Jammu & Kashmir High Court
M/S Soma Trg Joint Venture vs Commissioner Of Income Tax on 15 September, 2017
Author: Alok Aradhe
Bench: Alok Aradhe, B.S. Walia
HIGH COURT OF JAMMU AND KASHMIR
AT JAMMU
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013
Date of order: 15.09.2017
M/s Soma TRG Joint Venture V. Commissioner of Income Tax
Coram:
Hon'ble Mr. Justice Alok Aradhe, Judge
Hon'ble Mr. Justice B.S. Walia, Judge
Appearing counsel:
For the petitioner/appellant (s) : Mr. C S Aggarwal, Sr. Adv with
Mr. Gautam Jain, Advocate
Mr. K S Johal, Sr. Advocate with
Mr. J I Balban, Advocate
Mr. Subash Dutt, Adv with Mr. Suraz Wazir, Adv.
For the respondent(s) : Ms. Aruna Thakur, Advocate.
i/ Whether to be reported in : Yes/No
Press/Media
ii/ Whether to be reported in : Yes/No
Digest/Journal
Per Alok Aradhe,J:
In this bunch of appeals, common questions of law and fact arise for
consideration; therefore, they were heard analogously and are being
decided by this common order. For the facility of reference, facts from
ITA No.18/2010 are being referred to. The appeals have been admitted on
following substantial questions of law:
1. Whether on the facts and circumstances of the case and, on
consideration of agreements entered by M/s Soma Enterprises Ltd and,
M/s TRG Industries Ltd. could it be held that, receipts of
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 1 of 11
Rs.12,09,55,137/- represented income of the assessee and, it was not a
case of diversion of income by overriding title?
2. Whether the impugned order of the Income Tax Appellate Tribunal is
unreasoned, arbitrary and, non-speaking order, as such, the addition
sustained of Rs.12,09,55,137/- is not validly sustainable in law?
3. Whether on the facts and, circumstances of the case and, on true
construction of the statutory provisions contained in section 40(a)(ia)
of the Income Tax Act, 1961 the Income Tax Appellate Tribunal has
erred in holding that payments of Rs.12,09,55,137/- to the joint
ventures represented expenditure of the assessee which was not
allowable as deduction from the alleged income of the appellant in
view of the provisions of Section 40(a)(ia) of Income Tax Act, 1961?"
2. Facts leading to filing of this appeal briefly stated are that two separate
and independent companies incorporated under the Companies Act, 1956
namely M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd
entered in two separate joint venture agreements dated 23.07.2002 and
12.09.2002 for formation of the appellant, namely, M/s Soma TRG Joint
Venture with solitary objective of submission of two tenders for
construction of two tunnels of Northern Railway on the Katra-Reasi
Section of Udhampur-Srinagar-Baramullah rail link project. The
agreement dated 23.07.2002 was for construction of tunnel No.10
whereas agreement dated 12.09.2002 was for construction of tunnel Nos.
8 and 9. It is the case of the appellant that the need for formation of the
appellant arose as M/s TRG Industries (P) Ltd was not meeting the
qualifying criteria laid down in the notice inviting tender floated by
Northern Railways and it was only M/s Soma Enterprises Ltd. which had
the necessary experience under the Notice Inviting Tender.
3. The contracts in question were allotted in the name of the appellant and
the same were solely executed by M/S TRG Industries (P) Ltd and not by
M/S Soma Enterprises Ltd, which is evident from the side agreements
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 2 of 11
dated 09.06.2003 and 16.02.2004 entered between M/s TRG Industries
(P) Ltd and M/s Soma Enterprises Ltd, subsequent to the obtaining of the
tender in the name of the appellant. In fact, M/s Soma Enterprises Ltd had
only enabled M/s TRG Industries (P) Ltd to obtain the contract, therefore
it received 3 per cent of the contract value and M/s TRG Industries (P)
Ltd received 97 per cent of the contract value from the aggregate receipts
received under the tender. No work was intended to be done by the
appellant and nor the same was done by the appellant. The entire
expenditure was not incurred by the appellant but was only by M/s TRG
Industries (P) Ltd.
4. The aggregate receipts were allocated to the joint venture partners under
the joint venture agreement read with side agreement and no income
accrued to the assessee as there was diversion of income at source which
was provided in Clause 5 to the agreement that 97 per cent of the income
will be that of M/s TRG Industries (P) Ltd and only remaining 3 per cent
is that of M/s Soma Enterprises Ltd. In fact the appellant did not incur
any expenditure on the said project and was merely a conduit to obtain
the contract from the Northern railways. The appellant under the
aforesaid agreements received an aggregate sum of Rs.1,19,45,588/- in
Assessment Year 2004-2005. The aforesaid sum was received in respect
of two projects under construction i.e. Tunnel No.10 and Tunnel Nos. 8
and 9 respectively allotted by northern railways and was allocated to two
joint venturers namely M/s Soma Enterprises Ltd and M/s TRG Industries
(P) Ltd in the ratio of 97:3 as per separate agreement entered between the
two joint venture for construction of Tunnel No.10 and Tunnel Nos. 8 and
9, respectively. The appellant being an association of persons furnished a
return of income on 29.11.2004 and declared nil income for the
Assessment Year 2004-2005. The aforesaid income of return was
accepted by the revenue under Section 143(1) of the Act. The assessee in
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 3 of 11
the Assessment Year also have allocated the receipt and the assessing
officer did not disallow the payment made of the same
allocated/distributed receipts and thus accepted that the amount allocated
could not be disallowed under Section 40(a)(ia) of the IT Act.
5. For the Assessment Year 2005-2006, the appellant furnished a return of
income on 02.03.2005 declared nil income. Along with return of income,
the assessee also furnished a balance sheet, receipt and payment account
and not income and expenditure account as also two certificates of TDS
showing that northern railways had deducted tax at source on
Rs.12,43,257 and of Rs.11,17,192/- in respect of aggregate payments
made of Rs.2,92,02,742/- and Rs.5,31,99,678/-, respectively. The
assessing officer framed assessment under Section 143(3) of the Act by
an order dated 28.12.2007 wherein the income of the appellant was
computed at Rs.12,09,55,137 as against the income which was declared
to be nil by the appellant. The assessing officer disallowed the amount
paid by the assessee to the joint venturers complying the provisions of
Section 40(a)(ia) of the Act and held that the tax has been duly deducted
at source on the payments made by the railway authorities treating the
assessee as contractor and held that thereafter the assessee had sub
contracted the execution of the work in the ratio of 97:3 and thus
provisions of Section 40(a)(ia) of the Act are attracted. The assessee‟s
submission that no income accrued to the appellant and there was
diversion of income by overriding title was rejected. It was further held
that contention of the assessee that it did not carry out any business
during the year under assessment is so held to be factually incorrect.
6. Being aggrieved by the order dated 28.12.2006 passed under Section
143(3) of the Act, the appellant filed the appeal before the Commissioner
of Income Tax (Appeals). The Commissioner of Income Tax (Appeals),
who by an order dated 20.08.2008 dismissed the appeal filed by the
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 4 of 11
appellant company and confirmed the order of assessment. The appellant
being aggrieved by the order passed by the CIT (Appeals) filed an appeal
before the Income Tax Appellate Tribunal (for short „the Tribunal‟). The
Tribunal however by impugned order dated 22.01.2010, inter alia held
that income had accrued to the appellant and it was not a case of
diversion of income by overriding title because all payments were
received and duly credited in the books of the assessee. It was further
held that the appellant was liable for deduction of tax at source in respect
of payments made to M/s TRG Industries (P) Ltd and M/s Soma
Enterprises Ltd under Section 194 C and 194 J of the Act, respectively. It
was also held that the payments made by the appellant to M/S TRG
Industries (P) Ltd and M/s Soma Enterprises Ltd were not eligible for
deduction in view of Section 40(a)(ia) of the Act.
7. The appellant thereupon filed miscellaneous application under Section
254(2) of the Act on 22.02.2010 and prayed for correction of the mistakes
which had crept in the records; however the aforesaid application was not
decided. In the aforesaid factual background, this appeal has been filed.
8. Learned Senior counsel for the assessee submitted that the order passed
by the tribunal is non speaking order and is vitiated in law. It is further
submitted that joint venture agreement was merely entered into by two
joint venturers namely M/s Soma Enterprises Ltd and M/s TRG Industries
(P) Ltd, are two limited companies only for the limited purpose of
participating in the tender floated by northern railways and not to execute
the same. It is also argued that no income accrued to the appellant as the
contract was executed severally and independently and the assessee who
have executed the contract have declared the income which has been duly
assessed to tax. Thus, there is diversion of income at source. It is also
urged that no income accrues on mere receipt of the amount and appellant
was merely a conduit and as such no income could have been brought to
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 5 of 11
tax in the hands of appellant as no activity, no business and no accrual of
income had taken place. It is further submitted that there is no contract
between the joint venture and joint venturers and since there is only a
mutual agreement, therefore, the provisions of Section 194C(2) of the Act
is not applicable. It is also argued that with the insertion of second
proviso by Finance Act, 2012 to Section 40(a)(ia) of the Act, the joint
venture could not be held to be an assessee in default so as to disallow the
amount distributed by the joint venture to the joint venturers in the ratio
of 97:3 so as to invoke Section 40(a)(ia) of the Act as the aforesaid
amendment is retrospective in nature and the same is clarificatory. It is
also submitted that if two views are possible, the view which favours the
assessee has to be adopted even while disallowing under Section 40(a)(ia)
of the Act. It is also urged that once income is assessed in the hands of
joint venturers, no income can be assessed in the hands of joint venture. It
is also submitted that the order of the Tribunal is contrary to well settled
legal position as the Tribunal has taken a contrary view which has been
taken by a co-ordinate bench of equal strength. It is also submitted that
the contentions raised by the appellant have been overlooked by the
Tribunal. In support of the aforesaid submissions, reference has been
made to the decisions of the Supreme Court in the case of Linde AG,
Linde Engineering Division v. DDIT, 365 ITR 1(Del), Commissioner
of Income Tax-I v. Ansal Land Mark Township (P) Ltd, (2015) 377
ITR 635 (Del) and Commissioner of Income Tax-XIII v. Oriental
Structural Engineers (P) Ltd, (2015) 374 ITR 35 (Del).
9. On the other hand, learned counsel for the revenue has submitted once the
joint venture company receives the money, it becomes its income even
though no expenditure is claimed. It is further submitted that joint venture
company works as a separate individual entity and the revenue has rightly
taxed the joint venture company and it could not avoid its liability only
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 6 of 11
because joint venturers have paid taxes. It is also submitted that joint
venture company has been awarded the contract by the contractor and the
assessee has failed to produce the documents to show that separate
documents were filed by the joint venturers. It is also submitted that
agreement to share profits in a particular way is not a deterrent to levy the
tax and the order passed by the ITAT is speaking order which has been
passed after due application of mind.
10. We have considered the respective submissions made by learned counsel
for the parties and have perused the record. We may deal with the
substantial questions of law Ad Seriatum.
1st Substantial Question of Law:
Admittedly, two separate and independent limited companies
incorporated under the provisions of Companies Act namely M/s TRG
Industries (P) Ltd and M/s Soma Enterprises Ltd entered into two
separate joint venturers agreement dated 23.07.2002 and 12.09.2002 for
formation of the appellant namely M/s Soma TRG Joint Venture. The
relevant extract of the agreement dated 23.07.2002 reads as under:
1. The parites agree to submit a joint tender for the said „Work‟
as SOMA -T.R.G. JOINT VENTURE.
........
5. SOMA shall be the lead party of the joint venture, SOMA and the TRG shall jointly have and exercise the Authority to incur liabilities on behalf of this joint venture under the direction, of the APEX COORDINATING BOARD. Mr. T R Gupta, Chairman and Managing Director, TRG Industries (P) Ltd shall be authorized signatory on behalf of the joint venture to sign the tender and deal with the employers.
9. If the joint venture is awarded the work, the parties shall enter into a more detailed joint venture agreement as may be acceptable to the employer.
10. This joint venture agreement shall cease to be in force in any of the following events:
(i) The joint venture is not awarded the work;
(ii) The joint venture is awarded the work by the employer and a more detailed joint venture agreement based on this has been signed."ITA No.34/2013
c/w ITA No.18/2010 ITA No.19/2010 ITA No.52/2013, Page 7 of 11
11. Thus from the relevant clauses of the agreement, it is evident that the appellant was formed only for the purposes of submission of tender and it was agreed between the two companies namely M/S TRG Industries (P) Ltd and M/s Soma Enterprises Ltd that in case the joint venture is awarded the work by the employer, a more detailed joint venture based on the agreement shall be signed. Admittedly, M/s Soma Enterprises Ltd was the lead party of the joint venture and was supposed to execute the agreement. The appellant has admittedly not executed the agreement.
12. For the purpose of execution of the agreement, thereafter admittedly, the side agreements dated 09.06.2003 and 16.02.2004, were executed. It is pertinent to note that neither the existence nor the genuineness of side agreements has been disputed or even doubted by the revenue. There is no finding by the Assessing Officer that the members of the joint venture had authority to interfere with or comment on the work executed by the other member or that both the members have jointly executed the work. It is pertinent to note that neither amount would have been received by the assessee from the northern railways for no work performed by it nor it could be stated that the assessee has performed any activity but still the income has accrued. We are aware that the definition of income as provided under Section 2(24) of the Act is inclusive and wide, yet the fact remains that the income diverted at source before it accures to the assessee cannot be regarded as an income. See. CIT v. Sitaldas Tirathdas, 41 ITR 367(SC) CIT, Provat Kumar Mitter v. CIT, 41 ITR 624(SC), Motilal Chhadami Lal Jain v. CIT, 190 ITR 1 (SC), CIT v. Sahara Investment India Ltd, 266 ITR 641 (SC), CIT v Chamanlal Mangal Das & Co. 39 ITR 8 (SC), Dalmia Cement Ltd. vs. CIT, 237 ITR 617 (SC), CIT Vs. Sunil J. Kinariwala, 259 ITR 10 (SC) . Admittedly, the appellant had not incurred any expenditure and the work admittedly was executed by M/s Soma Enterprises Ltd. In CIT v.
ITA No.34/2013c/w ITA No.18/2010 ITA No.19/2010 ITA No.52/2013, Page 8 of 11 Sitaldas Tirathdas , (1961) 41 ITR 367, it has been held that true test of diversion of income by overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. To apply the doctrine of diversion of income by overriding title, the first and foremost condition to be satisfied is the nature of assessee‟s obligation, whether by the obligation, the income is diverted before it reaches the assessee, or whether the income is required to be applied to discharge an obligation after such income reaches the assessee. In the instant case, there is diversion of income at the source itself. Therefore, the instant case is diversion of income by overriding title. The receipt of amount of Rs.12,09,55,137/- could not be treated as income of the assessee and it was the case of diversion of income by overriding title. Accordingly, the first substantial question of law is answered in favour of the appellant.
13. 2nd Substantial Question of Law:
So far as the second substantial question of law is concerned, from the perusal of the order passed by the Tribunal, the same cannot be said to be unreasoned, arbitrary or non speaking. From the close scrutiny of the order passed by the Tribunal, it is evident that it has perused the relevant records and has gone through the written submissions which were filed on behalf of the assessee. Therefore, it cannot be said that order passed by the Tribunal is unreasoned, arbitrary or non speaking. Accordingly, the second substantial question of law is answered.
14. 3rd Substantial Question of Law:
Section 40(a)(ia) of the Act reads as under:
(a) In the case of any assessee-
[(i) any interest (not being interest on a loan issued for public subscription before the Ist day of April, 1938, royalty, fees for technical services or other sum chargeable under this Act, which is payable-
(A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, ITA No.34/2013 c/w ITA No.18/2010 ITA No.19/2010 ITA No.52/2013, Page 9 of 11 on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200:
(ia) any interest, commission or brokerage, (rent, royalty,) fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction.
Therefore, the second proviso in Sub clause (ia) of Clause (a) of Section 40 was inserted by a Finance Act, 2012 w.e.f 01.04.2003 which reads as under:
"Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso."
15. Thereafter a clarification was issued by the Government of India, Ministry of Finance in which it was clarified that where the consortium arrangement is made for executing the EPC/Turnkey contracts in which each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work, such a consortium may not be treated as association of person.
16. The Supreme Court in the case of R.B. Jodha Mal Kuthiala v.
CIT (1971) 82 ITR 570 (SC) has held that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the ITA No.34/2013 c/w ITA No.18/2010 ITA No.19/2010 ITA No.52/2013, Page 10 of 11 section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. The Division Bench of Delhi High Court followed the aforesaid decision in the case of Commissioner of Income Tax v. Rajinder Kumar, (2014) 362 ITR 241 (Del) and held that the amendment in the proviso to Section 40(a)(ia) of the Act is retrospective in nature.
17. Thus with insertion of section proviso by Finance Act, 2012 to section 40(a)(ia) of the Act as otherwise also since the taxes have been paid by the joint ventures, the assessee could be held to be an assessee in default so as to disallow the amount attributed by the joint venture to the joint venturers in the ratio of 97:3 so as to invoke Section 40(a)(ia) of the Act. The aforesaid amendment is retrospective and is clarificatory in nature. For yet another reason, Section 40(a)(ia) of the Act is inapplicable to the fact situation of the case as no amount was payable by the assessee at the close of the year and if two views are possible, the one which favours the assessee has to be adopted. See ACIT V. Red Brick Realtors, 70 SOT 592 (Chennai). Accordingly, the third substantial question of law is also answered in the affirmative and in favour of the assessee.
18. Accordingly, the orders passed by the assessing officer as well as Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal are hereby quashed. In the result, the appeals are allowed.
(B.S. Walia) (Alok Aradhe)
Judge Judge
Jammu:
15.09.2017
Raj Kumar
ITA No.34/2013
c/w
ITA No.18/2010
ITA No.19/2010
ITA No.52/2013, Page 11 of 11