2017 (9) TMI 1830 - AT - Income Tax

Addition in the hands of the assessee AOP - accrual of income - whether the income can be said to have accrued in the hands of AOP when the contract has been awarded to a consortium/joint-venture and whether such a consortium formed for the purposes of obtaining the contract constitutes an AOP or not ? - case of the AO that consortium/joint-venture in the instant case constitutes an AOP and thus a separate entity for incidence of taxation - assessee claims that the joint-venture agreement has been merely entered for the purposes of bidding for the project for which the tender was invited by the principal i.e. Bhopal Municipal Corporation - HELD THAT - Various clauses of the SA (supplementary agreement) are suggestive of the fact that it is the constituent-JMC indeed who is solely responsible for execution of the entire project. It is the JMC who is under obligation to bring in all resources, finances and all other services required for the execution of the project in exclusion to the other so-called partner of the joint venture. Noticeably, it is also specified by way of clause-4 of the SA that JMC shall be solely responsible for all the losses and profits. Thus, as mutually understood, one of the constituents alone has domain over the financial rewards and risks associated to the JV. The other partner of JV stands identified of all contractual obligations by virtue of this SA. The bank guarantee is to be provided by JMC alone. The SA further provides that the joint bank account shall be operated by JMC alone and all decisions pertaining to the joint-venture shall be taken by one constituent, i.e. JMC only. JMC shall be further responsible for compliance of all statutory requirements without any overlapping of responsibility. Under these circumstances, we find that it is one of the members, namely, JMC Project (India) Ltd. which essentially bears the risk of scope of work and enjoys control over the project. This being so, in view of the recent CBDT Circular No.7/2016 dated 07/03/2016, the assessee herein has rightly not been treated as an AOP for taxation purposes. CIT(A) has rightly held that income from the contract awarded by the principal cannot be said to have been accrued in the hands of the appellant AOP notwithstanding JV document executed for bidding and thus the appellant herein is not liable for income estimated on the contract awarded. We find no infirmity in the conclusion drawn by the CIT(A). 10. However, in the same vain, a liberty is granted to AO to call for necessary records from the Assessee-AOP herein to satisfy itself that the contract receipts in question and income thereon has suffered taxation in the hands of its constituent namely JMC Projects (India) Ltd., if so considered expedient, to ensure that contract receipts have been assessed in the hands of its member. Once, it is found that contract receipts have been assessed in the hands of constituent, the assessment of same receipts in the hands of AOP will cease to exist - Decided against revenue

Summary

Issues:
1. Whether the income accrued in the hands of the AOP from a joint-venture agreement for a construction project is taxable.
2. Whether the joint-venture agreement constitutes an Association of Persons (AOP) for taxation purposes.

Analysis:
1. The Revenue challenged the deletion of an addition of ?68,81,901/- by the Assessing Officer (AO) in the hands of the AOP for the Assessment Year 2009-10. The AO observed that the joint-venture formed by the AOP for a construction project was a taxable entity and liable for tax on the income arising from the project. The AO estimated the taxable income and made the addition.

2. The CIT(A) relied on judicial pronouncements and deleted the addition, concluding that the joint-venture was not an assessable entity for taxation purposes. The Revenue appealed to the Tribunal, with the Ld.DR supporting the AO's order, and the Ld.AR for the assessee arguing that the joint-venture agreement was solely for obtaining the contract work and did not constitute an AOP.

3. The Tribunal considered whether the income accrued in the hands of the AOP from the joint-venture agreement and if the joint-venture constituted an AOP. It was argued that the supplementary agreement clarified the responsibilities, with one constituent being solely responsible for the project execution, finances, and risks, indicating that the AOP was not liable for taxation.

4. The Tribunal found that the joint-venture agreement was primarily for bidding purposes and that the supplementary agreement defined the responsibilities, with one constituent bearing the risks and control over the project. Referring to a CBDT Circular, the Tribunal upheld the CIT(A)'s decision that the income from the contract did not accrue to the AOP and dismissed the Revenue's appeal.

5. The Tribunal granted the AO liberty to verify if the contract receipts had been assessed in the hands of the constituent member. If so, the assessment of the same receipts in the AOP's hands would cease to exist. The appeal of the Revenue was consequently dismissed.