2010 (2) TMI 21 - HC - Income Tax

Disallowance u/s 040A(2)(b) payment make to related persons - The respondent / assessee is a joint venture of two companies, namely, Oriental Structural Engineers Pvt. Ltd and Gammon India Ltd. The joint venture was established for the purposes of obtaining works from the National Highways Authority of India. However, it was the arrangement between the joint venture partners that the works that are assigned by the National Highways Authority of India to the joint venture would be carried out on a back-to-back basis by the partners themselves and that the works would be equally distributed between the partners. - The Assessing Officer felt that the payment made by the joint venture / assessee to the extent of ₹ 1,22,85,402/- was excessive and, therefore, the said amount was disallowed by invoking the provisions of Section 40 A(2) (b) of the said Act. held that - The Tribunal held as a fact that the arrangement between the parties was clear that after receipt of the contract from the National Highways Authority of India, the work was to be executed by the joint venture members directly and no effort was to be made by the assessee/ joint venture itself in the execution of the contract. It was, therefore, found by the Tribunal that the assessee was created as a joint venture for obtaining works from the National Highways Authority of India without there being any requirement or necessity of the joint venture to carry out any activity itself. In fact, all the activities were to be carried out by the aforesaid two members of the joint venture and for which they were to be remunerated. In this context, the Tribunal returned a clear finding that the remuneration of the members of the joint venture was not excessive having regard to the fair market value of the services rendered by them. decided in favor of assessee

Summary

Issues:
1. Disallowance under Section 40A(2)(b) of the Income-tax Act, 1961.
2. Whether the payments made by the joint venture to its partners were excessive.
3. Interpretation of the joint venture agreement and fair market value of services rendered.

Analysis:
1. The appeal by the revenue challenged the order disallowing Rs 1,22,85,406 under Section 40A(2)(b) of the Income-tax Act for the assessment year 2004-05. The joint venture, formed by two companies for works from the National Highways Authority of India, subcontracted the works to its partners as per the agreement. The Assessing Officer found the payments excessive and disallowed the amount.

2. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal both ruled in favor of the assessee, stating that the payments were not excessive. The Tribunal found that the joint venture was created solely for obtaining works, with the partners directly executing the projects without any involvement from the joint venture itself. The remuneration to the partners was deemed fair and not excessive based on the services rendered.

3. The Tribunal's decision was upheld as it was based on factual findings and did not raise any legal questions. Referring to a previous case, it was established that determining the reasonableness of expenses under Section 40A is a factual issue. The judgment concluded that no substantial question of law arose, leading to the dismissal of the appeal by the High Court judges, Justice Badar Durrez Ahmed and Justice Siddharth Mridul.