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2011 (5) TMI 636 - AT - Income TaxNon deduction of TDS - Consortium of Joint Venture - Held that - On an understanding of the concept of the Joint Venture and the terms of agreement between the members of the present case the consortium of Joint Venture has been formed only to procure the contract works. By way of the agreement the parties have only regulated the relationship inter se with respect to their joint responsibility that existed in relation to the Principal viz. M/s Konkan Railway. In reality both the parties have divided the contract works between themselves and they have executed their share of work on their own risks. AO has not given any finding on the issues like that each member had authority to interfere with or control the work executed by the other member that both the members have jointly executed the project and thus produced the income jointly. Thus the finding on the lines stated above is crucial to determine the issue of availability of income in the hands of Joint Venture - AOP. AO is on record that the each of the members has declared the income derived from their respective share of contract works in their hands. In this kind of situation no merit in the presumption made by the AO that the Joint Venture is the Main Contractor and the members are the Sub-contractors . Once this presumption has been found to be wrong then the question of estimation of income by way of Sub-contract commission does not arise. So also the question of deduction of tax u/s 194C(2) and the disallowance u/s 40(a)(ia) does not arise - in favour of assessee.
Issues Involved:
1. Income estimation towards sub-contract commission. 2. Addition made under Section 40(a)(ia) of the Income Tax Act. Detailed Analysis: 1. Income Estimation Towards Sub-Contract Commission: The primary issue in both appeals relates to the income estimated by the Assessing Officer (AO) towards sub-contract commission. The AO treated the joint venture (JV) as the main contractor, and its members as sub-contractors, thereby estimating income by way of sub-contract commission. The AO observed that the JV should have collected sub-contract commission from its members. The Additional Commissioner of Income Tax (Addl. CIT) agreed with the AO and directed the AO to assess income at 1% of the contract receipts. Consequently, the AO computed the income of the JV by treating 1% of the gross receipts as sub-contract commission. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the income estimated towards sub-contract commission, stating that the JV did not earn any income as the work was executed by the constituent members who were assessed to tax on the entire contractual receipts. The CIT(A) emphasized that the JV was formed to win contracts, not to make a profit, and the relationship between the JV and its members was that of principal to agent, not contractor to sub-contractor. 2. Addition Made Under Section 40(a)(ia) of the Income Tax Act: For the assessment year 2005-06, the AO disallowed an amount under Section 40(a)(ia) of the Act due to non-deduction of TDS on a contract amount. The CIT(A) deleted the addition, noting that the relationship between the JV and its members was not that of contractor-sub-contractor but principal-agent. The CIT(A) referenced the Punjab & Haryana High Court decision in M/s. Esskay Construction Company, which held that Section 194C(2) was not applicable where the entire contract was handed over to members of the AoP and no commission was charged. Joint Venture Concept and Legal Position: The Tribunal discussed the concept of a joint venture and its legal position vis-a-vis the Income Tax Act. The Supreme Court's observations in Faqir Chand Gulati v. Uppal Agencies (P.) Ltd. were cited, detailing the essential ingredients of a joint venture, such as joint ownership, control of property, sharing of expenses, profits, losses, and active participation in management. The Tribunal noted that joint ventures are not governed by the Indian Partnership Act, 1932, and their assessability as an AoP depends on the facts and circumstances of each case. Tribunal's Conclusion: The Tribunal concluded that the JV was formed solely to procure contract works, and the members executed their share of work independently. The AO did not provide any findings on whether the members had authority to interfere with each other's work or if they jointly executed the project. The Tribunal found no merit in the AO's presumption that the JV was the main contractor and the members were sub-contractors. Consequently, the estimation of income by way of sub-contract commission and the disallowance under Section 40(a)(ia) were deemed incorrect. Final Judgment: Both appeals by the revenue were dismissed.
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