2012 (8) TMI 587 - AT - Income Tax

Best judgement assessment - rejection of books of account - low profits - assessee being Joint Venture executing major portion of work awarded to it by NHAI through sub-contractor - deduction of 10 to 20% from the gross value of work and paying the remaining amount to the sub-contractor at the stage of awarding work to the sub-contractors - Held that - It is evident that joint venture is making profit without executing any work. Therefore, considering such modus operendi, profit disclosed at 4.68% is abnormally low compared to the actual profit derived from such type of work. It is also a fact found on record that the assessee s final accounts were qualified by a report of an Auditor which raises a doubt regarding correctness of the accounts. Hence, AO was justified in rejecting the books of account. Estimation of profit at 10% of the gross receipts without allowing any further deduction towards depreciation and interest is directed. Status of the joint venture held as an AOP charging tax at the maximum marginal rate - Held that - Assessee has failed to produce any evidence to show the existence of partnership between the members of the joint venture. Therefore, treating the joint venture as AOP cannot be faulted. However, it is seen from the Article25(4) of DTAA between India and Korea that the foreign company should not be subjected to tax which is more burdensome than tax imposed on similar entities of the concerned State. Thus, sole issue of determining whether such nature of income is within the purview of DTAA between India and Korea is restored to the file of CIT(A)

Summary

Issues:
1. Estimation of profit by rejecting books of accounts.
2. Determination of joint venture status as an Association of Persons (AOP) and tax implications.

Estimation of Profit by Rejecting Books of Accounts:
The appeal involved challenges to the estimation of profit by rejecting the books of accounts. The assessee, a joint venture company, contested the estimation of profit based on the rejection of books of accounts by the Assessing Officer (AO). The AO found the expenses to be abnormally high and noted discrepancies in the sub-contract agreements. The AO estimated the profit at 15% on total contract receipts and allowed depreciation. The CIT (A) agreed with the AO's inference but reduced the estimated profit to 10%, directing for the allowance of depreciation and interest. The ITAT, after considering the contentions and evidence, upheld the rejection of books of accounts and the estimation of profit at 10% of gross receipts without further deductions for depreciation and interest. The decision was influenced by a prior Third Member decision of ITAT, Hyderabad Bench, which held a 12.5% profit estimation to be reasonable in similar cases.

Determination of Joint Venture Status as an AOP and Tax Implications:
The second issue revolved around the determination of the joint venture status as an Association of Persons (AOP) and the resulting tax implications. The AO, based on audit reports and lack of evidence of partnership between joint venture constituents, treated the joint venture as an AOP and imposed tax at the maximum marginal rate, considering one constituent as a foreign company. The CIT (A) upheld this action. The assessee contended that tax imposition at the maximum marginal rate was not justified under the Double Taxation Avoidance Agreement (DTAA) between India and Korea, citing Article 25(4). The ITAT acknowledged the absence of partnership evidence but highlighted the need to consider the DTAA provisions. As the CIT (A) did not address this aspect, the ITAT remanded the issue back to the CIT (A) for further examination in light of the DTAA between India and Korea.

In conclusion, the ITAT partially allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal regarding the estimation of profit. The judgment emphasized the importance of accurately estimating profit in joint venture scenarios and the necessity to consider international agreements in determining tax implications for foreign entities involved in joint ventures.