2019 (10) TMI 1167 - AT - Income Tax

Reopening of assessment u/s 147 - Taxation of Association of person (AOP) u/s 167B - whether the shares of members of AOP are determined or not? - HELD THAT - The contention of the assessee that reassessment proceedings are prompted by mere change of opinion cannot be accepted for reasons that in the original assessment proceedings, there is nothing to show that Assessing Officer had examined the issue, whether the shares of members of AOP are determined or not. Therefore, it cannot be said that reassessment proceedings are promoted by mere change of opinion. Hence the ratio of the decision of Hon ble Supreme Court in the case of Kelvinator India Ltd (supra) cannot be applied to the facts of the present case. We do not find any merits in the contention challenging the validity of reassessment proceedings. In the result, grounds of appeal No.2 of the assessee stands dismissed. Applying provisions of Section 167B(1) of the Act while computing tax liability - Admittedly, in the present case, assessee was assessed in the status of AOP. The provisions of Section 167B of the Act provides that where the individual shares of the members of the AOP in the whole or any part of the income of the AOP or indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate of tax. Proviso to Section 167B(1) of the Act further provides that where total income of any member of the AOP is chargeable to tax at the rate which is higher than the maximum marginal rate, tax shall be levied on the total income of the AOP at such higher rate applicable to such members. In the present case, one of the member of AOP is an Non Resident i.e. HPI, a company registered in Canada and the income of this member is taxable at 42.23%. In order to determine the applicability of Section 167B(1) of the Act, it is essential to decide whether the shares of the members of the AOP are indeterminate or unknown. Clause 2 of the profit sharing agreement further provides for the mode of payment 2% guaranteed profit. Having regard to the above clauses of the three agreements, it is clear that as cumulative consideration of the terms of the three agreements, the parties have not agreed as to the shares of the profits of the AOP. More importantly, Consortium Agreement entered into between the parties is totally silent as to the shares of the profits of the AOP. In terms of MOU in clause VII entered between parties on 30.11.2007, there is clear obligation on the part of CCCL to pay a sum equivalent to 2% of the project cost to HPL, which would go to show that it is not the AOP which is under obligation to pay 2% of contract price to HPL but it is CCCL. The term share of net profit implies a share in the net profits which is an interest in the profits as profits, and implies a participation in the profits and losses. In the present case, the member of the AOP i.e. HPL is entitled to 2% of the profit cost regardless of the fact whether AOP made profits or losses. This is only a charge against the profits of the assessee, AOP but not share in profits. Therefore, it cannot be said that the shares of the profit in AO of members is determinate or known. Thus on cumulative consideration of all clause the three agreement entered into it is crystal clear that shares members of AOP are indeterminate and unknown, therefore the provisions of sub section (1) to Section 167B of the Act are squarely applicable and we do not find any reason to interfere with the orders of the lower authorities. Thus, grounds of appeal No.3 raised by the assessee stands dismissed.

Summary

Issues:
- Validity of reassessment proceedings
- Application of Section 167B(1) of the Income Tax Act
- Determination of profit sharing ratios in an Association of Persons (AOP)

Validity of Reassessment Proceedings:
The appeals were filed against orders of the Commissioner of Income Tax (Appeals) for various assessment years. The Assessee challenged the initiation of reassessment proceedings, contending that they were prompted by a mere change of opinion. However, the Tribunal held that the original assessment did not examine whether the shares of AOP members were determined. Therefore, the reassessment was not based on a mere change of opinion. Citing relevant legal precedents, the Tribunal dismissed the challenge to the validity of the reassessment proceedings.

Application of Section 167B(1) of the Income Tax Act:
The Assessee contested the application of Section 167B(1) of the Act by the lower authorities. The Tribunal noted that the agreements between the parties did not specify the profit sharing ratios of the AOP members. The MOU and profit sharing agreement lacked clarity on profit sharing ratios, with one member guaranteed a fixed profit share. The Consortium Agreement was also silent on profit sharing. Considering the agreements collectively, the Tribunal concluded that the profit shares of the AOP members were indeterminate and unknown. Consequently, Section 167B(1) applied, and the Tribunal upheld the lower authorities' decision on tax liability calculation.

Determination of Profit Sharing Ratios in an AOP:
The Tribunal analyzed the agreements between the parties to determine the profit sharing ratios in the AOP. It found that the agreements did not clearly establish the profit sharing ratios among the members. The obligations to pay a fixed percentage of project cost to a specific member indicated an indeterminate profit sharing structure. The Tribunal emphasized that the agreements did not reflect a share in profits but rather a charge against profits. Consequently, it affirmed that the profit shares of the AOP members were indeterminate. This analysis led to the dismissal of the Assessee's appeal.

In conclusion, the Tribunal dismissed the appeals for various assessment years, affirming the lower authorities' decisions on the validity of reassessment proceedings and the application of Section 167B(1) of the Income Tax Act due to indeterminate profit sharing ratios among the AOP members.