2019 (9) TMI 678 - AT - Income Tax

Tribunal overturns CIT(A)'s order, directs AO to delete addition under Section 40A(2)(b)

The Tribunal allowed both appeals filed by the assessee, setting aside the CIT(A)'s order and directing the AO to delete the addition. The Tribunal found ... Addition made u/s 40A(2)(b) - payment to the persons specified - Payment made towards subcontracting of work to JV - Payment of 99% of receipt instead of 95% as per AO - HELD THAT:- As decided in KEC-Delco-Vraha (JV) [2018 (9) TMI 1885 - 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, the provisions of this section are not attracted. Uphold the impugned order on this score deleting the disallowance - Decided in favour of assessee. Issues Involved:1. Disallowance of expenditure under Section 40A(2)(b) of the Income Tax Act.2. Justification of payments made to related parties.3. Treatment of joint venture income and expenses.Detailed Analysis of the Judgment:1. Disallowance of Expenditure under Section 40A(2)(b):The primary issue in the appeals was the disallowance made by the Assessing Officer (AO) under Section 40A(2)(b) of the Income Tax Act. The AO disallowed an amount of Rs. 5,15,240/- being the excess expenditure of 4% of the total payment made to the related party, M/s KEC International Ltd., which was a member of the Joint Venture (JV). The AO's rationale was that the payment made to the sub-contractor was excessive, as it was almost more than 99% of the receipt, whereas normally contractors pay not more than 95% of the receipt.2. Justification of Payments Made to Related Parties:The AO noted that M/s KEC International Ltd., to whom the work was subcontracted, was a related party under Section 40A(2)(b). The AO demanded that the assessee provide documentary evidence to justify that the payment made to the related party was as per the market rate. Since the assessee failed to provide such evidence, the AO concluded that the expenses were excessive and made the disallowance.3. Treatment of Joint Venture Income and Expenses:The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that it was a mere pass-through entity created for the purpose of bidding for the contract. The actual work was carried out by KEC International Ltd., and the other two partners received a credential fee of 2%. The CIT(A), however, was not satisfied with this argument and confirmed the AO's disallowance, following a similar decision in another group case.Tribunal's Findings:The Tribunal considered various arguments and precedents cited by the assessee, including decisions from the Hon'ble J&K High Court and the Hon'ble Delhi High Court, which supported the assessee's position that the JV was formed only for securing the contract and that the actual work was executed by the JV partners.The Tribunal also referred to its own decision in the case of ITO vs. M/s KEC-Delco Vraha (JV), where it was held that the AO was not justified in making the addition by invoking the provisions of Section 40A(2)(b) of the Act. The Tribunal noted that the AO had made the disallowance based on the income aspect rather than the expenditure, which was not in line with the provisions of Section 40A(2)(b).Conclusion:The Tribunal found that the facts of the present case were identical to those in the case of ITO vs. M/s KEC-Delco Vraha (JV). It concluded that the CIT(A)'s order was in consonance with the decisions of the Tribunal in other group concerns and the decisions of the Hon'ble High Courts. Therefore, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition. The appeals filed by the assessee were allowed.Separate Judgment for ITA No.7763/Del/2018:The Tribunal noted that the grounds raised in ITA No.7763/Del/2018 were identical to those in ITA No.7764/Del/2018. Following the same reasoning, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition, allowing the appeal filed by the assessee.Final Decision:Both appeals filed by the assessee were allowed, and the decision was pronounced in the open court on 09.05.2019.