Income Tax Appellate Tribunal - Jaipur
Kirodi Mal Modi , Jaipur vs Assessee on 5 September, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
JAIPUR BENCH: JAIPUR
(BEFORE SHRI R.P. TOLANI AND SHRI T.R. MEENA)
I.T.A. No. 697/JP/2011
Asstt. Year- 2008-09
PAN No. AFAPM 2021 E
Kirodi Mal Modi, The Addl. C.I.T.,
9- Leela Mansion, Raj Bhawan Road, Vrs. Range-2, Jaipur.
Civil Lines, Jaipur.
(Appellant) (Respondent)
I.T.A. No. 776/JP/2011
Asstt. Year- 2008-09
PAN No. AFAPM 2021 E
The D.C.I.T., Shri Kirodi Mal Modi,
Circle-2, Jaipur. Vrs. 9- Leela Mansion,
Raj Bhawan Road, Civil Lines,
Jaipur.
Assessee by :- Shri P.C. Parwal
Department by :- Shri D.C. Sharma.
Date of hearing : 11/08/2014
Date of pronouncement : 05/09/2014
ORDER
PER: T.R. MEENA, A.M. The ITA No. 697/JP/2011 filed by the assessee as well as cross appeal No. 776/JP/2011 by the Revenue are against the order dated 07/06/2011 of the learned C.I.T.(A)-I, Jaipur for the A.Y. 2008-09. The grounds of assessee's appeal as well as the Revenue are as under:-
2 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT Grounds of ITA No. 697/JP/2011 "1. The learned Commissioner of Income Tax (Appeals) has erred on facts and in law in directing to apply net profit rate of 7.20% subject to interest and depreciation on contract receipt of Rs. 96,53,57,927/- as against 6.06% (6.12% after considering disallowance in computation) declared by assessee and thereby confirming addition to the extent of Rs. 75,74,061/-.
2. The learned Commissioner of Income Tax (Appeals) has erred on facts and in law in not allowing the claim of Joint Venture charges of Rs. 65,04,574/- from the net profit rate of 7.20% applied by him.
2.1 The learned Commissioner of Income Tax (Appeals) has erred on facts and in law in holding that Joint Venture Charges of Rs. 65,04,574/- paid to Maruti Nandan Colonizer Private Limited being towards share of profit as per Joint Venture agreement cannot be debited to the profit and loss account and therefore disallowable. She has further erred in holding that income of joint venture be taxed as an AOP and at the same time assessing the same in the hands of the assessee."
Grounds of ITA No. 776/JP/2011 "1. On the facts and in the circumstances of the case and in view of section 44AD the learned CIT(A) after withholding the rejection of books is not justified in reducing the profit rate to below 8% i.e. rate prescribed as per 44AD when the books of account of the assessee were found defective in the year under consideration and in earlier years hence rejected.
2. On the facts and in the circumstances of the case, the learned CIT(A) was not justified in deleting the disallowance made by the A.O. of interest payment of Rs.
3 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT 41,01,334/- from the income estimated by applying N.P. rate when the interest income shown has been assessed under the head "Income from other sources" and accepted by the learned CIT(A)"
2. Grounds No. 1 and 2 of the assessee's appeal and grounds No. 1 and 2 of the Revenue's appeal are on application of net profit rate on contract receipts. The Assessing Officer observed that the assessee is engaged in the business of civil contract during the year under consideration. Total contract receipts of Rs. 96,53,57,927/- was shown and G.P. was declared by the assessee @ 6.06%, which was declared in immediate preceding year @ 6.97% on total gross receipts of Rs. 93,96,06,963/-. The learned Assessing Officer observed that the assessee had not maintained books of account project wise, which is required to be maintained under Accounting Standard-7 issued by the ICAI in construction business. On verification of books of account and vouchers produced before him, it was found by the Assessing Officer that same were not maintained properly. The learned Assessing Officer gave show cause notice for invoking the provisions of Section 145(3) and net profit rate @ 8%. He further pointed out that no stock register was maintained, site wise details of expenses and materials consumed, were not maintained. No supporting evidences/bills were available for travelling expenses of Rs.
2,12,650/-. He found some discrepancies under this head as incurred in cash.
The assessee claimed conveyance expenses of Rs. 6,10,663/- was not supported with evidences/bills except payment made to Ashok Service Station
4 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT and incurred on cash basis. The salary expenses of Rs. 99,07,160/- had been claimed, most of payments were made in cash. No supporting bills were produced for verification to him except monthly sheet prepared on computer. There is no signature of recipient of salary, diesel expenses of Rs. 2,83,97,332/- had been claimed. No quantitative details have been maintained. Payments to supplier for purchase of rodi, moram, GSP, stone etc. mining material amounting to Rs. 18,92,65,990/- had been claimed without any supporting evidence except sheet prepared on computer. Mess expenses of Rs. 8,49,115/- had been claimed, on the basis of cash payment except payment made to Boora Bhagirath. Wood charges amounting to Rs. 22,25,650/- had been claimed without bills/vouchers except sheet prepared on computer and payments were made in cash. The assessee replied vide letter dated 1/11/2010, which has been reproduced by the Assessing Officer on page Nos. 5 to 7. After considering the assessee's reply, the learned Assessing Officer concluded that the assessee had himself admitted in his submission that complete bills/vouchers could not be produced, as the same were lying at worksite. It is not possible for him to maintain each and every record. The assessee had not maintained proper record and the expenses were not vouched. Under these circumstances, the correctness or completeness of the books of account of the assessee is totally ruled out and correct profit of the assessee cannot be deduced from there. Therefore, it is a fit case for invoking provisions of Section 145(3) of the Income Tax Act, 1961 5 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT (in short the Act). Accordingly, he rejected the books of account. It is further clarified that in similar situation, the books of assessee had been rejected in the earlier year in A.Ys. 2001-02 to 2007-08 and the same had been upheld by the learned CIT(A). The Hon'ble ITAT, Jaipur Bench, Jaipur in assessee's own case had also confirmed the N.P. rate @ 8% in vide order dated 13/7/2005 for A.Y. 1994-95 and 1995-96 respectively by holding that past record of the assessee suggested to apply N.P. rate of 8%. When books result rejected U/s 145(3) of the Act, the Assessing Officer is free to estimate assessee's income on the basis of past record, which is the best guidance for him. The another method of decided assessee's case on the basis of comparable case, but has on account of peculiar nature of business of the assessee, this method also cannot be applied. As per Section 44AD in case of civil contract where total gross receipts is less than 40 lacs in net profit @ 8% shall be deemed profit of the business. The assessee's net profit before depreciation is 6.83%. It was submitted before him that the assessee had big turnover and resulted in lower net profit. There is cut thought competition in the line of business but these arguments of the appellant were not found tenable to the Assessing Officer as the assessee was not maintaining complete vouchers for various expenses. Claimed in profit and loss account. Therefore, he estimated net profit @ 8% on gross receipts. Thus, he made addition of Rs. 1,86,87,471/- in the income of the assessee.
6 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT
3. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter before the learned CIT(A), who had allowed the appeal partly in favour of the assessee by observing as under:-
"3.3 I have perused the order of AO and submissions of the AR of the assessee carefully. Given the defects in the books of accounts pointed out by the AO in his order rejection of books of accounts u/s 145(3) and estimation of income of the assessee is upheld. This decision is covered by the order of Hon'ble ITAT Jaipur Bench, Jaipur order dated 13.7.05 in ITA No.255/JP/2001 and ITA No.349/JP/99 for AY 1994-95 and 1995-96 and order dated 31.3.08 for 2003-04 inITANo.69/JP/07 & 105/JP/07 in assessee's own case on same facts.
3.4 Regarding estimation of income subsequent to the rejection of books of accounts, it is an established legal position that in cases where turnover is more than Rs.40 lacs for assessees covered u/s 44AD, 8% g.p. cannot be applied automatically. Reliance is placed on the judgment of CIT vs. Bhawan Path Nirman (Bohra) & Co. 258 ITR 431 (SLP filed by the Department was dismissed by Hon'ble Supreme Court 264 ITR
36. Therefore, best method of estimating the income on the contractual receipts would be the past history of the assessee himself. In the previous assessment year i.e. AY 2007-08, net profit sustained by the Hon'bk ITAT before allowing depreciation and interest was 7.20% on total turn over of Rs.93,96,06,963/- against net profit shown at 6.97% by the assessee. During the year the net profit rate shown by the assessee is 6.06%. It is held that net profit rate before allowing depreciation and interest be 7 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT estimated at 7.20% given the past history of the case as per the Hon'ble ITAT's order dt.28/05/09 in ITA No.l436/JP/2008. The AO is directed to apply net profit rate of 7.20% on the total turnover of Rs.96,53,57,927/-. First two grounds of appeal are decided partly in favour of the appellant."
4. Now the assessee as well as the Revenue are in appeal before us.
5. The learned A.R. for the assessee submitted that Section 145(3) provides that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting prescribed in sub section (1) or accounting standard as notified under sub section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in section 144. Section 144 provides for making the best judgment after taking into all the material, which the AO has gathered. In making a best judgment, the AO must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly belief to be a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns by and assessment of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate and though there must necessarily be guess work in the matter, it must be a honest guess work. In making best judgment assessment, the AO does not possess absolutely 8 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT arbitrary authority to assess at any figure he likes. He must be guided by the rule of justice equity and good conscience. A best judgment assessment is not a punitive assessment.
The above principle as laid down by the various courts when applied to the facts of the assessee's case, it can be noted that the N.P. Rate of 8% applied by the AO and 7.2% directed to be applied by the Ld. CIT(A) is without considering the special facts of the year under consideration. The position of N.P. rate declared by the assessee, applied by the AO and upheld by the CIT(A)/ITAT in earlier years is as under:-
A.Y. Gross Contract N.P. Rate N.P. Rate N.P. Rate Paper Book Receipts declared applied by applied by PB by AO CIT(A) & assessee upheld by ITAT (before (before dep. and depreciation interest) and interest) 2008-09 96,53,57,927/- 6.06% 8% (subject 7.2% by Present to CIT(A) Appeal depreciation) 2007-08 93,96,06,963/- 6.97% 8% 7.2% PB 38-39, Para 6 and 6.1 2006-07 66,75,57,202/- 7.02% 8% 7.1% PB 44, Para 6 2005-06 42,07,54,436/- 6.73% 8% 7.2% PB 49-50, Para 5
9 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT Hon'ble ITAT in A.Y. 05-06 in applying the N.P. rate, by relying on the decision of Rajasthan High Court in case of Shree Ram Jhanwar Lal Vs. ITO 10 DTR 229 held that where gross receipt of a contractor exceed Rs. 40 lacs, section 44AD cannot be applied. This is followed in A.Y. 06-07 and 07-08. Therefore, Ground No. 1 of the Department that CIT(A) is not justified in reducing the profit rate to below 8% specified in section 44AD is liable to be dismissed. So far as allowability of interest after application of N.P. rate is concerned, Hon'ble ITAT after considering the decision of CIT Vs. Bhawan Path Nirman (Bohra) & Co. 258 ITR 431 & 440 (Raj) has held that interest paid to third parties is to be allowed after application of N.P. rate. Therefore, Ground No. 2 of the department be dismissed.
The CIT(A) has applied N.P. rate of 7.2% as against 6.06% declared by the assessee. The N.P. rate has declined during the year as compared to 6.97% in the last year due to following reasons:-
(i) Payment of Joint Venture Expenses:- During the year, assessee has claimed joint venture expenses of Rs.65,04,574/- paid to M/s Maruti Nandan Colonizers (P) Limited. Up to last year this company was financing the assessee and interest was paid on the amount borrowed from it which was allowed as deduction. During the year assessee entered into a joint venture agreement with this company according to which it was paid joint venture charges of 10% of the profit. As a 10 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT result Rs.65,04,574/- was paid. This has resulted in decrease in net profit rate before depreciation and interest by 0.67%.
(ii) Rate of Bitumin:- During the year rate of bitumen increased rapidly to Rs.24,350/- per ton from Rs.16720/- per ton in last year. However, corresponding selling price not increased as major tenders are running from earlier years.
(iii) Rate of other Material:- The rates of royalty on cheja Pather have been increased by the State Government from Rs.8 per ton to Rs.16 per ton. Similarly rate of other material such as stone grit, moharam and roda pattar have also been increased.
All these facts were explained to the AO vide letter dated13.09.2010 and also before the CIT(A). However, these specific reasons were not at all considered and discussed by the lower authorities. Therefore, application of N.P. rate of 7.20% by CIT(A) is unjustified and the results declared by the assessee be accepted.
6. At the outset, the learned DR supported the order of the learned Assessing Officer and argued that 8% rate applied by the Assessing Officer is reasonable on the facts and circumstances of the case.
7. We have heard the rival submissions of both the parties and perused the relevant material on record. The total turnover of assessee during the year was more than 96 crores, on which, the assessee has disclosed net profit before depreciation @ 6.97%. There is decline in the net profit during the year 11 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT but gross receipt has gone up by 3 crorers approximately. In A.Y. 2006-07, N.P. rate in assessee's case was 7.02% on gross receipt of 66.75 crores whereas in A.Y. 2005-06, the N.P. rate was 6.73% on gross receipts of Rs. 42.07 crores. It proves from the assessee's record that the net profit rate has been fluctuating year after year and not constant. The learned Assessing Officer applied 8% net profit rate subject to depreciation in A.Y. 2005-06 to 2008-09. The Coordinate Bench had confirmed the net profit rate in A.Y. 2005- 06 @ 7.2% in A.Y. 2006-07 @ 7.1% and in A.Y. 2007-08 @ 7.2% subject to depreciation and interest. The evidence of expenditure were submitted before the lower authorities that during the year, the decline of net profit was due to price increase of bitumen from 16,720/- per ton in preceding year to Rs. 24,350/- during the year under consideration. Similarly, the royalty on Chaja pathhar has increased twice by the State Govt. i.e. from Rs. 8 per ton to 16 per ton. It is a fact that in the line of business, there is a huge competition amongst the contractor to get the contract in their favours by putting lower rates. The contractor has to survive in the business. 8% net profit rate has been provided U/s 44AD for the Act for the smaller contract, the appellant also relied in case of CIT Vs. Shree Ram Jhanwar Lal Vs. ITO (supra), wherein it has been held that in case of gross receipts are more than 40 lacs thus 8% net profit rate cannot be applied on the cases where the gross receipts are more than the prescribed limit of Section 144AD of the Act. The best method of estimating the income on the contractual receipts would 12 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT be past history of the assessee himself as held by the Hon'ble Rajasthan High Court in the case of Kansara Bearings P. Ltd. v. Assistant Commissioner of Income-tax (2004) 270 ITR 235. The Coordinate Bench has decided 7.2% net profit in preceding year on gross receipts of 93.96 crores but being a peculiar circumstances of the case during the year as mentioned above, we are of the considered view that 7% net profit rate is reasonable in this case subject to depreciation and interest to third party. The Assessing Officer is directed to calculate income as per the above observation. The defects pointed out by the Assessing Officer in case of assessee are sufficient to reject the book result U/s 145(3) of the Act. In past also, on the identical defects pointed out by the Assessing Officer, the Coordinate Bench had held the rejection of book result U/s 145(3) as justified. We also have the same view and accordingly, the action of the Assessing Officer is justified. Accordingly, we decide the grounds in question of the assessee's appeal partly in favour of him and dismiss the grounds of the Revenue's appeal.
8. Ground No. 2 of the assessee's appeal is against not allowing joint venture charges of Rs. 65,04,574/- from the net profit rate. The Assessing Officer noticed during the course of assessment proceedings that the assessee had claimed joint venture charges of Rs. 65,04,574/- as expenditure in the Schedule-14 of the audit report under head "direct cost". The Assessing Officer gave reasonable opportunity of being heard on this issue. It was submitted by the appellant that these financial charges paid to joint venture 13 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT held with M/s Maruti Nandan Colonizers Pvt. Ltd. for providing financial assistance by the company to the assessee. The assessee also submitted the copy of joint venture agreement to the Assessing Officer. The learned Assessing Officer found that this agreement was just on paper. There is no existence of joint venture. M/s Maruti Nandan Colonizers Pvt. Ltd. is stationed in Mumbai and not possible to monitor or control the business or give any type of assistance to the assessee. The second party had just provide money to the first party, which was being used by the first party and joint venture charges are just interest on the money given by the second party. It is also held that in earlier years, this money was outstanding and used by the appellant and paying interest on it. It is in current year on paper, this transaction has been shown as capital contribution and interest paid to second party was shown as joint venture charges or share of profit. It is further held that it is nothing but interest payment on the money lent by the second party. The Assessing Officer made inquiry through commission issued to the income tax office Bombay. The statement U/s 131 of the Act was recorded and it was admitted by Shri Anil Patodia, Director of M/s Maruti Nandan Colonizers Pvt. Ltd. that over all monitoring of the project was looked after by the assessee. Regarding capital, it was submitted by him that surplus fund of second party was already given to assessee as loan on which interest of Rs. 22 lacs was received in F.Y. 2006-07 and the same was converted as deposit of joint venture in F.Y. 2007-
08. No separate books of account of joint venture were kept. Whatever, 14 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT payment was made by the assessee to M/s Maruti Nandan Colonizers Pvt. Ltd. was actually interest on the money lent by it to the assessee. Since it was actually interest payment, which was liable to TDS U/s 194 of the Act. Thus he disallowed these expenses U/s 40a(ia) of the Act and giving telescopic benefit against the N.P. addition was given to the extent of joint venture expenses of Rs. 65,04,574/- and no separate additions were made by the Assessing Officer.
9. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter before the learned CIT(A), who has decided this issue by observing as under:-
"6.3 I have carefully perused the order of the AO and submissions alongwith paper book filed by the A.R. The AO gave a finding that Joint Venture Agreement is only on paper and did not exist in reality. He has based his finding on the Statement of Shri Anil Patodia, Director of M/s Maruti Nandan Colonizers Pvt. Ltd. In his statement u/s 131 Mr. Patodia averred that the overall monitoring of the project was done by the assessee. The surplus funds of his company were already lying with the assessee on which his company had received interest of Rs.22 lakhs in FY 2006-07 and the same was converted as deposit of Joint Venture in F.Y. 2007-
08. The AO thus held that Joint Venture was on paper because it was not practical to monitor the projects of the assessee from Mumbai & it was not clear what work was done by the second party i.e. Maruti Nandan Colonizers (P) Ltd. More so because supplementary agreement incorporating duties of associates were 15 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT not drafted nor separate books of accounts of the Joint Venture were kept.
6.4 The following articles of the Joint Venture Agreement are mentioned below as they are relevant for clarifying the issue:
(i) "WHEREAS party of the First Part is highly experienced in the field of executing civil contract, further induction of Joint Venture capital would enable to undertake bigger contracts. The Party of the Second Part is desirous of undertaking infrastructure related activities. A Joint Venture with the Party of the First Part would enable the Party of Second Part to gain experience in the field of infrastructure contracts. Further the Party of the First Part has be certification as Contractor necessary for undertaking infrastructure related activities
(ii) That the Joint Venture as hereby constituted, shall have deemed to have commenced from 1st April, 2007 to pool up their resources and are interested to execute bigger contracts together .....
(iii) That the Party of the First Part, is a Contractor registered in "AA"
Class Contractor with Jaipur Development Authority, Party of the Second Part, has agreed to enter into a Joint Venture Agreement with the Party of the First Part for the purpose of securing and executing Contracts with an initial joint venture capital of Rs. 1500 lacs......
(iv) The Profit and Loss, relating to the Joint - Venture shall be shared between and or borne by the two joint venture partners as under:-
1. Brahm Prakash Modi the lead firm 90% 16 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT
2. Maruti Nandan Colonizers (P) Ltd. 10% 6.5 The assessee being the First Party had 20 years' experience of undertaking civil contracts and was registered in the 'AA' Class Contractor with Jaipur, the Second Party had disposable funds which had already been advanced to the assessee in earlier years.
6.6 So the First Party needed funds to undertake bigger contracts and the Second Party was desirous of gaining experience in the field of infrastructural contracts. Moreover, it did not have necessary certification as a contractor necessary for undertaking infrastructure related activities in Rajasthan.
6.7 Though both the parties were to be jointly responsible for execution of work the main work, responsibilities for liabilities negotiations etc. were the task of the assessee & that is why it was called the lead party firm who was entitled to 90% of the profit & Loss.
6.8 This was a mutually beneficial Joint Venture agreement as is seen from the submission of the AR that as a result of this Joint Venture the interest receipt increased from Rs.1.48 crores last year to Rs.2.82 crores in this year. This was on account of availability of funds with the assessee of Rs.15.96 crores of the second party. This interest receipt has been included in the income of the assessee for taxation purposes. Till last year the assessee was paying interest of 6% on funds taken from second party. This year these accumulated funds have been shown to be the contribution of the M/s MarutNandan Colonizers (P). Ltd. to the 17 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT Joint Venture as per agreement signed by it and the assessee. This year as mentioned by the AR the second party of the Joint Venture Agreement i.e. M/s Maruti Nandan Colonizers (P). Ltd. wanted return on investment with risk & share in profitability.
6.9 A businessman knows best how to run his affairs the Department cannot undertake to teach him how to run his business. The appellant undertook to set up a Joint Venture with M/s Maruti Nandan Colonizers (P). Ltd. as per the written Joint Venture Agreement duly signed by both the parties. Rather than pay interest on funds advanced by M/s Maruti Nandan Colonizers (P). Ltd., the assessee sought to share risk & profitability on this capital. As per the Joint Venture Agreement profit and loss sharing has been clearly stated being 90% for Bharm Prakash Modi the lead firm and 10% for Maruti Nandan Colonizers (P). Ltd.
6.10 The assessee then debited this payment of Rs.65,04,574/- as share of Second Party of the Joint Venture Agreement in its P&L account as direct cost. The Joint Venture Agreement however, mentions that the profit & loss relating to the Joint Venture business shall be share and borne by the two Joint Venture partners as under:-
1. Brahm Prakash Modi the lead firm 90%
2. Maruti Nandan Colonizers (P) Ltd. 10% 6.11 The Joint Venture contract is for profit sharing and the share of profit of a Venture cannot be debited in P&L account.
Therefore, Rs.65,04,574/- being payment as per Joint Venture agreement debited by the assessee in his P&L account is to be 18 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT disallowed. The Financial Reporting of Interests in Joint Venture is governed by Accounting Standard (AS) 27 w.e.f. 01/04/2002 issued by Council of ICAI. While the Joint Venture Agreement has been drawn as per these guidelines the financial reporting has not been done accordingly by the assessee. 6.12 The AO may consider calling for the return and financial statements as per AS 27 of the Joint Venture. The N.P. on contract turnover may be determined as discussed in para 3.3 & 3.4 and after allowing depreciation and interest, the income of the Joint Venture be taxed as an AOP.".
10. Now the assessee is in appeal before us.
11. The AR for the assessee submitted that payment of Rs. 65,04,574/- to M/s Maruti Nandan Colonizers Pvt. Ltd. is a joint venture charges. As per agreement it has contributed a sum of Rs. 15.96 crores in the joint venture as security deposit on which no interest is payable. It is further appointed Chief Operating Officer, who shall have the overall control for the purpose of execution of the contract awarded to M/s Brahm Prakash Modi and supervisors to supervise the project site. It has a sharing in profit as well as loss thus, this is a joint venture agreement and not a simple finance transaction. The learned Assessing Officer wrongly treated these charges as finance charges. It is further submitted that a sum of Rs. 15.96 crores remained with the assessee. The simple interest @ 12% on this amount works out to Rs. 1,91,60,155/- as against the assessee was paid Rs. 65,04,574/- only as joint venture charges as 19 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT per the terms of the agreement. If this is in the nature of interest then why the second party would agree to receive venture charges of Rs. 65,04,574/- only as against the simple interest of Rs. 1,91,60,155/- rather the assessee saved expenditure to the extent of Rs. 1,26,55,581/-. Further there is increase in the interest income from Rs. 1,48,67,335/- in last year to Rs. 2,82,98,920/-. Therefore, it is incorrect to hold by the Assessing Officer as the same is financial charges. Accordingly, the same may please be deleted.
12. At the outset, the learned DR supported the order of the learned CIT(A).
13. We have heard the rival contentions of both the parties and perused the material available on the record. This amount was lying with the assessee from preceding year on which, interest was paid in that year. During the year, the assessee entered in joint venture agreement with M/s Maruti Nandan Colonizers Pvt. Ltd. The Assessing Officer held that this joint venture agreement is sham and is on paper. Actually, it is a finance transaction and joint venture expenses also in form of interest to M/s Maruti Nandan Colonizers Pvt. Ltd., which is liable to be deducted TDS U/s 194A of the Act. It is true that by getting this amount from M/s Maruti Nandan Colonizers Pvt. Ltd., the assessee became financially sound and had substantial fund with him, on which he earned substantial interest from the outside parties compared to preceding year. As such, no joint venture was executed during the year. The funds were used by the assessee for the business purposes and excess fund was put in the FDs with the bank. In subsequent year, the 20 ITA 697 & 776/JP/2011 Kirodi Mal Modi Vs. Addl.CIT assessee again reverted this fund from joint venture account to loan account and paid interest on it. We, therefore, considering the past history as well as nature of expenditure held that these payments are not joint venture expenses but are interest expenses on loan taken of Rs. 15.96 crores of M/s Maruti Nandan Colonizers Pvt. Ltd.. Therefore, it is allowable deduction from the net income deiced by this Bench in preceding paras. Accordingly, we decide this issue in favour of the assessee.
14. In the result, the assessee's appeal is partly allowed and the Revenue's appeal is dismissed.
Order pronounced in the open court on 05/09/2014.
Sd/- Sd/- (R.P. TOLANI) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Jaipur, Dated : 05th September, 2014 * Ranjan Copy forwarded to :- 1. Kirodi Mal Modi, Jaipur.
2. The Addl. C.I.T., Range-2 & DCIT, Circle-2, Jaipur.
3. The CIT (A)
4. The CIT
5. The D/R Guard file (I.T.A. No. 697 & 776/JP/2011) By Order, AR ITAT Jaipur.