Bombay HC admits Revenue Appeal on Income Tax TDS Applicability and Profit Taxability for Joint Ventures u/s 194C [Read Order]

The Bombay High Court has admitted an appeal filed by the Principal Commissioner of Income Tax-3, Pune, challenging the Income Tax Appellate Tribunal (ITAT), Pune’s decision in favour of Subhash and B.T. Patil and Sons and N.V. Kharote Construction Pvt. Ltd. Joint Venture.

The dispute revolves around applicability of TDS under Section 194C, profit taxability in the hands of joint ventures, and disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

The Revenue’s case concerns tax treatment of contracts executed in the name of the joint venture and the subsequent allocation of work among its members. According to the Revenue, such allocation amounted to subcontracting, thereby attracting TDS obligations under Section 194C. The ITAT, however, had ruled that in the absence of any formal contract or subcontract between the joint venture and its members, the provisions of Section 194C were not applicable.

Another issue raised by the Revenue pertained to taxation of profits. It argued that profits should be taxed in the hands of the joint venture itself, irrespective of whether such profits had already been offered to tax by the individual members. In support, reliance was placed on the Supreme Court’s ruling in Ch. Achaiah (1996) and the Authority for Advance Rulings decision in Geo-Consultant (AAR). The ITAT had rejected this argument and also held that disallowance under Section 40(a)(ia) of the Income Tax Act could not be sustained with respect to payments amounting to ₹29.80 crore made by the joint venture.

Appearing for the Revenue, Mr. Vikas T. Khanchandani submitted that the Tribunal’s findings were contrary to law. He argued that since the contracts were in the joint venture’s name and the payments were credited to its account, the internal reallocation of such contracts between members effectively amounted to subcontracting, thereby triggering Section 194C. He further contended that profits should have been taxed at the joint venture level, and that the Tribunal had erred in allowing the disputed expenditure despite Section 40(a)(ia) clearly prohibiting such deductions.

On the other hand, Mr. Satish Modi and Ms. Aasifa Khan appeared for the respondent joint venture. After hearing both sides, the division bench comprising Justice M.S. Sonak and Justice Advait M. Sethna admitted the appeal on three substantial questions of law. The first relates to the applicability of Section 194C to joint venture–member arrangements. The second concerns the taxability of profits in the joint venture irrespective of member-level taxation. The third question is whether the Tribunal was right in allowing deductions in light of Section 40(a)(ia) of the Income Tax Act.

The Court tagged the appeal with other connected matters, including ITXA No. 2444 of 2018, ITXA No. 163 of 2016, ITXA No. 1050 of 2013, ITXA No. 159 of 2016, and ITXA No. 161 of 2016.

The bench directed that the matter be listed for final hearing on 12 November 2025. Both parties agreed to provide a synopsis along with the list of judgments they intend to rely upon in advance of the hearing.

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