2024 (7) TMI 566 - AT - Income Tax

Addition u/s 40A(2)(b) - assignment of contractual receipt by the JV to one of the JV partners for execution of the work is to be construed as incurrence of expenditure and, therefore, the JV was not supposed to make total payment of the actual contract receipt from the contractee, i.e. State of Bihar to the JV partner - Assessee entered in JV with one company entering into an agreement object as to submit bid with CPWD, Government of India for development of State High-way in the State of Bihar and execution of the aforesaid Project, if awarded - CIT(Appeals) appraised that this is not an expenditure incurred by the JV. It is the cost of the Project, which has been assigned to one of the JV partners, who has executed that contract and also given Bank guarantee for performance of that contract HELD THAT - If an assessee has availed/purchased/incurred any expenditure for the purpose of business towards services/purchase of goods, etc. and such business needs have been availed from the persons mentioned in the list given under sub-clause (b) at a price which is over and above to the one available in the open market, then, such excess payment as deemed by the AO would be disallowed to the assessee as an expenditure. A perusal of the assessment order would indicate that cost of a Project given to the JV by the State Government was termed by the AO as an expenditure for availing the services of the JV partner for executing that contract. It is an incorrect interpretation of the whole activity undertaken by the JV as well as its partner. The contract has been assigned on cost to cost basis to one of the JV partners. AO cannot assume that JV partner could have completed that work. Had it been got down in the open market, then, less than 1.87% of the cost. It is totally an absurd view without support of any facts or in law. The cost of any project cannot be construed as expenditure. It is the cost from which the project is to be executed and on execution of that Project resultant profit/loss has to be offered for tax by the JV partner. Thus it is incorrect expectation of AO that JV will earn profit from assignment of contract to its one of partners. The other partner could raise an objection that profit from the Project should give some loss or profit to other partner also, but there is no grievance by the other partner. He has not undertaken any risk from the contract. He has not put any labour or allocated any assets towards that contract, so in the hands of JV, it is incorrect to suggest that some element of profit for even assignment of the contract to one of the partners deserves to be deemed as a profit. On the other hand, ld. CIT(Appeals) has not recorded any analytical finding. The ld. 1st Appellate Authority has taken note of all the details but nowhere mentioned as to how he is not agreeing with the finding of his predecessor ld. CIT(Appeals) in A.Y. 2011-12. There should be demonstrative reasons as to why the finding of the predecessor is not to be followed. Revenue has not challenged the order of the ld. CIT(Appeals) in A.Y. 2011-12. Therefore, in other words, it is a covered issue in favour of the assessee by the order of the ld. CIT(Appeals) in A.Y. 2011-12, which has been accepted by the Revenue. In view of the above, we allow all these appeals and delete the disallowances. As far as the loss claimed by the assessee is concerned, since existence of the assessee is intact, it is incurred only minimum expenditure for keeping its status as intact. Those expenses deserve to be allowed to the assessee and loss, if cannot be set off in these years, be allowed to carry forward. With the above finding, the appeals of the assessee are allowed.

Summary

Issues Involved:
1. Whether disallowances made under section 40A(2)(b) of the Income Tax Act for the assessment years 2012-13, 2013-14, and 2014-15 deserve to be upheld.
2. Whether the assessee is entitled to claim losses for the assessment years 2012-13, 2013-14, and 2014-15.

Detailed Analysis:

Issue 1: Disallowance under Section 40A(2)(b)
The primary grievance of the assessee revolves around the disallowances of Rs. 39,94,111/-, Rs. 23,86,420/-, and Rs. 18,40,168/- for the assessment years 2012-13, 2013-14, and 2014-15 respectively, made under section 40A(2)(b) of the Income Tax Act. The facts reveal that M/s. Harish Chandra (India) Limited (HCIL) and Subhash Projects & Marketing Limited (SPML) formed a joint venture (JV) named SPML-HCIL JV to bid for a State Highway development project in Bihar. The JV was awarded the project, which was then assigned back-to-back to SPML for execution. The Assessing Officer (AO) construed the assignment of the contractual receipt by the JV to SPML as an incurrence of expenditure, estimating an unreasonable assignment of 1.87% of the cost to SPML and disallowed Rs. 39,94,111/- for A.Y. 2012-13.

The CIT(Appeals) upheld the AO's decision, finding the payment to SPML exorbitant and excessive. However, the Tribunal found this interpretation incorrect, stating that the cost of a project assigned to a JV partner cannot be construed as an expenditure. The Tribunal noted that the AO's expectation of the JV earning profit from the assignment of the contract was incorrect and unsupported by facts or law. The Tribunal emphasized that the cost of the project is essential for its execution, and the resultant profit/loss should be offered for tax by the JV partner executing the contract. The Tribunal also noted that the Revenue had accepted a similar issue in favor of the assessee for A.Y. 2011-12, making it a covered issue. Consequently, the Tribunal allowed the appeals and deleted the disallowances.

Issue 2: Entitlement to Claim Losses
The second issue concerns the assessee's entitlement to claim losses of Rs. 52,180/-, Rs. 11,030/-, and Rs. 26,030/- for the assessment years 2012-13, 2013-14, and 2014-15 respectively. The AO disallowed the losses, stating that the JV was only nominal and thus the claim of loss was untenable. The CIT(Appeals) upheld this view.

However, the Tribunal found that since the existence of the JV was intact and it incurred only minimal expenditure to maintain its status, these expenses deserved to be allowed. The Tribunal held that the losses should be allowed to be carried forward if they cannot be set off in these years. Thus, the Tribunal allowed the appeals regarding the claim of losses.

Conclusion:
The Tribunal allowed all the appeals of the assessee, deleting the disallowances made under section 40A(2)(b) and allowing the claim of losses for the respective assessment years. The order was pronounced in the open Court on 13/12/2023.