2023 (10) TMI 843 - AT - Income Tax

Estimation of Profit/Section 40A(2)(b) - JV entered - AO had made disallowance by opining that the assessee JV should have earned income from sub-contracting - AO had formed a view that the assessee JV had suppressed its profit by making excessive payment to TPPL - to work out the amount to be disallowed u/s 40A(2)(b), the AO had applied the net profit rate of 8% on the Sub-Contract Expenses (net) - CIT(A) had observed that the net profit in the case of TPPL was 3.78% and formed a view that profit in the hands of the assessee JV should also be calculated by applying such rate of 3.78% - HELD THAT - We find that the section 40A(2)(b) has no application to income aspect of the assessee JV in the facts of the instant case. The AO has not brought any comparable figures to disallow the expenditure, moreover with the structuring of the JV provisions of Section 40A(2)(b) are not attracted in the given facts and circumstances of the instant case. Reliance as placed on the judgment of Oriental Structural Engineers 2015 (3) TMI 102 - DELHI HIGH COURT wherein it was held dismissing the appeals, that the concurrent findings were that the joint venture was formed only to secure the contract, in terms of which the scope of each joint venture partner's task was distinctly outlined. Further, the entire work was split between the two joint venture partners, they completed the task through sub-contracts and were responsible for the satisfaction of the National Highways Authority of India. Therefore, the Tribunal did not fall into error of law, in holding that the joint venture was not an association of persons liable to be taxed on that basis. Hence, we hold that the AO has fallen into error in determining the profit @ 8% and also invoking the provisions of Section 40A(2)(b) and the ld. CIT(A) has also erred in determining the profit of the assessee @ 3.78% equal to the profit of one of the parties to the JV. Penalty u/s 271G - AO held that the assessee has failed to maintain the required documents as per the provisions of Section 92B with Rule 10 of the I.T. Rules, 1962 - HELD THAT - Since neither the AO (during the course of assessment proceedings) nor the ld. CIT (A) during the course of appellate proceedings had required the assessee to furnish any specific information or document in terms of section 92D(3), there was reasonable cause for the said failure, if at all any, inadvertently occurred on the part of the assessee. Hence keeping into consideration, the provisions of section 273B and the judgments of Leroy Somer and Controls (India) Pvt. Ltd 2013 (9) TMI 761 - DELHI HIGH COURT and Hindustan Steel Ltd. Vs. State of Orissa 1969 (8) TMI 31 - SUPREME COURT we hold that the penalty imposed u/s 271G be deleted. Appeals of the assessee are allowed.

Summary

Issues Involved:
1. Estimation of Profit/Section 40A(2)(b)
2. Penalty u/s 271G

Estimation of Profit/Section 40A(2)(b):

The assessee, a joint venture (JV), filed appeals against the orders of the CIT(A) concerning the disallowance of expenses under Section 40A(2)(b). The JV was formed specifically to bid for a contract awarded by Delhi Jal Board, with the work executed by one of the JV partners, TPPL. The AO had computed the total income by disallowing expenses on the grounds of excessive payments to TPPL, applying a net profit rate of 8%. The CIT(A) reduced the disallowance by applying a 3.78% profit rate. However, the Tribunal found that the AO did not provide any material evidence to prove that the expenses were excessive or unreasonable, nor did he reject the books of accounts. The Tribunal held that Section 40A(2)(b) was not applicable as the AO failed to bring any comparable figures to justify the disallowance. Reliance was placed on the Delhi High Court judgment in CIT Vs. Oriental Structural Engineers & Ors., which supported the JV's structure and operations. Consequently, the Tribunal concluded that both the AO and CIT(A) erred in their profit estimations and disallowances.

Penalty u/s 271G:

The assessee appealed against the penalty imposed under Section 271G for failing to furnish required documents. The AO had levied the penalty during the assessment proceedings, which was confirmed by the CIT(A). The Tribunal noted that no specific information or documents were requisitioned by the AO, and the penalty order did not clarify which documents were not furnished. The Tribunal emphasized that for imposing a penalty under Section 271G, the AO must specify the required documents, which was not done in this case. The Tribunal referred to the Delhi High Court judgment in CIT Vs. Leroy Somer and Controls (India) Pvt. Ltd., which mandates specifying the information or documents required under Section 92D(3). Additionally, the Tribunal cited the Supreme Court judgment in Hindustan Steel Ltd. Vs. State of Orissa, highlighting that penalty should not be imposed for technical or venial breaches. Considering these judgments and the provisions of Section 273B, the Tribunal held that the penalty imposed under Section 271G should be deleted.

Conclusion:

In conclusion, the Tribunal allowed the appeals of the assessee, holding that the disallowance under Section 40A(2)(b) was unjustified and the penalty under Section 271G was to be deleted.