment of Rs.499.19 lakhs given to M/s ITDCL, since the said payments have not been received by it on its own account contemplated in sec. 67A r.w.s. 40(ba) of the Act and hence the same shall not acquire the character of “share income from AOP” in its hands. Accordingly we set aside the order passed by Ld CIT(A) on this issue.

In the result, the appeal of the assessee in respect of the ground restored to us by Hon’ble High Court (applicability of sec.40(ba) to salary payments) is allowed.

In the net result, the appeal filed by the revenue stands dismissed with no order as to cost. Order pronounced in the open court on 10th Oct. 2018