Tapi JWil JV Vs ITO (ITAT Delhi)
ITAT Delhi held that disallowance under section 40A(2)(b) of the Income Tax Act on merely estimating that more income should have been earned from sub-contracting without bringing any comparable figures is unsustainable in law.
Facts- The assessee M/s TAPI Prestressed Products Ltd. (‘TPPL’) and M/s JITF Water Infrastructure Ltd. (‘JWIL’) had entered into an agreement to form a Joint Venture (JV) with the specific purpose of bidding for construction of 318 MLD 70 MGD Sewage Pumping Station etc. on design, build and operator basis at Kalyan Puri, Delhi. The contract was awarded by Delhi Jal Board to the assessee JV.
TPPL had executed the work and raised bills for Rs.15,02,04,381/- to the assessee JV. The assessee JV had raised bills for Rs.15,52,33,963/- to Delhi Jal Board.
The assessee JV had filed its ITR declaring total income of Rs. 1,75,600/-. The AO had passed the assessment order u/s 143(3) in the status of AOP, determining the total income at Rs. 1,20,77,763/- while making disallowance u/s 40A(2)(b) at Rs.1,18,92,163/-.
AO had formed a view that the assessee JV had suppressed its profit by making excessive payment to TPPL. To work out the amount to be disallowed u/s 40A(2)(b), the AO had applied the net profit rate of 8% on the Sub- Contract Expenses (net) of Rs.14,86,52,038/-, and thus arrived at a figure of Rs.1,18,92,163/-.
CIT(A) had formed a view that profit in the hands of the assessee JV should also be calculated by applying such rate of 3.78%. Accordingly, the ld. CIT(A) had worked out the total income of the assessee JV at Rs.56,19,047/-.
Conclusion- Held that Section 40A(2)(b) has no application to the income aspect of the assessee JV in the facts of the instant case. The AO had not brought any comparable figures to disallow the expenditure, moreover with the structuring of the JV provisions of Section 40A(2)(b) are not attracted in the given facts and circumstances of the instant case.
Held that the Assessing Officer has fallen into error in determining the profit @ 8% and also invoking the provisions of Section 40A(2)(b) and the ld. CIT(A) has also erred in determining the profit of the assessee @ 3.78% equal to the profit of one of the parties to the JV.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeals have been filed by the assessee against the orders of ld. CIT(A)-43 and ld. CIT(A)-20, New Delhi dated 25.07.2018 and 22.03.2019.
2. In ITA No. 6722/Del/ 2018, following grounds have been raised by the assessee:
“1. That on the facts of the case and under the law, the total income declared by the assessee in its ITR, on the basis of its audited set of P & L A/C and Balance Sheet read with Auditors’ Report, ought to had been accepted as it is, particularly when the books of accounts were not rejected by the Id A.O.
2. That the authorities below had erred in estimating the income /expense in the hands of the assessee, without appreciating the fact that the assessee had not carried out any business activity on its own, but had awarded sub-contract for Rs.14,86,52,041/-.
3. That on the facts of the case and under the law, no disallowance out of the expenses incurred / claimed under the head “Sub-Contract Expenses” at Rs 14,86,52,041/- is called for.
The ld. A.O. had computed total income at Rs. 1,20,77,763/- by making disallowance at Rs. 1,18,92,163/- (which amount was worked out by applying rate of 8% on Rs. 14,86,52,041/-) and adding the same to the total income declared by the assessee. On appeal, the Id. CIT(A) had reduced such disallowance to Rs. 54,43,447/- (being the difference between Rs. 56,19,047/- representing the amount worked out by applying the rate of 3.78% on Rs. 14,86,52,041/- and Rs. 1,75,600/- representing the total income declared by the assessee).
That on the facts of the case and under the law, the disallowance sustained by the Id CIT(A) to the extent of Rs.54,43,447/-, is unjustified.”
3. In ITA No. 4873/Del/ 2019, following grounds have been raised by the assessee:
“1. That the penalty order passed by the ld AD u/s 271G on 08.02.2017 is liable to be quashed, because it was not passed in accordance with law.
In response to show case notice t. 20.12.2016 (fixing compliance for 27.12.2016), the assessee had filed a letter dt. 26.12.2016 explaining the issues with the help of supporting Without asking for any further clarification /documents, the id AD had passed the order on 29.12.2016 [against which, the assessee had filed an appeal on 30.01.2017 which was disposed at by the it CIT(A) on 25.07.2018). During the pendency of appeal, the Id AO had passed the penalty order u/s 271G on 08.02.2017, while mentioning that by not filing the requisitioned documents, the assessee had violated the provisions of section 92D and thus it is fit case for imposing u/s 271G.
2. That the penalty order passed by the ld AO u/s 271G on 08.02.2017 is liable to be quashed, because there are contradictions in the assessment order and penalty order.
As per the assessment order dt. 29.12.2016, the penalty u/s 271G was imposed on or bee 29.12.2016. As per the penalty order it 08.02.2017, the prior approval was granted by the JCIT Range-62 New Delhi vide his letter F. No. Joint CIT/R -62/P- 3/2016-17/715 dt. 07.02.2017.
3. That in the peculiar facts of the case and under the law, the penalty levied u/s 271G 25.73.041/- is able to be deleted. The observations of the authorities below are either factually incorrect or legally untenable.
4. That on the facts of the case and under the law, the Id CIT(A) has erred in confirming the penalty of Rs. 29,73,041/, which was levied by the Id AO vide order dt. 08.02.2017
5. That the penalty u/s 271G deserves to be deleted, because the assessee was prevented easonable cause for the alleged failure.
The penalty us 271G can be levied /sustain only if the default is held to be proved without reasonable cause.
6. That the penalty u/s 271G deserves to be deleted, because the turn over limit stands from Rs. 5 Crores to Rs. 20 Crores, and also because the provision of section 40A(2)(b) stands omitted from section 928BA (meaning of specified domestic transaction.”
ITA No. 6722/Del/2018
Estimation of Profit/Section 40A(2)(b):
4. Brief background of the case is as under:
The assessee M/s TAPI Prestressed Products Ltd. (‘TPPL’) and M/s JITF Water Infrastructure Ltd. (‘JWIL’) had entered into an agreement to form a Joint Venture (JV) with the specific purpose of bidding for construction of 318 MLD 70 MGD Sewage Pumping Station etc. on design, build and operator basis at Kalyan Puri, Delhi. The contract was awarded by Delhi Jal Board to the assessee JV.
TPPL had executed the work and raised bills for Rs.15,02,04,381/- (Rs. 14,86,52,041/- plus Rs.15,52,340/-being the Labour Welfare Cess) to the assessee JV. The assessee JV had raised bills for Rs.15,52,33,963/- to Delhi Jal Board. As per the financial statements for F.Y. 2013-14, there was net profit of Rs.1,70,416/-, which is shown as below:
