2017 (9) TMI 1239 - HC - Income Tax

Diversion of income at source - overriding title - income of assessee - Joint venture agreement - 97% of the receipt transfer to M/s TRG Industries (P) Ltd. - scope of the agreement - Held that - True test of diversion of income by overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. To apply the doctrine of diversion of income by overriding title, the first and foremost condition to be satisfied is the nature of assessee s obligation, whether by the obligation, the income is diverted before it reaches the assessee, or whether the income is required to be applied to discharge an obligation after such income reaches the assessee. In the instant case, there is diversion of income at the source itself. Therefore, the instant case is diversion of income by overriding title. The receipt of amount of ₹ 12,09,55,137/- could not be treated as income of the assessee and it was the case of diversion of income by overriding title. Accordingly, the first substantial question of law is answered in favour of the appellant. From the perusal of the order passed by the Tribunal, the same cannot be said to be unreasoned, arbitrary or non speaking. From the close scrutiny of the order passed by the Tribunal, it is evident that it has perused the relevant records and has gone through the written submissions which were filed on behalf of the assessee. Therefore, it cannot be said that order passed by the Tribunal is unreasoned, arbitrary or non speaking. Accordingly, the second substantial question of law is answered. Addition invoking Section 40(a)(ia) - Held that - With insertion of section proviso by Finance Act, 2012 to section 40(a)(ia) of the Act as otherwise also since the taxes have been paid by the joint ventures, the assessee could be held to be an assessee in default so as to disallow the amount attributed by the joint venture to the joint venturers in the ratio of 97 3 so as to invoke Section 40(a)(ia) of the Act. The aforesaid amendment is retrospective and is clarificatory in nature. For yet another reason, Section 40(a)(ia) of the Act is inapplicable to the fact situation of the case as no amount was payable by the assessee at the close of the year and if two views are possible, the one which favours the assessee has to be adopted. See ACIT V. Red Brick Realtors (2015 (7) TMI 437 - ITAT CHENNAI ). Accordingly, the third substantial question of law is also answered in the affirmative and in favour of the assessee.

Summary

Issues Involved:
1. Whether the receipts of ?12,09,55,137/- represented income of the assessee or if it was a case of diversion of income by overriding title.
2. Whether the order of the Income Tax Appellate Tribunal (ITAT) is unreasoned, arbitrary, and non-speaking.
3. Whether the ITAT erred in holding that payments to the joint ventures were not allowable as deductions under Section 40(a)(ia) of the Income Tax Act, 1961.

Detailed Analysis:

1. Whether the receipts of ?12,09,55,137/- represented income of the assessee or if it was a case of diversion of income by overriding title:

The court examined the formation and agreements of the joint venture, M/s Soma TRG Joint Venture, created by M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd for the purpose of submitting tenders for construction projects. The contracts were executed solely by M/s TRG Industries (P) Ltd, with M/s Soma Enterprises Ltd facilitating the contract acquisition and receiving 3% of the contract value. The court noted that the appellant did not perform any work or incur any expenditure, and the income was allocated to the joint venture partners as per the agreement. The court held that the income was diverted at the source, and thus, the receipts could not be treated as the income of the assessee. The case was deemed a diversion of income by overriding title, and the first substantial question of law was answered in favor of the appellant.

2. Whether the order of the Income Tax Appellate Tribunal (ITAT) is unreasoned, arbitrary, and non-speaking:

The court reviewed the ITAT's order and determined that it was not unreasoned, arbitrary, or non-speaking. The ITAT had perused relevant records and considered written submissions from the assessee. Therefore, the second substantial question of law was answered, confirming that the ITAT's order was reasoned and based on due application of mind.

3. Whether the ITAT erred in holding that payments to the joint ventures were not allowable as deductions under Section 40(a)(ia) of the Income Tax Act, 1961:

The court analyzed Section 40(a)(ia) of the Income Tax Act and the insertion of the second proviso by the Finance Act, 2012, which clarified that the assessee could not be deemed in default if the resident payee had furnished a return of income. The court cited the Supreme Court's decision in R.B. Jodha Mal Kuthiala v. CIT, which supports the retrospective application of amendments that remedy unintended consequences. The court concluded that the amendment to Section 40(a)(ia) is retrospective and clarificatory, and since the taxes were paid by the joint ventures, the assessee should not be deemed in default. The court also noted that if two views are possible, the one favoring the assessee should be adopted. Consequently, the third substantial question of law was answered in favor of the assessee.

Conclusion:

The court quashed the orders of the assessing officer, Commissioner of Income Tax (Appeals), and the ITAT. The appeals were allowed, favoring the appellant on all substantial questions of law.