Income Tax Appellate Tribunal - Hyderabad
M/S. Ivrcl-Kbl (Jv), Hyderabad vs Department Of Income Tax on 14 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 1197/Hyd/2011 - A.Y. 2008-09
The Dy. Commissioner of Vs. M/s. IVRCL-KBL-MEIL (JV)
Income-tax, Circle-7(1) Hyderabad
Hyderabad. PAN: AACFI3940F
Appellant Assessee
ITA No. 1198/Hyd/2011 - A.Y. 2008-09
The Dy. Commissioner of Vs. M/s. IVRCL-KBL (JV)
Income-tax, Circle-7(1) Hyderabad
Hyderabad. PAN: AAAAI1804R
Appellant Assessee
ITA No. 1199/Hyd/2011 - A.Y. 2008-09
The Dy. Commissioner of Vs. M/s. IVRCL-JL (JV)
Income-tax, Circle-7(1) Hyderabad
Hyderabad. PAN: AAAAI1688R
Appellant Assessee
Appellant by: Shri M.S. Rao
Assessee by: Shri V. Raghavendra Rao
Date of hearing: 14.05.2012
Date of pronouncement: 12.07.2012
ORDER
PER CHANDRA POOJARI, AM:
These three appeals by the Revenue are directed against different orders of the CIT(A)-VI, Hyderabad dated 06-04-2011 pertaining to three different assessees for assessment year 2008-
09. The grounds raised by the Revenue in these appeals more or less common. Being so, these appeals belong to a common group and the issues arising in these appeals are common, they are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
2 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
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2. Facts as in the case of IVRCL-KBL-MEIL(JV) are that the assessee is a Joint Venture (JV) formed by (i) IVRCL Infrastructure and Projects Ltd., Hyderabad; (ii) Kirloskar Brothers Limited (KBL), Pune; and (iii) Megha Engg. & Infrastructures Ltd. (MEIL), Hyderabad (Principal Contractor) with sharing participation of 65%, 20% and 15% respectively in the project value of the work. This JV came into existence by virtue of a Joint Venture Agreement (JVA) dated 02-06-2007 for the purpose of participating in tenders called by Irrigation & CAD Department, Government of Andhra Pradesh (Principal Employer) for the purpose of bidding contract works of "Investigation, Design, Manufacture, Supply of Pumps, Motors-and Pressure main at site of work including erection, commissioning and testing of 8 Nos. at each pumping station of Hydro- Mechanical, Electro-Mechanical and other accessories etc, complete equipment required and maintenance of 12 pumps and the system for 15 years at Km. (-) 2.050, Km 9.217, Km 56.917, Km 66.132, Km 78.785, Km. 88.690, Km. 95:735 and 173.837 of Phase I under H.N.S.S Division No. 11, Ananthapur, State of Andhra Pradesh. IVRCL Infrastructures and Projects Ltd., was the Lead Contractor amongst the constituents of the JV who was delegated all the powers to represent the JV before the Principal Employer and monitor the project work on behalf of the JV vide a Power of Attorney, dated 2.6.2007.
3. The JV was awarded works of a total contract value of Rs. 761.24 crores from the Government of Andhra Pradesh. Later on, the work was distributed amongst the constituents of the JV by an Agreement, dated 13-10-2007. The JV had allocated Rs..194.81 crores of value of the work on back to back basis sub-contract which is equivalent to 65% of the total work to the Lead Contractor viz., IVRCL Infrastructures and Projects Ltd. The Lead Contractor having been allocated the project value of Rs. 494.81 crores of the work in turn sub-contracted by an Agreement, dated 7.11.2007 to MEIL (Sub Contractor) for execution of the work by retaining a profit margin of 6.53%. The mode and manner of the allocation and execution of the work is as follows:
3 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== Government of Andhra Pradesh, Irrigation & CAD Department (Principal Employer) IVRCL-KBL-MEIL Joint Venture, Hyderabad (Principal Contractor) 65%: 15%: 20% sharing ratio of the total project value of Rs.
761.24 Crores IVRCL Infrastructures and Projects Ltd. (Lead Contractor) Profit Margin was retained @ 6.53% and returned in its Profit & Loss A/c.
Megha Engineering & Infrastructures Ltd. (Sub-Contractor) Declared Profit of Rs. 21.78 Crores in its Profit & Loss A/c
4. Thus, during the previous year ending 31-03-2008 which is relevant to the Asst. Year 2008-09, a total value of the work amounting to Rs. 208,85,35,883/- was executed by the Sub- Contractor. Therefore, the JV had to show in its Profit & Loss Account, the sub-contracted works to the tune of Rs. 208,85,35,882 as expenditure and it had shown Nil income. Accordingly, the JV declared NIL income in its return of income for the Asst. Year 2008-09, as against which the Assessing Officer completed the assessment by his order dated 31-12-2010 on a total income of Rs. 46,72,06,662 by taking the turnover/gross receipts received by the JV in its hands holding that it alone is liable to tax on the same and estimated income at 9% thereon. Besides, the Assessing Officer made two additions. In completing the assessment, the Assessing Officer made the following additions:
1. Estimation of income at Rs. 18,79,68,229 being 9% of the turnover of Rs. 208,85,35,883
2. Disallowance of alleged expenditure u/s 40(a)(ia) on the mobilization advance of Rs. 25,41,76,000 and 4 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
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3. Disallowance of expenditure of Rs. 2,50,62,432/- u/s 43B stating that the differential amount of VAT was not paid to the Department.
5. The Assessing Officer was prima facie of the view that (i) Irrigation & CAD Department of AP Government deals with joint ventures and not with the constituents of the JV members; (ii) JV undertakes liability from Irrigation & CAD Department of AP Government but only for internal purposes, the JV has divided the liabilities amongst its members; (iii) JV is regularly receiving the payments from Irrigation & CAD Department of AP Government;
(iv) It is the JV which is entitled for participating in the bid and not its members. Stating so, the Assessing Officer was of the opinion that two issues are to be examined by observing at Page No. 2 of the Assessment Order as under:
a. Determination of taxable income in the hands of JV assessee itself based on its entire activities and performance as it has filed the tender on its eligibility got the award from Irrigation & CAD Department of AP Government entered into contractual agreement with Irrigation & CAD Department of AP Government for the successful completion of the project as against NIL income offered by the assessee in complete disregard to risk and responsibility undertaken by it; and b. Examining the claim of expenditure on sub-contract payment of Rs. 208,85,35,883 from the perspective of excessive and unreasonableness of such payment u/s 40(A)(2)(b) of the Act because entire gross contractual receipts being passed on its members fully by way of sub-contract payment. The JV instead of retaining the suitable contribution for its performance, has passed on the entire receipts to its members who are also covered by Section 40(A)(2)(b) of the Act.
6. Keeping in view of the aforesaid reasoning, the Assessing Officer was of the view that since the assessee had passed on its gross receipts to its constituents, i.e., M/s IVRCL, M/s. KBL and M/s MEIL and also that it did not book any expenditure or 5 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== claimed depreciation on any assets, the ratio of the decision of the Hon'ble Supreme Court in ITO v. Ch. Atchaiah (218 ITR 239) and the decision of Hon'ble Delhi Bench of ITAT in the case of Pradeep Agencies (JV) (18 SOT 12)(Delhi) (SB) is applicable where according to him it was held that the income of the assessee must be taxed in its hands and not in the hands of the constituents. In both the cases, the facts were such that income had accrued in the form of capital gains and business income respectively in the hands of both the assessees who were constituted an Association of Persons in law. In both the cases, members of the association offered their respective share to income tax and contended that once the income is charged to tax in the hands of a member of an association of person, assessing officer will have an option not to tax the association of persons by relying upon (i) decision of Supreme Court in Muralidhar Jhawar & Purna Ginning & Pressing Factory [1966) 60 ITR 95 and (ii) CBDT Circular No. 75/19/191 of 1962-ITJ, Dated 24-8-1966. The Supreme Court in Ch, Atchaiah (supra) held that the earlier decision of the Supreme Court in Muralidhar Jhawar & Purna Ginning & Pressinq Factory (supra) was decided under the provisions of Indian Income Tax Act, 1922 where the charging Section 3 was differently worded giving an option to an assessing officer to make assessment either in the hands of an AOP or the members of such AOP, whereas the charging Section 4 of Income Tax Act, 1961 did not provide for such an option to the assessing officer as there was a marked difference in the language of charging Section 4. It was further held that the CBDT circular cannot override the provisions of Income Tax Act, 1961 even if the Board advised its officers to follow the said Supreme Court decision by choosing an option to assess either an AOP or its members. The Delhi Special Bench of ITAT in Pradeep Agencies v. ITO (supra) while dealing with the appeal of an AOP who did an agency business for commission held 6 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== that AOP alone is liable to tax on its business income as it alone did the business and incurred the expenditure. While doing so, the Special Bench followed the decision of the Supreme Court in ITO v. Ch. Atchaiah (supra). As a consequence thereof, the Delhi Bench of ITAT in Pradeep Agencies Joint Venture (cited supra) confirmed the assessment made by the assessing officer in the hands of the AOP. The ratio laid down in both the aforesaid cases is that when an AOP earns income in its hands, the same is liable to charge only in its hands since the assessing officer has no option under the provisions of Income-tax Act, 1961 to opt for assessing a member of an AOP by bringing to charge his share or apportioned income. Thus, the law laid down by the Supreme Court in the case of Ch. Atchaiah (cited supra) cannot be disputed nor can be distinguished in the light of the provisions of Section 4 of Income- tax Act, 1961.
7. In the course of completion of the assessment, the Assessing Officer issued notice u/s 142, dated 01-09-2010 along with letter dated 01-09-2010 requiring the assessee to furnish certain information to which the assessee through its AR filed a Note on JV and a reply letter, dated 23-10-2010. The Assessing Officer further issued a Notice u/s 142(1), dated 16-12-2010 along with a letter dated 16-12-2010 proposing to invoke Section 40A (2)(b) and required the assessee to furnish details, comparable market rates for different kinds of works, services etc., a note regarding comprehensive contracts awarded by the assessee to its associate concerns, viz., the constituent partners. The assessee filed its reply by letter dated 24-12-2010 stating that the provisions of Section 40A(2)(b) have no application as the whole work was given on back-to-back sub-contract basis. The Assessing Officer on a factual analysis of the explanation of the case of the assessee accepted its explanation on this issue of non-applicability of the provisions of Section 40A(2)(b) of the Act. It was also brought to 7 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== the notice of the Assessing Officer that a profit of Rs. 10.44 crores was declared by the Lead Contractor, viz., IVRCL, one of the constituents of the JV on this entire work of Rs. 208.85 Crores and furnished all other information as required by the Assessing Officer. The Sub-Contractor also declared an income of Rs. 21.78 crores on the project value of Rs. 208,85,35,883/- executed by it. The Assessing Officer disregarded these facts by simply holding that there is no double taxation in the instant case.
8. The Assessing Officer though admitted the fact that the JV has neither executed the work nor deploys any resource in the execution of work as work is being executed on back to back basis by constituent members, yet under the notion that JV also should offer income and in the absence of which he was of the strong opinion that this treatment is not acceptable, unreasonable and incorrect as there is distinct, identifiable and attributable contribution of JV for which income must be assessed. According to the Assessing Officer the purpose and intention of revenue authority is to assess, firstly the correct income and secondly, that correct income being assessed in the hands of correct taxable entity which in this case is JV itself. He illustrated that if income belonging to "A" has been offered as income in the hands of "B", then the assessing officer while assessing the income in compliance with provisions of income-tax has to correctly assess the true income in the hands of "A" only. Thus, the Assessing Officer proceeded to assess the income in the hands of the JV for its alleged share of income from the gross receipt and he viewed that his action is not amounting to double taxation as the income of the 'JV is considered exempt in the hands of' its members. He was of the view that the pooling of joint technical and financial strength is inherent towards a mission/project i.e., completion of project for which joint venture per se must be rewarded in terms of taxable income. Even after admitting the fact that it is true that 8 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== the claim of expenditure has been made in the name of sub- contractor payment but entire gross receipt has thus been diverted to constituent members, the Assessing Officer stated that the JV has legal obligation and commitment for the completion of the project with financial liability. Holding so, the Assessing Officer observed that notwithstanding the entire work has been transferred to constituent members through sub contract, the entire income from the project is not being assessed in the hands of JV but only a due share linked to JVs contribution is being assessed in the hands of JV. The Assessing Officer views that while the JV has chosen not to offer any income in its hands which is bereft of rationality and devoid of quid-pro-quo. He proceeded on the assumption that the JV having been formed primarily for resource pooling for the purpose of creating eligibility for tendering the specific projects/works which otherwise the constituent members of JV were not eligible, the JV shall alone be liable to tax. According to him, taxable income is necessarily to be quantified and determined in the hands of JV since JV cannot be considered an entity devoid of taxable income. To substantiate his point of view, the Assessing Officer has pointed out to the existential facts related to the JV such as name, address, pooling of resources, bank account, financial status and financial worth, contractual capacity, employer and the correspondence thereto, brand, carrying on the pre-tendering work in its name, PAN, and receipt of the mobilization advance.
9. The Assessing Officer while adverting to the observations of the Supreme Court in Ch. Atchiaih (supra), "where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable", held that in the case of the assessee, the income has been received by it but has been 9 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== given up to its members by way of a sub-contract. Holding so, the Assessing Officer opined that in such a situation, as per the Supreme Court decision even though the income may be given up the tax is payable by the entity in whose hands the income had arisen. Accordingly he held that in the light of this judgment too it is the joint venture which must be taxed and not its members.
10. The Assessing Officer in support of his case relied on several judgments of various judicial authorities. The sum and substance of the case-of the Assessing Officer as per the ratio of the aforesaid case law is that "once an assessee is established to be an AOP it means that it has entered into a joint venture to earn profit. Hence it cannot limit itself to having come into existence only for the purpose of bidding and tendering only and divert its income in the hands of its members by way of a sub-contract. Being a FIRM is very much liable to be taxed on the income earned by it".
11. The main allegation of the Assessing Officer was that the work would have been executed by them in any case as per the terms and conditions of JV agreement, even if there was no sub- contract, to say that the joint venture has not earned any income because it has neither executed the work nor deployed any resources in execution of the work is not acceptable as the work has been executed for I & CAD Department of AP as per the contract signed by the JV. As per the joint venture contract all the resources mentioned above, are to be pooled in by the constituent members of the JV to enhance the capabilities of the assessee JV to carry out the work awarded to it by I & CAD Department of AP. Stating so, the Assessing Officer held that the JV is to be necessarily and compulsorily be rewarded, compensated, and attributed for its share of work and performance which has not been done in the case of the JV.
10 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
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12. In conclusion, the Assessing Officer having come to an inference that the assessee has inextricable linkage and rights, out of total proceeds of the project or total income of the project, observed that the JV has not offered any income in its hands. According to him, when the assessee has undertaken the project and undertakes the responsibility for the completion of the project and is also liable in the form of contractual as well as legal liabilities for non performance of obligations, then it has to earn a reciprocal. Amount of income in the form of return/profit/income from the project with reasonable degree of association, which the JV has not complied with. The Assessing Officer's understanding is that the amount is in the form of income attributable to the risk undertaken by the assessee should be brought to charge irrespective of the fact whether there is earning or accrual of income or not in the hands of the JV. Thus, the Assessing Officer proceeded with an assumption that the JV is liable to tax on the income component of the total gross receipts it received from the Irrigation & CAD Department of AP and sub-contracted the whole of it to one of its constituent on back-to-back basis. The Assessing Officer while holding so, in para No. 23 of the Assessment Order estimated the income at 7.5% of the contract receipts of Rs. 149,81,40,236 and determined the total income at Rs. 11,23,60,517 as according to him in this line of infrastructural activities, offering taxable income in the range of 7% to 9% of gross contractual receipts is reasonable. However, in Para No. 24, the Assessing Officer assessed the income at 9% on the total gross receipts of Rs. 208,85,35,883 and arrived at the taxable income at Rs. 18,79,68,230/-.
13. Aggrieved by Assessment Order, the assessee filed appeal before the Commissioner of Income-tax (Appeals)-VI, Hyderabad and the learned CIT(A) by vide order, dated 06-04 2011 allowed the appeal of the assessee. The learned CIT (A) held that the 11 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== Assessing Officer is not correct in making the estimated addition at 9% on the total gross receipts for the following reasons:
(i). There was no accrual of income in the hands of the JV as per the Joint Venture Agreement dated 02-06-2007 among the constituents of the JV as the parties agreed for sharing of work only;
(ii). The Assessing Officer strongly took support from the cases of ITO v. Ch. Atchaiah (218 ITR 239) (SC) and Pradeep Agencies (JV) (18 SOT 12) (Del) (SB) and some other cases of more or less same import for framing the Assessment Order, dated 31-12-2010 which in no way help the case of the Assessing Officer since the ratio laid down therein has no application to the facts of the assessee JV's case;
(iii). The assessee by the Agreement, dated 13-10-2007 clearly divested the work in favour of the Lead Contractor, viz., IVRCL Infrastructure and Projects Ltd., which fact was not disputed by the Assessing Officer and this resulted in diversion of income by overriding title u/s 60 of the Income-
tax Act, 1961 which makes the assessee JV not liable to tax on the gross receipts;
(iv). The Lead Contractor, viz., IVRCL Infrastructure and Projects Ltd., having declared a profit of Rs. 10.44 vrores on the total project work of Rs. 208,85,35,883/- divested to it by the JV, it is clearly a case of double taxation which is not permissible under the Income Tax Act, 1961; and
(v). The Assessing Officer framed the assessment u/s 143(3) of the Act. Therefore, without finding fault with the books of the assessee or without invoking the provisions of Section 144 and or 145 of the Act, he should not have made any estimation of addition. Therefore, the action of the Assessing Officer is unwarranted and not valid in law.
12 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
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14. Holding so, the learned CIT (Appeals) deleted the addition of Rs. 18,79,68,229.
15. Aggrieved by the order of the CIT (Appeals), the Department filed the present appeal in Appeal No. 1197/Hyd/2011. Thereafter, the Assessing Officer filed a Petition u/s 154, dated 26-09-2011 before the successor CIT(A) by raising the same grounds of objection filed before the Hon'ble ITAT in Ground Nos. 2 &.3. The learned CIT (Appeals) by Order, Dated 06-01-2012 rejected the petition of the Assessing Officer by holding that-
"2.0 I have considered the petition u/s 154. I find from a perusal of the assessment order as well as the appellate order that there is no discussion of this argument, that the assessee had claimed TDS without offering the corresponding income in his hands which was in contravention of the relevant provisions of the income Tax Act, either in the assessment order or the appellate order. Non-examination of a particular argument is not an error apparent from record rectifiable u/s. 154. To examine and adjudicate on the plea of the Assessing Officer at this stage would amount to a review of the appellate order which is not permissible under the Act.
16. Aggrieved by the order of the CIT(A), the Department filed the present appeal raising the following grounds :
1. The CIT(A) erred in appreciating the facts, law, technicality and accounting principle involved in determining the income of the assessee for A.Y. 2008-09.
2. The CIT(A) erred in appreciating the provisions of Income-tax under section 40A(2)(b), 199, 238 & rule 37B. The income which ought to have been assessed in the hands of the assessee has not been assessed, which made the AO to bring the income to tax in the hands of the assessee in view of the above provisions of the Income-tax Act, 1961. Otherwise, it becomes gross mistake in allowing the TDS credit in the hands of the assessee.13 ITA No. 1197 to 1199/ Hyd/2011.
M/s. IVRCL-KBL-MEIL (JV) & Ors.
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3. The CIT(A) erred in holding the fact that the TDS is deducted only on income of the assessee, which may claim credit, otherwise it is a violation of the provisions of IT Act, in allowing the credit for TDS.
4. The CIT(A) erred in appreciating the technicality & principles of Accountancy involved in arriving the unexplained investment in the Balance Sheet by considering the facts in the transactions held by the assessee.
5. The CIT(A) erred in appreciating the facts and circumstances in invoking the provisions u/s. 43B of Income-tax Act, 1961. The CIT(A) has not appreciated the provisions of this section has not given any exception to the submission made by the assessee.
6. The CIT(A) erred in appreciating the law and technicality involved in disallowance of expenditure as per the provisions under section 40(a)(ia) of Income Tax Act, 1961. The CIT (A) has not appreciated the facts mentioned and telescoping made by the A.O. in the assessment order and failed in holding the TDS provisions which has not appreciated the transactions done by the assessee. The provision cannot give any scope to the assessee not to make TDS which ought to have been suffered to tax.
17. Facts in ITA No. 1198/Hyd/2011 are similar more or less to that of ITA No. 1197/Hyd/2011. The Assessing Officer made the following additions:
(i) The Assessing Officer herein made addition by estimating income at Rs. 15,61,89,392 being 9% of the total turnover of Rs. 173,54,37,697.
(ii) Addition towards difference in Balance Sheet at Rs.
38,62,05,043.
(iii) Disallowance of expenditure of Rs. 2,14,93,271 u/s.
43B of the Act stating that the differential amount of VAT was not paid to the Department.
14 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== The above additions were deleted by CIT(A) on further appeal. Against this, the Revenue is in appeal before us.
18. In ITA No. 1199/Hyd/2011 the facts are similar to the above cases. The Assessing Officer made the following additions:
(i) Estimation of income at Rs. 15,61,89,392 being 9% of the turnover of Rs. 173,54,37,697.
(ii) Difference in Balance Sheet at Rs. 38,62,05,043 and
(iii) Disallowance of expenditure of Rs. 2,14,93,271 u/s.
43B of the Act stating that the differential amount of VAT was not paid to the Department.
19. On appeal the CIT(A) deleted these additions. Being so in all these cases, the Revenue is in appeal before us.
20. The learned DR relied on the order of the Assessing Officer and submitted that these assessees are never assessed to income- tax. Further he submitted that the orders of the Assessing Officer may be confirmed.
21. The ld. AR filed written submissions which is kept on record and the main contention of the assessee's counsel therein is that this is a covered issue in favour of the assessee by the order of the Tribunal dated 4.11.2011 in the case of M/s. Limak-Soma Joint Venture, Hyderabad in ITA No. 498-500/Hyd/2006. Regarding the first issue of estimation of income he submitted that there is no accrual of income in the hands of the assessee JV. He also drew our attention to a copy of an order of the first appellate authority in the case of M/s. PCL-SUNCON Joint Venture dated 5.1.2006 before the CIT(A) by stating that a similar addition was made in the said case by the Income Tax Officer, Ward-7(1) which was deleted by him. The learned CIT (Appeals) dealt with the same in the appellate order at Page No. 34, in Para No. 1.4.7 and held that this appellate order also gives a persuasive value to the reasoning adopted by her in the instant case. The Department filed appeal against this order before this Tribunal in the aforesaid 15 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== assessee's case. The Tribunal by its order in I.T.A. Nos. 149 & 150/Hyd/2008, dated 11-04-2012 confirmed the order of the CIT (Appeals) by holding that there is no case for any addition by the Revenue and while doing so, they followed the order of the Co- ordinate Bench of this Tribunal in the case of M/s Limak Soma Joint Venture, Hyderabad in ITA Nos. 498 to 500/Hyd/2006, dated 04-11-2011. Copies of the aforesaid orders are placed on record. Further, he submitted that Visakhapatnam Bench of this Tribunal in the case of ITO Vs. UAN Raju Constructions, in ITA No. 344/Vizag/2009 & ITA No. 77/Vizag/2010, by order dated 13-05- 2011 took a similar view and held in Para No. 12 that when the object for the formation of the JV is only to procure. contracts, and as per the agreement, both the constituent members of the JV are responsible for their work separately, the amount of profit allocated is only taxable in the hands of the member constituents of the JV and not in the hands of the JV and consequently held that no disallowance can be made u/s 40(a)(ia) in the hands of the JV. Copy of the order is placed on record. Thus, the order of the learned CIT (Appeals) on the issue of non-accrual of income in the hands of the assessee JV is well supported by the successive decisions of this Tribunal.
22. The learned AR pointed to the clauses in JV Agreement and contented that it was never the intention nor the understanding of the constituents of the JV that the JV has to execute the works and share the profits amongst themselves. It was clear understanding amongst the parties that they joined the joint venture only for the purpose of securing the contract by pooling their expertise and do the works independently. The JV in fact acted only as a facilitator in securing the contract as the work awarded by the Principal Employer was a composite project of laying pipeline, erection and commissioning of pumps for the lift irrigation and constructing canals and channels. Both the 16 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== constituents joined in pre-tendering process only to secure the project work by showing their respective expertise and capabilities. This understanding between the constituents of the JV enabled and strengthened the JV for pre-qualification of the tender. There could not be any other intention behind this process and the Assessing Officer himself could not point out any motive in the understanding or agreements of the parties. The works awarded by the State Government of Andhra Pradesh were not civil construction simpliciter but involved erection of pumps for Lift Irrigation which had necessitated the parties to pool into joint venture only for becoming eligible for pre-qualification. It was contended that there was no other intention behind the agreements and the Assessing Officer never doubted the bona- fides or integrity of the parties nor the genuineness of the Agreements or the Contracts where the terms, conditions, rights, duties, liabilities and responsibilities were determined.
23. In view of the aforesaid understanding and agreement between the parties, the learned AR argued that the same could not be impeached by the Assessing Officer in any manner whatsoever by any semblance of evidence and as such the JV should not have been made to suffer the taxation on the project value of the works completed when in fact the same was executed by the other constituents who declared profits adequately. The learned AR in support of his case relying on a decision of Supreme Court in CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692, wherein it was held that 'in the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction'.
17 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
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24. The learned AR relied on a decision of Supreme Court in CIT v. B. M. Kharwar [1969] 72 ITR 603, where the court again reiterated that the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". It was further held in this case that the taxing authorities are bound to determine the true legal relation resulting from a transaction, where the legal relation is recorded in a formal document or it has to be gathered from evidence and the conduct of the parties to the transaction.
25. He quoted another decision of Supreme Court in CIT v. Calcutta Discount Co. Ltd. (91 ITR 8) wherein it was held that though the shares were transferred by the holding company to a subsidiary below the market price, since the transaction was bona fide, no income could be brought to tax in the hands of the holding company unless it is proved that the holding company had made some secret profits.
26. In reading commercial agreements between the parties and to give effect to the legal consequence thereof, the learned AR cited a decision of the Delhi High Court in the case of D.S. Bist & Sons v. CIT (149 ITR 276). In this case, it was held that the income-tax authorities have to interpret commercial agreements on its own terms as contained in the documents and furthermore that it is only if and when there is a solid material to hold a taint of collusion or of shamness that the income-tax authorities may disregard the terms of agreement. Thus, the learned AR argued that the Assessing Officer therefore, could not have re-written the agreements only to suit his view point which has no basis in law.
27. It was further contended by the learned AR that the Assessing Officer was well aware of the facts of the appellant's case and admittedly held that the JV did not execute any work 18 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== except that it had sub-contracted the whole work on back-to-back basis to its constituents. In such a situation, no income had accrued or had arisen in the hands of the appellant. Notwithstanding these glaring facts, the Assessing Officer brought to charge the income at Rs. 15,61,89,392/- by estimating at 9% of the total turnover of Rs. 149,81,40,236/- executed by the sub- contractor only with a mala-fide intention of showing income so as to apply the principle laid down by the Hon'ble Supreme Court in the case of Ch. Atchaiah (218 ITR 239). Having admitted the fact that the whole work was sub-contracted by the appellant to its constituents and shown the same as expenditure in the Profit & Loss Account, the Assessing Officer erred in law in estimating the income at 9% leaving aside the fundamental principles of income tax law that there shall not be any charge unless income accrue or arise in the hands of an assessee. When the appellant had admittedly not executed the work, no income accrued nor had arisen in its hands so that the principles laid down by the Supreme Court in the aforesaid case have any application to the facts and circumstances of its case. The learned AR strongly argued that the Assessing Officer ignored and disregarded the basic rule of income tax law that income shall be estimated only in a best judgment assessment u/s 144 of the Act or when the provisions of Section 145 are invoked. In the instant case, the Assessing Officer made the assessment u/s 143(3) of the Act while collecting all the information required by him from the appellant from time to time. He objected to the action of the Assessing Officer by arguing that the Assessing Officer never adhered to the provisions of Section 145 of the Act while estimating the income. Thus, the learned AR of the appellant contended that the action of the Assessing Officer in framing the Assessment Order is vitiated in law and illegal.
19 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
28. Proceeding further, the learned AR objected to the action of the Assessing Officer arguing that the same is blatantly incorrect and illegal on the face of the provisions of Section 5 of the Income Tax Act, 1961. Elaborating his case, he submitted that the assessee had by Agreement dated 27-11-2006 sub-contracted the entire work of Rs. 557.80 Crores to the Lead Contractor which is nothing but divesting its income producing asset. Execution of such work for earning income is coupled with discharging and fulfillment of various conditions / obligations / responsibilities for which the parties have adequately provided for and safeguarded the interests of the Principal Employer and the Principal Contractor. When such income producing asset which is otherwise known as turnover or gross receipts for execution of the project work is divested by an Agreement and the same was executed and profits thereon were declared by the constituent in its return of income, the Assessing Officer cannot say that income had accrued in the hands of the appellant or to say that there was no double taxation by any stretch of imagination. The Assessing Officer grossly ignored the fundamental principles of income tax law that when there is transfer of an income producing asset from which income arises, no income shall be chargeable to tax as chargeable income in the hands of the transferor. The appellant being the Principal Contractor having secured the contract from the Principal Employer, transferred the entire project work or income producing asset on back to back basis and in which case income accrued or had arisen only in the hands of the Lead Contractor which fact is reflected and is borne out of assessment records of the Lead Contractor/sub-contractor. The learned AR emphasized his case by pointing out that by any stretch of comparison or analysis, the rate of profit suffered to income tax at cumulative figure of 40.34% in both the hands of the JV and the Lead Contractor is far more higher than the normal profit declared 20 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== by any other person in this line of business when all other additions are also included. All the agreements which were entered into by the appellant were genuine and fair and suit to the business exigencies of the constituents. It is the common knowledge that income accrues in a construction contract, only after execution of the contract works either in full or in part at the end of every year. The JV has been since acting as a facilitator had to account for the entire gross receipts received by it from the Principal Employer in its books while transferring the same to the account of the Lead Contractor/Sub-Contractor as the same is only a debt due to them for the project work already executed by them. In reality, the Principal Employer releases the payment of gross receipts in parts as and when certification of completion of the work is done and also on the basis of the bills raised by the contractor by withholding a portion for operating and maintenance of such work depending upon the contract works. In the case on hand, the entire work having been executed by the constituents of the JV and claimed for the same through Running Account Bills, the JV had to account for the same and pass on the gross receipts to them. Thus, the accounting entries made by the JV in its books of accounts by showing the entire gross receipts as expenditure in its Profit & Loss Account is a true reflection of its activity. The learned AR thus argued that the Assessing Officer therefore, could not have said that the JV did not book any expenditure or claimed depreciation on any assets for the sole reason that when the entire work was sub-contracted on back-to-back basis to its constituent, the JV had to account for it only as expenditure and there would not be any possibility of claiming depreciation as it had not admittedly executed the work nor deployed any plant & machinery which would be reflected in the books of accounts of the constituents.
21 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
29. To illustrate the meaning of commercial profits and its accrual vis- a-vis theoretical profits, the learned AR quoted a decision of Allahabad High Court in CIT v. UBS Publishers & Distributors (1984) (147 ITR 114) wherein the court considered allowability of devaluation loss determined on account of foreign exchange rate announced by the Government of India six days after the end of the previous year by holding that there was nothing wrong in taking into account the devaluation of the Indian currency announced by the Government of India six days after the end of the previous year. In holding so, the High Court elaborated the concept of commercial profit and its accrual vis-a-vis theoretical profits in the following words at Page 118 that-
"7. Income-tax is a levy on income. It is well settled that what is assessed to tax in a business are not profits considered from a theoretical, academic or legalistic sense, but commercial profits, i.e., profits which are made in a business by the carrying on of the business which a commercial man would accept as profits of that business - CIT v. Bai Shirinbai K. Kooka [1956] 30 ITR 753 (Bom.). This principle was approved by the Supreme Court in its decisions in CIT v. Bai Shirinbai K. Kooka [1962J 46 ITR 86. Again in CIT v. Shoorji Vallabhdas & Co. [1962) 46 ITR 144, Hidayatullah, J. observed:
"Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income', which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." (pp. 144-45) 22 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== This view was cited with approval by Khanna, J. in Morn Industries Ltd. v. CIT [1971) 82 ITR 835 (SC). The concept of 'real income' was also emphasized by the Supreme Court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, where the principle expounded in the decision of the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT [1960J 391TR 706, to the effect that in examining any transaction and situation of this nature, the Court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it, was approved".
30. He contended that in the present case, it has been conceded by the Assessing Officer that the JV did not execute any work and the entire gross receipts were divested or passed on to the Lead Contractor and the same was debited in its Profit & Loss· account and the only reasoning of the Assessing Officer was that there was no profit retained by it while divesting the entire gross receipts which according to him was not acceptable and found to be unreasonable. Therefore, he determined a theoretical income at an estimate of 9% of the gross receipts in the hands of the JV which otherwise had not accrued as contemplated u/s 5 of the Act. No income accrued to the appellant u/s 5 of the Act as admittedly the JV had not executed any work. Income, in fact and in law had accrued only in the hands of the constituent of the JV who executed the work. The learned AR cited the judgment of the Supreme Court in E.D, Sassoon & Co Ltd. v CIT (26 ITR 27) on accrual of profit/income wherein the court held that -
"The word "profits" has a well-defined legal meaning as was observed by Lord Justice Fletcher Moulton at page 98 in The Spanish Prospecting Company Limited [1911]1 Ch. 92- "The word 'profits' has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental 23 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== signification. 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. "
This concept of the term was also adopted by Mr. Justice Mahajan as he then was in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay [1950]18 ITR. 472 at 502 ;
" Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of business at two specific dates separated by an interval of an year and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by a comparison of the assets of the business at the two dates, the increase shown at a later date compared to the earlier date represents the profits of the business. "
The Court further on this principle held that -
The word "earned" has not been used in Section 4 of the Income- tax Act. The section talks of "income, profits and gains" from whatever source derived which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word "income" nor the words "is received", "accrues" and "arises" have been defined in the Act. The Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace & Co. [1932]I.LR. 59 Ca I. 1343 attempted a definition of the term "income" in the words following:
"Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. "
Mukerji, J., has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India [1925] 11.
24 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== ITC 363:
"Now what is income? The term is nowhere defined in the Act.. ..In the absence of a statutory definition we must take its ordinary dictionary meaning- 'that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L.J., in Colquhoun v. Brooks [1888] 21 Q.B.D. 52 at 59 [this part of the decision not having been affected by the reversal of the decision by the Houses of Lords [1889] 14 App. Cas. 493] that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.25 ITA No. 1197 to 1199/ Hyd/2011.
M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'.
The observations of Lord Justice Fry quoted above by Mukerji, J., were made in Colquhoun's case (supra), while construing the provisions of 16 and 17 Victoria Chapter 34, Section 2, Schedule '0'. The words to be construed there were "profits or gains, arising or accruing" and it was observed by Lord Justice Fry at page 59:-
"In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by'. If the enactment were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits ."
To the same effect are the observations of Satyanarayana Rao, J., in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd. [1950]18 ITR. 333, and Mukherjea, J., in Ahmedbhai Umarbhai & Co.'s case (supra), where this passage from the judgment of Mukerji, J., in Rogers Pyatt Shellac of Co. v. Secretary of State for India [1925] 1 ITC. 365 is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro See W.S. Try Ltd. v. Johnson (Inspector of Taxes) [1946]1 AII ER 532 at 539 and Webb v. Stenton and Others, Garnishees 11 Q.B.D. 518 at 522, 52. Unless and until there is created in favour of the 26 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.
"'The word "earned" even though it does not appear in Section 4 of the Act has beet) very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court. (Vide Ahmedbhai Umarbhai & Co. 's case (supra), and Commissioner of income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty & Co. [1953] 24 ITR 525 at 533). It has also been used by the. Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk [1900] A.C. 588 at 592. The concept however cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in prasenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression "earned" in the sense of rendering the services etc. by itself is of no avail.
31. Submitting so, the learned AR contended strongly that the Assessing Officer having nowhere disputed the facts that the JV had not executed the work and also that it had not incurred' any expenditure for execution of the same, misdirected himself in charging the income that had accrued only in the hands of the Lead Contractor/Sub-Contractor who factually executed the work by deploying their own resources.
32. The learned AR further submitted that the Assessing Officer could not make out any case nor pointed out to any clause of any agreement that they are questionable in any aspect. According to 27 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== him, the Assessing Officer misguided himself in bringing to charge the total turnover or gross receipts or income producing asset by making a wild estimate thereon in the hands of the appellant when on the facts of the case, the income producing asset itself is diverted at source in law. He submitted that the Assessing Officer could have brought to charge any income, if at all accrued in the hands of the JV, only when there is no transfer of income producing asset. In other words, the learned AR submitted that the Assessing Officer in law can bring to charge any income in the hands of a person only when there is mere diversion of income to another but not the transfer of income producing asset. He contended that this fundamental principle of law is otherwise known as 'charge is created only when there is application of income, but no charge is created when there is diversion of income by overriding title'. Thus, the learned AR argued that the action of the Assessing Officer is illegal in the case on hand as he had not adhered to the provisions of Income Tax Law, particularly the provisions of Section 60 of the Income Tax Act, 1961.
33. The learned AR submitted that the substance of the provisions of Section 60 makes it abundantly clear that all income arising to any person where there is no transfer of the asset from which the income arises, be chargeable to income tax as income of the transferor and shall be included in his total income. In other words, when there is transfer of the asset from which income arises, income arising from such income producing asset shall be chargeable to income tax as the income of the transferee/Lead Contractor or Sub-contractor alone. In the instant case, a part of the income producing asset being the project works valued at Rs. 173,54,37,697/- executed for this year having already been transferred by the appellant in favour of the Lead Contractor by the Agreements, Dated 27-11-2006, no income accrued in the hands of the JV nor it shall be liable to tax on any income out of 28 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== the said project value or gross receipts. Therefore, the Lead Contractor alone being the transferee who declared profits of Rs. 11.81 crores from a project value or gross receipts of Rs. 150.50 crores resulting in a profit percentage of 7.85% is liable to charge and the same was declared in its return of income. The learned AR submitted that the principle of law relied upon by the Assessing Officer is therefore, totally misconstrued and is inapplicable to the facts of the appellant's case as it applied only to sharing or distribution or apportionment of income by a member of an AOP which accrued already in the hands of an AOP. In this case, the JV received the bills on behalf of the Lead Contractor/Sub-Contractor who alone having executed the work established a legal claim for it. Accordingly, the appellant JV had rightly shown the entire gross receipts of Rs. 173,54,37,697/- as expenditure in its books as the same was legally liable to be paid to the Lead Contractor in terms of the Agreement, Dated 27-11-2006. Factually, the entire amount was paid by the JV to the Lead Contractor immediately as and when the same was released by the Principal Employer. The learned AR contended that the appellant JV is not entitled to any portion of it as per the terms of the Agreements. The entire gross receipts excluding the deductions made by the Principal Employer thus was transferred by the JV to the Lead Contractor before it reached its coffers. Thus, the learned AR submitted that the action of the appellant is in consonance with the principles and the provisions of Section 60 of the Act.
34. In support of his submission, the learned AR, relied upon the decision of Supreme Court in Dalmia Cements Ltd. v. CIT (237 ITR 617) wherein the court elaborated this principle in the following words:
"9. The concept of diversion of income by an overriding title has been very lucidly explained by this Court in 29 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 in the following manner:
" ... In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable .... " (p. 374)
10. In CIT v. Travancore Sugar & Chemicals Ltd. (1973) 88 ITR 1, this Court reiterated the same test and observed:
" ... It is, thus, clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But, where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is, therefore, not deductible." (p. 13) In this context, reference to a Bench decision of the Calcutta High Court in the case of CIT v. Jhanzie Tea Association [1989]179 ITR 295 also seems to be apposite. S.C. Sen, J. (as His Lordship then was) in the last noted decision observed:
"It is true that the income-tax liability cannot be assigned by any agreement. The revenue is entitled to proceed against the person who earned the income but where the income has been diverted by an 30 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== overriding title even before accrual, then the Income- tax Officer cannot proceed to assess the income, thus, diverted as the income of the transferor. In this case, not only had the tea estates been transferred but the income accruing therefrom had also been transferred to the purchaser with effect from January 1, 1969. All its manufacturing activities as from that date were on behalf of the purchaser. The income attributable to the manufacturing activity accrued to the purchaser. I fail to see how the income realized from sale of such tea can be assessed as the income of the vendor.
In this connection, reference may be made to the observations made by G.K. Mitter, J. in the case of CIT v. Tea Producing Co. of India Ltd. [1963]48 ITR 200 (Cal.), where it was stated that before a person could be assessed under section 10, it must be shown that it was he who carried on the business, profession or vocation and in the case of a business, it was open to any person to put another person in charge thereof although ostensibly such person appeared to be carrying on the business, in reality the business was that of the person who owned it and under section 10 of the Act such owner of the business would be the assessee. it was observed in the case that (at page 206) :
"It a business carried on by A is transferred to B as from a certain point of time, B alone can be assessed to tax in respect of the period subsequent to the change of the ownership. A and B may agree that any profits or loss of the business as from a date anterior to that of the change of ownership will be on B's account. In such a case, A will have to account to B for the income and profits of the business covered by the period of the agreement and A may be held to have carried on the business as B's agent from the agreed date.' " (p. 301)
12. Similar is the view expressed by the Bombay High Court in the case of CIT v. M.D. Kanoria [1982] 1371TR 137.
The law, thus, seems to be well-settled by a long catena of cases to the effect that in the event of there being a diversion of income byoverriding title, question of the income being assessed in the hands of the assessee does not and cannot arise.31 ITA No. 1197 to 1199/ Hyd/2011.
M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
35. Contending so, the learned AR argued on this ground that in view of the aforesaid provisions of Section 60 of the Act and the law settled down by the Supreme Court in plethora of cases which is applicable on all fours to the facts of the appellant's case, the action of the Assessing Officer has no legs to stand. He contended that the case law relied upon by the Assessing Officer though in principle are correct to the facts and circumstances of those cases, but they have no application to the facts of the appellant's case in any manner whatsoever. Thus, the learned AR argued that no income accrued in the hands of the JV as the entire project value of the work in the form of gross receipts being an income producing asset was divested and or transferred by the appellant to its constituent. According to him, the understanding and or the agreement amongst the constituents of the JV is only diversion of income by overriding title which principle shall not enable the Assessing Officer to estimate any theoretical income for the purpose of levying income tax and as such the appellant is not liable to income tax assessment on the gross receipts of Rs. 173,54,37,697.
36. Regarding the addition u/s. 43B, the AR submitted that the Assessing Officer made an addition of Rs. 2,50,62,432 u/s 43B being the balance amount of VAT at 1.2% which was withheld by the Irrigation Department of the State Government of Andhra Pradesh subject to certain clarifications to be received by them from the Commercial Taxes Department. The assessee JV withheld the same in turn from the amounts paid to the Lead Contractor/Sub-Contractor. However, the Assessing Officer was of the mistaken view that the assessee JV debited the same to Profit & Loss Account and did not pay the same to the Department before the due date for filing the return of income which in fact is not correct. In this connection, the AR submitted that the differential VAT amount of Rs. 2,50,62,432 was withheld by the Department and not received by the JV till 31-03-2008. Therefore, an 32 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== equal amount was withheld by it from the amounts payable to the Lead Contractor/Sub-Contractor and as such the same was shown in the Balance Sheet of the JV under both "Assets" and "Liabilities". This position is amply clear from the detailed statement showing details of gross turnover, recoveries made on various accounts, VAT amount withheld, recovery of mobilization advance, etc. The provisions of Section 43B contemplate disallowance only if the amount was received and outstanding for payment at the end of the year in the books of account of an assessee. In the instant case, the work was given on back-to-back sub-contract basis and the amount of VAT was not received by the JV as the same was withheld by the Department and therefore, the JV had to withhold an equal amount from the payments to be made to the sub- contractor.
37. Regarding the issue of addition u/s. 40(a)(ia), he submitted that the Assessing Officer disallowed Rs. 25,41,76,000 being the mobilization advance received from the I & CAD Department of AP by the assessee and transferred to two of its constituents, viz., KBL and MEIL by alleging that since no TDS was deducted from the said amount while transferring to the aforesaid constituents, section 40(a)(ia) is attracted resulting in the disallowance. The Assessing Officer in the course of assessment proceedings required the JV by his Letter Dated 01-09-2010 for explanation of the same. In response thereto, a reply Letter Dated 23-10-2010 was filed before the Assessing Officer. The Assessing Officer by another Letter Dated 16-12-2010 sought for explanation from the JV and in response to which the assessee filed another letter dated 24-12- 2010. In these letters, the assessee furnished the information required by the Assessing Officer and also explained that firstly that the JV had not debited any expenditure in its profit & loss account on account of mobilization advance nor claimed any deduction of the same in its return of income and as such the provisions of Section 40(a)(ia) are not attracted. It was also explained to the Assessing Officer that TDS was deducted by the 33 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== JV at 1.133%. However, the Assessing Officer brushed aside the explanation of the assessee JV and resorted to disallow Rs. 25,41,76,000 by simply stating that the JV has violated the TDS provisions.
38. The AR submitted that it is the common practice in the line of construction contracts that principal employer on awarding a contract for construction or development of any infrastructure facility, a portion of the project value is released towards mobilization advance for enabling the contractor to equip itself with the necessary resources like plant and machinery or other equipment for execution of the project work. This amount is only on capital account and there is no element of income embedded in it as the principal employer deducts the same from out of the amounts due or running account bills raised against the completed work by the contractor from time to time. However, TDS is deducted regularly by the principal employer as and when it releases such mobilization advance. Therefore, the income tax department doesn't grant credit for such TDS in the first year itself and credit for TDS is granted only in proportion of the work executed from year to year. This practice adopted both by the assessees and the department has been consistent. In the instant case, the JV on receipt of the mobilization advance of Rs. 25,41,76,000 from the Principal Employer disbursed or released the same to its constituents by deducting the necessary TDS. Therefore, no expenditure on account of disbursal of such mobilization advance to the account of the constituents arise under law. However, the Assessing Officer lacked the comprehension of the nature of mobilization advance and he was of the opinion that the same was claimed as expenditure by the JV in its books which could not have been done under any principle of law. Proceeding further, the Assessing Officer was under the wrong notion that since no TDS was deducted by the assessee, he 34 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== was of the mistaken view that the same is disallowable u/s 40(a)(ia) of the Act.
39. The AR submitted firstly that the findings of the Assessing Officer are self-contradictory on the face of it. In Para No.(b) at Page No. 16 of the Assessment Order, the Assessing Officer categorically admitted as follows: "In the instant case, the assessee has deducted TDS on the Mobilization Advance, however, the assessee while making payments to the contract receipts erred in deducting the TDS". Having admitted the fact of deducting TDS, the Assessing Officer blatantly erred in making the disallowance. Further, the Assessing Officer failed to comprehend the provisions of section 40(a)(ia) of the Act when in fact the same is applicable only when there is expenditure or deduction claimed by an assessee and if no TDS is deducted there from, such expenditure or deduction is not allowable, whereas the assessee had not claimed any expenditure or deduction on account of "Mobilization Advance". This is for the simple reason that the Mobilization Advance stands as Liability in the books of accounts of the Lead Contractor/Sub- Contractor as it is only on capital account and the JV could not have claimed any expenditure on this account. Therefore, the Assessing Officer unwarrantedly invoked the provisions of Section 40(a)(ia) of the Act to the facts of the assessee's case as the same is inapplicable by any stretch of imagination.
40. The AR submitted that the CIT (Appeals) dealt with this issue and cancelled the disallowance as the same is baseless and unwarranted on the basis of the self contradictory findings of the Assessing Officer and also that the provisions of Section 40(a)(ia) are not applicable to the facts of the assessee's case. In view of the aforesaid, the AR submitted that the order of the CIT(A), Hyderabad, dated 06-04-2011 which gave rise to the Departmental Appeal in ITA No. 1197/Hyd/2011 is well reasoned and is in 35 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== accordance with the provisions of Income Tax Act, 1961 and as such the Departmental Appeal is not sustainable in law. The AR submitted that the Tribunal may dismiss the Departmental Appeal in ITA No. 1197/Hyd/2011 in the assessee's case by confirming the order of the CIT(Appeals), dated 06-04-2011. The AR further requested the Tribunal to direct the Assessing Officer to grant the refund of the amounts due to it together with interest as per law in the interests of justice.
41. We have heard both the parties and perused the material on record. It is an admitted fact that in these cases after filing of appeal before the Tribunal the Assessing Officer filed petition u/s. 154 before the CIT(A) seeking rectification of order. The CIT(A) passed the rectification order in these cases rejecting the same. For clarity, we will record the findings given by the CIT(A) in the case of IVRCL-KBL-MEIL (JV):
2.0 I have considered the petition u/s. 154. I find from a perusal of the assessment order as well as the appellate order that there is no discussion of this argument, that the assessee had claimed TDS without offering the corresponding income in his hands which was in contravention of the relevant provisions of the Income-tax Act, either in the assessment order or the appellate order.
Non-examination of a particular argument is not an error apparent from record rectifiable u/s. 154. To examine and adjudicate on the plea of the Assessing Officer at this stage would amount to as review of the appellate order which is not permissible under the Act.
42. Similar order was passed in the case of IVRCL-JL (JV) and in the case of IVRCL-KBL(JV). The above orders show that the Department exhausted the alternative remedy also.
43. Coming to the issue or estimation of income on contract, it is an admitted fact that the assessee carried on the business through JVs. The first assessee before us, M/s. IVRCL-KBL-MEIL a Joint Venture between M/s. IVRCL Infrastructure & Projects 36 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== Limited, M-22/3RT, Vijaynagar colony, Hyderabad, M/s. Kirloskar Brothers Limited, Udyog Bhavan, Tilak Road, Pune and Megha Eng & Infrastructures Ltd., S-2 TIE, Techno Industrial Estate, Balanagar, Hyderabad with share of 65%, 20% and 15% respectively. It came into existence by a Joint Venture agreement among these three parties w.e.f. 02.06.2007. The objective of the Joint Venture is execution of contract works of investigation, design, supply, delivery of pumps, motors and pressure main at site work including erection, commissioning and testing of 8 Nos. at each pumping station of hydro-mechanical, electro-mechanical and other accessories etc, of AVR-HNSS project main canal for stage II of Phase I . It was awarded to the assessee JV with total contract value being Rs. 761,24,00,000 crore from Govt of Andhra Pradesh Irrigation & Cad Department.
44. As seen from the Profit & Loss account, the assessee's gross turnover is of Rs. 208,85,35,883 for the year ending 31-3-2008. The entire amount has thereafter been debited as expenditure under the head "sub contract expenses". It is also seen that project works have been sub-contracted to JV members on back to back basis. It was further seen that the said sub contract is among the JV constituents i.e. M/s IVRCL, M/s KBL & M/s MEIL. In other words, the entire income has been diverted in the hands of the members by way of a subcontract. The assessee has declared 'NIL' income in the return of income for A.Y. 2008-09. Irrigation and CAD department of AP Govt deals with joint ventures and not with the constituents of the JV members. JV undertakes liability from Irrigation and CAD department of AP Govt but only for internal purposes, the JV has divided the liabilities amongst its members. JV is regularly receiving the payments from Irrigation and CAD department of AP Govt. It is the JV which is entitled for participating in the bid and not its members.
37 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
45. The Assessing Officer examined two issues in the case of assessee (a) Determination of taxable income in the hands of JV assessee itself based on its entire activities and performance as it has filed the tender on its eligibility got the award from Irrigation and CAD department of AP Govt, entered into contractual agreement with Irrigation and CAD department of AP Govt for the successful completion of the project as against NIL income offered by the assessee in complete disregard to risk and responsibility undertaken by it and (b) examining the claim of expenditure on sub-contract payment of Rs. 208,85,35,883 from the perspective of excessive and unreasonableness of such payment u/s. 40(A)(2)(b) of LT. Act, 1961 because entire gross contractual receipts of Rs. 208,85,35,883/- being passed on its members fully by way of sub-contract payment. The joint venture instead of retaining the suitable contribution for its performance, has passed on the entire receipt to its members who are also covered by section u/s 40 (A) (2) (b) of I. T. Act, 1961.
46. The next assessee, M/s. IVRCL-KBL (JV) is a JV between M/s. IVRCL Infrastructure & Projects Limited, M-22/3RT, Vijaynagar colony, Hyderabad and M/s. Kirloskar Brothers Limited, Udyog Bhavan, Tilak Road, Pune. It came into existence through a Joint Venture agreement between these two parties w.e.f. 15.03.2007. The contract works of investigation, design, supply and erection of components to lift 16.40 TMC from Gandikota reservoir to storage reservoir I and II awarded to the assessee JV with total contract value of Rs. 551 crores by the Govt of Andhra Pradesh Irrigation & Cad Department. During the course of assessment proceedings it was noticed that in the profit & Loss account, the assessee has shown gross turnover of Rs. 149,81,40,236 and the entire amount has thereafter debited as expenditure under the head "sub contract expenses". It is also 38 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== seen that project work has been sub-contracted to JV members on back to back basis. It was further seen that the said sub contract is between the assessee and its constituents i.e. M/s IVRCL & M/s KBL. In other words, the entire income has been diverted in the hands of its members by way of a subcontract. The assessee joint venture has declared 'NIL' income in the return of income for A.Y. 2007-08. Irrigation and CAD department of AP Govt deals with joint ventures and not with its members. JV undertakes liability from Irrigation and CAD department of AP Govt but only for internal purposes, the JV has divided the liabilities amongst its members. JV is regularly receiving the payments from Irrigation and CAD department of AP Govt. It is the JV which is entitled for participating in the bid and not its members. The Assessing Officer examined the two issues in the case of assessee:
a. Determination of taxable income in the hands of JV itself based on its entire activities and performance as it has filed the tender on its eligibility got the award from Irrigation and CAD department of AP Govt, entered into contractual agreement with Irrigation and CAD Department of AP Govt for the successful completion of the project as against 'NIL' income offered by the assessee in complete disregard to risk and responsibility undertaken by it.
b. Examining the claim of expenditure on sub-contract payment of Rs. 149,81,40,236 from the perspective of excessive and unreasonableness of such payment u/s 40(A)(2)(b) of IT Act, 1961 because entire gross contractual receipts of Rs. 149,81,40,236 being passed on its members fully by way of sub-contract payment. The joint venture instead of retaining the suitable contribution for its 'performance, has passed on the 39 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== entire receipt to its members who are also covered by section 40 (A)(2)(b) of IT Act, 1961
47. Similarly M/s. IVRCL-JL (JV) is a JV between M/s. IVRCL Infrastructure & Projects Limited, and M/s. Jyothi Limited (JL). It came into existence by a Joint Venture agreement between these two parties w.e.f. 27.11.2006. The contract works of investigation, designs, estimation & construction of pumping stations including erection & commissioning etc., of HNSS main canal of Peruru Branch canal awarded to the assessee JV by the Govt of Andhra Pradesh Irrigation & CAD Department. The total contract value is Rs. 557,80,00,000. During the course of assessment proceedings, it was noticed that in the profit & Loss account, the assessee has shown gross turnover of Rs. 173,54,37,697. The entire amount has thereafter been debited as expenditure under the head "sub contract expenses" and opening work in progress. It is also seen that project work has been sub-contracted to JV members on back to back basis. It was further seen that the said sub contract is between the assessee and its members i.e. M/s IVRCL & M/s JL. In other words, the entire income has been diverted in the hands of the members by way of a subcontract. The assessee joint venture has declared "NIL" income in the return of income for A.Y. 2007-08. Irrigation and CAD department of AP Govt deals with joint ventures and not with its members. JV undertakes liability from Irrigation and CAD department of AP Govt. but only for internal purposes. The JV has divided the liabilities amongst its members. JV is regularly receiving the payments from Irrigation and CAD department of AP Govt. It is the JV which is entitled for participating in the bid and not its members. The following two issues are examined in the case of assessee:
a. Determination of taxable income in the hands of JV assessee itself based on its entire activities and 40 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== performance as it has filed the tender on its eligibility got the award from Irrigation and CAD department of AP Govt. entered into contractual agreement for the successful completion of the project and the assessee in complete disregard to risk and responsibility undertaken by it.
b. Examining the claim of expenditure on sub-contract payment of Rs. 173,54,37,697/- from the perspective of excessive and unreasonableness of such payment u/s 40 (A) (2) (b) of LT. Act, 1961 because entire gross contractual receipts of Rs. 173.54 crores, being passed on its members fully by way of sub-contract payment.
The joint venture instead of retaining the suitable contribution for its performance, has passed on the entire receipt to its members who are also covered by section u/s 40 (A) (2)(b) of LT. Act, 1961
48. The dispute herein is regarding assessability of income in the hands of the assessee as an Association of Persons (AOP). The case of the Assessing Officer is that the "JV and its members should be treated as separate persons and hence the contracts allocated to the members should be treated as "sub contracting receipts". On the other hand, the assessee made a case that the JV has come into existence only to procure and win the contracts and the contracts were allocated between the members and the members executed the contracts and offered income for taxation in their respective hands. The assessee further made a contention that after successfully bidding for the project, the JV offered to sub-contract the total work awarded to the JV partners on a back to back basis without retaining any margin with the JV. As per sub-contract agreement the entered with the JV partners by the JV, all the payments received from the parties were transferred to 41 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== the sub-contract as also all related liabilities and related expenditure. No way could the assessee be considered as a party executing the contract. The members of the JV have booked the contract receipts in their books and offered the same for taxation. The purpose of forming the JV is in order to get qualifies for any tender process. They regulate themselves by entering into a JV agreement, the methodology to be adopted for executing the contracts awarded. When two or more join together forming association for the purpose of carrying out the contract it falls in the category of AOP under the Income-tax Act, 1961. There is a dispute regarding assessability of AOP. This issue came before the Supreme Court in the following cases:
The Hon'ble Supreme Court has made a detailed discussion on the concept of "Joint Venture" in the case of Fazir Chand Gulati vs. Uppal Agencies Private Ltd. (2008) 10 SCC 345 (2008-TIOL-147-SC-MISC). The relevant observations are extracted below:
"17. This Court had occasion to consider the nature of "joint venture' in New Horizons Ltd vs. Union of India [1995) (1) SCC 478). This Court held:
"The expression "joint venture" is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p. 839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P. 117, Vol. 23}. "[Emphasis supplied] The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol. 46 pages 19, 22 and 23} is relevant:42 ITA No. 1197 to 1199/ Hyd/2011.
M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== "A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise. Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships."
"A joint venture is to be distinguished from a relationship of independent contractor, the latter' being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation. " (Emphasis supplied) To the same effect is the definition in Corpus Juris Secundum (Vol. 48A pages 314-315):
"Joint venture," a term used interchangeably and synonymous with joint adventure', or co-venture, has 43 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== been defined as a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit or a special combination of persons undertaking jointly some specific adventure for profit, for which purpose they combine their property, money, effects, skill, and knowledge Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement." (emphasis supplied) Black's Law Dictionary (7th Edition, page 843) defines 'joint venture' thus "Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out,' (3) shared profits and losses; and (4) each member's equal voice in controlling the project."
9. On a careful reading of the order of the Hon'ble Supreme Court, we notice the following essential ingredients for a "Joint Venture".
a) It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit. (or)
b) it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership. (or)
c) a special combination of two or more persons wherein some specific venture for profit is jointly sought without 44 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit.
d) that each joint venture must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise.
e) Among the acts or conducts which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are:
(1) joint ownership and control of property;
(2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings;
(3) community of control over, and active participation in, management and direction of business enterprise;
(4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement."
10. As stated earlier, in order to participate in the global tender process, some of the foreign companies have established joint ventures with the Indian Companies. With regard to the issue of the assessability of Joint ventures, the foreign companies have approached the Authority for Advance Ruling (AAR). We discuss below the decision rendered by AAR in brief.
a) Van Oord ACZ BV (248 ITR 399): In this case the parties therein had specifically provided in the agreement that each party will bear its own loss and retain the profits separately. There was also specific declaration that it was not the intention to create a joint venture to carry on business in common. The parties therein had undertaken separate scope of works according to their respective technical skills. There was no control and connection between the work done by each of the parties. Thus it was noticed that there was no intention to carry out any business in common. Under these factual circumstances, the AAR held that the consortium cannot be treated as Association of Persons under the Income Tax Act. It is pertinent to note 45 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== that this decision was rendered prior to 1.4.2002, i.e. prior to the insertion of of the Explanation to section 2(31).
b) Geo Consult ZT GMBH (304 ITR 283): In this case, though the work was allotted to each of the members and each member has to bear its own costs and expenses, yet it was noticed that the agreement stated that the members will collaborate for all the work associated with the project which is to be managed on a joint basis by all the members. Further the agreement provided that the members are jointly and severally responsible for execution of project. The AAR has expressed opinion, by placing reliance on the decision of Hon'ble Supreme Court in the case of N.V. Shanmugam and Co. V CIT (1971) 81 ITR 301 that the ultimate division of profits amongst members of the joint enterprise is not a relevant criterion. Finally it was held that the Joint venture is assessable as "AOP".
c) M/s Hyundau Rotem Co., Korea and M/s Mitsubishi Co., Japan (AAR Nos. 798-799 of 2008 dt. 23-03-2010). In this case, the AAR has held that the Consortium formed by four members is not assessable as AOP, since the AAR has felt that the facts of the case are similar to the facts relating to Van Oord ACZ BV, supra.
Section 2(31) of the Act defines the term "Person", which inter aliaa, include "an association of persons or a body of individuals, whether incorporated or not. Since the term "Association of Persons" (AOP) was not defined in the Act, the Courts have interpreted to mean that it is an association established to produce income. Hence the Finance Act 2002 has inserted an "Explanation" to section 2(31), according to which, an AOP shall be deemed to be a person, whether or not such AOP was formed or established with the object of deriving income, profits or gains. However, in the instant case, there is no dispute with regard to the assessability of the "Joint Venture" per se. Both the assessee and the department have taken the stand that the "Joint Venture" is assessable in the status of "Association of Person". However, the issue is whether the AO is right in treating the Joint Venture-AOP as the main contractor and its members as the sub-contractors, thereby estimating the income which was not earned by the Joint Venture.
46 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
49. Adverting to the facts of the present case more specifically clause 4 and 6 JV agreement which reads as follows (Ref. ITA No. 1199/H/11):
"4. If the said joint venture is successful in procuring the said works, the parties of the Joint Venture will fulfil the responsibilities of each for proper execution of the works as set out in this agreement.
6. Each member of the Joint Venture agrees to place at the disposal of the Joint Venture the benefit of all its experience, technical knowledge and skill and shall to all respects bear its share of responsibilities and burden of completing the contract as stated below:
1 IVRCL Complete design and 90% value of construction of pipeline, physical Specials, Civil, works Mechanical, Electrical Works and Erection & Commissioning
2. Jyoti Pumps & Motors 10% Value of Ltd. physical works.
7. Each member of the Joint Venture shall be responsible to mobilise his part of infrastructure project e.g., Engineers, Technicians, Manpower, Plant, Machinery, Vehicles, Lab & Survey Equipment and full financial resources required to complete the performance of the contract in time as per accepted time schedule."
50. As seen from the terms of JV as narrated above, in the instant case the JV has been formed between the parties only to procure contract works. The JV agreement between the parties only regulates the relationship with respect to their responsibility that exists in relation to the principal who award the contract. It appears that the contracts awarded and received by the JV i.e., the present assessee, have been passed in their entirety to the constituent members to carry out the contracts and they have booked the contract receipt in their books of account and offered the same for taxation. If each member of the JV offered the income derived from respective share of contract works in their 47 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== hands it is not possible to tax the same contract receipt in the hands of the consortium of JV. There is no merit in the argument of the DR that the JV is the "main contractor" and members are the sub-contractors. Further there is no meaning in estimating the income in the hands of the assessee. This view of ours is supported by various orders of the tribunal viz., ITO vs. UAN Raju Constructions (2011-TIOL-542-ITAT-VIZAG) wherein held that when the object for the formation of the JV is only to procure contract, and as per the agreement both the constituent members of the JV are responsible for their work separately, the amount of profit allocated is only taxable in the hands of the assessee not in the hand of the JV "AOP".
51. Further we find that similar issues came up for consideration before this Tribunal in the case of M/s Limak Soma Joint Venture, Hyderabad in ITA Nos. 498 to 500/Hyd/2006 for the assessment years 2002-03 to 2004-05 vide its order dated 4.11.2011 the Tribunal in Para No.6 has held as follows:
"6...........We have considered the rival submissions carefully and have perused the orders of the assessing officer and the CIT(A) and the contents of the compilation filed by the assessee before us. We find that the income in the hands of the assessee-AOP has been estimated at 2% of the payment to individual members by invoking the provisions of S.145 of the Act. We find that the assessing officer has made the addition on estimate basis by observing that the payment made by the assessee-AOP to its members appears to be excessive and unreasonable, having regard to the fair market value of such services. The assessing officer has not placed on record any basis for such observation made by him. What is the fair market value of such services rendered by the members of the assessee-AOP to the joint venture has not been detailed by the assessing officer. The assessing officer has made the disallowance under S.40A(2) of the Act, holding that the payment made for work entrusted to the members of the joint venture is excessive and unreasonable, without comparing the payment made to the fair market value of such services. Disallowance 48 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== under S.40A(2) of the Act could be made only when the assessing officer on the basis of some material brought on record, could come to the conclusion that the expenditure incurred by the assessee was excessive or unreasonable, having regard to the fair market value of the goods/services or facilities for which the payment was made. No such case was made out by the Revenue in this case of the assessee. We find force in the argument of the learned counsel for the assessee that it could not be a case of tax evasion as the rate of taxation of the members of the Joint Venture was higher than the rate of taxation applicable to the assessee, as the members of the Joint Venture are foreign concerns. There is no material brought on record to doubt the genuineness of the relevant agreement, copy of which is filed in the compilation filed before us. We find that the CIT(A) has given a finding that the assessee has maintained regular books of account, which were audited and it has filed audited Balance Sheet and Receipts and Payments Account before the authorities, copy of which has been filed in the compilation before us. The CIT(A) has further mentioned that the assessing officer has not recorded any finding that the books of account were not correct and complete. The CIT(A) has observed that the only objection of the assessing officer appears to be non- striking of Profit & Loss Account, but the same could not insisted in situations where income and expenditure do not exist and what exist are receipts and payments only. The CIT(A) has further observed that the question of estimating the profit does not arise and the assessing officer has contradicted himself by applying the provisions of S.40A(2) of the Act and also invoking the provisions of S.145(3) of the Act. We find that these findings of the CIT(A) could not be controverted on behalf of the Revenue before us. In reply to a specific query from the bench, the learned counsel for the assessee submitted that no deduction of 2% of the receipts treated as income of the assessee AOP was allowed by the Department in the hands of the members of the AOP. We find that the CIT(A) has given a finding that the appellant AOP did not execute any contract work in question and therefore, did not derive any income during the year and the additions made by the assessing officer could not be sustained. In the facts of the case, we hold that there is no mistake in the order of the CIT(A) in holding that the question of estimating profit does not arises and in deleting the 49 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== addition made in the hands of the assessee. We hold that no case for disallowance/addition could be made under S.40A(2) by the Revenue and accordingly, there being no merit in the grounds of appeal of the Revenue, the same are rejected for all the three assessment years in appeal before us".
5. Respectfully, following the orders of the Co- ordinate Bench of this Tribunal, we hold that no case for disallowance/addition could be made u/s 40A(2) by the Revenue and since there being no merit on the grounds of the appeal of the Revenue, the grounds taken by the Revenue are rejected.
7. In the result, the appeal of Revenue is dismissed.
ITA No. 150/Hyd/200852. Further, the Tribunal in the case of PCL SUNCON JV & PLL STITCO JV vide order dated 11th April 2012 in ITA No. 149- 160/Hyd/2008 has followed the earlier order of the Tribunal dated 4.11.2011 in the case of M/s. Limak Soma Joint Venture (cited supra).
53. In our opinion, no income accrued in the hands of the present assesee as JV as the entire project value of the work in the form of gross receipts being an income producing asset was divested and was transferred by the assessee to its constituents. The understanding and or the agreement amongst the constituents of the Joint Venture is only diversion of income by overriding title which principle shall not enable the Assessing Officer to estimate any theoretical income for the purpose of levying tax on it. In view of the above discussion, we are of the opinion that the CIT(A) is justified in holding that income is to be assessed not in the hands of the assessee.
54. The facts in all the cases herein are similar on this issue. Accordingly, we also reject the assessability of income in the hands of the assessees in appeal in ITA No.1198 & 1199/Hyd/2011.
50 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
55. Coming to the second ground relating to disallowance of expenditure u/s. 40(a)(ia) on mobilisation advance in ITA No. 1197/Hyd/2011, as we have held already in earlier paras of this order that the assessment of income in the hands of the assessees is not possible as the JV is only for facilitating the business among the constituent members. The Assessing Officer made the disallowance of Rs. 25,41,76,000 u/s 40(a)(ia) of the Act holding that no TDS was deducted from the mobilization advance while transferring to the constituents. He was of the view that since TDS was not deducted, section 40(a)(ia) is attracted resulting the disallowance. We agree with the submissions of the learned AR that mobilization advance is not on revenue account and question of claiming it as revenue expenditure doesn't arise. The provisions of section 40(a)(ia) of the Act are attracted only when any sum is claimed as expenditure and if no TDS is deducted therefrom, such expenditure or deduction is not allowable. The assessee had not claimed any expenditure or deduction on account of "Mobilization Advance" and it is really incomprehensible as to how the Assessing Officer could invoke section 40(a)(ia) of the Act to the mobilization advance of Rs. 25,41,76,000 which is nothing but a conjecture having no valid reason. Besides, the findings of the Assessing Officer are self contradictory in the sense that he himself admitted the fact of deduction of TDS by the assessee and having admitted that assesee has deducted TDS on mobilisation advance in para No. (b) at Page No. 16/18 of the Assessment Order, that, what inspired him to make such a disallowance is really incomprehensible. Therefore, we hold that the disallowance of Rs. 25,41,76,000 made by the Assessing Officer u/s 40(a)(ia) is totally unwarranted and baseless and the same is cancelled. This ground is rejected.
51 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
56. The next ground with regard to disallowance of expenditure u/s. 43B stating that the differential amount of VAT was not paid to the Department. This issue is in ITA Nos. 1197, 1198 & 1199/Hyd/2011, we heard both the parties on this issue. We have already held in the foregoing paras that since there is no income liable to tax in the hands of the assessee on the gross receipts divested by it, the Assessing Officer is not empowered to make any disallowance unless otherwise provided for in the Income Tax Act, 1961 for violating any provision thereof. The learned AR of the assessee referring the ITA No. 1197/Hyd/2011 submitted that the Irrigation & CAD Department, Govt., of AP deducted VAT at 2.8% on the gross contract receipts and recovered the same from the RA bills. However, the Principal Employer withheld an additional 1.2% from the RA bills amounting to Rs. 2,50,62,432/-, but the same was not paid to the Commercial Taxes Department as they were seeking clarifications with regard to the rate of tax. This factual position is very clear from the copy of the "Statement showing particulars of RA Bill details, Recoveries & Net Bill Paid to JV" placed on record. The assessee has to, as a matter of fact, withhold the same amount from the RA Bills disbursed to the Lead Contractor and show it as both "Assets" and "Liabilities" in its Balance Sheet which was done accordingly. There is no complication involved in this issue and the Assessing Officer has totally disregarded the fundamental principles of income tax law while making the addition u/s 43B of the Act which is unwarranted on the face of it. Therefore, we confirm the deletion of the addition of made u/s. 43B of the Act. This ground is rejected in all these appeals.
57. The next ground in ITA No. 1198/Hyd/2011 and 1199/Hyd/2011 is with regard addition made towards difference in Balance Sheet. We have heard both the parties on this issue. We have carefully gone through the orders of the lower authorities.
52 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== The facts in ITA No. 1198/Hyd/2011 on this issue are that an addition of Rs. 31,75,00,000 made by the Assessing Officer holding that there is a difference in the figures of the Balance Sheet. The Assessing Officer has initially required the assessee by his letter dated 16-12-2010 by seeking explanation for the Sundry Debtors of Rs. 26.16 crores as according to him the Sundry Debtors should have been at Rs. 63.76 crores against Rs. 26.16 crores. In response thereto, the assessee filed its letter dated 27- 12-2010 and furnished the statement of reconciliation. The learned AR of the assessee contended that the Assessing Officer could not properly comprehend the reconciliation and he made his own workings with a misconceived notion that the Sundry Debtors should have been only at Rs. 63.76 crores. The learned AR of the assessee argued that Assessing Officer had worked out the impugned difference of Rs. 31,75,00,000 in a hastened manner without application of mind.
58. The learned AR of the assessee submitted that he filed a letter dated 27-12-2010 in a detailed manner and had shown as to how the Sundry Debtors of Rs. 26.16 was arrived at in the Balance Sheet. He alleged that however, the Assessing Officer in utter disregard of the explanation offered by the assessee had arrived at his own figure of the impugned difference of Rs. 32,75,00,000 which was based on mere guess work, surmise and conjecture and without any valid reason. The learned AR of the assessee explained the workings of the turnovers of the JV, Mobilization Advances recovered by the Department (Principal Employer) along with other recoveries and the balances due from the Department in Project L1-01 and L1-02 which are shown hereunder:
Amount (Rs. in crores) Gross turnovers of the JV as shown in the Profit & Loss Account (At Page 45 of the Paper Book) Rs in Crs PADA Pkg I 63.54 53 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
PADA Pkg 11 86.27 149.81
Less: Recoveries made by the Department
PADA PADA Total Rs
Pkg I Pkg 11 in Crs
Mobilisation advance recovery 16.75 29.36
Security deposit 2.77 2.97 5.74
Interest on Mobilisation advance 0.68 0.61 1.29
Labour welfare cess (1 %
Professional tax) 0.43 0.70 1.13
Tax deducted at source 1.25 1.55 2.80
VAT (2.80% recovered) 1.78 2.41 4.19
NAC 0.16 0.21 0.37
Seionrage charges 0.12 0.12
VAT (1.20% with held by Dept) 0.76 1.03 1.79 46.79
103.02
Less: Amounts received from Department against R.A bills (net) as 76.86 per Receipts & payments of Bank accounts Sundry Debtors in the Balance sheet. 26.16
59. He drew our attention to workings of Mobilisation Advance received and recovered along with other recoveries and net amounts payable of both the packages PADA-I and PADA-II and the statements of R.A. Bills. He drew our attention to a detailed statement showing details of gross turnover, recoveries made on various accounts, recovery of mobilization advance, etc.
60. We have gone through the facts of the case on this issue and orders of the lower authorities. At the outset, we are fully agreement with the findings of the CIT(A) on this issue. Further, we are of the considered opinion that the assessee JV is not at all liable to charge on the gross receipts for various reasons and findings given by us in the foregoing paragraphs, the Assessing Officer should not have made any disallowance. This reasoning is similarly applicable for any addition. This is for the reason that when the assessee is not at all liable to tax on the gross receipts since it did not execute any work as the same was divested to one of its constituents, viz., IVRCL Infrastructure and Projects Ltd., there shall be no question of any disallowance or addition. In other words, when the assessee has diverted or transferred its 54 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== commercial asset of the project value at source itself no income accrued to it. In such an event, the Assessing Officer is not empowered to make any disallowance or addition unless otherwise provided for in the Income Tax Act, 1961 for violating any provision thereof.
61. Coming to the merits of the addition, we have gone through the workings furnished by the assessee and it is very clear from the figures appearing in the Balance Sheet that the Assessing Officer committed grave mistakes in adopting the amounts receivable from Department as Rs. 63.76 crores instead of the actual receivables of Rs. 26.16 crores, as he had taken the Departmental recoveries at Rs. 9.37 crores, whereas from the table above, it can be clearly seen that the total recoveries made by the Department was Rs. 46.79 crores including Rs. 29.36 crores towards recovery of mobilization advance. We further find that the Assessing Officer was clearly mistaken in mentioning that the Mobilisation Advance received from the Department as Rs. 33.35 crores, when in fact the Mobilisation Advance received by the JV in both the packages as mentioned in the Enclosures was Rs. 33,46 crores. The recovery of Mobilisation advance also was wrongly taken by him as Rs. 16.74 crores, which was the recovery from PADA - Pkg II (L1-02) only and he wrongly took the figures of the recovery of Mobilisation Advance from Pkg - I (L1-01) of Rs. 12.61 crores, with the net balance of mobilization advance payable to Department being Rs, 4.10 crores. The Assessing Officer had wrongly mentioned the figure of Rs. 3.73 crores as payable to Department towards balance Mobilisation Advance, when in fact, the amount of Rs. 3.73 Crores was the amount of Mobilisation Advance recoverable from the sub contractor which was available on the Assets side of the Balance sheet.
55 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
62. The Assessing Officer further mistaken in stating in his order that the Balance sheet total should be Rs. 63.76 crores and not Rs. 41.38 crores as was the total figure of the Balance sheet of the JV filed before him. Against the recoveries shown in the statement above, Rs. 29.36 crores was towards Mobilization Advance, which has to be reduced from the total Mobilisation Advance received from the Department of Rs. 33.46 crores, thereby having a balance of Rs. 4.10 crores liable to be paid towards Mobilisation Advance to the Department. Apparently, the Assessing Officer has not followed the principle of double entry book keeping, due to which, he had taken the Receipts and Payments Account of the JV and the Balance sheet individually or separately, due to which the "difference of Balance sheet" as per his order had arisen. The JV had followed the principles of accounting and book keeping in the correct sense and had recorded the entries in the books of accounts following the principles of double entry book keeping. The Assessing Officer while passing the Assessment Order was not clear in applying the basic principle of accounting and made an addition of Rs. 31.75 Crores by wild guesswork to the 'NIL' income declared by the assessee JV. In all probability, the Assessing Officer might not be conversant with the accounting principles in arriving at this addition of Rs. 31,75,00,000. On considering the facts and the figures in the Balance Sheet of the assessee, we find that there is no justification for such an addition under the caption of "Difference in Balance Sheet". We do not find any such difference and the accounting treatment and or the entries made by the assessee are in accordance with accounting principles which are well recognized under Income Tax law. Therefore, the addition of Rs. 31,75,00,000 made by the Assessing Officer can not be sustained in law and he is directed to delete the same in ITA No.1198/Hyd/2011.
56 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
63. In ITA No. 1199/HYD/11 there is an addition of Rs. 38,62,05,043 made by the Assessing Officer holding that there is a difference in the figures of the Balance Sheet and he made the addition under the caption of "Unexplained Investment". The Assessing Officer has initially required the assessee by his letter dated 16-12-2010 seeking explanation for the Sundry Debtors of Rs. 18.99 Crores as according to him the Sundry Debtors should have been at Rs. 62.81 Crores against Rs. 18.99 crore. In response thereto, the assessee filed its letter dated 22-12-2010 and furnished the statement of reconciliation. The learned AR of the assessee contended that the Assessing Officer could not properly comprehend the reconciliation and he made his own workings with a misconceived notion that the Sundry Debtors should have been only at Rs. 62.81 crores. The learned AR of the assessee argued that Assessing Officer had worked out the impugned difference of Rs. 38,62,05,043 in a hastened manner without application of mind.
64. The learned AR of the assessee submitted that he filed a letter dated 22-12-2010 in a detailed manner before the CIT(A) and had shown as to how the Sundry Debtors of Rs. 18.99 was arrived at in the Balance Sheet. However, the Assessing Officer in utter disregard of the explanation offered by the assessee had arrived at his own figure of the impugned difference of Rs. 38,62,05,043 which was based on mere guess work, surmise and conjecture and without any valid reason. Therefore, the learned AR alleged that the difference of Rs. 38,62,05,043 worked out by the Assessing Officer from the Balance Sheet figures and adding the same to the income as unexplained is baseless and unwarranted.
65. The learned AR of the assessee explained the workings of the turnovers of the JV, Mobilization advances recovered by the 57 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== Department (Principal Employer) along with other recoveries and the balances due from the Department. The Gross Turnover of the Joint Venture declared by it in its Profit & loss account for the financial year 2007-08 was Rs. 173.54 crore which was also accepted by the Assessing Officer during the assessment proceedings. However, it was contended that the Assessing Officer erred in taking the figures of "Net receivables from the Department" as Rs. 162.58 crores instead of "Net Receipts received from the Department" at Rs. 99.77 crore, resulting in balance receivable as Rs. 62.81 crores, which is not correct on the face of it. The learned AR submitted that the Assessing Officer lacked the basic concepts of the accounting principles while looking into the figures in the Balance Sheet.
66. He drew our attention to the summary of the Gross turnover, recoveries by receivable (Sundry Debtors) from the Department (Principal Employer)" is shown herein below:
Rupees in Crores Gross turnover as declared in Profit and Loss A/c. 173.54 Less: Recoveries made by Department Security deposit 5.07 Deposit with PWD 0.60 Recovery of Mobilisation Advance 33.63 Interest on Mobilisation Advance 2.23 Operations & maintenance 3.58 Miscellaneous recoveries 0.02 TDS on RA Bills & Mob. Advance 3.88 VAT at 2.8% 4.80 VAT withheld at 1.2% 2.14 Labour welfare cess 1.79 NAC 0.43 Seigniorage charges 0.05 58.22 115.32 Less: Amounts received from the Department for current year and deposited in 98.48 Bank Account of JV Balance receivable from Department at the year end, shown as Sundry Debtors 16.84 in Balance Sheet excluding Rs. 2.14 crores of VAT withheld by the Department at 1.2% as shown above.
67. It was contended by the learned AR that from the above summary, it could be clearly seen that the Assessing Officer 58 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== grossly erred in not taking all the recoveries made by the Department (Principal Employer) such as Mobilisation Advance and other recoveries available in the Balance sheet like Security Deposit, Deposit with PWD, VAT withheld at 1.20% and Operation & Maintenance Cost receivable from the Gross RA bills and only the net amount would be paid to the JV which was deposited in the JV's bank account as shown above.
67.1 The ld DR relied on the order of the assessing officer.
68. We have gone through the facts of the case on this issue. At the outset, we are of the considered opinion that when the assessee JV is not at all liable to charge on the gross receipts for various reasons and findings given by us in the foregoing paras, the Assessing Officer should not have made any disallowance. This reasoning is similarly applicable for any addition. This is for the reason that when the assessee is not at all liable to tax on the gross receipts since it did not execute any work as the same was divested to one of its constituents, viz., IVRCL Infrastructure and Projects Ltd., there shall be no question of any disallowance or addition. In other words, when the assessee has diverted or transferred its commercial asset of the project value at source itself no income accrued to it. In such an event, the Assessing Officer is not empowered to make any disallowance or addition unless otherwise provided for in the Income Tax Act, 1961 for violating any provision thereof.
69. Coming to the merits of the addition, we have gone through the workings furnished by the assessee and it is very clear from the figures appearing in the Balance Sheet that the Assessing Officer committed grave mistakes in adopting the amounts receivable from Department (Principal Employer). The Assessing Officer committed a gross mistake in taking only Rs. 10.96 crores 59 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== as recoveries made by the Department from the gross RA bills submitted by the JV and ended up with a higher figure of Rs. 162.58 crores as receivable from the Department. The actual amount receivable from the Department was Rs. 16.84 crores only, which was RA Bill No. 15 submitted by the JV at the end of March 2008, which is also verifiable from the detailed summary statement of RA Bills & Recoveries with net amounts paid/receivable from the Department. The Assessing Officer mentioned in the order that the amount receivable from the Department was Rs. 162.58 crores and since only a sum of Rs. 99.77 crores was received from the Department as shown in the Receipts & Payments account of the Bank, he was under the mistaken impression that the difference of Rs. 62.81 crores was supposed to be receivable from the Department and to be shown as Sundry Debtors in the Balance sheet. Notwithstanding the detailed clarification and explanation furnished by the JV in its Letter Dated 22-12-2010, he overlooked the fact of the recoveries of Rs. 43.86 crores, which is exactly the difference of Rs. 62.81 crores as assumed by him to be the sundry debtors and Rs. 16.84 crores being the actual Sundry Debtors available in the Balance sheet filed by the JV excluding Rs. 2.14 crores of VAT withheld by the Department at 1.2% as shown in the above summary.
70. We further found that as the recoveries amounting to Rs. 43.86 crores had been deducted by the Department, before releasing the net payment to the assessee, the amount received by it would definitely be less after recoveries and hence the amount of Rs. 99.77 crores received from the Department is correct, which is available in the Bank statement furnished during the assessment proceedings. It is apparent that the Assessing Officer had not followed the principle of double entry book keeping, as he had taken the Receipts and Payments Account of the assessee and the Balance sheet independently or separately, due to which the 60 ITA No. 1197 to 1199/ Hyd/2011. M/s. IVRCL-KBL-MEIL (JV) & Ors.
=========================== "difference of Balance sheet" as per his order had arisen. The Assessing Officer while passing his order was not clear in applying the principles of accounting and made an unwarranted and unjustified addition of Rs. 38,62,05,043. Considering the facts and circumstance of the case and the figures in the Balance Sheet of the assessee, we find that there is no justification for such an addition under the caption of "Difference in Balance Sheet" or "Unexplained Investment". We are really not able to understand as to how an addition could have been made under the head "Unexplained Investment" when there was no asset found. We do not find any such difference in the Balance Sheet and the accounting treatment and or the entries made by the assessee are in accordance with accounting principles which are well recognised under Income-tax law. Therefore, the addition of Rs. 38,62,05,043 made by the Assessing Officer cannot be sustained in law and deletion by the CIT(A) is justified. This ground of the Revenue is rejected in ITA No.1199/Hyd/2011.
71. In the result, all the appeals of the Revenue are dismissed.
Order pronounced in the open court on 12th July, 2012.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 12th July, 2012
Copy forwarded to:
1. The Deputy Commissioner of Income-tax, Circle-7(1), 2nd Floor, B-Block, IT Towers, AC Guards, Hyderabad.
2. M/s. IVRCL-KBL-MEIL (JV), M-22/3RT, Vijayanagar Colony, Hyderabad.
3. M/s. IVRCL-KBL (JV), M-22/3RT, Vijayanagar Colony, Hyderabad.
4. M/s. IVRCL-JL (JV), M-22/3RT, Vijayanagar Colony, Hyderabad.
61 ITA No. 1197 to 1199/ Hyd/2011.M/s. IVRCL-KBL-MEIL (JV) & Ors.
===========================
5. The CIT(A)-VI, Hyderabad
6. The CIT-VI, Hyderabad
7. The DR - B Bench, ITAT, Hyderabad.
Tprao