ITAT deletes Disallowance u/s 40A(2)(B) upon Estimated Income from Sub-Contract of Joint Venture [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the disallowance under Section 40A(2)(B) of the Income Tax Act 1961, upon estimated income from subcontract of joint venture

The assessee TAPI Prestressed Products Ltd. (TPPL) and 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 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 to the assessee JV . The assessee JV had raised bills for Delhi Jal Board. The assessee JV had filed its ITR declaring total income.

The AO had passed the assessment order dated 29.12.2016 under Section 143(3) of the Income Tax Act in the status of AOP, determining the total income while making disallowance under Section 40A(2)(b) of the Income Tax Act. The 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 under Section 40A(2)(b) of the Income Tax Act the AO had applied the net profit rate of 8% on the SubContract Expenses and thus arrived at a figure.

The CIT(A) had observed that the net profit in the case of TPPL was 3 .78%. The CIT(A) had formed a view that profit in the hands o f the assessee JV should also be calculated by applying such rate of 3 .78% . Accordingly, the CIT(A) had worked out the total income of the assessee JV.

C. S. Anand, appeared on behalf of the assessee and Amitabh K. Sinha appeared on behalf of the revenue.

The two-member Bench of C. M. Garg, (Judicial Member) and B. R. R. Kumar, (Accountant Member) observed that the provisions of section 40A(2)(b) were applicable to the expenses which are considered to be excessive or unreasonable, having regard to the fair market value of the goods /services or facilities for which the payments were made. The AO had made disallowance under Section 40A(2)(b) of the Income Tax Act, by opening that the assessee JV should have earned income from subcontracting. The AO had estimated the profit of the assessee JV and determined the income of the assessee JV by making disallowance under Section 40A(2)(b) of Income Tax Act.

Section 40A(2)(b) of the Income Tax Act had 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) of the Income Tax Act were not attracted in the given facts and circumstances of the instant case.

The Bench allowed this ground of appeal filed by the assessee.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates