2016 (9) TMI 302 - AT - Income Tax

Disallowance u/s 040(a)(ia) - assessee in default - the amount paid by the AOP (Joint-venture) to its member without deduction of tax - works contract - it contended that, joint venture does not execute any contract but was a conduit for obtaining work, receiving payments against work done by the individual constituents and distribution of amounts in their individual shares as per the agreed ratio. - Held that - Respectfully following the decision of the Co-ordinate Bench of the Tribunal in the case of ITO vs. Shraddha & Mahalaxmi Joint Venture and Others (2014 (12) TMI 347 - ITAT PUNE ), we are inclined to hold against the Revenue. We simultaneously find that the case of the assessee is fully supported by CBDT Circular No.07/2016 We also simultaneously take affirmative note of the argument on behalf of the assessee that rigours of section 40(a)(ia) are diluted in the facts of the case since the payee has admittedly filed its return of income disclosing the impugned receipts and income earned by it embedded in the receipt has been duly offered for taxation. In this view of the matter, the assessee Joint Venture cannot be treated as assessee in default in view of the decision of the Hon ble Delhi High Court in the case of Ansal Land Mark Township (P.) Ltd. (2015 (9) TMI 79 - DELHI HIGH COURT ) and the decision of the Co-ordinate Bench of the Tribunal in the case of ITO vs. Shri Chandrakant J. Mandale (supra). Thus, seen from any angle, we find no infirmity in the order of the CIT(A). Accordingly, the appeal of the Revenue is dismissed.

Issues Involved:
1. Applicability of Section 194C for TDS purposes.
2. Characterization of payments as sub-contracts.
3. Taxability of income in the hands of the AOP versus its members.
4. Application of Section 40(a)(ia) for disallowance of expenses without TDS.
5. Consistency with previous judicial decisions and CBDT Circulars.

Issue-wise Detailed Analysis:

1. Applicability of Section 194C for TDS purposes:
The primary contention was whether Section 194C, which mandates tax deduction at source (TDS) on payments to contractors and sub-contractors, applied to the payments made by the Joint Venture (JV) to its members. The Assessing Officer (AO) argued that the JV was responsible for executing the contract and thus should have deducted TDS on payments made to its members. However, the CIT(A) and Tribunal found that the JV merely acted as a conduit for obtaining work and distributing payments to its members, who executed the contract work. Therefore, the JV was not liable to deduct TDS under Section 194C.

2. Characterization of payments as sub-contracts:
The AO characterized the payments made by the JV to its members as sub-contracts, suggesting that the JV had subcontracted the work to its members. The Tribunal, however, noted that the JV did not execute any work itself and was only formed to obtain and distribute the work among its members. The Tribunal referenced the decision in the case of ITO vs. Shraddha & Mahalaxmi Joint Venture, where it was held that such assignments of work to members are not equivalent to sub-contracts. Therefore, the payments were not considered sub-contracts requiring TDS.

3. Taxability of income in the hands of the AOP versus its members:
The AO argued that the income should be taxed in the hands of the JV (AOP) and not its members. However, the Tribunal upheld the CIT(A)'s decision, which followed the precedent set in the case of Swapnali RDS Joint Venture, where it was determined that the income generated from the contract should be taxed in the hands of the respective members who executed the work. This view was supported by the decision of the Hon’ble Bombay High Court in CIT vs. SMSL-UANRCL (JV), which held that receipts are not chargeable to tax in the hands of the JV if the work is executed by its constituents.

4. Application of Section 40(a)(ia) for disallowance of expenses without TDS:
The AO disallowed the expenses under Section 40(a)(ia) due to the JV's failure to deduct TDS on payments made to its members. The CIT(A) and Tribunal, referencing the decision in the case of ITO vs. Shraddha & Mahalaxmi Joint Venture, held that since the JV was not liable to deduct TDS, the disallowance under Section 40(a)(ia) was not applicable. Additionally, the Tribunal noted that the second proviso to Section 40(a)(ia) and the decision in CIT vs. Ansal Land Mark Township (P.) Ltd. supported the view that disallowance cannot be made if the payee has filed a return of income and offered the sum for tax.

5. Consistency with previous judicial decisions and CBDT Circulars:
The Tribunal emphasized consistency with previous judicial decisions, particularly the case of Swapnali RDS Joint Venture, and referenced several judicial precedents that supported the assessee's position. Additionally, the Tribunal considered CBDT Circular No.07/2016, which clarified that similar consortium arrangements should not be treated as an AOP, thereby supporting the assessee's claim that the income should be taxed in the hands of the respective members.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals for both assessment years 2010-11 and 2011-12. The Tribunal concluded that the JV was not liable to deduct TDS under Section 194C, the payments made to its members were not sub-contracts, and the income should be taxed in the hands of the members. Consequently, the disallowance under Section 40(a)(ia) was not applicable. The Tribunal's decision was consistent with previous judicial rulings and CBDT Circulars, ensuring that the income generated from the contract was appropriately taxed in the hands of the members who executed the work.

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