2019 (9) TMI 678

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.... 15% respectively. The Assessing Officer noted that the work contract was awarded to the assessee by the RVNL. This work was in turn subcontracted by the assessee to M/s KEC International Ltd. Contract price receivable by the assessee from RVNL was Rs. 56,96,05,620/- and the sub contract amount payable to M/s KEC International was Rs. 56,88,08,170/- leaving an amount of Rs. 7,97,448/-. The Assessing Officer pointed out that as per audit report, the following payments were made to the persons specified u/s 40A(2)(b):- Name of related person PAN of related person Relation Nature of transaction Payment made (amount) M/s KEC International Ltd. AACCK5599H Member AOP Subcontracting expenses 1,28,81,117/- 4. The Assessing Officer observed that normally in the case of sub-contract of this nature, the contractors pay not more than 95% of the receipt. In the assessee's case the amount paid to sub-contractor is almost more than 99% of the receipt. Expenses incurred by the assessee, therefore is excessive. 5. The Assessing Officer pointed out that M/s KEC International Ltd. to whom the work was subcontracted was a related party u/s 40A(2)(b) and accordingly asked the assess....

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....cision has held that where JV was formed only to secure contract, in terms of which scope of each JV partner's task was distinctly outlined and further, entire work was split between two JV partners and they completed task, through sub-contractors, JV was not an association of persons and liable to be taxed on that basis. 10. Referring to the decision of the Hon'ble Delhi High Court in the case of Linde AG, Linde Engineering Division vs. DDIT reported in 365 ITR 1 (Del), he submitted that the Hon'ble High Court in the said decision has held that in absence of sufficient degree of joint action between consortium members in either execution or management of project, consortium would not be deemed as an AOP for purposes of Income-tax Act. 11. He submitted that under identical circumstances, the Tribunal in the case of one of the sister concern namely ITO vs M/s Kec-Delco Vraha (JV) vide ITA No.2327/Del2016 order dated 18.09.2018 for A.Y. 2011-12 has decided the issue and held that the Assessing Officer was not justified in making the addition by invoking the provisions of section 40A(2)(b) of the Act and the appeal filed by the Revenue was dismissed. He accordingly submi....

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..... However, in the instant case, the AO estimated the profit of the assessee and determined the income, nowhere he doubted the expenses incurred by the assessee. Therefore, I am of the confirmed view that the AO was not justified in making the addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenditure and not to the receipts and the ld. CIT(A) rightly deleted the same. A similar issue having identical facts has already been adjudicated by the ITAT Delhi Bench "SMC", New Delhi vide order dated 21.11.2016 in ITA No. 2326/Del/2016 for the assessment year 2011-12 in the case of ITO, Ward-2(2), Gurgaon Vs KEC-Asiakom UB (JV), Gurgaon wherein the relevant findings are given in paras 5 & 6 of the order dated 21.11.2016 which read as under: "5. It is noticed that the AO made disallowance u/s 40A(2)(b) of the Act by opining that the assessee should have earned income from subcontracting. At this stage, it is relevant to note the prescription of the relevant part of Section 40A(2), which is as under :- '40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clau....

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....s to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.' 6. On going through the mandate of the above provision, it is clear that the 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, I am of the considered opinion that the provisions of this section are not attracted. I, therefore, uphold the impugned order on this score deleting the disallowance." 5. Respectfully following the decision of the Tribunal in the case of Kec- Asiakom U....