2012 (10) TMI 563 - AT - Income Tax

Commercial profits and its accrual - allegation of diversion of income - Joint venture - sub contractors - Estimation of income being 9% of the turnover - Disallowance under S.40A(2) - excessive and unreasonable payments - The dispute herein is regarding assessability of income in the hands of the assessee as an Association of Persons (AOP). The case of the Assessing Officer is that the JV and its members should be treated as separate persons and hence the contracts allocated to the members should be treated as sub contracting receipts . On the other hand the assessee made a case that the JV has come into existence only to procure and win the contracts and the contracts were allocated between the members and the members executed the contracts and offered income for taxation in their respective hands. Held that - If each member of the JV offered the income derived from respective share of contract works in their hands it is not possible to tax the same contract receipt in the hands of the consortium of JV. There is no merit in the argument of the DR that the JV is the main contractor and members are the sub-contractors. Further there is no meaning in estimating the income in the hands of the assessee. - The question of estimating the profit does not arise and the assessing officer has contradicted himself by applying the provisions of S.40A(2) of the Act and also invoking the provisions of S.145(3) - the appellant AOP did not execute any contract work in question and therefore did not derive any income during the year and the additions made by the assessing officer could not be sustained. In the facts of the case we hold that there is no mistake in the order of the CIT(A) in holding that the question of estimating profit does not arises and in deleting the addition made in the hands of the assessee. Addition u/s. 43B - the balance amount of VAT at 1.2% which was withheld by the Irrigation Department of the State Government of Andhra Pradesh subject to certain clarifications to be received by them from the Commercial Taxes Department - The assessee JV withheld the same in turn from the amounts paid to the Lead Contractor/Sub-Contractor - Assessing Officer was of the mistaken view that the assessee JV debited the same to Profit Loss Account and did not pay the same to the Department before the due date for filing the return of income which in fact is not correct. - As work was given on back-to-back sub-contract basis and the amount of VAT was not received by the JV as the same was withheld by the Department and therefore the JV had to withhold an equal amount from the payments to be made to the subcontractor - appeal by revenue dismissed. Addition u/s. 40(a)(ia) - mobilization advance - Held that - Mobilization Advance stands as Liability in the books of accounts of the Lead Contractor/Sub- Contractor as it is only on capital account and the JV is not liable - having admitted that assesee has deducted TDS on mobilisation advance in para No. (b) at Page No. 16/18 of the Assessment Order that what inspired him to make such a disallowance is really incomprehensible. - against revenue. Differences in Balance sheet - Assessing Officer had not followed the principle of double entry book keeping as he had taken the Receipts and Payments Account of the assessee and the Balance sheet independently or separately due to which the difference of Balance sheet arises. The Assessing Officer while passing his order was not clear in applying the principles of accounting and made an unwarranted and unjustified addition of Rs. 38, 62, 05, 043. Held that - No Difference in Balance Sheet or Unexplained Investment as there was no asset found. Therefore the addition of Rs. 38, 62, 05, 043 made by the Assessing Officer cannot be sustained in law and deletion by the CIT(A) is justified - ground of the Revenue is rejected.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the income from the Joint Venture (JV) should be assessed in the hands of the JV itself or its constituent members.
• The applicability of Section 40(a)(ia) concerning the disallowance of expenditure due to non-deduction of TDS on mobilization advance.
• The applicability of Section 43B concerning the disallowance of VAT not paid to the Department.
• Whether the estimation of income by the Assessing Officer (AO) at 9% of the gross receipts was justified.
• The correctness of additions made by the AO concerning discrepancies in the Balance Sheet.

2. ISSUE-WISE DETAILED ANALYSIS

Determination of Taxable Income in the Hands of the JV:

• Relevant Legal Framework and Precedents: The AO relied on the Supreme Court decision in ITO v. Ch. Atchaiah and the Delhi ITAT decision in Pradeep Agencies (JV) to argue that income should be taxed in the hands of the JV.
• Court's Interpretation and Reasoning: The Tribunal found that the JV was formed solely to procure contracts, and the income should be taxed in the hands of the constituent members who executed the work and declared profits.
• Key Evidence and Findings: The Tribunal noted that the JV did not execute any work and that the entire contract was sub-contracted to its members, who declared the income in their returns.
• Application of Law to Facts: The Tribunal applied the principle that income should be taxed where it accrues, which in this case was in the hands of the JV members.
• Treatment of Competing Arguments: The Tribunal rejected the AO's argument that the JV should retain a portion of the income for its performance, noting that the JV acted only as a facilitator.
• Conclusions: The Tribunal concluded that the income should not be assessed in the hands of the JV.

Disallowance under Section 40(a)(ia):

• Relevant Legal Framework and Precedents: Section 40(a)(ia) disallows expenditure if TDS is not deducted.
• Court's Interpretation and Reasoning: The Tribunal found that mobilization advance is not a revenue expenditure, and thus, Section 40(a)(ia) does not apply.
• Key Evidence and Findings: The Tribunal noted that TDS was deducted on the mobilization advance.
• Application of Law to Facts: The Tribunal applied the law by confirming that mobilization advance is a capital account item.
• Treatment of Competing Arguments: The Tribunal dismissed the AO's disallowance as baseless.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to cancel the disallowance.

Disallowance under Section 43B:

• Relevant Legal Framework and Precedents: Section 43B requires certain expenses to be paid before the due date for filing the return.
• Court's Interpretation and Reasoning: The Tribunal found that the VAT amount was withheld by the Department and not received by the JV.
• Key Evidence and Findings: The Tribunal noted that the withheld VAT was shown in the Balance Sheet as both an asset and a liability.
• Application of Law to Facts: The Tribunal applied the law by confirming that the JV did not receive the VAT amount.
• Treatment of Competing Arguments: The Tribunal dismissed the AO's disallowance as unwarranted.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to cancel the disallowance.

Estimation of Income by the AO:

• Relevant Legal Framework and Precedents: The AO estimated income at 9% of the gross receipts.
• Court's Interpretation and Reasoning: The Tribunal found that the estimation was baseless as the JV did not execute any work.
• Key Evidence and Findings: The Tribunal noted that the JV acted only as a facilitator.
• Application of Law to Facts: The Tribunal applied the law by confirming that no income accrued in the hands of the JV.
• Treatment of Competing Arguments: The Tribunal dismissed the AO's estimation as unreasonable.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition.

Discrepancies in the Balance Sheet:

• Relevant Legal Framework and Precedents: The AO made additions based on alleged discrepancies in the Balance Sheet.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's calculations were incorrect and based on a misunderstanding of accounting principles.
• Key Evidence and Findings: The Tribunal noted that the JV followed proper accounting principles.
• Application of Law to Facts: The Tribunal applied the law by confirming that there were no discrepancies.
• Treatment of Competing Arguments: The Tribunal dismissed the AO's additions as baseless.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the additions.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that "no income accrued in the hands of the present assessee as JV as the entire project value of the work in the form of gross receipts being an income producing asset was divested and was transferred by the assessee to its constituents."
• The Tribunal established the principle that the income should be taxed where it accrues, which in this case was in the hands of the JV members.
• The Tribunal concluded that mobilization advance is not a revenue expenditure and thus, Section 40(a)(ia) does not apply.
• The Tribunal confirmed that the VAT amount was withheld by the Department and not received by the JV, and thus, Section 43B does not apply.
• The Tribunal dismissed the AO's estimation of income at 9% of the gross receipts as unreasonable.
• The Tribunal found that the AO's additions based on alleged discrepancies in the Balance Sheet were baseless.
• The Tribunal dismissed all the appeals of the Revenue, upholding the CIT(A)'s decisions.