2018 (4) TMI 1747 - AT - Income Tax

Addition u/s 40A(2)(b) - payment to the persons specified - computing the profit of the Joint Venture @4% of the gross receipts - HELD THAT - It is an admitted position that the AO made the addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenses considered to be excessive or unreasonable having regard to the fair market value of the goods/services or facilities for which the payment is made. However, in the instant case, the AO estimated the profit of the assessee and determined the income, nowhere he doubted the expenses incurred by the assessee. Therefore, AO was not justified in making the addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenditure and not to the receipts and the ld. CIT(A) rightly deleted the same. - Decided in favour of assessee

Summary

Issues:
Appeal against deletion of addition made by AO under Section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
1. The case involved three appeals by the department against a common order of the ld. CIT(A)-I, Gurgaon dated 18.09.2017. The issue was common, and the appeals were heard together for convenience.

2. The primary issue in ITA No. 7044/Del/2017 was whether the deletion of an addition of ?44,29,401/- by the CIT(A) was justified. The AO had made the addition by computing the profit of the Joint Venture @4% of the gross receipts, alleging that the assessee had shifted its real profit through sub-contracting covered under Section 40A(2)(b) of the Act.

3. The AO observed that the assessee diverted 99% of the contract work to another party, leading to the addition. However, the CIT(A) deleted the addition citing precedents where it was held that Section 40A(2)(b) pertains to expenses incurred, not income aspects, and thus the provisions were not attracted in this case.

4. The Tribunal, in its detailed analysis, upheld the CIT(A)'s decision based on earlier orders in the assessee's own case for the assessment years 2011-12 and 2012-13. The Tribunal reiterated that Section 40A(2)(b) applies to expenses, not income, and as the AO estimated the profit without doubting the expenses, the addition was unjustified.

5. The Tribunal found no merit in the department's appeal and dismissed it, applying the same reasoning to other appeals (ITA Nos. 7045 & 7046/Del/2017) with similar issues and facts. The decision was based on the consistent interpretation of Section 40A(2)(b) in previous judgments.

This comprehensive analysis highlights the key legal arguments, interpretations of Section 40A(2)(b), and the application of precedents in arriving at the decision to dismiss the department's appeals.