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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri P.M.Jagtap & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER S.S.Viswanethra, Judicial Member:-
This appeal by the Revenue is against the order dated 13.01.2014 passed by Commissioner of Income Tax (Appeals)-XIX, Kolkata for assessment year 2009-10.
Only issue raised in this appeal of Revenue is as to whether the CIT(A) is justified in deleting the addition made u/s. 40A(2)(b) of the Act in the facts and circumstances of the case.
The assessee is an association of persons for short M/s SPML-HCIL JV created for the purpose execution of work under the scheme ‘Development of State Highways in the State of Bihar’ under Rastriya Sam Vikas Yojna. The assessee consists of two
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 2 entities i.e. Subhash Projects and Marketing Limited (SPML for short) and M/s Harish Chandra (India) Limited (HCIL for short) and the percentage of participation of SPML and HCIL at 33 and 67 percent respectively. Assessee filed its return on 30.09.2009 declaring a loss of ₹90,002/- and under scrutiny notices u/s. 143(2)/142(1) of the Act were issued and in response such notice assessee was represented and furnished the information and other details as required by AO. The facts relevant to the issues are that CPWD has awarded a contract to develop of State highway in Bihar by an order dated 14.05.2007 and thereafter the entity by name HCIL was withdrawn from the execution of work and other entity of SPML executed the whole work. The Joint Venture (JV for short) received ₹90,92,49,670/- from the CPWD and transferred the same to the account of SPML. The Assessing Officer was of the opinion that assessee i.e. JV could have incurred expenditure and without retaining anything from the said receipt transferred entire receipt to SPML and the said amount is excessive and accordingly comparing the gross profit and net profit rate of three other such Joint Ventures, the AO disallowed 1% of such amount to the extent of ₹ 90,92,496/- u/s. 40A(2)(b) of the Act.
Before CIT(A) assessee filed written submission with supporting documents, wherein he questioned the addition stating that all the money received by SPML is only reimbursement by assessee to SPML who on its own executed the whole project since the withdrawal of HCIL, as such the assessee did not engage itself from such project as the project was executed and completed only by SMPL and the receipt thereon was transferred to SPML. The assessee further submitted that it did not book any profit nor claim any deduction on account of expense of such project and the profits are only gained by SPML and submitted that all the contractual receipts as stated above does not represent the expenditure of the assessee and prayed to delete the addition as made by AO and relevant portion of assessee’s submission is reproduced hereinbelow:- “6. During the course of the appellate proceeding, the appellant filed written submission along with supporting documents which have been examined against the backdrop of the assessment order. The submission of the appellant is reproduced hereunder for the sake of convenience.
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 3 ‘2.1 With regard to the above, it is firstly submitted that the contract expenses reimbursed by the assessee to SPML is not an expenditure incurred by the assessee and hence the question of allowing or disallowing the same does not arise.
2.2 After the project was awarded to the assessee, HCIL declined to carry forward the project due to extremist activities in the area. However, SPML had furnished a huge bank guarantee which would have been forfeited had the assessee withdrawn itself from the said project. In the given circumstances, SPML alone took up the responsibility of executing the project.
2.3 Now since HCIL was no longer a co-venture, the JV virtually dissolved as SPML alone was entitled to 100% of the profits from the said project. Thus, SPML, chose to book all the profits from the said project in its books. Resultantly, the assessee neither booked profits from the project nor did it claim deduction u/s. 80-IA.
2.4 Now since the assessee was not booking profits from the said project, it had neither offered any income nor claimed any deduction on account of expenses in relation to the contract. Thus, the question of allowing or disallowing the same does not arise.
2.5 The fact that the assessee did not book any profits from the said project and all the profit were booked by SPML, was before the AO at the time of assessment, who never disputed the same. He merely disregarded the said fact while concluding the assessment.
3.1 Attention in this regard is invited to the financial statements of the assessee. A perusal of the Balance Sheet shall show that the assessee had no capital contributions. The only source of funds was advances from client, which too was forwarded to SPML (See schedule 6, loans and advances). Thus, the assessee clearly did not indulge itself in any project-execution activity.
3.2 Since the assessee was not involved in the project execution, it was neither booking income from the said activity nor claiming expenses on account of the same. It merely received a sum of Rs.90,92,49,670/- (contractual receipts) from the Government and passed on the same to SPML.
3.3 From the above, it is clear that sum of Rs.90,92,49,670/- did not represent expenditure of assessee. it represents the contract value received by the assessee from the Government which was passed on to SPML. Thus, the question of allowing or disallowing the contract expenses against the assessee’s income does not arise.
4.1 Without prejudice to the above, if we assume the same to be expenses incurred by the assessee, even then no addition is justified in the light of the legal position. Attention in this regard is invited to the provisions of section 40A(2) of the Act:
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 4 “(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 unreasonably shall not be allowed as a deduction.”
From the above it is clear that section 40A(2) can be invoked only when the AO is of the opinion that payment for expenses made to the sister concern is in excess of their fair market value. Thus the AO has the burden of proving that conditions required for invoking provisions of section 40A(2) exist.
4.2 The aforesaid claim finds strength from the following judgments, wherein it has been repeatedly been held that the AO has burden of proving that the expenditure debited to P/L is higher than their fair market value. It has been further held that in the absence of a finding to the effect that expenditure incurred is in excess of its fair market value, no disallowance u/s. 40A(2) can be made: “(i) The ITAT (Bangalore) in the case of S.K. Engineering v. Joint Commissioner of Income-tax (Asstt.) [286 ITR (AT) 210] held that ‘Neither the Assessing Officer nor the Commissioner (Appeals) had given any finding as to what was the excessive or unreasonable portion in the total commission payment. There was no finding on what was the legitimate need of the business. The authorities had gone by the principle that since in the earlier year the commission amount paid was 0.94 per cent, amount in excess of 0.94% becomes unreasonable. This approach was not correct. There might be several reasons why the assessee paid lower commission in the initial years. Looking to the background of the person concerned and the nature of services rendered by him, the payment of commission at two and half per cent could not be considered excessive or unreasonable. The services were rendered by a person who was an influential person, who retired from M as senior vice president and was able to influence the company which was one of the top most customers of the assessee. Therefore, no part of the commission could be disallowed invoking the provisions of section 40A(2).”
(ii) The ITAT (Bangalore) in the case of BPL Refrigeration Ltd. v. Assistant Commissioner of Income-tax (272 ITR (AT) 47] held that “As it had not been demonstrated that the fair market
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 5 value of the trade mark was anything less than the amount of Rs.6 crores paid, by invoking the provisions of section 40A(2) of the Act by the authorities, it had to be held that the entire payment of Rs.6 crores was an admissible amount”
(iii) The Madhya Pradesh High Court in case of Commissioner of Income-tax v. Udhoji Shrikrishnadas [139 ITR 827] “In view of the finding of the Tribunal that there was no adequate material to hold that the purchase of the tobacco was not made t the market rate, it could not be said that the payment of price made by the assessee to the firm was either excessive or unreasonable. Therefore, the extra payment of Rs.70,257 could not be added to the income of the assessee under s. 40A(2).”
5.1 However, in the instant case the AO has nowhere alleged that the assessee has paid to SPML, a sum over and above the fair market value of goods. His only contention is that the profits of the assessee cannot be zero. He compared the GP ratios & NP ratio of the assessee with that of similar concerns in the industry. From the said comparison, he observed that the assessee was earning lower profits than the others in the industry. However he nowhere alleged that payment for contract expenses incurred is in excess of their fair market value.
5.2 The approach of comparison of GP ratios adopted by the AO is not correct. All the firms in an industry cannot be expected to earn profits at the same rate. The difference between their GPs may be attributed to many reasons. Hence, the approach adopted by the AO was not correct.
5.3 The aforesaid claim finds strength from the following: ‘(i) The ITAT (Bangalore) in case of S.K. Engineering v. Joint Commissioner of Income-tax (Asstt.) – discussed in Para 4.3(i) above.
(ii) The Delhi High Court in case of Commissioner of Income-tax v. Denso Haryana Pvt. Ltd. [328 ITR 14] held that “the Assessing Officer was required to compare the price which prevailed in the local market in the same year. It was a pure finding of fact recorded by the two appellate authorities and, therefore, no question of law arose.”
6.1 As already clarified above, disallowance u/s. 40A(2) can be made only if the payment made to the sister concern is in excess of the fair market value. Further form discussion in para 5, it is clear that the AO has not brought any material to prove that payment of Rs.90,92,49,670/- made by the assessee to SPML was in excess of the fair market value. However, the facts of the case clearly prove the contrary.
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 6 6.2 Coming to the facts of the case it is pointed out that the contract was awarded to the assessee through a competitive bidding procedure. It was awarded by the Government at market value of Rs.90,92,49,670-. Thus, it is undisputed that the said sum represents the fair market value of the contract. 6.3 Further, it is clear that the same work (as awarded by the Government) was contracted to SPML. On account of the said work a sum of Rs.90,92,49,670/- was paid to SPML during the year, which represents the market value as already clarified in para 7.2. Thus, it is clear the payment made to SPML is at par with the market value and is not in excess of the same. Thus no disallowance u/s. 40A(2) can be made in this case.”
Considering the above, Ld. CIT(A) was of the opinion that the addition as made by AO does not represent any expenditure and it is only a contract receipt transferred to SPML by Joint Venture i.e. assessee. Accordingly, deleted the said addition by observing as under:- “From the perusal of the audited accounts it is clear that the contract expenses disallowed by the AO u/s 40A(2) is not expenditure incurred by the assessee and hence the question of allowing or disallowing the same does not arise. Even otherwise, the provisions of section 40A(2) cannot be invoked because the payment made to sister concern is not in excess of the market value and is at par with the same. Moreover, the AO has failed to discharge his burden of proof u/s 40A(2), the approach adopted by him is clearly erroneous. Thus, it is prayed that the addition made by the AO be deleted. 7. The assessment order and the submission of the appellant have been duly gone through and having weighed the issue after considering both sides, I find that the arguments put forth by the appellant lend much force in vindicating its stand that disallowance u/s 40A(2)(b) cannot be made in the facts and circumstances of the case. The AO has estimated the disallowance as aforesaid based purely on his whims, which is not backed by any cogent and acceptable premise. From the above, it is clear that sum of ₹90,92,49,670/- did not represent expenditure of appellant. It represents the contact value received by it from the Government which was passed on to SPML. Thus, the question of allowing or disallowing the contract expenses against the appellant’s income does not arise. Without prejudice to the above, if we assume the same to be expenses incurred by the assessee, even then no addition is justified in the light of the legal position as submitted (supra). Having considered the issue with particular reference to the assessment order and the submission of the appellant along with the case laws as referred to, I find that the action of the AO is devoid of any merit and hence the addition made in this regard is deleted.”
Before us Ld. DR submits that the profit has to be crystallized by the joint venture in pursuance to percentage of participation as decided by the assessee at the time of agreement 33% and 67%. The AO rightly disallowed 1% of the contractual
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 7 receipt taking into consideration the method adopted by other joint venture in a similar area of business. Ld. DR argued the entire accounting standards cannot be obliterated and the amount transferred by assessee to SPML is excessive and unreasonable as the contract was awarded to joint venture and without keeping anything to its account made entire receipt to SPMC and he supported the order of Assessing Officer. In reply, Ld. AR submits that there is no profit or loss to the revenue and the SPML paid tax on such receipt if the disallowance is allowed to stand and it would amount to double taxation and prayed to confirm the order of Ld. CIT(A).
Heard rival submissions and perused the materials available on record. We find that Govt. of India through CPWD awarded the contract to assessee vide its order dated 14.05.2007 to execute works in Development of Highways in State of Bihar and entity by name HCIL withdraw from the participation in execution of such development work and the other entity SPML executed the entire work and assessee received contractual receipt from CPWD to the tune of ₹90,92,49,670/-. The assessee transferred the entire receipt to SPML and SPML admittedly recorded all the profit from the said project in its book and assessee did not claim any profit from such project nor claim deduction u/s. 80-IA of the Act. These are the facts which are not disputed either of the party before us. It is noticed that all the contractual receipts from the CPWD was transferred to SPML and said SPML paid tax on its profit derived from such project. Therefore, it establishes that the Joint Venture incurred no expenditure nor claimed any deduction and whatever amount received from assessee by SPML is only receipt received for the purpose of contractual work as awarded by CPWD. The Sec. 40A(2)(a) explains that no deduction shall be allowed on payment made to any person in pursuance to clause(b) of sub-section-2 if such expenditure is excessive or unreasonable to the fair market value of goods services or facilities for which the payment is made. In the present case, as discussed above, other participant of assessee withdraw from the said project and that the SPML only executed the said project and whatever the amount received by assessee was transferred to SPML as it was incurred expenditure in executing such projected. Therefore, the receipt does not
ITA No.634/Kol/2014 A.Y. 2009-10 ITO Wd-33(4), Kol. Vs. M/s SPMLHCIL JV Page 8 represent any expenditure and no question arises for determining whether it is excessive to the fair market value is only contractual receipt received by the assessee which was transferred to SPML and the disallowance u/s. 40A(2)(b) of the Act is not justified and we find no reason to interfere with the order of CIT(A). In such circumstances, we uphold the order of CIT(A), accordingly, ground raised by Revenue is dismissed.
In the result, Revenue’s appeal stands dismissed. Order pronounced in open court on 25/01/2017
Sd/- Sd/- (लेखा सद�य) (�या�यक सद�य) (P.M.Jagtap) (S.S.Viswanethra Ravi) Accountant Member Judicial Member *Dkp-Sr.PS �दनांकः- 25/01/2017 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-ITO Ward-33(4), 10-B,Middleton Row, 3rd, Floor, Kol-71 2. ��यथ�/Respondent-M/s SPML-HCIL JV, Block A, 3rd Floor, 22, Camac St, Kol-16 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता