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2021 (8) TMI 865 - AT - Income TaxAddition u/s 40A(2)(b) - computing the profit of joint venture @4% of the gross receipts as the assessee had given the payment to the persons specified under section 40A(2)(b) - HELD THAT - As decided in own case 2018 (4) TMI 1747 - ITAT DELHI disallowance under this section is made in respect of the expenses incurred or payments made which are not deductible. This section has no application to income aspect of the assessee. As the AO has made disallowance u/s 40A(2)(b) in respect of income which the assessee in his opinion ought to have earned rather than certain expenses incurred, are of the considered opinion that the provisions of this section are not attracted. Therefore, uphold the impugned order on this score deleting the disallowance - Decided in favour of assessee.
Issues Involved:
1. Validity of the addition of ?2,19,56,917/- made by the Assessing Officer (AO) by computing the profit of the joint venture (JV) at 4% of the gross receipts under Section 40A(2)(b) of the Income Tax Act. Detailed Analysis: 1. Background and Facts of the Case: The assessee, a joint venture between KEC International Limited and Kiran Infra Engineers Ltd, filed its return of income for AY 2014-15, declaring an income of ?30,02,517/-. The case was selected for scrutiny, and the AO estimated the income of the assessee at 4% of the gross receipt of ?62,39,85,858/-, resulting in an addition of ?2,19,56,917/-. The AO noted that the work contract was diverted to the leading partner, KEC International Limited, and issued a show-cause notice to the assessee. The assessee responded, explaining that KEC International Limited bore all bid management costs and provided performance guarantees without additional costs to the JV. The AO did not accept the reply and made the addition. 2. CIT(A) Decision: On appeal, the CIT(A) deleted the entire addition, referencing a similar case (M/s. KEC Sidharth JV vs ITO) where the Tribunal had deleted a similar addition. The CIT(A) followed this precedent and granted relief to the assessee. 3. Tribunal's Analysis: The Tribunal heard submissions from both the revenue and the assessee. The revenue relied on the AO's order, while the assessee argued that the issue was already covered by previous Tribunal decisions in similar group cases (M/s KEC Sidharth JV and others). The Tribunal found that in similar cases, the additions made by the AO were deleted by the CIT(A) and upheld by the Tribunal. 4. Legal Precedents and Rationale: The Tribunal referenced several past decisions where similar additions were made and subsequently deleted. The key argument was that Section 40A(2)(b) of the Income Tax Act pertains to disallowances of expenses deemed excessive or unreasonable, not to income estimation. The AO's application of this section to estimate income was thus found to be incorrect. The Tribunal reiterated that the section applies to expenses and not to income, and as such, the AO's addition was not justified. 5. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition. The Tribunal emphasized that the AO's application of Section 40A(2)(b) was inappropriate for estimating income and that similar cases had consistently been decided in favor of the assessee. 6. Final Order: The appeal of the revenue was dismissed, and the order was pronounced in the open court on 17th August 2021. Summary: The Tribunal dismissed the revenue's appeal against the CIT(A)'s order, which had deleted the addition of ?2,19,56,917/- made by the AO. The Tribunal found that the AO's application of Section 40A(2)(b) to estimate the income of the assessee was incorrect, as the section pertains to disallowance of excessive or unreasonable expenses, not income estimation. The decision was consistent with previous Tribunal rulings in similar cases involving the assessee's group entities.
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