JV assignment of contractual receipt to partner for project execution not expenditure under section 40A(2)(b)

ITAT Kolkata held that assignment of contractual receipt by a JV to one of its partners for project execution cannot be construed as expenditure under section 40A(2)(b). The JV entered into an agreement to bid for highway development in Bihar and assigned the contract to one partner on cost-to-cost basis. The AO incorrectly treated project cost as expenditure and made disallowances. The tribunal ruled that project cost differs from expenditure - it represents funds for execution, not services availed. The assignment created no profit element requiring deemed treatment. Following precedent from earlier assessment year where CIT(Appeals) decided favorably and revenue accepted, the tribunal allowed all appeals and deleted disallowances.

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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.

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