Administrative Expenses cannot be disallowed when Assessee is a Passover Entity and a facilitator in procuring the orders in a Joint Venture: ITAT [Read Order]

The Income Tax Appellate Tribunal Hyderabad bench recently held that amount paid to members cannot be disallowed on ground of non-deduction of tax when Assessee is a Passover Entity and a facilitator in procuring the orders in a Joint Venture.

The assessee is an AOP comprising of two members formed as a Joint Venture for securing the contract tendered by the Chief Engineer (DPI & Roads), Govt. of Orissa. During the return filing the assessee filed its return with a loss and claimed itself to be a ‘pass through entity’ that had been only formed to obtain the contract work.

During the Course of assessment proceedings, the AO noticed that an amount received from contractee had been debited to profit and loss account as payment to subcontracts.   The assessee stated that the contract had been given to AMRCL on back to back basis and the same was communicated to the contractee / employer and the contractee had been asked to deduct TDS in the name of AMRCL u/r 37B of the Income Tax Rules.

The Assessing Officer rejected the claim of the assessee, and accordingly disallowed a sum of Rs,9,90,37,030/- u/s 40(a)(ia) of the Act. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT (A).

Assessee claimed that under the agreement, it merely receives order from contractors and pass over the same to other contractors for the purposes of smooth execution of work.

The CIT (A) analysing the issue with various case laws, summarized the decision in favour revenue and held that It is liable to compute the profit arising from the contract work and pay tax on the same.

Aggrieved by the order of CIT (A), the assessee and the revenue are in appeal before the tribunal. Considered the rival submissions and perused the material facts on record the tribunal found that they formed this joint venture only to secure the orders and as per their mutual agreement the contract will be executed by one of the constituents on back to back basis.

The bench observed that all the costs, liability and bank guarantees will be arranged by only AMRCL and KCL will only be a facilitator in procuring the orders and for the benefit of the individual members and a business is carried on for the benefit of the businessman.

The bench held that the coordinate bench of this Tribunal in the case of Hindustan Ratna JV vs. DCIT and in other cases, there is no subcontract relationship existed between JV partners. Accordingly, the work executed by the AMRCL is not in sub-contract.

The bench noted that “the assessee has actually executed the work. JV is formed merely to secure the orders and not to execute the orders. When the assessee has not executed the order, there is no question of making any profit. As the assessee has not shown any profit in the business and the assessee being used as a Passover entity and set up only to secure the order, the AO has the option of disallowing all the administrative expenses, if any. Since the assessee has not shown any profit nor paid any remuneration to any of the members, the provisions of section 40(ba) will not be attracted.”