ITD CEM INDIA JV,MUMBAI vs. ADDL CIT 19(2), MUMBAI

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 expenses were incurred by M/s ITD Cementation Ltd (member of AOP-assessee) on its behalf, which were reimbursed by the assessee. Accordingly it was submitted that they are reimbursements of expenses only. However, the Assessing Officer was of the view that the assessee should have deducted tax at source u/s 192 of the Act and since the assessee has failed to make deduction under section 192 of the Act, the AO disallowed the above said claim under section 40(a)(ia) of the Act. Since the assessee has made the payments to its Member, the AO took the view that the provisions of section 40(ba) of the Act are also attracted and accordingly held that this expenditure is disallowable u/s 40(ba) also. The provisions of sec. 40(ba) stipulates that any payment of salary or remuneration by whatever name called, made by an Association of Person to a member of such association shall not be deducted in computing the income chargeable under the head Profits and gains of 2 business. On appeal filed before the Ld. CIT(A), the disallowance on both counts were sustained. On further appeal before the Tribunal, the disallowance was ordered to be deleted, vide order dated 04.09.2014. Aggrieved by the order of Tribunal, the Revenue field appeal before the Hon'ble Bombay High Court. The Hon'ble High Court upheld the order of Tribunal in deleting the disallowance under section 40(a)(ia). However, the Hon’ble Bombay High Court expressed the view that the Tribunal has not approached the matter/issue, in so far as the applicability of section 40(ba) of the Act and accordingly restored back the same to the file of the Tribunal for deciding the same afresh on merits and in accordance with law. Hence the issue cited above came before us for fresh adjudication.

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:- “40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”:- (a) ..... (b)........ (ba) in the case of an association of persons or body of individuals (other than a company or a co-operative society or a society 3

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 assessee-AOP are corporate bodies and hence the question of providing any “personal services” by them would not arise.

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 4 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 made to the member of AOP, which shall constitute income in his hands.

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 ITDCL has duly deducted tax at source from the salary payments made by it to its employees, who were deputed to the assessee. The Ld A.R submitted that M/s ITDCL has duly deducted tax at source from the salary payments made to its employees and further the assessee has also clarified this aspect to the tax authorities.

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 5 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.