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2013 (11) TMI 178 - AT - Income TaxIncome of AOP, when it has not offered any income and profit of business has been diverted to the members of AOP Held that - Assessee A.O.P. has not offered any income since its formation A.O. rejected the books of accounts u/s 145 of the Act and thereafter, after giving credit of recovery made on account of stores and material supplied by Kandla Port Trust at Rs.1,62,87,262/-, worked out the gross receipts at Rs.1,17,33,378/-(Rs.2,80,20,640-Rs.1,62,87,262/-) A.O. estimated the net profit at 5% of the receipts at Rs.5,86,669/- and added in to the income Decided against the Assessee. Applicability of section 40A(2) of the Income Tax Act Held that - For the purpose of invocation of this section one of the essential ingredient is that where an assessee incurs any expenditure and the AO is the opinion that such an expenditure is excessive, then the unreasonable amount is not to be allowed as a deduction In the present case, AO has also raised a question quote Now question arises as what is the nature of receipts was it loan/advance/relinquishment of right/gift. Answer is as simple as that these are payments by assessee towards sub-contract for the work executed for Kandla Port Trust unquote - This aspect requires an indepth adjudication on the basis of the agreements executed between the parties and the constitution of this AOP on the basis of which the alleged amount was transferred in the hands of the members - Restored back to the file of ld.CIT(A) for de novo adjudication.
Issues Involved:
1. Invocation of Section 145(3) of the I.T. Act, 1961. 2. Estimation of income at 5% of receipts. 3. Non-deduction of amounts paid to members of the AOP. 4. Mechanical following of predecessor's decision without merit evaluation. 5. Double taxation of estimated income. Detailed Analysis: 1. Invocation of Section 145(3) of the I.T. Act, 1961: The assessee, an A.O.P. engaged in civil construction, challenged the invocation of Section 145(3) by the A.O. The A.O. had rejected the books of accounts under Section 145 due to the entire receipt from Kandla Port Trust being passed to its members as sub-contract payments, resulting in NIL income for the A.O.P. The A.O. viewed this as a colorable device to divert profit, leading to the estimation of gross profit at 5% of the receipts. The CIT(A) upheld this action, referencing a similar decision for A.Y. 2005-06, where the estimation of income by the A.O. was justified due to the nature of the joint venture and the necessity of offering income irrespective of its appropriation to members. 2. Estimation of income at 5% of receipts: The A.O. estimated the net profit at 5% of the gross receipts, amounting to Rs.5,86,669/-, after deducting the value of materials supplied by Kandla Port Trust. This estimation was upheld by the CIT(A), who found no reason to deviate from the precedent set in A.Y. 2005-06, where the estimation was deemed appropriate given the business nature and the necessity for the joint venture to show income. 3. Non-deduction of amounts paid to members of the AOP: The assessee argued that the CIT(A) erred in not deducting Rs.2,18,789/- paid to M/s Indiana Build, a member of the AOP. The CIT(A) upheld the A.O.'s estimation without considering this deduction. The Tribunal noted that the CIT(A) did not evaluate the merits of this claim, leading to the remand of the case for de novo adjudication. 4. Mechanical following of predecessor's decision without merit evaluation: The assessee contended that the CIT(A) mechanically followed the predecessor's decision from A.Y. 2005-06 without independently assessing the facts presented for the current year. The Tribunal recognized this concern and directed a re-evaluation of the facts and agreements relevant to the case. 5. Double taxation of estimated income: The assessee claimed that the estimated income of Rs.5,86,669/- was subjected to double taxation, as the income from the contract receipts sub-contracted to the AOP members was already taxed in their individual assessments. The Tribunal acknowledged the need to examine the nature of the payments and the agreements to determine if the income was indeed taxed twice. Tribunal's Decision: The Tribunal noted that the facts of the case for the current year were identical to A.Y. 2005-06. It referred to the coordinate Bench's decision for A.Y. 2005-06, which required a re-examination of the nature of payments to the AOP members and the applicability of Section 40(a)(ia) and Section 40A(2)(b). The Tribunal remanded the matter to the CIT(A) for de novo adjudication, emphasizing the need to consider the agreements and terms under which the AOP transferred profits to its members. The CIT(A) was directed to provide a reasonable opportunity for hearing to the assessee before making a decision. Conclusion: The appeal was allowed for statistical purposes, with the case remanded to the CIT(A) for re-evaluation in light of the directions provided by the Tribunal, ensuring a thorough examination of the agreements and the nature of the payments involved.
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