M/S. KEC- SIDHARTHA (J.V.),GURGAON vs. ITO, GURGAON

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.

“1. Because the learned CIT has erred in appreciating that Article 265 of the Constitution of India provides that "No tax shall be levied or collected except by authority of law" and the fundamental rule of taxation is that unless otherwise expressly provided, income cannot be taxed twice. This principle is well settled and the Supreme Court has reiterated the same in its decision 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 Singhania v. CIT[1969] 72 ITR 291, where it has said that it is fundamental rule of the law of taxation that unless otherwise expressly provided, income cannot be taxed twice and because the KEC has already returned the same income in the same financial 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 been issued by the CBDT after the Supreme Court judgment in the case of Murlidhar Jhawar & Puma Ginning & Pressing Factory and the CBDT instructed the department 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 from an association of persons or firm, it is not open to him to assess the same income again in the hands of the association of persons or firm. In other words, once the assessment of a partner or a member of an association has been made by taxing directly his proportionate share from the firm 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 the firm, the income -tax Officer comes to conclusion that the 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.

In view of the above decision, the income tax Officers assessing the partners of a firm should not normally complete the regular assessments of the partners by including their share from the firm unless 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 realize that if they delay the assessments of the firms, they would be responsible for the assessments of all the partners being held up. In an exceptional case if the income tax Officer assessing the firm feels that the assessment of the firm is likely to be delayed so that there would be unnecessary delay in the assessment of the partners, he may consider the firm's claim for registration and pass a suitable order under section 26A of the 1922 Act/sections 184 and 185 of the 1961 Act even before passing the order of assessment. After an order on the firm’s claim for registration has been passed by the income tax Officer, the income tax Officer assessing the partners can proceed with their assessments and include their share in the firm, accordingly. The share so included can later be modified by the Income Tax Officer under section 155 after the firm's assessment or reassessment has been made.

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 AOP 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 against the order of the High Court of Delhi in the case of Linde. The SLP was dismissed 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 taxmann.com 212 (SC)/ [2016] 242 Taxman 371 (SC). The copy of the order enclosed. The Delhi High Court was reported in [2014] 44 taxmann.com 244 (Delhi) 5. Because the learned CIT (A) has failed to appreciate the that the appellant facts were like the case of CIT Vs Oriental structures as reported in 374 ITR 35 wherein it was held by the Honourable Delhi High court that the consortium of the two or more companies which has come together for the 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 already been taxed in the hands of the KEC as it has already filed the ITR considering the above said income and has already been assessed.

3. At the time of hearing, ld. counsel for the assessee filed a copy of the decision of ITAT, Delhi Benches, New Delhi in the case of ITO vs. Kec- Asiakom UB (JV) in order dated 21.11.2016, wherein, the Tribunal has held that the disallowance made u/s 40A(2)(b) of the Act was not justified. Ld. counsel explained that 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 submission. I have also perused the documents filed by the appellant in support of its contentions. It is evident from the facts discussed above that the appellant JV was awarded work contracts amounting to more than Rs. 29 crores by the Railway authorities during the year. Such contract amount has the element 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 evident from the documents filed by the appellant that the liability to start the work within stipulated time was with the appellant. It is also evident from the facts that all 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 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 norms 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 appellant JB @ 4%. The addition made by the A.O. is accordingly confirmed. The ground of appeal is dismissed.”

“4. I have heard the ld. AR and perused the relevant 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 disposed of. I am agreeable with the contention of the ld. AR and, accordingly, proceeding 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 expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.’ 6. On going through the mandate of the above provision, 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 section has no application to income aspect of the assessee. As the AO has made disallowance u/s 40A(2)(b)

in respect of income which the assessee in his opinion 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, therefore, uphold the impugned order on this score deleting the disallowance.”