Jammu And Kashmir H.C : No Income in hand of joint Venture Company Formed Just for participating in tender for contracts

High Court Of Jammu And Kashmir

Soma TRG Joint Ventue Vs. CIT

Section 194C, 40(a)(ia) and 194J

Assessment year 2005-06

Alok Aradhe And B.S. Walia, Jj.

IT Appeal Nos. 18 & 19 Of 2010 And 34 & 52 Of 2013

September  15, 2017 

JUDGMENT

Alok Aradhe, J – In this bunch of appeals, common questions of law and fact arise for consideration; therefore, they were heard analogously and are being decided by this common order. For the facility of reference, facts from ITA No. 18/2010 are being referred to. The appeals have been admitted on following substantial questions of law:

“1. Whether on the facts and circumstances of the case and, on consideration of agreements entered by M/s. Soma Enterprises Ltd and, M/s. TRG Industries Ltd. could it be held that, receipts of Rs. 12,09,55,137/- represented income of the assessee and, it was not a case of diversion of income by overriding title?
2. Whether the impugned order of the Income Tax Appellate Tribunal is unreasoned, arbitrary and, non-speaking order, as such, the addition sustained of Rs. 12,09,55,137/- is not validly sustainable in law?
3. Whether on the facts and, circumstances of the case and, on true construction of the statutory provisions contained in section 40(a)(ia) of the Income Tax Act, 1961 the Income Tax Appellate Tribunal has erred in holding that payments of Rs. 12,09,55,137/- to the joint ventures represented expenditure of the assessee which was not allowable as deduction from the alleged income of the appellant in view of the provisions of Section 40(a)(ia) of Income Tax Act, 1961?”

2. Facts leading to filing of this appeal briefly stated are that two separate and independent companies incorporated under the Companies Act, 1956 namely M/s. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd entered in two separate joint venture agreements dated 23.07.2002 and 12.09.2002 for formation of the appellant, namely, M/s. Soma TRG Joint Venture with solitary objective of submission of two tenders for construction of two tunnels of Northern Railway on the Katra-Reasi Section of Udhampur-Srinagar-Baramullah rail link project. The agreement dated 23.07.2002 was for construction of tunnel No. 10 whereas agreement dated 12.09.2002 was for construction of tunnel Nos. 8 and 9. It is the case of the appellant that the need for formation of the appellant arose as M/s. TRG Industries (P) Ltd was not meeting the qualifying criteria laid down in the notice inviting tender floated by Northern Railways and it was only M/s. Soma Enterprises Ltd. which had the necessary experience under the Notice Inviting Tender.

3. The contracts in question were allotted in the name of the appellant and the same were solely executed by M/S. TRG Industries (P) Ltd and not by M/S. Soma Enterprises Ltd, which is evident from the side agreements dated 09.06.2003 and 16.02.2004 entered between M/s. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd, subsequent to the obtaining of the tender in the name of the appellant. In fact, M/s. Soma Enterprises Ltd had only enabled M/s. TRG Industries (P) Ltd to obtain the contract, therefore it received 3 per cent of the contract value and M/s. TRG Industries (P) Ltd received 97 per cent of the contract value from the aggregate receipts received under the tender. No work was intended to be done by the appellant and nor the same was done by the appellant. The entire expenditure was not incurred by the appellant but was only by M/s. TRG Industries (P) Ltd.

4. The aggregate receipts were allocated to the joint venture partners under the joint venture agreement read with side agreement and no income accrued to the assessee as there was diversion of income at source which was provided in Clause 5 to the agreement that 97 per cent of the income will be that of M/s. TRG Industries (P) Ltd and only remaining 3 per cent is that of M/s. Soma Enterprises Ltd. In fact the appellant did not incur any expenditure on the said project and was merely a conduit to obtain the contract from the Northern railways. The appellant under the aforesaid agreements received an aggregate sum of Rs. 1,19,45,588/- in Assessment Year 2004-2005. The aforesaid sum was received in respect of two projects under construction i.e. Tunnel No. 10 and Tunnel Nos. 8 and 9 respectively allotted by northern railways and was allocated to two joint venturers namely M/s. Soma Enterprises Ltd and M/s. TRG Industries (P) Ltd in the ratio of 97:3 as per separate agreement entered between the two joint venture for construction of Tunnel No. 10 and Tunnel Nos. 8 and 9, respectively. The appellant being an association of persons furnished a return of income on 29.11.2004 and declared nil income for the Assessment Year 2004-2005. The aforesaid income of return was accepted by the revenue under Section 143(1) of the Act. The assessee in the Assessment Year also have allocated the receipt and the assessing officer did not disallow the payment made of the same allocated/distributed receipts and thus accepted that the amount allocated could not be disallowed under Section 40(a)(ia) of the IT Act.

5. For the Assessment Year 2005-2006, the appellant furnished a return of income on 02.03.2005 declared nil income. Along with return of income, the assessee also furnished a balance sheet, receipt and payment account and not income and expenditure account as also two certificates of TDS showing that northern railways had deducted tax at source on Rs. 12,43,257 and of Rs. 11,17,192/- in respect of aggregate payments made of Rs. 2,92,02,742/- and Rs. 5,31,99,678/-, respectively. The assessing officer framed assessment under Section 143(3) of the Act by an order dated 28.12.2007 wherein the income of the appellant was computed at Rs. 12,09,55,137 as against the income which was declared to be nil by the appellant. The assessing officer disallowed the amount paid by the assessee to the joint venturers complying the provisions of Section 40(a)(ia) of the Act and held that the tax has been duly deducted at source on the payments made by the railway authorities treating the assessee as contractor and held that thereafter the assessee had sub contracted the execution of the work in the ratio of 97:3 and thus provisions of Section 40(a)(ia) of the Act are attracted. The assessee’s submission that no income accrued to the appellant and there was diversion of income by overriding title was rejected. It was further held that contention of the assessee that it did not carry out any business during the year under assessment is so held to be factually incorrect.

6. Being aggrieved by the order dated 28.12.2006 passed under Section 143(3) of the Act, the appellant filed the appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), who by an order dated 20.08.2008 dismissed the appeal filed by the appellant company and confirmed the order of assessment. The appellant being aggrieved by the order passed by the CIT (Appeals) filed an appeal before the Income Tax Appellate Tribunal (for short ‘the Tribunal’). The Tribunal however by impugned order dated 22.01.2010, inter alia held that income had accrued to the appellant and it was not a case of diversion of income by overriding title because all payments were received and duly credited in the books of the assessee. It was further held that the appellant was liable for deduction of tax at source in respect of payments made to M/s. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd under Section 194 C and 194 J of the Act, respectively. It was also held that the payments made by the appellant to M/S. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd were not eligible for deduction in view of Section 40(a)(ia) of the Act.

7. The appellant thereupon filed miscellaneous application under Section 254(2) of the Act on 22.02.2010 and prayed for correction of the mistakes which had crept in the records; however the aforesaid application was not decided. In the aforesaid factual background, this appeal has been filed.

8. Learned Senior counsel for the assessee submitted that the order passed by the tribunal is non speaking order and is vitiated in law. It is further submitted that joint venture agreement was merely entered into by two joint venturers namely M/s. Soma Enterprises Ltd and M/s. TRG Industries (P) Ltd, are two limited companies only for the limited purpose of participating in the tender floated by northern railways and not to execute the same. It is also argued that no income accrued to the appellant as the contract was executed severally and independently and the assessee who have executed the contract have declared the income which has been duly assessed to tax. Thus, there is diversion of income at source. It is also urged that no income accrues on mere receipt of the amount and appellant was merely a conduit and as such no income could have been brought to tax in the hands of appellant as no activity, no business and no accrual of income had taken place. It is further submitted that there is no contract between the joint venture and joint venturers and since there is only a mutual agreement, therefore, the provisions of Section 194C(2) of the Act is not applicable. It is also argued that with the insertion of second proviso by Finance Act, 2012 to Section 40(a)(ia) of the Act, the joint venture could not be held to be an assessee in default so as to disallow the amount distributed by the joint venture to the joint venturers in the ratio of 97:3 so as to invoke Section 40(a)(ia) of the Act as the aforesaid amendment is retrospective in nature and the same is clarificatory. It is also submitted that if two views are possible, the view which favours the assessee has to be adopted even while disallowing under Section 40(a)(ia) of the Act. It is also urged that once income is assessed in the hands of joint venturers, no income can be assessed in the hands of joint venture. It is also submitted that the order of the Tribunal is contrary to well settled legal position as the Tribunal has taken a contrary view which has been taken by a co-ordinate bench of equal strength. It is also submitted that the contentions raised by the appellant have been overlooked by the Tribunal. In support of the aforesaid submissions, reference has been made to the decisions of the High Court in the case of Linde AG, Linde Engineering Division v. Dy. DIT [2014] 365 ITR 1/44 taxmann.com 244/224 Taxman 43 (Mag.) (Delhi), CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 377 ITR 635/234 Taxman 825/61 taxmann.com 45 (Delhi) and CIT v. Oriental Structural Engineers (P.) Ltd. [2015] 374 ITR 35/231 Taxman 823/58 taxmann.com 77 (Delhi).

9. On the other hand, learned counsel for the revenue has submitted once the joint venture company receives the money, it becomes its income even though no expenditure is claimed. It is further submitted that joint venture company works as a separate individual entity and the revenue has rightly taxed the joint venture company and it could not avoid its liability only because joint venturers have paid taxes. It is also submitted that joint venture company has been awarded the contract by the contractor and the assessee has failed to produce the documents to show that separate documents were filed by the joint venturers. It is also submitted that agreement to share profits in a particular way is not a deterrent to levy the tax and the order passed by the ITAT is speaking order which has been passed after due application of mind.

10. We have considered the respective submissions made by learned counsel for the parties and have perused the record. We may deal with the substantial questions of law Ad Seriatum.

1st Substantial Question of Law:

Admittedly, two separate and independent limited companies incorporated under the provisions of Companies Act namely M/s. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd entered into two separate joint venturers agreement dated 23.07.2002 and 12.09.2002 for formation of the appellant namely M/s. Soma TRG Joint Venture. The relevant extract of the agreement dated 23.07.2002 reads as under:

“1. The parites agree to submit a joint tender for the said ‘Work’ as SOMA -T.R.G. JOINT VENTURE.
5. SOMA shall be the lead party of the joint venture, SOMA and the TRG shall jointly have and exercise the Authority to incur liabilities on behalf of this joint venture under the direction, of the APEX COORDINATING BOARD. Mr. T R Gupta, Chairman and Managing Director, TRG Industries (P) Ltd shall be authorized signatory on behalf of the joint venture to sign the tender and deal with the employers.
9. If the joint venture is awarded the work, the parties shall enter into a more detailed joint venture agreement as may be acceptable to the employer.
10. This joint venture agreement shall cease to be in force in any of the following events:
  (i) The joint venture is not awarded the work;
  (ii) The joint venture is awarded the work by the employer and a more detailed joint venture agreement based on this has been signed.”

11. Thus from the relevant clauses of the agreement, it is evident that the appellant was formed only for the purposes of submission of tender and it was agreed between the two companies namely M/S. TRG Industries (P) Ltd and M/s. Soma Enterprises Ltd that in case the joint venture is awarded the work by the employer, a more detailed joint venture based on the agreement shall be signed. Admittedly, M/s. Soma Enterprises Ltd was the lead party of the joint venture and was supposed to execute the agreement. The appellant has admittedly not executed the agreement.

12. For the purpose of execution of the agreement, thereafter admittedly, the side agreements dated 09.06.2003 and 16.02.2004, were executed. It is pertinent to note that neither the existence nor the genuineness of side agreements has been disputed or even doubted by the revenue. There is no finding by the Assessing Officer that the members of the joint venture had authority to interfere with or comment on the work executed by the other member or that both the members have jointly executed the work. It is pertinent to note that neither amount would have been received by the assessee from the northern railways for no work performed by it nor it could be stated that the assessee has performed any activity but still the income has accrued. We are aware that the definition of income as provided under Section 2(24) of the Act is inclusive and wide, yet the fact remains that the income diverted at source before it accures to the assessee cannot be regarded as an income. See. CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC), Provat Kumar Mitter v. CIT [1961] 41 ITR 624 (SC), Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1/56 Taxman 49 (SC), CIT v. Sahara Investment India Ltd. [2004] 266 ITR 641/136 Taxman 61 (SC), CIT v. Chamanlal Mangaldas & Co. [1960] 39 ITR 8 (SC), Dalmia Cement Ltd. v. CIT [1999] 237 ITR 617/104 Taxman 97 (SC), CIT v. Sunil J. Kinariwala [2003] 259 ITR 10/126 Taxman 161 (SC). Admittedly, the appellant had not incurred any expenditure and the work admittedly was executed by M/s. Soma Enterprises Ltd. In Sitaldas Tirathdas (supra), it has been held that true test of diversion of income by overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. To apply the doctrine of diversion of income by overriding title, the first and foremost condition to be satisfied is the nature of assessee’s obligation, whether by the obligation, the income is diverted before it reaches the assessee, or whether the income is required to be applied to discharge an obligation after such income reaches the assessee. In the instant case, there is diversion of income at the source itself. Therefore, the instant case is diversion of income by overriding title. The receipt of amount of Rs. 12,09,55,137/- could not be treated as income of the assessee and it was the case of diversion of income by overriding title. Accordingly, the first substantial question of law is answered in favour of the appellant.

13. 2nd Substantial Question of Law:

So far as the second substantial question of law is concerned, from the perusal of the order passed by the Tribunal, the same cannot be said to be unreasoned, arbitrary or non speaking. From the close scrutiny of the order passed by the Tribunal, it is evident that it has perused the relevant records and has gone through the written submissions which were filed on behalf of the assessee. Therefore, it cannot be said that order passed by the Tribunal is unreasoned, arbitrary or non speaking. Accordingly, the second substantial question of law is answered.

14. 3rd Substantial Question of Law:

Section 40(a)(ia) of the Act reads as under:

(a) In the case of any assessee—
  [(i) any interest (not being interest on a loan issued for public subscription before the Ist day of April, 1938, royalty, fees for technical services or other sum chargeable under this Act, which is payable-
  (A) outside India; or
  (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200: (ia) any interest, commission or brokerage, (rent, royalty,) fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction.

Therefore, the second proviso in Sub clause (ia) of Clause (a) of Section 40 was inserted by a Finance Act, 2012 w.e.f 01.04.2003 which reads as under:

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”

15. Thereafter a clarification was issued by the Government of India, Ministry of Finance in which it was clarified that where the consortium arrangement is made for executing the EPC/Turnkey contracts in which each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work, such a consortium may not be treated as association of person.

16. The Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC) has held that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. The Division Bench of Delhi High Court followed the aforesaid decision in the case of CIT v. Rajinder Kumar [2014] 362 ITR 241/220 Taxman 3/[2013] 39 taxmann.com 126 (Delhi) and held that the amendment in the proviso to Section 40(a)(ia) of the Act is retrospective in nature.

17. Thus with insertion of section proviso by Finance Act, 2012 to section 40(a)(ia) of the Act as otherwise also since the taxes have been paid by the joint ventures, the assessee could be held to be an assessee in default so as to disallow the amount attributed by the joint venture to the joint venturers in the ratio of 97:3 so as to invoke Section 40(a)(ia) of the Act. The aforesaid amendment is retrospective and is clarificatory in nature. For yet another reason, Section 40(a)(ia) of the Act is inapplicable to the fact situation of the case as no amount was payable by the assessee at the close of the year and if two views are possible, the one which favours the assessee has to be adopted. See Asstt. CIT v. Red Brick Realtors (P.) Ltd. [2015] 70 SOT 592/62 taxmann.com 169 (Chennai – Trib.). Accordingly, the third substantial question of law is also answered in the affirmative and in favour of the assessee.

18. Accordingly, the orders passed by the assessing officer as well as Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal are hereby quashed. In the result, the appeals are allowed.

[Citation : 398 ITR 425]