The Principal Commissioner Of Income Tax-5 v. Honourable Ms. Justice Sangeeta K. Vishen

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 702 of 2019With R/TAX APPEAL NO. 703 of 2019 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX-5 VersusM/S BACKBONE PROJECTS LTD. ==========================================================Appearance:MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANIand HONOURABLE MS. JUSTICE SANGEETA K. VISHEN Date : 07/10/2019 COMMON ORAL ORDER (PER : HONOURABLE MS.JUSTICE HARSHA DEVANI) 1.Both these appeals under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) arise out of a common order dated 25.4.2019 passed by the Income Tax Appellate Tribunal ‘C’ Bench, Ahmedabad (hereinafter referred to as the “Tribunal”) in ITA No.1486/Ahd/2013 and ITA No.2621/Ahd/2011. Since the facts and contentions in both these appeals are similar, the same were taken up for hearing together and are being decided by this common judgment. 2.The assessment years are 2009-10 and 2008-09 respectively. The appellant has challenged the above referred order of the Tribunal by proposing the following three questions, stated to be substantial questions of law:- “(A) Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs.8,72,76,300/- made by the Assessing Officer by adopting net profit ratio @ 11.59% of the gross receipts? (B)Whether the Appellate Tribunal is right in law and on facts in holding that the assessee, despite being an AOP, was correct to distribute business receipts directly among its constituents members without recording the same in its profit and loss account? (C)Whether the business receipt distributed by the assessee amongst its members is ‘application of income’ or ‘diversion of income by overriding title’?” 3.The questions proposed in both the appeals are common except that the amount stated in question (A) in respect of Tax Appeal No.703 of 2019 is Rs.10,17,87,325/-. 4.For the sake of convenience, reference is made to the facts of Tax Appeal No.702 of 2019. 5.The assessment for assessment year 2009-10 came to be completed under section 143(3) of the Act determining the total income at Rs.8,72,76,300/- as against the returned income of Rs. Nil after making addition of Rs.8,72,76,300/- on account of estimated net profit. 6.In this case, the assessee is a joint venture between Backbone Project Limited (BPL) and Backbone Construction Private Limited (BBC) constituted through a joint venture 3.The questions proposed in both the appeals are common except that the amount stated in question (A) in respect of Tax Appeal No.703 of 2019 is Rs.10,17,87,325/-. 4.For the sake of convenience, reference is made to the facts of Tax Appeal No.702 of 2019. 5.The assessment for assessment year 2009-10 came to be completed under section 143(3) of the Act determining the total income at Rs.8,72,76,300/- as against the returned income of Rs. Nil after making addition of Rs.8,72,76,300/- on account of estimated net profit. 6.In this case, the assessee is a joint venture between Backbone Project Limited (BPL) and Backbone Construction Private Limited (BBC) constituted through a joint venture agreement dated 5.12.2007 holding a separate permanent account number and having status of association of persons. During the year under consideration, the assessee had declared gross business receipts in respect of work contracts carried out by it during the said period. Accordingly, tax was deducted in accordance with law. However, the assessee had not declared any income from its business and had also not drawn a proper profit and loss account. According to the Assessing Officer, being an association of persons, the assessee was required to prepare profit and loss account and distribute the profit, if any, amongst the members of the association of persons. However, instead of distributing the net profit, the assessee had directly distributed the business receipts amongst its constituent members in the so-called participation ratio. The Assessing Officer was of the view that an association of persons is a ‘person’ and in terms of section 4 of the Act, income tax shall be charged on the total income of ‘every person’ and the expression includes inter alia, a firm and an association of persons or a body of individuals. He, accordingly, finalised the assessment under section 143(3) of the Act treating the assessee as an association of persons and making addition of Rs.8,72,76,300/- for assessment year 2009-10 by adopting the net profit ratio at 11.59% of the gross receipt and made an addition of Rs.10,17,87,325/- for assessment year 2008-09. 7.Being aggrieved, the respondent-assessee preferred an appeal before the Commissioner (Appeals), who allowed the appeals of the assessee and deleted the addition made by the Assessing Officer. Revenue carried the matter in appeal before the Tribunal but did not succeed. 8.Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that the decision of the Tribunal is erroneous on merits, inasmuch as, the assessee has a separate permanent account number and is also an individual taxable person, and hence, it should have maintained the profit and loss account, recorded the receipts in the profit and loss account and distributed the profit amongst its members in the participation ratio. It was submitted that the Assessing Officer had, therefore, rightly assessed the assessee as an association of persons and that the Tribunal was not justified in confirming the order of the Commissioner (Appeals) in deleting the addition made by the Assessing Officer. 8.Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that the decision of the Tribunal is erroneous on merits, inasmuch as, the assessee has a separate permanent account number and is also an individual taxable person, and hence, it should have maintained the profit and loss account, recorded the receipts in the profit and loss account and distributed the profit amongst its members in the participation ratio. It was submitted that the Assessing Officer had, therefore, rightly assessed the assessee as an association of persons and that the Tribunal was not justified in confirming the order of the Commissioner (Appeals) in deleting the addition made by the Assessing Officer. 9.As can be seen from the order passed by the Commissioner (Appeals), he has duly considered the clauses in the agreement of the joint venture. He has accepted the contention of the Assessing Officer that as per section 4 of the Act there is a charge on the person as defined in section 2(31) of the Act and after the amendment, a duty is cast upon an association of persons irrespective of the fact whether the same is formed for earning profit or otherwise, to file a return of income. He, however, found that the assessee had complied with all such requirements and was of the opinion that it is not necessary that in all facts and circumstances, such association of persons should show positive income. The Commissioner (Appeals) further found that the assessee duly maintains books of accounts, gets its books audited and files return of income to discharge its statutory liability. It has also complied with the other provisions of deduction of TDS from subcontract transaction and paid the tax to the exchequer and that the Assessing Officer to this extent could not draw any adverse finding. The Commissioner (Appeals) was further of the view that in the absence of any defect in the books of the members of the association of persons or even in the books of the assessee, the Assessing Officer was not justified in rejecting the same under section 145(3) of the Act. He has further noted that in fact the assessee’s JV partner M/s. Backbone Project Limited and M/s. Backbone Construction Private Limited offered the income from the same work carried out by it in pursuance of award of main tender to the appellant and thereafter, in compliance of the subcontract, which otherwise is an exempt income under section 80IA(4) of the Act in the hands of the assessee. The Commissioner (Appeals) found that, therefore, the revenue has gained from these transactions and treatment inasmuch as the respondent had not made any claim under section 80IA(4) of the Act since there was no positive income. 10.The Commissioner (Appeals) considered the joint venture agreement and was of the view that though the responsibility of completing the work awarded under the tender was of the respondent, but the actual work was sub-contracted to one of the joint venture partners as per agreed terms and conditions. According to the Commissioner (Appeals) such kind of arrangement is not to be disbelieved but to be construed in its true spirit from the point of view of a businessman. He, accordingly, was of the view that such arrangement cannot be treated as a colourable device to defraud the revenue since all the transactions are disclosed and entered into in a transparent manner subject to audit and scrutiny. 10.The Commissioner (Appeals) considered the joint venture agreement and was of the view that though the responsibility of completing the work awarded under the tender was of the respondent, but the actual work was sub-contracted to one of the joint venture partners as per agreed terms and conditions. According to the Commissioner (Appeals) such kind of arrangement is not to be disbelieved but to be construed in its true spirit from the point of view of a businessman. He, accordingly, was of the view that such arrangement cannot be treated as a colourable device to defraud the revenue since all the transactions are disclosed and entered into in a transparent manner subject to audit and scrutiny. 11.The Tribunal, in the impugned order, has concurred with the findings recorded by the Commissioner (Appeals) and has found that the association of persons was formed only to secure the work and after that there was no involvement of such association of persons in the execution of the work as the entire work was executed by the members of the joint venture as agreed between them. Accordingly, the fees from the execution of the project work were shared between the members as per their understanding. The Tribunal further noted that the members of the joint venture have disclosed the entire income which was originally received by the assessee in their books of account and income tax returns. The returns of income of these members have been subject to the assessment framed under section 143(3) of the Act and hence, it could be inferred that there was no loss to the revenue on account of the income disclosed by the members of the joint venture even if it is assumed that it belongs to the joint venture. Moreover, both the joint venture and the members are chargeable to tax at the maximum marginal rate. The Tribunal placed reliance upon the CBDT Circular No.7/2016 whereby it has been clarified that there will not be any tax liability on the income of the joint venture if the same income has been offered to tax by the members of the joint venture. The Tribunal has found as a matter of fact that the assessee had complied with all the conditions as specified by the CBDT and was of the considered view that no addition could be made in the hands of the assessee in the given facts and circumstances on the ground that income was offered to tax by its members and not by the joint venture. Considering the totality of the facts, the Tribunal was of the view that there could not be any addition in the hands of the assessee for the income in question 12.From the facts noted hereinabove, it emerges that both, the Commissioner (Appeals) as well as the Tribunal, have found that the members of the joint venture have duly shown the income in their returns of income and have paid the tax thereon. The joint venture and the members of the joint venture are being taxed at the maximum marginal rate, and hence, no loss has been caused to the revenue. Moreover, the Tribunal as a matter of fact has found that the requirements of CBDT circular referred to hereinabove are duly satisfied in the case of the assessee and hence, once the amount has been offered to tax by its members, the assessee could not be saddled with the liability to pay tax in respect of the same amount. 13.Having regard to the concurrent findings recorded by the Tribunal after appreciating the material on record as referred to hereinabove, it is not possible to state that the impugned order passed by the Tribunal suffers from any legal infirmity so as to warrant interference. No question of law, much less, a substantial question of law can be said to arise out of the impugned order so as to warrant interference. The appeals, therefore, fail and are, accordingly, summarily dismissed. (HARSHA DEVANI, J) Z.G. SHAIKH (SANGEETA K. VISHEN,J)