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TMI Blog2018 (12) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... essee but not accepted by GAIL. The issue is whether the income accrues in the hands of the assessee despite it being disputed by the payee. It is also an accepted fact that there was a dispute and matter was referred to arbitration. Therefore, it was not sure whether the assessee has acquired right to receive the above income. Income can be held to accrue only when the assessee acquires a right to receive that income. Unless, the assessee acquired that right it merely remains a claim and not income. The mere raising a claim or a bill does not by itself create any legally enforceable right to receive any income. The Hon'ble Supreme Court in Godhra Electricity Vs. CIT [1997 (4) TMI 4 - SUPREME COURT] has held that unilateral increase in the rates of electricity shown as receipt in the books which could be realized due to protracted litigation did not result in an accrual of income, hence, such amount was not assessable. Therefore, in the present case there was no certainty of realization of the claim of the assessee as it was referred to arbitration, we confirm the finding of the ld CIT(A) in holding that such amount of ₹ 26.10 crore did not have any right to receive acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was liable to include this income in his gross receipt once the bill has been raised by the assessee. 3. Brief facts of the case is that the assessee is a consortium of association of person formed with four other members for laying of pipeline and associated facilities from Jagoti to Vijaipur pipeline project floated by GAIL vide agreement dated 19.12.2003. The assessee filed its return of income declaring loss of ₹ 7145551/-. The return was accompanied with tax audit report u/s 44AB of the Act. During the course of assessment proceedings the books of account and contentions of the assessee were examined and total taxable income of the assessee was determined at ₹ 47375458/-. The ld AO noted that the assessee has shown contract receipt of ₹ 59.21 and has deducted 26.10 crores being deduction made by the customers and therefore, net receipt of ₹ 33.11 was shown. The assessee also debited the expenditure of ₹ 33.05 crores being direct contract expenses. The assessee submitted that this is the expenditure incurred by the assessee as work done by sub-contractors which are the parties of AOP. It was further stated that this is as per the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced before the ld AO and same were rejected wrongly by the ld AO. He referred to paragraph No. 41 and 42 of the order of the ld CIT(A). He further stated that now the issue is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in case of Linde AG and Circular No. 7/2016 dated 07.03.2016. He therefore, submitted that there is no infirmity in the order of the ld CIT(A). With respect to ground No. 3 of the revenue he referred to para No. 40 of the order of the ld CIT(A) and stated that the assessee raised bills of ₹ 59.21 crores and GAIL passed the bills only ₹ 33.11 crores and there was uncertainty with respect to the receipt of amount and therefore, same could not be assessed during the year as income of the assessee. He therefore, submitted that deduction of ₹ 26.10 crores cannot be assessed to tax as income of the assessee. 8. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The ld CIT(A) has dealt with issue of taxing of income of AOP vide para No. 11 to 39 of his order as under:- 11. The issues raised and discussed in the assessment order have been care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable therefore from GAIL, for the following reasons:- a) The intention of the members was not to carry on the business in common. b) The scope of work to be carried on independently by each member and the amount payable as per schedule was also predetermined. c) The members were to bear their own cost for the work specified in their respective agreements, retain its profits or bear losses if any and were assessable an independent entities for the scope of work assigned to them. It is submitted that the assessing officer has not appreciated the facts of the case in proper perspective and has not appreciated that the consortium was only a vehicle formed for coordination and successful completion of the project and the amount receivable from GAIL could not be brought to tax in the hands of the appellant, assessed in the status of an AOP. The relationship between the appellant and the consortium members was stated to be an independent relationship and there was no principalagency relationship. 16. It was also one of the contentions of the ARs that the assessing officer in the assessment order has not been able to rebut the correct factual matrix i. e. that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own losses and retain all profits arising from the performance of its requisite works package. Nothing in this agreement shall be deemed to give rise to a partnership between the parties or to any contract for services between the parties and each of the parties undertakes to use all reasonable endeavours not to do any act or thing which would cause such a relationship to arise. On the above facts and circumstances the applicant approached the Authority for an advance ruling on the following question, besides some other questions: 1. Whether, on the facts and in the circumstances of the case, the joint venture constitutes an association of persons within the meaning of section 2(31 )(v) so as to become liable to tax under the Income-tax Act. 1961, or each party of the joint venture is liable to tax on its own profits? The Authority ruled as under: So far as questions Nos. 1 and 2 are concerned the parties have specifically ruled out constitution of any partnership between them. There is no sharing of profits or loss. They7 have specifically provided in the agreement that each party w-ill bear its ow-n loss and retain its profits as and when such profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has argued that the assessment of the appellant, in the status of an AOP, it was submitted, could only be made in respect of 0.1% of the gross receipts receivable from GAIL, retained by the appellant and that 99.9% of the gross amount received from GAIL was assessable in the hands of respective members. 19. Alternatively, the ARs- of the appellant submitted that even if the amount received from GAIL constituted income of the appellant for the assessment year under consideration, the assessing officer should have allowed the deduction for the payment amounting to ₹ 33,05,43,749 made to the consortium members in respect of the work done by them as per the fixed ratio specified in the Consortium Agreement. 20. It was further contended that the amount paid to the consortium members by the appellant as per the agreed terms constituted independent income in the hands of the respective consortium members and any expenditure incurred by the consortium members was to be deducted therefrom by the consortium members, while computing their respective income liable to tax. It was further contended that there could not be any bills and vouchers for the amount paid to the conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant has not been able to produce the details of expenses amounting to ₹ 12.88 crores incurred by Expotec International Ltd., my attention was drawn to the relevant pages of the paper-book wherein the appellant had annexed copy of notices dated, 7.12.06 issued under sections 131/ 133(6) of the Act summoning one of the consortium members, viz., M/s Expotec International Ltd. (Expotec) to produce details regarding the said expenditure incurred in relation to the said project. The said member vide reply dated 11.12.2006, had submitted complete details of the expenditure incurred during the year in relation to the said project including that of expenses of ₹ 12.88 crores. Therefore, it was argued that the observations of the AO are factually incorrect. 24. It was submitted that the appellant had maintained the regular account books, bills and the vouchers in respect of the business administrative expenses and the same have been audited by the tax auditors and no adverse inference has been drawn by the auditors. It is stated that the assessing officer has not pointed out any discrepancy either in the books of account maintained in the regular course of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative expenses were produced during the assessment proceedings for verification. It was stated that the assessing officer without appreciating that the accounts of the appellant are audited and without pointing out any discrepancy in the bills, vouchers and ledger accounts produced before him during the assessment proceedings, rejected the books of accounts on the sole ground that the appellant has not been able to substantiate the amount paid to the consortium members for the work done by them in relation to the pipeline project and is not maintaining the record of bills/ vouchers in relation to the expenses incurred by the respective members for the said project. 27. The appellant has submitted that the assessing officer has erred in rejecting the books of acc-ount of the appellant for the following reasons: (a) there could not have been any other bill/ voucher for making payments to the members besides the agreements, (b) the members are independent assessable entities distinct from the appellant and thus the appellant has no control over the records of the members, and (c) one of the consortium member namely, Expotec International Ltd. in pursuanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f pipeline project, it was submitted that since GAIL and the appellant had referred the matter for arbitration there was uncertainty as to ultimate collection of the-abov.e amount of ₹ 26,10,57,290 and the said income did not statedly accrue to the appellant during the relevant previous year as GAIL did not acknowledge the debt in respect of the above amount. It is seen that the assessing officer has though not denied that there was a dispute between the parties, which was also confirmed by GAIL. However, the AO held that the whole of the amount receivable from GAIL. viz.. ₹ 59,21.93.232 constituted income of the appellant which had as per the AO accrued to the appellant during the assessment year under consideration. 30. In this regard it was submitted by the Ld. ARs that even though the appellant was maintaining its accounts on the mercantile system, wherein credit items are brought into the account immediately after they become legally due but before they are actually received and all expenses for which a legal liability has been incurred are debited before they are actually disbursed, yet it is to be appreciated that even under the mercantile system, provisiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land was acquired permanently by the State Government. The Land Acquisition Officer awarded a sum of ₹ 24.97,249 as compensation to the assessee. The assessee was not satisfied with the amount of compensation and preferred an appeal before the Arbitrator. The arbitrator made an award, whereby the compensation was fixed at Rs/30.10,873 on account of the permanent acquisition of the land, thus enhancing the original amount of compensation by ₹ 5,1 J,624 on which directions were also issued for payment of interest @ 5 per cent PA. The arbitrator also directed that further recurring compensation at ₹ 62,72,104/- per mensem should be paid to the assessee from the date of the requisition till the date of the acquisition. The State Government appealed to the High Court and during the pendency of the appeal, it deposited ₹ 7,36,691, which the assessee was permitted to withdraw on furnishing security'. On receipt of the amount, the assessee credited it in its suspense account on the same date. During the assessment proceedings for the assessment year 1956-57, the Assessing Officer brought to tax a sum of ₹ 7.24,914 as the assessee;s business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee also can appeal against the insufficiency of the enhanced compensation. Can it be said that the final determination by the highest court of the compensation would entitle the Income-tax Officer, notwithstanding the period of limitation fixed under the Income-tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation1? We do not think there can be any justification for such a proposition. On a proper construction of the terms 'accrue' or 'arise1, we are of the view that such an inteipretation cannot be placed. The interpretation given by us does not affect the interests of the Revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise wduld be contrary to the provisions of law. (emphasis supplied) 34. The appellant also refered to and relied upon the case of Topandas Kundanmal vs. CIT: 114 ITR 237 (Guj.). Addl. CIT vs. New Jehangir Vakil Mills Co. Ltd.. 117 ITR 849 (Guj.). K. V. Moosa Koya and Co. vs. ITO: 175 ITR 120 (Ker.), CIT vs. Mysore Sugar Company Limited: 183 ITR 113 (Kar.), CIT vs. Abdul Mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee contended that the share in the profits of M/s Amrit Chemicals for the calendar year which accrued on or after December 31, 1955, belonged to Ashokbhai in his individual capacity and was not liable to be included in the taxable income of the assessee, because it had been declared under the partition deed to belong exclusively to Ashokbhai as from January 1, 1955, and that in any event since the firm made up its accounts at the end of the calendar year, the assessee had no interest in the share of profits for the calendar year 1955, which accrued at the end of that year to Ashokbhai in his individual capacity. The Assessing Officer while completing the assessment of the assessee made an addition of ₹ 21,051 received by Ashokbhai as five annas share in the profits of the firm. On appeal the AAC held that Ashokbhai ceased to represent the HUF and the share of profits received from the firm had to be apportioned between the assessee and Ashokbliai. This order was confirmed by the Tribunal and the High Court. Aggrieved, the Department filed an appeal before the Supreme Court. The Court observed as under: In the present case at the date when Ashokbhai acquired the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss arising to that company on account of execution of the above contract holding that the loss is to be allowed in the hands of the appellant (RNGS Consortium). It was submitted that the expenses incurred by that member (Expotec), which' have been verified with reference to bills/vouchers, etc. in the assessment of that assessee, to the extent of the amount paid by the appellant to Expotec as per the sub-contract agreement with Expotec has to be allowed as deduction in the hands of the appellant, otherwise it will lead to double taxation. 39. The Ld. ARs, therefore, submitted that the action of the assessing officer in computing the income of the appellant estimated @ 8% of the gross receipts, not allowing the deduction of payments made to the Consortium members and disallowing the loss as computed by the appellant may kindly be deleted. 9. Further the issue is also clearly covered in favour of the assessee by circular of CBDT which is as under:- 07/2016 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi, the 7th of March, 2016 Subject: Clarification regarding taxability of conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consortium members for administrative convenience; 4. There may be other additional factors also which may justify that consortium is not an AOP and the same shall depend upon the specific facts and circumstances of a particular case, which need to be taken into consideration while taking a view in the matter 5. It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of section 92A of the Act. In such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue. 6. The above may be brought to the notice of all for necessary compliance. 7. Hindi version to follow. (Rohit Garg) Deputy Secretary to the Government of India 10. Therefore, the ld Assessing Officer is not right in rejecting the books of accounts of the assessee for the reason that the ld AO could not appreciate the nature of the business of the assessee and purpose of entering into consortium contract. He did not consider that assessee was only a pass through entity bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and allowing the entitled expenditure incurred. As GAIL had not accepted the entire claim of the appellant for ₹ 59,21,93,232 and had disputed the same, the appellant could be said be not to have received the right to receive the above amount and the same cannot constitute income of Ae appellant for the relevant assessment year. Only the amount of ₹ 33,1 1.35,942 being the amount of claim accepted by GAIL can be said to be the income assessable to tax in the hands of the appellant. The case laws referred to by the appellant i.e. E.D. Sassoon Co. Ltd Vs. CIT 26 ITR 27 (SC), CIT Vs. Hindustan Housing and Land Development Trust. 161 ITR 524 (SC) and other case laws discussed above have been considered and it is seen that they support the appellant s contention. It is also seen that the case law- relied upon by the AO in the assessment order, as discussed above, does not support the action of the AO. Keeping in view the facts and circumstances of the case as discussed above, the assessing officer is directed to take the net receipts as declared by the appellant for computing the income of the appellant for the year under consideration. This disposes off ground No.4(g) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consortium, New Delhi. It filed its return of income on 01.11.2004 declaring loss of ₹ 5929379/-. The total income of assessee is assessed at ₹ 46167749/- vide order dated 06.12.2006, wherein, the loss of ₹ 57498232/- incurred by the assessee in the contract work was disallowed by the ld AO. The ld AO was of the view that an AOP is a separate entity and the income and expenditure pertaining to that cannot be assessed in the hands of the member. 16. The assessee aggrieved preferred an appeal before the ld CIT(A) who held that the income and expenditure of the assessee was determined by a separate agreement entered by the assessee with the AOP for the work to be performed by assessee as per sub-contract agreement dated 15.05.2003. He further noted that 99.9% of the receipts were distributed amongst the member for the work to be done by them and therefore, the above loss cannot be disallowed. Revenue aggrieved has preferred this appeal. 17. The ld Departmental Representative relied upon the order of the ld AO and the ld AR relied upon the order of the ld CIT(A) as well as his submissions made in appeal of the AOP. 18. We have carefully considered the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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