JPE AND DK INFRA (JV),MUMBAI vs. INCOME TAX OFFICER 19 (1) (1), MUMBAI

The brief facts of the case are that the assessee is a civil contractor and has been allotted work of construction of roads in Nagpur by the Nagpur 2 (A.Y.: 2018-19) JPE And DK Infra (JV) Municipal Corporation. The assessee is a Joint Venture between M/s J.P. Enterprises, a partnership firm and M/s D.K. Infrastructure Private Limited. Both entities are civil contractors and execute various types of civil construction for various government and semi-government agencies. For the year under consideration, the assessee filed its return of income on 29/10/2018 declaring a total income of Rs. Nil. The return filed by the assessee was selected for scrutiny through CASS and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, the assessee was asked to furnish the details of persons to whom sub-contract payment amounting to Rs. 7,18,93,817 was made as per the trading profit and loss account along with bank account details through which the payment has been made and details of TDS deducted on it. In response, the assessee furnished the requisite details. Upon perusal of the same, it was noticed that the work was awarded to the assessee and the same was sublet to the lead member M/s J.P. Enterprises without retaining any profit. As per the assessee, no profit was earned by the assessee and therefore, no income was offered for tax. However, the assessee claimed a refund of all the TDS deducted by the Nagpur Municipal Corporation. After considering the details filed by the assessee, the Assessing Officer (“AO”) vide order dated 06/04/2021 passed under section 143(3) read with section 143(3A) and section 143(3B) of the Act did not agree with the submissions of the assessee and held that no prudent businessman will transfer the whole contract receipts to any other person without retaining any profit margin.

The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that the assessee has not been able to support its claim with complete supporting documents and thus not able to rebut the observations made by the AO in the assessment order. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a Joint Venture and was awarded the contract for the construction of concrete roads in Nagpur by the Nagpur Municipal Corporation. As per the Memorandum of Understanding for Joint Venture Agreement entered into on 05/04/2016, finance required by the parties was required to be provided in the profit- sharing ratio, i.e. M/s J.P. Enterprises to introduce70% and M/s D.K. Infrastructure Private Limited to introduce 30%. However, vide letter dated 01/09/2016, M/s D.K. Infrastructure Private Limited due to financial constraints expressed its inability to provide the finance for the work and to arrange manpower and machinery, etc. as agreed upon in the MOU. M/s D.K. Infrastructure Private Limited further agreed that the work may be executed by undertaking a sub-contract from the Joint Venture with no retention from the contract receipts. As per the assessee, the agreement for (A.Y.: 2018-19) JPE And DK Infra (JV) sub-contract was made and the entire work was sub-contracted by the assessee to M/s J.P. Enterprises. Thus, the work was awarded to the assessee and the entire work was sublet/sub-contracted to the lead member, i.e. M/s J.P. Enterprises without retaining any profit by the assessee. In this regard, the assessee has also placed on record the bank statement of the account maintained with the Bank of Maharashtra, which forms part of the paper book from pages 23-25, to support the submission that the amount received in cheque from the Nagpur Municipal Corporation was transferred to M/s J.P. Enterprises. In this regard, the trading profit and loss account, forming part of the paper book on page 16, was also placed reliance upon to support the submission that Nil profit was retained by the assessee and the entire amount received from the Nagpur Municipal Corporation was sub-contracted to M/s J.P. Enterprises. However, the lower authorities did not agree with the submissions of the assessee and estimated the income of the assessee @ 8% of the contract receipts on the basis that no prudent businessmanwould transfer the whole contract receipts without retaining any profit margin.

In the present case, it is undisputed that even though the assessee was constituted as a Joint Venture, however, due to the financial constrain of one of the members, the entire financial contribution, manpower and machinery was arranged by the lead member, i.e. M/s J.P. Enterprises. The assessee claims that the entire contract receipts received from the Nagpur Municipal Corporation were transferred to M/s J.P. Enterprises without retaining any profit. However, it is pertinent to note that the assessee is a 5 (A.Y.: 2018-19) JPE And DK Infra (JV) Joint Venture and thus is a separate taxable entity. Further, in the saidcapacity, the assessee is receiving the contract receipt from the Nagpur Municipal Corporation for the execution of work assigned to it after the deduction of tax, which has been claimed as a refund by the assessee. It is also an admitted fact that an agreement for sub-contract was made between the assessee and M/s J.P. Enterprises and the entire work was sub- contracted. Further, it is pertinent to note that the assessee itself has claimed the payment to M/s J.P. Enterprises as a sub-contract payment and treated it as an expense in its trading profit and loss account. Such being the facts, we do not find any infirmity in the findings of the lower authorities in concluding that no prudent businessman would transfer the whole contract receipts without retaining any profit margin. However, we are of the considered view that the estimation of the income of the assessee @ 8% of the contract receipts is on an ad-hoc basiswhich lacks legal sanctity. The fact that M/s J.P. Enterprises is a lead member of the assessee Joint Venture and now has substantial/complete interest in the assessee is also not disputed. Thus, we are of the considered view that before estimating the income of the assessee the procedure as laid down in the provisions of section 40A(2) of the Act is required to be followed. Accordingly, in order to compute the income of the assessee as per the provisions of section 40A(2) of the Act, we restore the issue to the file of the Jurisdictional AO. We direct that no order shall be passed without affording the reasonable and adequate opportunity of hearing to the assessee. With the above directions, the

In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 01/10/2024