ITO, GURGAON vs. M/S KEC-DELCO-VARAHA (JV), GURGAON

ORDER PER R.K. PANDA, AM:

This appeal filed by the revenue is directed against the order dated 16.02.2016 of the CIT (A)-1, Gurgaon relating to A. Y. 2011-12.

i. Civil Construction of major and minor bridges both in case of original and diverted alignment on pile/well foundation. The work assigned also includes construction of station buildings and level crossing between Saraigarh to Forbesganj (Bihar) for a value of Rs.67,63,81,924/- (Tender No.14 of 2009-10(open) awarded vide letter No.ECR/CAO/CON/16(North)/568 dated 03.03.2010). ii. Civil Construction of major and minor bridges both in case of original and diverted alignment on pile/well foundation. The work assigned also includes construction of station buildings and level crossing between Saharasa to Forbesganj (Bihar) for a value of Rs.18,57,25,992/- (Tender No.14 of 2009-10(open) awarded vide letter No. ECR/CAO/CON/WT/15/North / 757 dated 23.03.2010.

5. Rejecting the various explanations given by the assessee and relying on various decisions the Assessing Officer made addition of Rs.93,12,189/- by computing the profit of Joint Venture at the rate of 4% of the gross receipts on the ground that the assessee had given the subcontract to persons specified u/s 40A (2) (b) of the IT Act.

(i) I have given careful consideration to the arguments advanced in this regard and find that the subject matter is covered by decision in the case of CIT vs. Oriental Structural Engineers P. Ltd. and KMC Constructions P. Ltd Income Tax Act, (2015) 374 ITR 35 (Delhi). In this case Hon’ble High Court has approved decisions of Hon’ble ITAT (Delhi) had recorded a finding that the joint venture which have been formed only to secure the contract cannot be subjected to tax as Association of Person (AOP). The Hon’ble High Court elaborately discussed the case of Linde AG. Linde Engineering Division vs. Deputy Director of Income Tax (2014) 365 ITR 1 (Delhi) to come to this conclusion.

(ii) Further Hon’ble High Court (Delhi) in Income Tax Act No.146/2010 decided on 11.02.2010 in the case of CIT Vs. Oriental Structure Engineers Pvt. Ltd. has also observed that in the case of JV of such kind Section 40A (2) is not applicable. There are other judicial findings in this regard arriving at the same conclusion which are reported as CIT vs. OSE Pvt. Ltd. 374 ITR 35 (Delhi) High Court and CIT vs. SMSL UANRCL (JV) (2015) 372 ITR 425 Bombay. In all the above cases, it has been held that where the constituent participants make a JV to secure a contract, which is merely a pass through entity with minimal expenses, no tax liability can be attributed by holding the subject entity as AOP.

(iii) No net profit on % basis can be taxed as has been down in this case. In consideration of settled position of law the ground of appeal is allowed.

1. “Whether the Ld. CIT (A) was right on facts and in law in deleting the addition of Rs.93,12,189/- made by the Assessing Officer by computing the profit of the Joint Venture @ 4% of the gross receipts as the assessee had given the payment to the persons specified u/s 40 A (2) (b) of the Income Tax Act, 1961.

2. Whether the Ld. CIT (A) was right on facts and in law in stating that JV is merely a pass through entity with minimal expenses, no tax liability can be attributed to JV as AOP. 3. That the appellant craves for the permission to add, delete or amend grounds of appeal before or at the time of hearing of appeal.”

“8 I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted position that the AO made the addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenses considered to be excessive or unreasonable having regard to the fair market value of the goods/services or facilities for which the payment is made. However, in the instant case, the AO estimated the profit of the assessee and determined the income, nowhere he doubted the expenses incurred by the assessee. Therefore, I am of the confirmed view that the AO was not justified in making the addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenditure and not to the receipts and the ld. CIT(A) rightly deleted the same. A similar issue having identical facts has already been adjudicated by the ITAT Delhi Bench “SMC”, New Delhi vide order dated 21.11.2016 in for the assessment year 2011-12 in the case of ITO, Ward-2(2), Gurgaon Vs KEC-Asiakom UB (JV), Gurgaon wherein the relevant findings are given in paras 5 & 6 of the order dated 21.11.2016 which read as under:

“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 subcontracting. 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.”

9. The aforesaid order was followed in the assessee’s own case in for the assessment year 2012-13 vide order dated 28.02.2017 wherein it has been held as under:

“4. I have considered the submissions of both the parties and perused the record of the case. Admittedly, the Assessing Officer has invoked the provisions of section 40A(2)(b) as the contract had been given to associated party. I find that under identical circumstances the Tribunal in the case of Kec-Asiakom UB (JV) (supra) has observed as under:- “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.”

11. In & 7046/Del/2017, identical issue having similar facts is involved, therefore, the findings given in the former part of this order shall apply mutatis mutandis.

10. Since the order of the CIT (A) is in consonance with the decisions of the Tribunal in other group concerns, therefore, in absence any contrary material brought to our notice against the orders of the Tribunal and considering the fact that the Ld. CIT (A) while deciding the issue has followed the decisions of the Hon’ble High Court, therefore, we find no infirmity in the order of Ld. CIT(A). Accordingly, the same is upheld and the grounds raised by the revenue are dismissed.

Order pronounced in the open court on 18.09.2018.