TMI Blog2010 (4) TMI 1131X X X X Extracts X X X X X X X X Extracts X X X X ..... ees only if paid/deposited within grace period allowed under the statute. 3. On the facts and circumstances of the case and in law, the Ld. AO erred in not allowing claim of loss of ₹ 8,81,52,174/-being the amount of sub-contract charges paid to Nitin Construction Ltd. 3. The facts of the case are that assessee-company, having name and style LG E C-Patel Joint Venture, is a joint venture between LGE C (a Korean Company) and Patel Engineering Ltd.,( in short PEL) formed to carry out construction of the project Surat Manor Tollway Road Project Package-2 awarded to it by the National Highway Authority of India (NHAI). The return of income for the assessment year 2003-04 was filed on a loss of ₹ 3,31,13,117. Originally the return was processed u/s. 143(1) but later the case was picked up for scrutiny and detailed examination of the agreements between the two partners of the joint Venture and other accounts was carried out. It was explained that Patel Engineering Ltd., is a Public Ltd. Co., engaged in the construction of large scale infrastructure projects and is filing its return of income at Mumbai. On the other hand LGE C i.e. L.G. Eng. Constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 544,407,978 650,595,213 Expenditure. Opening work in progress. --- 4,039,790 4,039,790 Direct expenses Sub-contract 94,367,363 499,502,939 593,870,302 Employee Remuneration Welfare. 7,199,914 --- 7,199,914 Operation Admn. Exps. 36,651,644 85,591 36,737,235 Depreciation. 20,679,945 --- 20,679,945 Total 158,898,866 503,628,320 662,527,186 4. First issue relates to disallowance of claim of expenditure of ₹ 41,35,814/-, incurred by LGE C after 2-9-02 and claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly responsible for executing the whole contract taken from NHAI. Once establishment is continuing to exist even though 100% work is shifted to PEL, the expenditure incurred by it would belong to Joint Venture and therefore, it has to be allowed against income earned during the year by Joint venture. 7. The Ld. DR on the other hand submitted after the agreement dt. 2-9-02 common interest in earning income ceased to exist and therefore, no Association of Person surviving and therefore, no assessment of Joint venture as AOP could be made after 2-9-02.It is only the income earned prior to 2-9-02 could be assessed in the status of AOP. Therefore, expenditure incurred by LGE C could not be set off against income of joint venture. Further, this expenditure was incurred after 2-9-02 by LGE C against which LGE C has not earned any income which could be said to have been earned by A.O.P. Once no income is earned by A.O.P. after 2-9-02 then it cannot be said that expenditure was incurred for earning income. On this account also, claim of expenses by LGE C could not be allowed. 8. The ld. DR further referred to the detailed order of the AO and Ld. CIT(A) for assessment year 2004 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mages of every kind made or accrued for the balance works and additional works (2) LGE C will demobilize from the site and not deploy any of its employees in site. Provided, however, that, if LGE C thinks fit to its sole discretion, LGE C may let its employee(s) visit the site and, in such case, Patel will provide proper support. However the costs of the same will not be borne by Patel. Patel shall, at regular interval, in every month, send LGE C s Head Office a copy of Monthly Progress Report, Statement of Interim Payment Application, approved or certified Statement thereof and any other material and information which are requested by LGE C or related to LGE C s interest. (4) Patel will be entitled to receive all payment from for the balance works of LGE C and additional works done solely by them at BOQ Rates, Extra Item rates etc including for all escalation payment, deemed export benefits etc., and all amounts so received will be passed on from the JV s account to Patel s account by authorized representative of Patel. The amounts due to LGE C as agreed by both the parties under this Amendment will be paid to LGE C within 7 working days for, the day the moneys are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e joint venture is existing, it does not necessarily lead to inference that association of person for the purposes of being taxed under Income tax Act would also be existing. Joint venture and Association of person are two distinct legal concepts. An AOP can be a joint venture but all joint ventures need not necessarily be AOP. It is because joint venture is a concept for accounting purposes and for sharing legal responsibility vis- -vis third parties But AOP is a concept under I.T. Act and is listed in section 2 (31) (v) of the Act. For an AOP to exist there are two import ingredients to be satisfied one is that they should come together to work and secondly they should have intention to earn income from such work. Even though LGE C and PTEL are together but after 2-9-02 they did not have common interest to earn income from this venture. Once LGE C decides to withdraw from work then his interest in earning income from the work ceased to exist. Once a party to the Joint venture ceases to have interest in earning income from the joint venture then AOP comes to an end. Joint venture may continue to exist even after AOP ceases to exist. For assessing the income in the hands of AOP or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. It was held by Hon ble High Court that there was no act of volition on the part of the rest of the partners of the AOP to continue with a common purpose to produce income, profit and gains. The assessment in the status of AOP was held not valid. 12. Hon ble Gauhati High Court in the case of Smt. Jawant Kaur Sehgal Others vs. CIT (2004) 271 ITR-475 (Gauhati) held that an essential ingredient of AOP is that there is a unity of the members for a common purpose and there has to be community of interest in order that an income can be assessed in the hands of AOP. It must be derived from the process in which the association of persons has some control in allowing continuation of its members in earning the income, profit or gain for which it is formed. In other words, involvement of all the members of association of person showing community of interest is necessary. Hon ble Himachal Pradesh High Court in Bhupendra Food Malt Industries (1998) 229 ITR-496 also emphasised on volition on the part of the members of the association as an essential ingredient. Hon ble Madras High Court in State of Tamil Nadu vs. Thiruivalargal Singara Estate (1996) 217 ITR-199 (Mad) hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he individual members of an association chose to realise their dividends as individuals, there is an end of the association. 14. From the plethora of above decisions we cull out following principles:- (1) Members must voluntarily come together, join for carrying out activities to earn income and share them in determined proportion. (2) Volition on the part of each member to join and to remain joint is necessary. (3) If association is formed once, then it is not necessary, that it will continue to be in existence even when members avoided to remain together. If one of them act in such a manner which is contrary to the interest of others then AOP will come to an end. 15. When we apply above principles on the facts of the present case we notice that though LGE C and PEL formed AOP by virtue of an agreement dt.16-10-2000, but such volition on the part of LGE C came to an end by the agreement dated 2-9-2002 and therefore, no association of persons survived after LGE C withdrew from sharing any profit making work and having no further volition in sharing any income from the work done for NHAI. 16. In view of this any expenditure incurred by LGE C after 2-9-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a bad debt. The Ld. CIT (A) did not allow the same on the ground that claim was not made in the return of income. Even in the audited accounts, it has been shown as advance as on 31-3-03. The mandatory requirement as per section 36(2) of the Act was not fulfilled i.e. the amount was not written off in the books of accounts. Therefore, the same was not allowed by Ld. CIT(A). 19. We have heard the rival parties and carefully perused the material on record. Firstly, the claim was not made in the return of income. The A.O. has not discussed the same in the assessment order therefore, it is not known whether claim was at all made before him. The claim is apparently made before the Ld. CIT (A) for the first time. Since the amount was not written off in the books of accounts by LGE C, it could not be claimed as a bad debt. Further, as per clause 6 of the Supplementary Agreement dt.2-9-02 liability arising from the work executed by LGE C till the date of signing of this agreement shall be that of LGE C and Patel will be indemnified by LGE C against the same. In view of this, loss arising in respect of any loss due to non recovery of advance from NCL will be that of LGE C and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the work is transferred to PEL for execution and LGE C has sought to indemnify itself from any loss, obligation, duty or payments etc., arising from execution of the above project after 2-9-02. The relevant clause No.2 of the supplementary agreement is quoted while disposing of the appeal for A.Y. 2003-04. During this year, Ld. AO noted that PEL has simultaneously entered into an agreement with M/s. KNR Construction and transferred 100% work to it after retaining 7% of the royalty charges from the total receipts. As per agreement with KNR construction on 7-9-02, all the receipts from NHAI received by the joint venture and transferred to PEL in accordance with the agreement with LGE C dt.2-9-02 would be further transferred to M/s. KNR Construction subject to deduction of 7% as royalty by PEL. The AO has referred to relevant clauses of the agreement with KNR Construction as under :- The First Party shall pay to the second party at the quoted rates as per the measurements accepted by NHAI, deducting 7% (seven percent) towards royalty from gross bills. The income tax as prevailing at the date of payment and other recoveries proposed by the NHAI in the bills will be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... member when it is no longer actively involved in the execution of the road project from October,2002 and all the receipts received from the NHAI were reflected by the PEL member of the JV? 26. In response to this, the joint venture furnished detailed submission to the AO out of which AO has referred some portion which was considered as relevant by him. For the sake of convenience they are being referred here also for the sake of convenience. The next query raised by you relates to the proposal to assess 7% of the construction receipts from MHAI, as profits of the JV. For the reasons explained earlier, at length, in para no 10 to 12, we submit that the LGE C-Patel JV had to alternative but to sub-contract the LGE C s portion of incomplete work to another contractor. Due to the reasons also mentioned earlier, no contractor was forthcoming to work on the site on which the work was earlier being carried out by LGE C as such contractor would have to deal with a number of contentious issues on that site with its subcontractors, labourers and the material suppliers. Hence, the LGE C-Patel JV took a commercial decision to subcontract the LGE C s portion of work to P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the nominated Project Manager. LGE C will demobilize from the site and not deploy any of its employees in site. Provided, however, that, if LGE C thinks fit to its sole discretion, LGE C may let its employee(s) visit the site and, in such case. Patel will provide proper support. However the cost of the same will not be borne by Patel. Patel shall, at regular interval in every month, send LGE C s Head Office a copy of Monthly Report, Statement of Interim Payment Application, approved or certified statement thereof and any other material and information which are requested by LGE C or related to LGE C s interest. Article-15: Patel will continue with the existing sub-contractors of LGE C viz. M.S. Khurana, Desai Constructions, Indian Developers and other provided they agree to the rates,. Terms and conditions offered to them by Patel for execution of balance work. From the above submissions, you would appreciate that by taking over the incomplete identified and allocated work of LGE C, all the onerous responsibilities and risks relating thereto were assumed by PEL solely in its individual and independent capacity; the LGE C-PATEL JV or the other mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio of 75% to 25% between LGE C and PEL the profits were shown in the return of income of joint venture and they were not shown in their individual returns. Thus, if now arrangement is 0 to 100% then why not income by PEL be shown in the joint venture. (4) No income has been shown in the joint venture but TDS refund has been claimed from joint venture. Therefore, PEL taking over the entire project is only an after thought. Thus, if one member doing 100% instead 25% it would not mean that there is no income to joint venture. (5) In the A.Y. 2003-04 PEL has shown 9% of the receipts received from NHAI in the hands of joint venture. Even though after 2-9-02 100% work was given to PEL, it has shown still 7% received as income of the joint venture. (6) Joint venture is still continuing to file the return of income. Thus, joint venture is not ceased to exist. It continues to be assessable entity. (7) Joint venture is still raising running bills on NHAI and is responsible for carrying out contract for NHAI which only recognized joint venture and consolidated bills were submitted by JV to NHAI. The money was realised only by the joint venture which was later on shared be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enture in its individual return of income. If the joint venture does not want to show any income from the project in its return of income, then it cannot claim credit for the TDS and claim refund. (16) Agreement dt.2-9-02 is not according to the guidelines issued by NHAI. As per part-2 of guidelines and page-214 of the contract with NHAI, it is stipulated that joint venture is not authorized to sub-contract any portion of the work without the consent of the Engineer of NHAI. (16) Even otherwise, according to Ld. AO section 40A(2)(b) could be invoked as members of joint venture are in the same position as partners in the case of the partnership firm. (17) The members of the joint venture are closely related to each other and clause 18 of 3CD report filed with the return of income of the joint venture showed the sum of ₹ 114.82 crores as expenditure on work given to PEL. (18) Thus, when joint venture gave the work to PEL then market value of project was less than 7% and therefore, joint venture ought to have given the work at price reduced by 7%. From this point of view also 7% of the total receipts would be taxable in the hands of joint venture. 28. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant AOP, LGE C is a company registered under the laws of South Korea. Considering the above factual aspects of the case the appellant AOP is not eligible for availing of deduction u/s. 80-IA of the Act. This additional ground raised by the appellant is dismissed. 34. After hearing the parties we are of the considered view that there is no case for interference in the order of the Ld. CIT (A). Admittedly LGE C is a Korean Company and even if it formed a joint venture with the Indian Company, still it can not be a consortium of Indian Companies and hence deduction is rightly not allowed. Notwithstanding we have held in the assessment year 2003-04 that AOP consisting of LGE C and PEL ceased to exist after supplementary agreement dt. 2-9-2002 and therefore, question of assessing it and granting any deduction under the I.T. Act in respect of profits earned by PEL after 2-9-02 does not arise. As a result this ground of the assessee is rejected. 35. Ground No.5 relates to recovery of Tax or interest from the AOP. After hearing the parties we are of the considered view that tax and interest relating to period up to 2-9-2002 or arising on account of income earned by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2-9-2002. Therefore, even if joint venture has declared income from work carried out after 2-9-2002 till 31-3-2003 as its income, it does not prevent the revenue from taxing it in the hands of PEL as it is a right person in whose hands income, after supplementary agreement was executed, could be taxed. We have already held that no AOP continued to be in existence after 2-9-2002 as one member has lost interest in earning income for itself. Unless both the parties have common interest in earning income, no AOP can be said to be in existence. In view of this, if any tax or interest has been paid by joint venture during A.Y. 2003-04 or even after 2004-05, the credit of the same should be transferred to PEL where that income is assessable. Our view is that credit of TDS can be given only in the hands where income there-from is subjected to tax. If accrual of income in respect of the receipts received de-jure by joint venture is shifted to a member of the joint venture through an overriding title, then credit of TDS in respect of such receipts should be considered in the hands of that member of the joint venture in whose hands such income is found assessable. Ground No.5 is accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had entered into contract with JV. (ii) If there being, no LGE C, contract would not have procured. (iii) Right to work remained with the joint venture. (iv) Joint ventrure continues to exist, payments were received by joint venture, Govt. recognizes only Joint venture and not LGE C or PEL in individual capacity. (v) Joint venture still has motive to earn profit. (vi) The Joint venture has filed return of income with audited accounts. (vii) During 2003-04 Joint venture declared income as earned by PEL. (viii) No rectification is done by Patel of bringing 7% of income into joint venture, in the A.Y. 2003-04. (ix) The working in A.Y. 2004-05 is the same and comes out of the same contract as in the A.Y.2003-04 Therefore, there cannot be a different treatment in A.Y. 03-04 and 04-05. (x) Joint Venture receives funds from Govt. (xi) If there is no joint venture no contract with the Govt would survived. Payments are still continued to be received by Joint venture. (xii) Alternatively provisions of sec. 40A(2)(b) would be applicable as work is given to the partner of the joint venture whose where market value is further lesser as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Hon ble S.C. in CIT vs. Travancore Sugar and Chemicals Ltd., (1973) 88 ITR-1 (SC) where it is held that when income is diverted at source so that when it accrues it is not really the income of the assessee but somebody else s income then it cannot be taxed in the hands of the assessee. In the entire arrangement one has to find out the determinative factor which effects assessee s obligation in regard to the amount in question. Thus, where a third person becomes entitled to receive the amount under an obligation even before assessee could lay the claim to receive that income it would be a diversion of income by overriding title. Hon ble S.C. in CIT vs. Sunil J. Kinariwala (2003) 126 Taxman 161 (SC) held that it is only when after receipt of the income by the assessee if it is passed on to a third person in discharge of an obligation of the assessee only then it would be an application of income by the assessee. In CIT vs. Madras Race Club (1996) 219 ITR 39 (Mad.) the race club conducted races under an agreement with the Govt for Chief Minister s Rehabilitation Funds and Beggers Fund. Entire net collections were handed over to Govt. On these facts, it was held that it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in Additional Commissioner of Income-tax Vs. Rani Pritam Kunwar (1980) 125 ITR 102 (All) held as under:- In order that a payment should be treated as a diversion at source it is necessary that it should have been made under some legal obligation. Such obligation must attach to the source of income. In order words, for such a payment there should be an overriding charge, a charge which is created under any law for the time being in force or by virtue of a court's decree or by a voluntary settlement or the obligation must be such that, though not made a specific charge on the property, it can be enforced in a court of law. 46. In CIT vs. Rajaram Jaiswal (1992) 195 ITR-384 Hon ble Allahabad High Court held as under :- During the assessment proceedings for the assessment year 1970-71, the assessee raised a claim before the Income-tax Officer that he had borrowed certain amounts from two persons, namely, S and H, which amount he invested in a firm in which he was a partner. The assessee had entered into an agreement with the aforesaid two lenders some time in the year 1969, where under he had agreed to pay the said two persons 7 per cent. and 13 per cent. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee from the B firm as its partner was to be shared by the assessee and the other partners of J firm. Though for the years 1951-52 to 1957-58, the assessee was taxed only on one-third of the share income received from B firm, for the year 1958-59 the officer held that the entire share income received by the assessee was assessable in his hands. The Appellate Assistant Commissioner and the Tribunal, however, held that only onethird was assessable in the hands of the assessee. Held , the agreement had the effect of making an effective alienation at source of the profits by an overriding title created by it and hence the real income of the assessee was only one-third of his share income in the B firm. 49. The Hon ble Allahabad High Court in U.P.Bhumi Sudhar Nigam vs. CIT (2006) 286 ITR-197 (All) laid down the principle to decide as to when there will be diversion of income by overriding title or when it would be application of income as under :- The principles relating to diversion of income by overriding title are (i) if a third person becomes entitled to receive an amount under an obligation of an assessee even before he could claim to receive it as his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------ Rs.7,98,91,965/- Less:- Set off of brought forward losses as claimed. A.Y. 2002-03 Rs.2,78,45,878/- A.Y. 2003-04 ₹ 0,58,53,923/- Rs.3,36,99,801/- Total Income. ₹ 4,61,92,164/- Say.. ₹ 4,61,92,160/- =========== 52. Thus, the assessment of Joint venture was done at only ₹ 4.61 crores as against possible assessment at ₹ 8.03 crores being 7% of total receipt of 114.82 crores, which income has been offered by PEL in its assessment. Thus, avoidance of tax could not be a motive for entering into agreement on 2-9-02 with PEL. On the other hand,. There is considerable force in the argument of Ld. AR that LGE C being Korean could not afford to continue to bear losses and therefore, desired to get itself out from the present work and for getting out it agreed to receive a sum of ₹ 2.6 crores from PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would arise or accrue only when work as per contract with NHAI is carried out. If LGE C has withdrawn itself from carrying out any work then no income can really accrue to it. As per this agreement, PEL is carrying out the work even though bills would be finally submitted by joint venture and money would be realized from NHAI by joint venture from where the receipt would be transferred to PEL but that itself is not sufficient to hold that income would also accrue to LGE C. or to J.V. The carrying out of the actual work as per the contract with NHAI is necessary to hold that any income would accrue to LGE C. or to J.V. There is no material on record to suggest that in spite of agreement dt.2-9-02 LGE C has actively engaged itself in executing the contract and is carrying out the work but is not showing any income in its hands and thus whatever is given to PEL whole or part of it is an application of income. Therefore, only conclusion is that the source of income originally available to LGE C by way of executing 75% of work is totally shifted and transferred to PEL by LGE C for a consideration and therefore, there is no question of holding that what accrued to PEL was an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf. We have already held that an A.O.P. can be a joint venture but all Joint ventures can not be A.O.P, unless essential three conditions for forming A.O.P. are satisfied. Even if one condition is missing A.O.P. cannot be said to be in existence as discussed by us (supra). Therefore, we are of the considered view that provisions of sec. 40A (2) (b) cannot be invoked on the facts of the present case. This argument of the Department is also rejected. 59. As a result ground No.1 is allowed in favour of the assessee. As a result appeal of the assessee for A.Y. 2004-05 is partly allowed. ITA.No.3180/A/2007 (A.Y. 2005-06). 60. In the assessment year 2005-06 the assessee has raised the following grounds:- 1. On the facts and circumstances of the case and in law, the A.O. erred in assessing ₹ 1,73,99,098/- as income of the appellant being 7% of the total receipt from National Highway Authority of India. (NHAI). 2. On the facts and circumstances of the case and in law, the A.O. erred in disallowing the expenses incurred by the Joint Venture of ₹ 1,54,70,622. 3. On the facts and circumstances of the case and in law, the A.O. erred in initiating penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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