LGE & C Patel J.V., Mumbai v. The ACIT.,Vapi Circle,, Vapi

ITA 3180/AHD/2007 | 2005-2006
Pronouncement Date: 16-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 318020514 RSA 2007
Bench Ahmedabad
Appeal Number ITA 3180/AHD/2007
Duration Of Justice 2 year(s) 8 month(s) 22 day(s)
Appellant LGE & C Patel J.V., Mumbai
Respondent The ACIT.,Vapi Circle,, Vapi
Appeal Type Income Tax Appeal
Pronouncement Date 16-04-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 16-04-2010
Date Of Final Hearing 25-03-2010
Next Hearing Date 25-03-2010
Assessment Year 2005-2006
Appeal Filed On 25-07-2007
Judgment Text
IN THE INCOME_TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD BEFORE SHRI T. K. SHARMA AND SHRI D.C. AGRAWAL. I.T.A. NOS.3178 TO 3180 /AHD/2007 (ASSESSMENT YEARS: 2003-04 2004-05 & 2005-06) LGE & C PATEL -J.V. C/O. PATEL ENGINEERING LTD. PATEL ESTATE ROAD JOGESHWARI (W) MUMBAI-400 102. VS ASSISTANT COMMISSIONER OF INCOME TAX VAPI CIRCLE VAPI. (APPELLANT) (RESPONDENT) PAN: AAALO387 J APPELLANT BY : SHRI A.C. SHAH CA RESPONDENT BY : SHRI RAJEEV AGARWAL CIT (DR). ( (( ( )/ )/)/ )/ ORDER PER D.C. AGRAWAL A.M. THESE ARE THREE APPEALS FILED BY THE ASSESSEE FOR THE A SSESSMENT YEARS 2003-04 2004-05 AND 2005-06 AGAINST THE ORDER OF LD. C.I.T.(A) INVOLVING COMMON ISSUES. THEREFORE THEY ARE TAKEN UP TOGETHER FOR THE SAKE OF CONVENIENCE. ITA.NO.3178/AHD/ 2. IN THIS YEAR ASSESSEE HAS RAISED FOLLOWING GROUNDS :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO ERRED IN DISALLOWING VARIOUS EXPENSES AGGREGA TING OF RS.41 35 814/- INCURRED BY THE JOINT VENTURE FOR THE PERIOD FROM 1 ST OCTOBER 2002 TO 31 ST MARCH 2003. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW T HE LD. A.O. AFTER HAVING HELD THAT CONTRIBUTIONS PAID BE FORE THE DUE DATE OF FILING THE RETURN OF INCOME ARE ALLO WABLE ERRED IN DIRECTING THE A.O. TO ALLOW PF/ESIC CONTRIBU TION ON BEHALF OF EMPLOYEES ONLY IF PAID/DEPOSITED WITHIN GRA CE PERIOD ALLOWED UNDER THE STATUTE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW T HE LD. AO ERRED IN NOT ALLOWING CLAIM OF LOSS OF RS.8 81 52 174/-BEING THE AMOUNT OF SUB-CONTRACT CHARGE S PAID TO NITIN CONSTRUCTION LTD. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE-COMPANY HAVIN G NAME AND STYLE LG E & C-PATEL JOINT VENTURE IS A JOINT VENTURE BETWEEN LGE &C ( A KOREAN COMPANY) AND PATEL ENGINEERING LT D. ( IN SHORT PEL) FORMED TO CARRY OUT CONSTRUCTION OF THE PROJECT SU RAT MANOR TOLLWAY ROAD PROJECT PACKAGE-2 AWARDED TO IT BY THE NATIONAL HIGHWAY AUTHORITY OF INDIA (NHAI). THE RETURN OF INCOM E FOR THE ASSESSMENT YEAR 2003-04 WAS FILED ON A LOSS OF RS.3 31 13 117. ORIGINALLY THE RETURN WAS PROCESSED U/S. 143(1) BUT LATE R THE CASE WAS PICKED UP FOR SCRUTINY AND DETAILED EXAMINATION OF THE AGREEMENTS BETWEEN THE TWO PARTNERS OF THE JOINT VENT URE AND OTHER ACCOUNTS WAS CARRIED OUT. IT WAS EXPLAINED THAT PATEL EN GINEERING LTD. IS A PUBLIC LTD. CO. ENGAGED IN THE CONSTRUCTION OF LARGE SCALE INFRASTRUCTURE PROJECTS AND IS FILING ITS RETURN OF INCO ME AT MUMBAI. ON THE OTHER HAND LGE & C I.E. L.G. ENG. & CONSTRUCTI ON CORPORATION IS A KOREA BASED COMPANY. PEL & LGE & C JOINTLY BID FOR THE TENDER QUOTED BY NHAI FOR WORK ON SURAT MANOR TO LWAY ROAD PROJECT. FOR THE PURPOSES OF THE BID THE TWO PARTIES EN TERED INTO A JOINT VENTURE (JV) VIDE AGREEMENT DATED 4-10-1999. THE JOINT VENTURE WAS AWARDED CONTRACT TO CONSTRUCT THE PROJECT. THE REAFTER THE TWO MEMBERS OF THE JV NAMELY PEL & LGE & C ENTER ED INTO AN AGREEMENT ON 16-10-2000 VIDE WHICH THEY AGREED TO SHA RE THE RECEIPTS RECEIVED FROM NHAI IN THE RATIO OF 75% (TO LGE & C) AND 25% (TO PEL). IT WAS AGREED TO SHARE THE WORK IN THE SAME PROPORTION AND TO USE THEIR OWN RESOURCES OF MANPOWER MATERIAL MACHINES PLANT AND OTHER EQUIPMENTS TO EXECUTE THE W ORK AND TO OWN ENTIRE RESPONSIBILITY FOR THEIR SHARE OF WORK. A S BOTH THE MEMBERS OF THE JOINT VENTURE DECIDED TO SHARE THE WORK THEY SHOWED THEIR GROSS RECEIPTS AND EXPENSES UNDER SEPARATE COL UMNS IN THE P & L ACCOUNT AND FINALLY INCOME/LOSS OF THE TWO MEM BERS WAS CLUBBED TOGETHER TO DECLARE THE INCOME/LOSS OF THE JOINT VENTURE WHICH FILED THE RETURN OF INCOME IN THE STATUS OF A.O.P . WHILE EXECUTING THE WORK TWO MEMBERS FURTHER SUB-CONTRACTED TH EIR PORTION OF THE WORK TO OTHER PARTIES. PEL ON ITS PART SUB-CONT RACTED THE WORK TO M/S. KNR CONSTRUCTION WHEREAS LGE & C SUB-CONTRACTED TH E WORK TO NITIN CONSTRUCTION LTD. INDIAN INFRA DEVELOPERS PVT. LTD. MS. KHURANA LTD. CM BABARI ETC. M/S. PEL TRANSFERRED TH E WORK TO M/S. KNR CONSTRUCTION VIDE AGREEMENT DT.17-9-2001. AFTER R ETAINING 9% TOWARDS ITS PROFITS FROM THE GROSS BILLS TO ITS SHARE IT TRANSFERRED THE REST OF THE RECEIPTS TO SUB-CONTRACTOR. (M/S. KNR CONSTRUCTI ONS) DURING THE A.Y. 2003-04 TWO PARTIES TO THE JOINT VEN TURE HAD SHOWN EXPENDITURE EQUIVALENT TO AMOUNT TRANSFERRED TO SUB-CO NTRACTOR. THE A.O. HAS SHOWN FOLLOWING INCOME AND EXPENDITURE ACCOUNT OF THE JT. VENTURE IN HIS ASSESSMENT ORDER RELEVANT TO ASSESSMENT YEAR 2003- 04 :- LGE&C PATEL TOTAL INCOME CONTRACT INCOME 96 584 985 542 652 546 639 237 531 OTHER INCOME 9 602 250 1 755 432 11 357 682 TOTAL INCOME. 106 187 235 544 407 978 650 595 213 EXPENDITURE. OPENING WORK IN PROGRESS. --- 4 039 790 4 039 790 DIRECT EXPENSES SUB-CONTRACT 94 367 363 499 502 939 593 870 302 EMPLOYEE REMUNERATION & WELFARE. 7 199 914 --- 7 199 914 OPERATION & ADMN. EXPS. 36 651 644 85 591 36 737 235 DEPRECIATION. 20 679 945 --- 20 679 945 TOTAL 158 898 866 503 628 320 662 527 186 4. FIRST ISSUE RELATES TO DISALLOWANCE OF CLAIM OF EXPEND ITURE OF RS.41 35 814/- INCURRED BY LGE&C AFTER 2-9-02 AND CLAIMED AS A JOINT VENTURE EXPENDITURE. DURING THE COURSE OF ASSESSMEN T PROCEEDINGS IT WAS EXPLAINED TO THE A.O. THAT M/S./ LG E & C HAD SUFFERED HEAVY LOSSES AND ITS WORK WAS RUNNING BEHIND SCH EDULE AND THEREFORE IT DECIDED TO ENTER INTO A SUPPLEMENTARY AGREEMENT DATED 2-9-2002 WITH PEL. ACCORDING TO WHICH LGE & C DECIDED TO REMAIN A SLEEPING PARTNER AND TRANSFERRED 100% TO M/S. PEL. THE ARTICLE OF THIS AGREEMENT DATED 2-9-2002 PROVIDED FOLLOWING ARRANGE MENT. ARTICLE 2: THE PROJECT MANAGER SHALL BE A NOMINEE OF PATEL AND JV SHALL GRANT A IRREVOCABLE POWER OF ATTORNEY TO PATEL AND/O R ITS NOMINATED PROJECT MANAGER FOR DEALING WITH THE EMPLO YER ENGINEER UNDER THE CONTRACT AND ALL CONCERNED AUTHORITIES/PARTIES REGARDING EXECUTION OF WORKS SUBMI SSIONS OF INTERIM PAYMENT STATEMENTS CORRESPONDENCE ON ALL TECHNI CAL FINANCIAL AND ALL CONTRACTUAL MATTERS. PATEL WILL BE F ULLY RESPONSIBLE FOR ANY AND ALL ACTIONS OF THE NOMINATED P ROJECT MANAGER. LGE&C WILL DEMOBILIZE FROM THE SITE AND NOT DEPLOY A NY OF ITS EMPLOYEES IN SITE. PROVIDED HOWEVER THAT IF LGE&C THINKS FIT TO ITS SOLE DISCRETION LGE&C MAY LET ITS EMPLOYEE(S) VISIT T HE SITE AND IN SUCH CASE. PATEL WILL PROVIDE PROPER SUPPORT. HOWEVER THE COST OF THE SAME WILL NOT BE BORNE BY PATEL. 5. AFTER EXAMINING THE ARTICLE 2 OF THE AGREEMENT DA TED 2-9-2002 THE LEARNED AO INFERRED THAT :- ( I) THIS IS ONLY AN INTERNAL ARRANGEMENT MADE BY THE T WO PARTIES OF JT. VENTURE AND NHAI HAS NOTHING TO DO AS HO W THE WORK IS SHARED BY THE TWO MEMBERS. (II) EXPENDITURE INCURRED BY LGE & C AFTER 2-9-20 02 ON VISITS OF THE EMPLOYEES ETC. CLAIMED AT RS.41 35 814/- COULD NOT BE ALLOWED AGAINST RECEIPT OF THE JT. VENTURE PRIOR T O 2-9- 02. THE A.O. EXAMINED THE P & L ACCOUNT AND EXPENDITURE A ND HELD THAT SALARY TRAVELING CONVEYANCE COMMUNICATION EXPENDITURE ETC. DEBITED BEYOND OCTOBER 2002 TO THE P & L ACCOUNT COULD NOT BE ALLOWED. HE ACCORDINGLY ADDED THE SAME IN THE TOTAL INCOME OF THE ASSESSEE. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO. IN DISALLOWING EXPENSES OF LGE & C AS ACCORDING TO HIM THE ASSESSEE WAS NOT ABLE TO JUSTIFY CLAIM OF EXPENSES INCURRED BY IT AFTER OCTOBER 2 002. 6. AGAINST THIS LD. AR FOR THE ASSESSEE SUBMITTED THAT EVE N THOUGH 100% WORK IS GIVEN TO M/S/ PEL STILL IT IS CARRYING O UT INSPECTION MAINTAINING STAFF AND ESTABLISHMENT IN THE CAPACITY OF MEMBER OF JT. VENTURE AS IT IS EQUALLY RESPONSIBLE FOR EXECUTING THE W HOLE CONTRACT TAKEN FROM NHAI. ONCE ESTABLISHMENT IS CONTINUING TO EXIST EVEN THOUGH 100% WORK IS SHIFTED TO PEL THE EXPENDITURE INCURRED BY IT WOULD BELONG TO JOINT VENTURE AND THEREFORE IT HAS TO BE ALLOWED AGAINST INCOME EARNED DURING THE YEAR BY JOINT VENTU RE. 7. THE LD. DR ON THE OTHER HAND SUBMITTED AFTER THE AGREEMENT DT. 2-9-02 COMMON INTEREST IN EARNING INCOME CEASED TO EXIST AND THEREFORE NO ASSOCIATION OF PERSON SURVIVING AND THEREF ORE NO ASSESSMENT OF JOINT VENTURE AS AOP COULD BE MADE AFTER 2- 9-02.IT IS ONLY THE INCOME EARNED PRIOR TO 2-9-02 COULD BE ASSESSED IN THE STATUS OF AOP. THEREFORE EXPENDITURE INCURRED BY LGE & C CO ULD NOT BE SET OFF AGAINST INCOME OF JOINT VENTURE. FURTHER THIS EX PENDITURE WAS INCURRED AFTER 2-9-02 BY LGE & C AGAINST WHICH LGE & C HAS NOT EARNED ANY INCOME WHICH COULD BE SAID TO HAVE BEEN EARN ED BY A.O.P. ONCE NO INCOME IS EARNED BY A.O.P. AFTER 2-9-02 THEN I T CANNOT BE SAID THAT EXPENDITURE WAS INCURRED FOR EARNING INCOME. ON THIS ACCOUNT ALSO CLAIM OF EXPENSES BY LGE & C COULD NOT BE ALLOWED. 8. THE LD. DR FURTHER REFERRED TO THE DETAILED ORDE R OF THE AO AND LD. CIT(A) FOR ASSESSMENT YEAR 2004-05 AND 2005-06 AND THE AGREEMENTS BETWEEN LGE & C AND PEL TO DERIVE POINT T HAT ENTIRE RESPONSIBILITY ACCOUNTABILITY HAS BEEN SHIFTED TO PEL & LGE&C HAS SOUGHT TO GET ITSELF IMMUNED FROM ANY LOSS ON ACCOUNT O F JOINT VENTURE. IN VIEW OF THIS ALSO ANY EXPENDITURE INCURRE D BY LGE&C COULD NOT BE SAID TO BE AN EXPENDITURE OF JOINT VENTURE. I T COULD BE BUSINESS EXPENDITURE OF LGE&C AND IT COULD BE CONSIDERED ONLY I N THE PERSONAL ASSESSMENT OF LGE&C BUT NOT IN THE HANDS OF JOINT VENTUR E. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED MA TERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR IN TERFERENCE IN THE ORDER OF AUTHORITIES BELOW. IT IS NOT DISPUTED TH AT RECEIPT AND EXPENDITURE PRIOR TO 2-9-02 AND PERTAINING TO TWO M EMBERS HAVE BEEN CLUBBED TOGETHER TO FORM INCOME AND EXPENDITURE ACCOUNT OF THE JOINT VENTURE. BUT THEREAFTER VIDE AGREEMENT DT.2-9-02 L GE&C HAS COMPLETELY WITHDRAWN ITSELF FROM ASSOCIATION AND TRANSFE RRED ALL THE WORK TO PEL. IN THIS REGARD WE REFER TO SOME MORE PRO VISIONS OF AGREEMENT DT.2-9-02 TO HIGHLIGHT THE ARRANGEMENT BE TWEEN THE TWO MEMBERS. WHEREAS BOTH LGE & C AND PATEL ARE JOINTLY AND SEVE RALLY LIABLE FOR THE PERFORMANCE OF THE CONTRACT TOWARD THE EMPLOY ER AND FOR THE EFFECTIVE AND EFFICIENT EXECUTION OF THE CONTR ACT WORK . THE PARTIES HERETO BY MUTUAL CONSENT DIVIDED THE CON TRACT WORK APPROXIMATELY IN PROPORTION OF 75% LGE&C AND 25% PA TEL. UNDER THIS ARRANGEMENT BOTH PARTIES HAS PERFORMED TH EIR RESPECTIVE SCOPE OF WORK BY DEVELOPING ITS OWN RESOURCES. PATEL SHALL TAKE OVER EXECUTE AND COMPLETE THE REMAIN ING WORKS OF LGE&C PORTION OF 75% AND ALL ADDITIONAL WORKS TO THE ORIGINAL CONTRACT WITH THE EMPLOYER UNDER THE CONTRACT AS WELL A S WORKS ORIGINALLY EARMARKED FOR PATEL. (1) PATEL SHALL COMPLETE ALL THE WORKS INCLUDING ADDITI ONAL WORKS WITHIN OCTOBER 2003 AND SHALL BE SOLELY RESPONSIBL E THEREFORE IF NOT COMPLETED. LGE&C SHALL NOT ASSUME ANY RESPONSIBILITY LIABILITY O BLIGATION OR DUTY WITH REGARD TO THE REMAINING WORKS OF LGE&C AND ANY ADDITIONAL WORKS. PATEL SHALL ASSUME ANY AND ALL RESPON SIBILITIES FOR THE TECHNICAL AND COMMERCIAL RISKS INCLUDING PROFIT AN D LOSS FROM THE EXECUTION AND COMPLETION OF THE WORKS MENTION ED ABOVE AND SHALL INDEMNIFY LGE&C AND HOLD LGE&C HARML ESS FROM AND AGAINST AND SHALL DEFEND AGAINST ANY AND ALL CLAI MS 9INCLUDING CLAIMS BY THE EMPLOYER) LOSSES AND DAMAGES OF EVERY KIND MADE OR ACCRUED FOR THE BALANCE WORKS AND AD DITIONAL WORKS (2) LGE&C WILL DEMOBILIZE FROM THE SITE AND NOT DEPL OY ANY OF ITS EMPLOYEES IN SITE. PROVIDED HOWEVER THAT IF LGE &C THINKS FIT TO ITS SOLE DISCRETION LGE&C MAY LET ITS EMPLOYEE(S) VIS IT THE SITE AND IN SUCH CASE PATEL WILL PROVIDE PROPER SUPPORT . HOWEVER THE COSTS OF THE SAME WILL NOT BE BORNE BY PATEL . PATEL SHALL AT REGULAR INTERVAL IN EVERY MONTH SEN D LGE&CS HEAD OFFICE A COPY OF MONTHLY PROGRESS REPORT STATEMENT OF INTERIM PAYMENT APPLICATION APPROVED OR CERTIFIED ST ATEMENT THEREOF AND ANY OTHER MATERIAL AND INFORMATION WHICH ARE REQUESTED BY LGE&C OR RELATED TO LGE&CS INTEREST. (4) PATEL WILL BE ENTITLED TO RECEIVE ALL PAYMENT FR OM FOR THE BALANCE WORKS OF LGE&C AND ADDITIONAL WORKS DONE SOLELY BY THEM AT BOQ RATES EXTRA ITEM RATES ETC INCLUDING FOR A LL ESCALATION PAYMENT DEEMED EXPORT BENEFITS ETC. AND A LL AMOUNTS SO RECEIVED WILL BE PASSED ON FROM THE JVS ACCOUN T TO PATELS ACCOUNT BY AUTHORIZED REPRESENTATIVE OF PATEL. THE AMOUNTS DUE TO LGE&C AS AGREED BY BOTH THE PARTIES UND ER THIS AMENDMENT WILL BE PAID TO LGE&C WITHIN 7 WORKING DA YS FRO THE DAY THE MONEYS ARE TRANSFERRED TO PATELS ACCOUNT. (5) IT IS AGREED THAT FOR ALL THE BALANCE AND ADDITIO NAL WORK TO BE EXECUTED UNDER THE CONTRACT PATEL WILL PAY LGE&C A LUMP SUM COMPENSATION AMOUNT OF RS.2.6 CRORES (RUPEES TWO CROR ES AND SIXTY LACS ONLY). THE PAYMENT OF SUCH COMPENSATION AMO UNT SHALL BE MADE BY PATEL AS A SINGLE PAYMENT OF RS. 2.6 CR ORES WHICH WILL BE MADE AT THE COMPLETION OF THE CONTRACT WH EN THE CLIENT REFUNDS THE SECURITY DEPOSIT. BOTH PARTIES AGREE T HAT BESIDES THE COMPENSATION AMOUNT AGREED ABOVE. LGE&C SHAL L NOT BE ENTITLED TO ANY OTHER BENEFITS ADVANTAGES PR OFIT CLAIMS THAT MAY DIRECTLY OR INDIRECTLY ARISE FROM THE EXECUTIO N OF THIS BALANCE AND ADDITIONAL WORKS UNDER THE CONTRACT WITH TH E EMPLOYER. (6) LGE&C SHALL CLEAR ALL THEIR EXISTING LIABILITIES SUCH ROYALTY INCOME TAX SALES TAX PROVIDENT FUND FERA ETC TO THE CONCERNED DEPARTMENTS FOR THE WORK EXECUTED BY THEM. PATEL WILL BE PROVIDED AN AUDITED REPORT FOR THE PERIOD ENDING MA RCH 31 2002 AND AUDIT REPORT FOR THE PERIOD FROM APRIL 20 02 TILL DATE OF SIGNING OF THIS AGREEMENT. ANY LIABILITY ARISING FROM THE WORK EXECUTED BY THEM TILL THE DATE OF SIGNING OF THIS AG REEMENT SHALL BE TO THE LGE & CS ACCOUNT. PATEL WILL BE INDEMNIFIED BY LGE &C AGAINST THE SAME. LGE & C SHALL CLEAR ALL THEIR EXISTIN G LIABILITIES WITHIN 6 MONTHS FROM THE SIGNING OF THIS AGREEMENT. PA TEL SHALL INDEMNIFY LGE & C AGAINST ROYALTY SALES TAX PROVIDE NT FUND ON ACCOUNT OF THE BALANCE AND ADDITIONAL WORK TO BE EXECUT ED BY PATEL. 10. A READING OF THE ABOVE CLAUSES OF AGREEMENT DATED 2-9-02 CLEARLY PROVIDE THAT LGE&C SHALL NOT HAVE ANY RESPONSIB ILITY LIABILITY OBLIGATION OR DUTY TOWARDS REVENUE WORK TRANSFERRED TO PEL WHICH SHALL INDEMNIFY LGE & C AGAINST SUCH LIABILITY/OBLIGA TION OR LOSS. LGE&C WILL REMOVE ITSELF FROM THE SITE. HOWEVER PATEL WILL PERMIT THE EMPLOYEES TO LGE&C TO VISIT THE SITE BUT THE COST THEREO F SHALL NOT BE BORNE BY PATEL. PATEL WILL RECEIVE ALL THE DUES FROM NHAI AND RECEIPTS FROM NHAI WILL BE TO PATELS ACCOUNT. LGE & C WOULD BE PAID SOME COMPENSATION OF RS.2.6 CRORES FOR TRANSFER TO REMAINING P ORTION OF WORK TO PATEL WHICH WOULD BE PAID AT THE END OF THE CONTRACT BY PATEL. 11. THUS AFTER WITHDRAWAL OF LGE&C FROM THE ASSOCIATI ON NO ASSOCIATION OF PERSONS SURVIVED EVEN THOUGH LEGALLY JOINT VENTURE CONTINUED TO EXIST TILL THE COMPLETION OF THE WORK. M ERELY BECAUSE JOINT VENTURE IS EXISTING IT DOES NOT NECESSARILY LEAD TO INF ERENCE THAT ASSOCIATION OF PERSON FOR THE PURPOSES OF BEING TAXED UND ER INCOME TAX ACT WOULD ALSO BE EXISTING. JOINT VENTURE AND ASSOCIA TION OF PERSON ARE TWO DISTINCT LEGAL CONCEPTS. AN AOP CAN BE A JOINT V ENTURE BUT ALL JOINT VENTURES NEED NOT NECESSARILY BE AOP. IT IS BECAUSE JOINT VENTURE IS A CONCEPT FOR ACCOUNTING PURPOSES AND FOR SHARING LEGAL RESPONSIBILITY VIS--VIS THIRD PARTIES BUT AOP IS A CONCEP T UNDER I.T. ACT AND IS LISTED IN SECTION 2 (31) (V) OF THE ACT. FOR AN AOP TO EXIST THERE ARE TWO IMPORT INGREDIENTS TO BE SATISFIED ONE IS THAT THEY SHOULD COME TOGETHER TO WORK AND SECONDLY THEY SHOULD HAVE INTENTI ON TO EARN INCOME FROM SUCH WORK. EVEN THOUGH LGE&C AND PTEL ARE TOGETHER BUT AFTER 2-9-02 THEY DID NOT HAVE COMMON INTEREST TO EARN INCOME FROM THIS VENTURE. ONCE LGE&C DECIDES TO WITHDRAW FROM WORK THEN HIS INTEREST IN EARNING INCOME FROM THE WORK CEASED TO E XIST. ONCE A PARTY TO THE JOINT VENTURE CEASES TO HAVE INTEREST IN E ARNING INCOME FROM THE JOINT VENTURE THEN AOP COMES TO AN END. JOIN T VENTURE MAY CONTINUE TO EXIST EVEN AFTER AOP CEASES TO EXIST. FOR AS SESSING THE INCOME IN THE HANDS OF AOP OR IN THE STATUS OF BODY OF INDIVIDUAL 2 CONDITIONS MUST BE SATISFIED. (I) THERE MUST BE JOINT VENTURE. (II) OBJECT OF THE JOINT VENTURE MUST BE TO EARN INCO ME. (III) THERE SHOULD BE VOLITION ON THE PART OF EACH ME MBER TO ASSOCIATE AND REMAIN ASSOCIATED TO EARN INCOME. THE WORD ASSOCIATE MEANS TO JOIN IN COMMON PURPOSE OR TO JOIN IN AN ACTION. THE EXPRESSION ASSOCIATION OF PERSONS USED IN THE I NCOME TAX ASSESSMENT MEANS THE ASSOCIATION IN WHICH TWO OR MORE PERSONS JOIN IN A COMMON PURPOSE AND THE OBJECT OF EACH IS TO PRODUCE INCOME PROFIT OR GAINS. TWO OR MORE PERSONS TO THE ASSOCIATION MUST JOINTLY AFFECT THE TRANSACTION WITH A COMMON PURPOSE OF PRODUCING INCOME IN A JOINT VENTURE AND BOTH THE PERSONS AS SUCH PLAY IMPORT ANT ROLE IN CONNECTION WITH THE CARRYING ON OF THE OPERATION OF TH E BUSINESS OF THE JOINT VENTURE. HOWEVER THERE CANNOT BE A UNIVERSAL FO RMULA TO FIND OUT WHETHER AOP IS EXISTING OR NOT. WHAT FACTS OR HOW MAN Y OF THEM OR OF WHAT NATURE ARE NECESSARY TO ENQUIRE INTO COME TO THE CONCLUSION THAT THERE IS AN ASSOCIATION OF PERSONS. IT DEPENDS UPON T HE PARTICULAR FACTS AND CIRCUMSTANCES OF THE CASE AS TO WHETHER CONCLUSION OF EXISTENCE OF ASSOCIATION OF PERSONS CAN BE DRAWN OR NOT. IT IS HELD BY HOHBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. SEHGAL OIL & GENERAL MILLS (2008) 303 ITR-102 (P&H) WHERE EMPHASIS WAS LAID DOWN ON VOLITION ON THE PART OF THE MEMBERS OF THE ASSOCIATION AS AN ESSENTIAL INGREDIENT. VOLUNTARILY COMBINING TOGETHER FOR A CERT AIN PURPOSE I.E. TO EARN INCOME IS CONSIDERED AS ESSENTIAL INGREDIENT OF AOP BEING AN EXISTENCE. IN THAT CASE A FIRM WAS CONSTITUTED BY S MAI N PARTNER AND HIS SONS. IT CONTINUED UP TO A.Y. 1981-82 AS PER THE LAST PARTNERSHIP DEED WHICH WAS EXECUTED ON DECEMBER 28 1968. THE MAIN SOURCE OF INCOME OF THE ASSESSEE FIRM WAS FROM THE SHARE HELD BY S I N THE FIRM LE. SUBSEQUENTLY FIRM LE WAS CONVERTED INTO PRIVATE L TD. COMPANY NAMED LV AND SHARES HELD BY S WAS CONVERTED INTO EQUI TY CAPITAL ON WHICH DIVIDENDS WERE RECEIVED WITH INTEREST ON DEPOSITS H ELD IN THE NAME OF S IN LV. S EXPIRED ON APRIL 11 1982. IT WA S CLAIMED BY THE ASSESSEE THAT NO BUSINESS IS DONE THEREAFTER AND THE FIRM I S TO BE DISSOLVED BY THE OPERATION OF LAW ON DEATH OF S. HOWEV ER A.O. COMPLETED THE ASSESSMENT IN THE STATUS OF AOP IN RESPECT OF INCOME RECEIVED FROM LV BY INCLUDING REMAINING PARTNERS AS MEM BERS OF ASSOCIATION. IT WAS HELD BY HONBLE HIGH COURT THAT THERE WAS NO ACT OF VOLITION ON THE PART OF THE REST OF THE PARTNERS OF T HE AOP TO CONTINUE WITH A COMMON PURPOSE TO PRODUCE INCOME PROFIT AND GAI NS. THE ASSESSMENT IN THE STATUS OF AOP WAS HELD NOT VALID. 12. HONBLE GAUHATI HIGH COURT IN THE CASE OF SMT. JAWA NT KAUR SEHGAL & OTHERS VS. CIT (2004) 271 ITR-475 (GAUHATI) HELD THAT AN ESSENTIAL INGREDIENT OF AOP IS THAT THERE IS A UNITY OF THE MEMBERS FOR A COMMON PURPOSE AND THERE HAS TO BE COMMUNITY OF INTER EST IN ORDER THAT AN INCOME CAN BE ASSESSED IN THE HANDS OF AOP. IT MUST BE DERIVED FROM THE PROCESS IN WHICH THE ASSOCIATION OF PERSON S HAS SOME CONTROL IN ALLOWING CONTINUATION OF ITS MEMBERS IN EARN ING THE INCOME PROFIT OR GAIN FOR WHICH IT IS FORMED. IN OTHER WORDS INVOLVEMENT OF ALL THE MEMBERS OF ASSOCIATION OF PERSON SHOWING COMMUNITY OF INTEREST IS NECESSARY. HONBLE HIMACHAL PRADESH HIGH COURT IN BHUPEND RA FOOD & MALT INDUSTRIES (1998) 229 ITR-496 ALSO EMPHASISED ON VOLITION ON THE PART OF THE MEMBERS OF THE ASSOCIATION AS AN ESSENTIAL INGREDIENT. HONBLE MADRAS HIGH COURT IN STATE OF TAMIL NADU VS. T HIRUIVALARGAL SINGARA ESTATE (1996) 217 ITR-199 (MAD) HELD THAT TH E JOINTNESS OF THE ENTERPRISE OR PRODUCTION OF SHARING OF INCOME PROFI T AND GAINS ARE THE ESSENTIAL INGREDIENT TO CALL A BODY OF PERSONS AN AO P. IN OTHER WORDS VOLUNTARILY COMING FORWARD BY THE MEMBERS TO FO RM AN ASSOCIATION WITH THE OBJECT OF PRODUCING INCOME AND MAKIN G PROFIT AND GAIN AND SHARING THE SAME IS NECESSARY FOR AN AOP TO BE I N EXISTENCE. 13. IN FACT AOP IS NOT MERELY A LEGAL STATUS RESULTING FROM OPERATION OF LAW BUT VOLUNTARILY COMBINING FOR A COMMON ENDEAVO R. CO-OWNERS CO-HEIRERS CO-LEGALITIES DO NOT CONSTITUTE SUCH AN ASSOCIAT ION IN RESPECT OF INCOME OF THE JOINT OR COMMON ASSET BY REASON O NLY OF THEIR JURAL RELATIONSHIP. THE ESSENTIAL INGREDIENT THAT ATTR ACTS FORMATION OF AOP FOR INCOME TAX ASSESSMENT IS THE WILLING UNITY OF THE INCOME MAKING PURPOSE AND SHARING THE SAME RATHER THAN MERE UNITY OR TITLE IN THE INCOME YIELDING ASSET. THIS VIEW IS UPHELD BY HO NBLE PATNA HIGH COURT IN THE CIT VS. CHANDMAL RAJGARHIA (1995) 2 13 ITR-789 (PATNA) HONBLE SUPREME COURT IN CIT VS. INDIRA BALK RISHNA (1960) 39 ITR-546 (SC) ALSO TOOK THE SIMILAR VIEW. IN THIS RE GARD WE MAY REFER THE OBSERVATION OF HONBLE SUPREME COURT IN G. MURUGESAN & BROTHERS VS. CIT (1973) 88 ITR-432 (SC) AS UNDER :- FOR FORMING AN 'ASSOCIATION OF PERSONS' THE MEMBER S OF THE ASSOCIATION MUST JOINT TOGETHER FOR THE PURPOSE OF PRODUCING AN INCOME. AN 'ASSOCIATION OF PERSONS' CAN BE FORMED ONLY WHEN TW O OR MORE INDIVIDUALS VOLUNTARILY COMBINE TOGETHER FOR A CERTAIN PURPOSE. HENCE VOLITION ON THE PART OF THE MEMBERS OF THE ASSOCIATION IS AN ESSENT IAL INGREDIENT. EVEN A MINOR CAN JOIN AN 'ASSOCIATION OF PERSONS' I F HIS LAWFUL GUARDIAN GIVES HIS CONSENT. IN THE CASE OF RECEIVING DIVIDENDS FROM SHARES WHE RE THERE IS NO QUESTION OF ANY MANAGEMENT IT IS DIFFICULT TO DRAW AN INFER ENCE THAT TWO OR MORE SHAREHOLDERS FUNCTIONED AS AN 'ASSOCIATION OF PERSO NS' FROM THE MERE FACT THAT THEY JOINTLY OWN ONE OR MORE SHARES AND JOINT LY RECEIVE THE DIVIDENDS DECLARED. THESE CIRCUMSTANCES DO NOT BY THEMSELVES GO TO SHOW THAT THEY ACTED AS AN 'ASSOCIATION OF PERSONS'. IN THE CASE OF AN 'ASSOCIATION OF PERSONS' IT IS AL WAYS OPEN TO ITS MEMBERS TO WITHDRAW FROM THE ASSOCIATION. NO ONE CAN BE COM PELLED TO CONTINUE AS A MEMBER OF THE ASSOCIATION. NO PARTICULAR FORM NEE D BE OBSERVED FOR WITHDRAWING FROM AN ASSOCIATION. IN THE CASE OF REALISATION OF DIVIDENDS IF THE IND IVIDUAL MEMBERS OF AN ASSOCIATION CHOSE TO REALISE THEIR DIVIDENDS AS IND IVIDUALS THERE IS AN END OF THE ASSOCIATION. 14. FROM THE PLETHORA OF ABOVE DECISIONS WE CULL OUT F OLLOWING PRINCIPLES :- (1) MEMBERS MUST VOLUNTARILY COME TOGETHER JOIN FOR CARRYI NG OUT ACTIVITIES TO EARN INCOME AND SHARE THEM IN DETERMI NED PROPORTION. (2) VOLITION ON THE PART OF EACH MEMBER TO JOIN AND TO R EMAIN JOINT IS NECESSARY. (3) IF ASSOCIATION IS FORMED ONCE THEN IT IS NOT NECESSARY TH AT IT WILL CONTINUE TO BE IN EXISTENCE EVEN WHEN MEMBERS AVOIDED TO REMAIN TOGETHER. IF ONE OF THEM ACT IN SUCH A MANNER WHICH IS CONTRARY TO THE INTEREST OF OTHERS THEN AOP WILL COME TO AN END. 15. WHEN WE APPLY ABOVE PRINCIPLES ON THE FACTS OF THE PRESENT CASE WE NOTICE THAT THOUGH LGE & C AND PEL FORMED AOP BY VIRTUE OF AN AGREEMENT DT.16-10-2000 BUT SUCH VOLITION ON THE PA RT OF LGE & C CAME TO AN END BY THE AGREEMENT DATED 2-9-2002 AND T HEREFORE NO ASSOCIATION OF PERSONS SURVIVED AFTER LGE & C WITHDREW F ROM SHARING ANY PROFIT MAKING WORK AND HAVING NO FURTHER VOLITI ON IN SHARING ANY INCOME FROM THE WORK DONE FOR NHAI. 16. IN VIEW OF THIS ANY EXPENDITURE INCURRED BY LGE&C AFTER 2-9-02 IN CONNECTION WITH THE INSPECTION OF THE WORK COULD NOT BE THE EXPENDITURE OF JOINT VENTURE. FURTHER IT COULD NOT BE SAID THAT LGE&C HAS INCURRED EXPENDITURE TO EARN ANY INCOME FROM THE J OINT VENTURE AFTER SUPPLEMENTARY AGREEMENT CAME TO EXISTENCE ON 2-9 -02. THEREFORE WE UPHOLD THE ORDER OF AUTHORITIES BELOW IN DISALLOWING THE CLAIM OF THIS EXPENDITURE AGAINST INCOME OF JOINT VENTU RE PRIOR TO 2-9- 02. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS REJECTED. 17. THE ISSUE IN GROUND NO.2 IN ASSESSEES APPEAL REL ATES TO CLAIM OF PROVIDENT FUND AND ESIC CONTRIBUTION ON BEHALF OF EM PLOYEES. IT WAS CLAIMED THAT THIS EXPENDITURE WAS PAID BEFORE THE FILI NG OF THE RETURN BY THE JOINT VENTURE. THE ISSUE IS NOW COVERED IN FAVOU R OF THE ASSESSEE BY THE DECISION OF HONBLE SUPREME COURT IN CIT V S. ALOM EXTRUSION LTD. (2009) 319 ITR-306 (SC) WHEREIN IT I S HELD THAT DELETION OF SECOND PROVISO TO SECTION 43B AND AMENDMENT OF THE FIRST PROVISO BY THE FINANCE ACT 2001 WAS TO AVOID IMPLEMENTA TION PROBLEMS AND EVEN THOUGH AMENDMENTS WERE MADE APPLICA BLE BY APRIL ONLY W.E.F.1-4-2004 WERE CURATIVE IN NATURE AND CAN APPLY RETROSPECTIVELY W.E.F. 1-4-98. IN VIEW OF THIS THE DECISION OF HONBLE BOMBAY HIGH COURT IN PAMBI TISSUES CASE REPORTED IN 313 ITR-137 (BOMBAY) WAS IMPLIEDLY OVERRULED. THUS THE PAYMENT M ADE BEFORE FILING OF THE RETURN OF INCOME WOULD BE AN ALLOWABLE DEDUCTION BUT THIS IS SUBJECT TO CLAIM OF EXPENSES PERTAINING TO THE PERIOD PRIOR TO 2-9-02. ANY PAYMENT THEREAFTER WOULD BE CONSIDERED ONLY IN TH E INDIVIDUAL HANDS OF THE MEMBERS OF THE JOINT VENTURE. THIS GROUN D OF THE ASSESSEE IS ACCORDINGLY DISPOSED OF. 16. THE THIRD GROUND RELATES TO ALLOWING THE CLAIM OF LOSS OF RS.8 81 52 174/- BEING THE AMOUNT OF SUB-CONTRACT CHARGE S PAID BY LGE&C TO NITIN CONSTRUCTION LTD. THE ISSUE IS APPARENT LY NOT DISCUSSED BY THE AO EVEN THOUGH LD. CIT(A) HAS DISCUSSED THE SAME. LGE&C HAD GIVEN SUM OF RS.8 81 52 174/- TO M/S. NITIN CONSTRUCTIO N LTD. (IN SHORT NCL) A SUB-CONTRACTOR TO LGE&C AGAINST THE WORK CARRIED OUT OR TO BE CARRIED OUT TILL THE END OF F.Y. 2002-03. CERTAIN DI SPUTES AROSE BETWEEN LGE&C AND SUB-CONTRACTOR. LGE&C INVOKED ARBITRATION PR OVISIONS AND FILED ARBITRATION PROCEEDINGS FOR RECOVERING THE DUES. THE AMOUNT PAID TO NCL BY JOINT VENTURE THROUGH LGE & C IS SHOWN AS A N ADVANCE TO NCL IN THE AUDITED ACCOUNTS. THE ASSESSEE CLAIMED THE SAID SU M AS A BAD DEBT. THE LD. CIT (A) DID NOT ALLOW THE SAME ON THE GROUND THAT CLAIM WAS NOT MADE IN THE RETURN OF INCOME. EVEN IN TH E AUDITED ACCOUNTS IT HAS BEEN SHOWN AS ADVANCE AS ON 31-3-03. THE MANDATORY REQUIREMENT AS PER SECTION 36(2) OF THE ACT W AS NOT FULFILLED I.E. THE AMOUNT WAS NOT WRITTEN OFF IN THE BOOKS OF ACCOUNTS. THEREFORE THE SAME WAS NOT ALLOWED BY LD. CIT(A). 19. WE HAVE HEARD THE RIVAL PARTIES AND CAREFULLY PER USED THE MATERIAL ON RECORD. FIRSTLY THE CLAIM WAS NOT MADE IN THE RETURN OF INCOME. THE A.O. HAS NOT DISCUSSED THE SAME IN THE ASSESSMENT ORDER THEREFORE IT IS NOT KNOWN WHETHER CLAIM WAS AT ALL M ADE BEFORE HIM. THE CLAIM IS APPARENTLY MADE BEFORE THE LD. CIT (A) F OR THE FIRST TIME. SINCE THE AMOUNT WAS NOT WRITTEN OFF IN THE BOOKS OF A CCOUNTS BY LGE&C IT COULD NOT BE CLAIMED AS A BAD DEBT. FURTHER AS PER CLAUSE 6 OF THE SUPPLEMENTARY AGREEMENT DT.2-9-02 LIABILITY ARISING FROM THE WORK EXECUTED BY LGE&C TILL THE DATE OF SIGNING OF TH IS AGREEMENT SHALL BE THAT OF LGE&C AND PATEL WILL BE INDEMNIFIED BY L GE&C AGAINST THE SAME. IN VIEW OF THIS LOSS ARISING IN RESPECT OF ANY LOSS DUE TO NON RECOVERY OF ADVANCE FROM NCL WILL BE THAT OF LGE&C AN D NOT OF JOINT VENTURE. FURTHER IT IS ALSO PROVIDED IN THE SUPPLEMEN TARY AGREEMENT THAT PEL WOULD BE FREE TO GET THE WORK EXECUTED FROM THE SUB CONTRACTORS USED BY LGE&C PRIOR TO THIS AGREEMENT DT.2-9 -02 AT THE TIMES AND CONDITIONS SET-OUT BY PATEL. THEREFORE ONCE A MOUNT IS NOT WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF LGE&C PRIOR TO 2-9-02 IT COULD NOT BECOME THE LOSS OF JOINT VENTURE. THE AMOUNT IS NO T STILL WRITTEN OFF TILL 31-3-2003 AND THEREFORE IT COULD NOT BE CLAIMED AS BAD DEBT. AS A RESULT WE UPHOLD THE ORDER OF THE LD. CIT(A) ON THIS GROUND. 20. APPEAL OF THE ASSESSEE IS ACCORDINGLY PARTLY ALLOWED AS ABOVE. ITA.NO.3179/A/07 (A.Y. 2004-05) . 21. IN THIS YEAR THE JOINT VENTURE ASSESSEE HAS RAISED FOLLOWING GROUNDS :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE A.O. ERRED IN ASSESSING RS.8 03 80 805/- AS INCOME OF TH E APPELLANT BEING 7% OF THE TOTAL RECEIPT FROM NATIONAL HIGHWAY AUTHORITY OF INDIA (NHAI). 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW THE A.O. ERRED IN DISALLOWING THE EXPENSES INCURRED BY THE JOINT VENTURE OF RS.89 21 135/-. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW T HE A.O. ERRED IN INITIATING PENALTY PROCEEDINGS U/S. 271( 1)(C ) OF THE ACT. 4. WITHOUT PREJUDICE IN THE FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW HAVING ASSESSED THE APPELLANT ON POSITIVE INCOME THE A.O. OUGHT TO HAVE ADMITTED APPELLANTS ALTERNATIVE PLEA FOR GRANT OF DEDUCTION U/S. 80IA. THE APPELLANT SUBMITS THAT ALL THE CONDITIONS GERMANE TO GRANT DEDUCTION U/S. 80IA(4) ARE FULFILLED. 5. STILL WITHOUT PREJUDICE IN THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW NO TAX OR INTEREST CAN BE RECOVERE D FROM THE AOP UNLESS SUITABLE CREDIT FOR TAX PAID BY TH E MEMBER (IN RESPECT OF IN COME ASSESSED AS AOP INCOME) HAS BEEN GRANTED. 22. THE FACTS RELATING TO COMING INTO EXISTENCE OF JOINT VENTURE AND WORK HAVING BEEN AWARDED TO IT BY NHAI FOR COMPLETION OF THE PROJECT AT SURAT MANOR TOLLWAY ROAD PROJECT PACKAGE-2 HAVE BE EN DISCUSSED WHILE DISPOSING OF THE APPEAL OF THE ASSESSEE FOR A.Y. 2 003-04 23. DURING THIS YEAR JOINT VENTURE FILED RETURN OF INCOME AT A LOSS OF RS.4 31 09 776/-. THIS WAS PROCESSED U/S. 143(1) BUT LATER PICKED UP FOR SCRUTINY. IT WAS EXPLAINED TO THE A.O. THAT THERE WAS A SUPPLEMENTARY AGREEMENT BETWEEN LGE&C AND PEL DT.2-9 -02. ACCORDING TO IT 100% OF THE WORK IS TRANSFERRED TO PEL FOR EXECUTION AND LGE & C HAS SOUGHT TO INDEMNIFY ITSELF FROM ANY LO SS OBLIGATION DUTY OR PAYMENTS ETC. ARISING FROM EXECUTION OF THE AB OVE PROJECT AFTER 2-9-02. THE RELEVANT CLAUSE NO.2 OF THE SUPPLEM ENTARY AGREEMENT IS QUOTED WHILE DISPOSING OF THE APPEAL FOR A.Y. 2003-04. DURING THIS YEAR LD. AO NOTED THAT PEL HAS SIMULTANE OUSLY ENTERED INTO AN AGREEMENT WITH M/S. KNR CONSTRUCTION AND TRANSF ERRED 100% WORK TO IT AFTER RETAINING 7% OF THE ROYALTY CHARGES FROM THE TOTAL RECEIPTS. AS PER AGREEMENT WITH KNR CONSTRUCTION ON 7-9-0 2 ALL THE RECEIPTS FROM NHAI RECEIVED BY THE JOINT VENTURE AND T RANSFERRED TO PEL IN ACCORDANCE WITH THE AGREEMENT WITH LGE&C DT.2-9 -02 WOULD BE FURTHER TRANSFERRED TO M/S. KNR CONSTRUCTION SUBJECT TO DEDUCTION OF 7% AS ROYALTY BY PEL. THE AO HAS REFERRED TO RELEVANT CLAUSES OF THE AGREEMENT WITH KNR CONSTRUCTION AS UNDER :- THE FIRST PARTY SHALL PAY TO THE SECOND PARTY AT THE Q UOTED RATES AS PER THE MEASUREMENTS ACCEPTED BY NHAI DEDUCTING 7% (SEVEN PERCENT) TOWARDS ROYALTY FROM GROSS BILLS. THE IN COME TAX AS PREVAILING AT THE DATE OF PAYMENT AND OTHER RECOVE RIES PROPOSED BY THE NHAI IN THE BILLS WILL BE DEDUCTED FROM THE BILLS OF THE SECOND PARTY. 24. DURING THE ASSESSMENT YEAR 2004-05 TOTAL RECEIPTS O F RS.14 82 97 211/- WERE RECEIVED FROM NHAI WHICH WERE TR ANSFERRED TO PEL AND SUBSEQUENTLY TRANSFERRED TO KNR CONSTRUCTION AFT ER DEDUCTION OF 7% BY PEL. IN THE ACCOUNT OF JOINT VENTURE FOLLOWING RE CEIPTS AND EXPENDITURE WERE SHOWN BY THE ASSESSEE. LGE&C PATEL TOTAL INCOME CONSTRUCTION. 89 21 135 1 14 82 97 211 1 15 72 18 346 OTHER INCOME. 1 15 17 927 --- 1 15 17 927 TOTAL INCOME 2 04 39 062 1 14 82 97 211 1 16 87 36 273 89 21 135 2 04 39 062 1 14 82 97 211 1 15 98 15 138 EXPENDITURE. WAGES & LABOUR. 2 89 729 1 14 82 97 211 1 14 85 86 940 OP. & ADMN. 66 99 468 --- 66 99 468 DEPRECIATION. 1 50 26 433 --- 1 50 26 433 TOTAL EXPENDITURE 2 20 15 630 1 14 82 97 211 1 17 03 12 841 25. FROM THE ABOVE AO NOTED THAT LGE&C HAS CLAIMED T OTAL EXPENDITURE OF RS.2 20 15 650/- WHICH INCLUDED DEPRE CIATION AND HAS OFFERED TO THE JOINT VENTURE AN INCOME OF RS.2 04 39 062/-. ON THE OTHER HAND PATEL HAS SHOWN ENTIRE RECEIPTS OF RS.1 14 82 97 211/- AS ITS INCOME AND ENTIRE AMOUNT HAS BEEN SHOWN AS THE EXPE NDITURE. THUS PEL DID NOT SHOW ANY PROFIT FOR BEING ASSESSED IN T HE JOINT VENTURE. THE A.O. ACCORDINGLY RAISED FOLLOWING TWO ISSUE S :- 1. WHY PEL HAS NOT SHOWN 7% OF THE GROSS RECEIPTS IN THE P & L A/C. AS PROFIT AS PER THE AGREEMENT WITH KNR CONSTRUCTION. 2. WHAT ARE THE EXPENSES CLAIMED BY LGE&C MEMBER WHEN IT IS NO LONGER ACTIVELY INVOLVED IN THE EXECUTION OF THE ROAD PROJECT FROM OCTOBER 2002 AND ALL THE RECEIPTS RECEIVED FROM THE NHAI WERE REFLECTED BY THE PEL MEMBER OF THE JV? 26. IN RESPONSE TO THIS THE JOINT VENTURE FURNISHED DETAILED SUBMISSION TO THE AO OUT OF WHICH AO HAS REFERRED SOME PO RTION WHICH WAS CONSIDERED AS RELEVANT BY HIM. FOR THE SAKE OF CONVEN IENCE THEY ARE BEING REFERRED HERE ALSO FOR THE SAKE OF CONVENIEN CE. THE NEXT QUERY RAISED BY YOU RELATES TO THE PROPOSAL TO ASSESS 7% OF THE CONSTRUCTION RECEIPTS FROM MHAI AS PROFITS OF THE JV. FOR THE REASONS EXPLAINED EARLIER AT LENGTH IN PARA NO 10 TO 12 WE SUBMIT THAT THE LGE&C-PATEL JV HAD TO ALTERNATIVE BUT TO SUB-CONTRACT THE LGE&CS PORTION OF INCOMPLETE WORK TO ANOTHER CONTRACTOR. DUE TO THE REASO NS ALSO MENTIONED EARLIER NO CONTRACTOR WAS FORTHCOMING TO WORK ON THE SITE ON WHICH THE WORK WAS EARLIER BEING CARRIED OUT BY LGE&C AS SUCH CONTRACTOR WOULD HAVE TO DEAL WITH A NUMBER OF CONTENTIOUS ISSUES ON THAT SITE WIT H ITS SUBCONTRACTORS LABOURERS AND THE MATERIAL SUPPLIERS. HENCE THE LGE&C-PATEL JV TOOK A COMMERCIAL DECISION T O SUBCONTRACT THE LGE&CS PORTION OF WORK TO PEL (THE OTH ER MEMBER OF THE AOP) ON BACK-TO-BACK BASIS. CONSIDERING THE PEL WOULD HAVE TO DEPLOY SUBSTANTIAL INFRASTRUCTUR E AS ALSO DEAL WITH ALL THE SUPPLIERS CONTRACTORS LABOURERS E TC. ON THAT SITE WHICH WAS A HIMALAYAN TASK THE JV TOOK TH E BUSINESS COMMERCIAL DECISION TO SUBCONTRACT THE WORK TO PEL AT THE BOQ RATES TENDERED BY THE JV TO NHAI. NEEDLESS TO ADD THE DECISION OF THE LGE&C-PATEL JV T O CONTRACT THE WORK TO PEL AT BOQ RATES WAS PURELY FOR BUSINESS CONSIDERATIONS AND COMMERCIAL IN NATURE WHICH IS APPARENT FROM THE ONEROUS CONDITIONS (REPRODUCED IN ITA LICS FOR CONVENIENCE) LAID DOWN AGAINST PEL IN SUPPLEMENTAL AGREEMENT NO.2 DATED 2-9-2002. IN TERMS OF THIS AGREEMENT THE JV AS WELL AS ONE OF ITS MEMBERS NAMELY LGE&C WERE TOTALLY ABSOLVED OF ALL THEIR COMMITMENTS LIABILITIES AND RESPONSIBILITIES TO THE NHAI. THIS IS BRO UGHT OUT IN THE SAID AGREEMENT MORE PARTICULARLY AS UNDE R : (ARTICLES OF SUPPLEMENTARY AGREEMENT DT.2-9-2002) . ARTICLE-1: PATEL SHALL TAKE OVER EXECUTE AND COMPLETE THE REMAIN ING PORTION OF THE WORK OF LGE&C PORTION OF 75% AND ALL ADDITIONAL WORKS TO THE ORIGINAL CONTRACT WITH THE EM PLOYER UNDER THE CONTRACT AS WELL AS WORKS ORIGINALLY EARMARKE D FOR PATEL. PATEL SHALL COMPLETE ALL THE WORKS INCLUDING ADDITIONAL WORKS WITHIN OCTOBER 2003 AND SHALL BE SOLELY RESPONSIB LE THEREFORE IF NOT COMPLETED. LGE&C SHALL NOT ASSUME ANY RESPONSIBILITY LIABILITY OBLIGATION OR DUTY WITH REGARD TO THE REMAINING WOR KS OF LGE&C AND ANY ADDITIONAL WORKS. PATEL SHALL ASSUME ANY AND ALL RESPONSIBILITIES FOR THE TECHNICAL AND COMMERCIAL RISKS INCLUDING PROFIT AND LOSS FROM THE EXECUTION AND COMPLETION OF THE WORKS MENTIONED ABOVE AND SHALL INDEMNIFY LGE&C AND HOLD LGE&C HARMLESS FROM AGAINST AND SHALL DEFEND AGAINST AND ALL CLAIMS (INCLUDING CL AIMS BY THE EMPLOYER) LOSSES AND DAMAGES OF EVERY KIND MAD E OR ACCRUED FOR THE BALANCE WORKS AND ADDITIONAL WORKS. ARTICLE 2: THE PROJECT MANAGER SHALL BE A NOMINEE OF PATEL AND JV SHALL GRANT A IRREVOCABLE POWER OF ATTORNEY TO PATEL AND/OR ITS NOMINATED PROJECT MANAGER FOR DEALING WITH THE EMPLOYER ENGINEER UNDER THE CONTRACT AND ALL CONCERN ED AUTHORITIES/PARTIES REGARDING EXECUTION OF WORKS SUBMISSIONS OF INTERIM PAYMENT STATEMENTS CORRESPONDENCE ON ALL TECHNICAL FINANCIAL AND ALL CONTRACTUAL MATTERS. PATEL WILL BE FULLY RESPONSIBLE FOR ANY AND ALL ACTIONS OF THE NOMINATED PROJECT MANAGER. LGE&C WILL DEMOBILIZE FROM THE SITE AND NOT DEPLOY A NY OF ITS EMPLOYEES IN SITE. PROVIDED HOWEVER THAT IF LGE &C THINKS FIT TO ITS SOLE DISCRETION LGE&C MAY LET ITS EMPLOYEE(S) VISIT THE SITE AND IN SUCH CASE. PATEL WILL PROVIDE PROPER SUPPORT. HOWEVER THE COST OF THE SAME WILL NOT BE BORNE BY PATE L. PATEL SHALL AT REGULAR INTERVAL IN EVERY MONTH SEND LGE&CS HEAD OFFICE A COPY OF MONTHLY REPORT STATEMENT OF INTERIM PAYMENT APPLICATION APPROVED OR CERTIFIED STATEMENT THEREOF AND ANY OTHER MATERIAL AND INFORMA TION WHICH ARE REQUESTED BY LGE&C OR RELATED TO LGE&CS INTEREST. ARTICLE-15: PATEL WILL CONTINUE WITH THE EXISTING SUB-CONTRACTORS OF LGE&C VIZ. M.S. KHURANA DESAI CONSTRUCTIONS INDIAN DEVELOPERS AND OTHER PROVIDED THEY AGREE TO THE RATE S . TERMS AND CONDITIONS OFFERED TO THEM BY PATEL FOR EXECUTION OF BALANCE WORK. FROM THE ABOVE SUBMISSIONS YOU WOULD APPRECIATE THAT B Y TAKING OVER THE INCOMPLETE IDENTIFIED AND ALLOCATED W ORK OF LGE&C ALL THE ONEROUS RESPONSIBILITIES AND RISKS RELATI NG THERETO WERE ASSUMED BY PEL SOLELY IN ITS INDIVIDUAL AN D INDEPENDENT CAPACITY; THE LGE&C-PATEL JV OR THE OTH ER MEMBER VIZ. LGE&C WERE ABSOLVED OF ALL RISKS CONSEQUENCES AND LIABILITIES RELATING TO THE CONTRACT. IT IS UNDER THESE CIRCUMSTANCES THAT THE JV TOOK A COMMERCIAL DECISION TO SUBCONTRACT THE WORK TO PEL ON A BACK-TO-BACK BASIS AT THE BOQ RATES. WE SUBMIT THAT THE FURTHER SUBCONTRACTING OF THE WORK BY PEL TO KNR CONSTRUCTIONS WHEREIN PEL RETAINED 7% OF T HE CONSTRUCTION RECEIPTS AS ITS MARGIN IS AN INDEPENDENT COMMERCIAL CONTRACT BETWEEN PEL AND KNR CONSTRUCTION AND HENCE HAS NO RELEVANCE IN THE ASSESSMENT OF THE JV. WE FURTHER SUBMIT THAT SUCH MARGIN IS NOT AT ALL INDICAT IVE IN THE LIGHT OF CIRCUMSTANCES ELABORATELY DISCUSSED HEREINABOVE OF THE RETURNS THAT THE JV WOULD HAVE E ARNED HAD IT DECIDED TO COMPLETE THE LGE&CS PORTION OF WORK ; IN FACT WE REITERATE THAT UNDER THE FACTUAL CIRCUMSTANCES EXPLAINED EARLIER THE JV WAS IN NO POSITION TO UNDER TAKE THAT WORK. AT THE COST OF REPETITION WE SUBMIT THAT THE SAID MARG IN OF 7% COULD HAVE BEEN VALIDLY RETAINED BY PEL FOR ITSELF WHILE FURTHER SUBCONTRACTING THE WORK TO KNR CONSTRUCTION AS PEL HAS ASSUMED ALL THE RISKS CONSEQUENCES RESPONSIBILITIES AND THE LIABILITIES IN ITS INDIVIDUAL A ND INDEPENDENT CAPACITY REGARDING THE CONTRACT VIS--VIS NHAI. IN VIEW OF THE ABOVE FACTS OF THE CASE ESPECIALLY THE RI SKS AND THE RESPONSIBILITIES ASSUMED BY PEL IN UNDERTAKING T HE LGE&CS PORTION OF THE WORK WE SUBMIT THAT THE SUBCONTRACTING OF LGE&CS PORTION OF WORK AT BOQ RATES T O PEL IS JUSTIFIED AND WAS FOR JUST AND COMMERCIAL REASONS AND HENCE NO INCOME CAN BE IMPUTED IN THE ASSESSMENT OF THE JV ON A NOTIONAL BASIS AS NO INCOME HAS IN FACT ACCRUE D TO IT. 27. THE AO CONSIDERED THAT 7% RECEIPTS RETAINED BY PEL WHILE TRANSFERRING THE WORK TO KNR CONSTRUCTION WAS IN FACT THE INCOME OF JOINT VENTURE. HE RAISED FOLLOWING ARGUMENTS IN ITS SUP PORT. (1) SUPPLEMENTARY AGREEMENT DT.2-9-02 IS ONLY AN INTERNA L ARRANGEMENT OF SHARING WORK. AS PER THIS SUPPLEMENTAR Y AGREEMENT WORK IS NOW TO BE DONE ONLY BY ONE OF THE MEMBERS OF THE JOINT VENTURE. IT IS NO WHERE STIPULATE D THAT JOINT VENTURE WILL NO LONGER DO THE WORK AND P EL WOULD DO THE WORK IN ITS INDEPENDENT CAPACITY. SUPPLEMENTARY AGREEMENT IS ONLY A RE-ORGANIZATION OF THE WORK AS PE R AGREEMENT BETWEEN THE TWO MEMBERS. (2) IT IS NOT A CASE THAT JOINT VENTURE HAS SUB-CONTRACTED THE WORK TO PEL. (3) WHEN THE WORK SHARING ARRANGEMENT WAS IN THE RATIO OF 75% TO 25% BETWEEN LGE&C AND PEL THE PROFITS WERE SHOWN IN THE RETURN OF INCOME OF JOINT VENTURE AND TH EY WERE NOT SHOWN IN THEIR INDIVIDUAL RETURNS. THUS IF N OW ARRANGEMENT IS 0 TO 100% THEN WHY NOT INCOME BY PEL B E SHOWN IN THE JOINT VENTURE. (4) NO INCOME HAS BEEN SHOWN IN THE JOINT VENTURE BUT TDS REFUND HAS BEEN CLAIMED FROM JOINT VENTURE. THEREFORE PEL TAKING OVER THE ENTIRE PROJECT IS ONLY AN AFTER THOUG HT. THUS IF ONE MEMBER DOING 100% INSTEAD 25% IT WOULD N OT MEAN THAT THERE IS NO INCOME TO JOINT VENTURE. (5) IN THE A.Y. 2003-04 PEL HAS SHOWN 9% OF THE RECEIP TS RECEIVED FROM NHAI IN THE HANDS OF JOINT VENTURE. EVEN THOUGH AFTER 2-9-02 100% WORK WAS GIVEN TO PEL IT H AS SHOWN STILL 7% RECEIVED AS INCOME OF THE JOINT VENTURE. (6) JOINT VENTURE IS STILL CONTINUING TO FILE THE RETU RN OF INCOME. THUS JOINT VENTURE IS NOT CEASED TO EXIST. IT CONTINUES T O BE ASSESSABLE ENTITY. (7) JOINT VENTURE IS STILL RAISING RUNNING BILLS ON NHAI AND IS RESPONSIBLE FOR CARRYING OUT CONTRACT FOR NHAI WHICH ONLY RECOGNIZED JOINT VENTURE AND CONSOLIDATED BILLS WERE SUBMITTED BY JV TO NHAI. THE MONEY WAS REALISED ONLY BY THE JOINT VENTURE WHICH WAS LATER ON SHARED BETWEEN T HE TWO MEMBERS EARLIER IN THE RATIO OF 75% TO 25% AND NOW IN THE RATIO OF 0 TO 100%. (8) THE CONTRACT WAS BORNE BY JOINT VENTURE AND NOT BY PEL OR LGE&C SEPARATELY. IT WAS A MANDATORY REQUIREMENT OF NHAI THAT THERE SHOULD BE A JOINT VENTURE AGREEMENT. THUS EVEN IF NO PROFIT IS EARNED BY LGE & C THE INCOME F ROM THIS PROJECT SHOULD BE SHOWN IN THE ACCOUNT OF JOINT VENTURE. (9) THOUGH THE TWO MEMBERS CHOSE TO DIVIDE THE WORK AM ONG THEMSELVES IN TURN THEY SUB-CONTRACTED THE WORK TO OTHE R PARTIES. WHETHER ONE MEMBER CARRIED ON ENTIRE WORK HIMSELF IS NOT MATERIAL AS JOINT VENTURE IS AN INDEPEN DENT ENTITY. (10) FURTHER IT IS ONLY A JOINT VENTURE WHICH IS ENTI TLED TO RECEIVE RETENTION MONEY FROM NHAI AFTER COMPLETION OF THE PROJECT. (11) LGE&C HAS CLAIMED EXPENDITURE INCURRED AFTER 2-9 -02 AGAINST INCOME OF JOINT VENTURE PRIOR TO 2-9-02. THE REFORE INCOME ARISING FROM THIS CONTRACT AFTER 2-9-02 SHOULD ALSO BE ASSESSED IN THE HANDS OF JOINT VENTURE. (12) EVEN THE ASSESSEE I.E. JOINT VENTURE HAS VIDE ITS LETTER DATED. 15 TH SEPTEMBNER 2002 SUBMITTED THAT INCOME HAS ACCRUED TO THE JOINT VENTURE ON THE WORK COMPLETED AGA INST WHICH THERE WAS RECEIPT OF RS.1 14 82 97 211/-. (13) IT CANNOT BE A CASE THAT JOINT VENTURE WOULD EXIST FOR CLAIMING EXPENDITURE AND JOINT VENTURE WOULD NOT EXI ST FOR ASSESSING INCOME. (14) IN THIS REGARD AO REFERRED TO THE LETTER OF ASSE SSEE DT.15 TH SEPTEMBER AND QUOTED A PORTION THERE FROM AS UNDER : - WE WOULD LIKE TO DRAW YOUR ATTENTION THAT DURING THE YEAR LGE&C HAS REFLECTED A CONTRACTUAL INCOME OF RS.89 21 135/- AND OTHER INCOME OF RS.1 15 17 927. TOT AL RS.204.39 LACS. AS AGAINST THE ABOVE LGE&C INCURRED AN EXPENSE OF RS.79.89 LACS ALL BEING INTEGRAL TO THE EXECU TION OF THE ENTIRE CONTRACT BEING EXECUTED IN THE NATURE OF DIRECT OPERATING AND ADMINISTRATION EXPENSES. ALL THE ABOVE EXPENSES ARE RELATED ONLY TO THE PROJECT AND ARE THEREFORE ELIGIBLE AS DEDUCTIBLE FROM THE INCOME OF T HE PROJECT. (15) IT IS IMMATRERIAL FOR THE PURPOSE OF INCOME TAX ACT AS TO WHICH MEMBER OF THE JOINT VENTURE COMPLETED THE WORK OR NOT AND WHICH MEMBER DID NOT. THE REVENUE AUTHORITIE S ARE REQUIRED TO SEE WHERE THE INCOME IS TO BE FINALLY ASSESSED. IF RECEIPTS ARE LEGALLY RECEIVED BY JOINT VENTUR E FROM NHAI PROFITS SHOULD BE THEN SHOWN BY JOINT VENTU RE AND NOT BY A MEMBER OF JOINT VENTURE IN ITS INDIVIDU AL RETURN OF INCOME. IF THE JOINT VENTURE DOES NOT WANT TO SHOW ANY INCOME FROM THE PROJECT IN ITS RETURN OF INCOME THEN IT CANNOT CLAIM CREDIT FOR THE TDS AND CLAIM REFUN D. (16) AGREEMENT DT.2-9-02 IS NOT ACCORDING TO THE GUID ELINES ISSUED BY NHAI. AS PER PART-2 OF GUIDELINES AND PAGE-2 14 OF THE CONTRACT WITH NHAI IT IS STIPULATED THAT JOINT V ENTURE IS NOT AUTHORIZED TO SUB-CONTRACT ANY PORTION OF THE W ORK WITHOUT THE CONSENT OF THE ENGINEER OF NHAI. (16) EVEN OTHERWISE ACCORDING TO LD. AO SECTION 40A(2)(B) COULD BE INVOKED AS MEMBERS OF JOINT VENTURE ARE IN TH E SAME POSITION AS PARTNERS IN THE CASE OF THE PARTNERSHI P FIRM. (17) THE MEMBERS OF THE JOINT VENTURE ARE CLOSELY RELATED T O EACH OTHER AND CLAUSE 18 OF 3CD REPORT FILED WITH THE RETURN OF INCOME OF THE JOINT VENTURE SHOWED THE SUM O F RS.114.82 CRORES AS EXPENDITURE ON WORK GIVEN TO PEL. (18) THUS WHEN JOINT VENTURE GAVE THE WORK TO PEL THEN MARKET VALUE OF PROJECT WAS LESS THAN 7% AND THEREFORE JOINT VENTURE OUGHT TO HAVE GIVEN THE WORK AT PRICE REDUCED BY 7%. FROM THIS POINT OF VIEW ALSO 7% OF THE TOTAL RECEIPTS WOULD BE TAXABLE IN THE HANDS OF JOINT VENTURE. 28. HE ACCORDINGLY SOUGHT TO TAX A SUM OF RS.8 03 80 805/ -BEING 7% OF RS.1 14 82 97 211/- AS INCOME OF THE JOINT VENTU RE. 29. THE A.O. FOLLOWING HIS ORDER FOR THE ASSESSMENT YEAR 2003-04 SOUGHT TO DISALLOW THE CLAIM OF EXPENSES OF RS.89 29 135/ - AS IT IS INCURRED SUBSEQUENTLY AFTER SUPPLEMENTARY AGREEMENT D T.2-9-02. 30. THE ARGUMENT OF THE LD. AO IN DISALLOWING THE CLA IM IS THAT LGE & C IS NO-LONGER ACTIVELY INVOLVED IN THE EXECUTION O F THE PROJECT IT IS NOT SHOWING ANY INCOME FROM THE WORK TAKEN FROM NHAI W HICH IS ENTIRELY TRANSFERRED TO PEL LGE&C HAS DEMOBILIZED F ROM THE SITE AND AS PER SUPPLEMENTARY AGREEMENT PEL IS NOT BOUND TO BE AR ANY PART OF THE EXPENSES INCURRED BY LGE & C ENTIRE RECEIPTS ARE TR ANSFERRED TO PEL AND THEREFORE NO INCOME WOULD ACCRUE OR ARISE TO L GE&C AND THEREFORE NO EXPENDITURE CAN BE CLAIMED AS THEY ARE NO T INCURRED TO EARN ANY INCOME. 31. GROUND NO.3 RELATES TO INITIATION OF PENALTY PRO CEEDINGS U/S. 271(1)(C). THIS ISSUE IS PRE-MATURE AT THIS STAGE AS CAUSE OF ACTION FOR SUCH INITIATION OR MERITS OF LEVY OF PENALTY CAN ONLY BE DECIDED IN THE APPEAL PROCEEDINGS RESULTING FROM THE ORDER LEVYING T HE PENALTY. THIS GROUND IS ACCORDINGLY REJECTED. 32. GROUND NO.4 RELATES TO NOT GRANTING DEDUCTION U/S . 80IA(4) TO THE JOINT VENTURE EVEN THOUGH ACCORDING TO THE ASSESSEE I T HAS FULFILLED ALL THE CONDITIONS LAID DOWN THEREIN. THIS ISSUE IS APPAR ENTLY NOT RAISED BEFORE THE A.O. 33. IN THE GROUND OF APPEAL RAISED BEFORE THE LD. CI T (A) THIS ISSUE IS ALSO NOT MENTIONED. HOWEVER FROM THE PARAGRAPH 12.1 ISSUE REGARDING U/S. 80IA (4) IS DEALT WITH BY LD. CIT (A). HE HAS GIVEN A FINDING THAT AOP IS NOT ELIGIBLE FOR CLAIM OF DEDUCT ION U/S. 80IA. HIS REASONING ARE REPRODUCED AS UNDER :- I HAVE PERUSED THE FACTS OF THE CASE. THE AO HAS OBJECTED TO THE RAISING OF THIS ADDITIONAL GROUND IN HER REMAND R EPORT. THE AO HAS FURTHER STATED IN THE REMAND REPORT THAT PEL H AS NOT CLAIMED THIS DEDUCTION IN ITS COMPANY RETURN OF INCOME. APART FROM THE ABOVE DEDUCTION U/S. 80IA IS AVAILABLE ONLY F OR AN INDIAN COMPANY OR A CONSORTIUM OF SUCH COMPANIES. SECTI ON 80 IA(4) (I) (A) READS AS UNDER :- 4(I) (A) IT IS OWNED BY A COMPANY REGISTERED IN INDIA OR BY A CONSORTIUM OF SUCH COMPANIES. SECTION 2(26) OF THE ACT DEFINES INDIAN COMPANY AS A CO MPANY FORMED AND REGISTERED UNDER THE COMPANIES ACT 1956. IN THE CASE OF THE APPELLANT AOP LGE&C IS A COMPANY REGISTERE D UNDER THE LAWS OF SOUTH KOREA. CONSIDERING THE ABOVE FACTUAL ASPECTS OF THE CASE THE AP PELLANT AOP IS NOT ELIGIBLE FOR AVAILING OF DEDUCTION U/S. 8 0-IA OF THE ACT. THIS ADDITIONAL GROUND RAISED BY THE APPELLANT IS DISM ISSED. 34. AFTER HEARING THE PARTIES WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF THE L D. CIT (A). ADMITTEDLY LGE&C IS A KOREAN COMPANY AND EVEN IF IT FORMED A JOINT VENTURE WITH THE INDIAN COMPANY STILL IT CAN NOT BE A CONSORTIUM OF INDIAN COMPANIES AND HENCE DEDUCTION IS RIGHTLY NOT AL LOWED. NOTWITHSTANDING WE HAVE HELD IN THE ASSESSMENT YEAR 2003 -04 THAT AOP CONSISTING OF LGE&C AND PEL CEASED TO EXIST AFTER SU PPLEMENTARY AGREEMENT DT. 2-9-2002 AND THEREFORE QUESTION OF AS SESSING IT AND GRANTING ANY DEDUCTION UNDER THE I.T. ACT IN RESPECT O F PROFITS EARNED BY PEL AFTER 2-9-02 DOES NOT ARISE. AS A RESULT THIS GR OUND OF THE ASSESSEE IS REJECTED. 35. GROUND NO.5 RELATES TO RECOVERY OF TAX OR INTERE ST FROM THE AOP. AFTER HEARING THE PARTIES WE ARE OF THE CONSIDERED VIE W THAT TAX AND INTEREST RELATING TO PERIOD UP TO 2-9-2002 OR ARISING ON ACCOUNT OF INCOME EARNED BY THE AOP UP TO 2-9-2002 CAN BE RECOVE RED BY THE REVENUE AS PER LAW AND BOTH THE MEMBERS OF THE JV WOU LD BE JOINTLY AND SEVERALLY LIABLE. HOWEVER THE QUESTION OF LEVY A ND RECOVERY OF TAX AND INTEREST IN RESPECT OF ANY INCOME OF JV AFTER 2-9-2 002 WOULD NOT ARISE AS IN OUR CONSIDERED VIEW NO INCOME WOULD ACCRUE OR ARISE TO A.O.P. AFTER 2-9-2002 IN RESPECT OF THE WORK CARRIED O UT BY PEL. 36. BOTH THE PARTIES INFORMED THE BENCH THAT EVEN AFT ER 2-9-2002 JOINT VENTURE HAS DECLARED INCOME IN RESPECT OF THE WORK CARRIED OUT AFTER 2-9-2002 TILL 31-3-2003 PERTAINING TO THE ASSESSM ENT YEAR 2003- 04. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT IT IS BY MISTAKE THAT INCOME EARNED BY PEL HAS BEEN BROUGHT TO TAX IN THE H ANDS OF AOP EVEN THOUGH NO AOP IN LAW CEASED TO EXIST AFTER 2-9-2 002. IF AN ERROR IS COMMITTED BY THE JOINT VENTURE IN DECLARING THE INCO ME EARNED BY PEL AS ITS OWN INCOME THEN THAT ERROR SHOULD NOT PREVE NT THE REVENUE AUTHORITIES OR APPELLATE AUTHORITIES TO DECIDE THE RIG HT HAND IN WHICH SUCH INCOME SHOULD HAVE BEEN ASSESSED. EVEN WHERE AN INCOME IS ASSESSED IN WRONG HANDS THEN IT DOES NOT PREVENT THE AUT HORITIES OR THE COURT TO TAX IT IN THE HANDS OF THE RIGHT PERSON WHERE SUCH INCOME IS ASSESSABLE. THE LD. AR REFERRED TO THE DECISION OF HONB LE SUPREME COURT IN THE CASE OF ITO VS. ATCHAIH (CH) (1996) 218 ITR 239 (SC) FOR THE PROPOSITION THAT EVEN WHERE AN INCOME IS ASSESSED IN T HE HANDS OF A MEMBER OF AOP IT WILL NOT PREVENT THE INCOME TO B E ASSESSED IN THE HANDS OF AOP. REVERSE ANALOGY IS ALSO TRUE. THE LD. AR ALSO SUBMITTED THAT NO REAL INCOME HAD ACCRUED TO THE JOINT VENTURE A ND THEREFORE NO INCOME IS ASSESSABLE IN ITS HAND BY VIRTUE OF AGREEMENT DT . 2-9-2002. ACCRUAL OF INCOME IS SHIFTED IN THE HANDS OF PEL. THEREF ORE REAL INCOME HAS ACCRUED IN THE HANDS OF PEL AND NOT IN THE HANDS OF JOINT VENTURE. 37. THE LD. D.R ON THE OTHER HAND ARGUED THAT ONCE A SSESSEE HAS TAKEN A STAND THAT IN THE A.Y. 2003-04 THAT INCOME EA RNED BY PEL IS IN FACT THE INCOME OF JOINT VENTURE AND ACCORDINGLY IT H AS BEEN SO DECLARED IN THE HANDS OF AOP THEN THERE IS NO REASON T O TAKE A DIFFERENT STAND IN SUBSEQUENT YEAR AND THEREFORE TAX AND INTEREST CAN BE RECOVERED FROM JOINT VENTURE IN RESPECT OF INCOME EA RNED/DECLARED BY IT AFTER 2-9-2002 ALSO. 38. IN OUR CONSIDERED VIEW INCOME AFTER 2-9-2002 REALL Y BELONGED TO PEL IN RESPECT OF THE WORK CARRIED OUT BY IT AFTER 2-9 -2002. THEREFORE EVEN IF JOINT VENTURE HAS DECLARED INCOME FROM WORK CAR RIED OUT AFTER 2-9-2002 TILL 31-3-2003 AS ITS INCOME IT DOES NOT PREV ENT THE REVENUE FROM TAXING IT IN THE HANDS OF PEL AS IT IS A RIGHT PE RSON IN WHOSE HANDS INCOME AFTER SUPPLEMENTARY AGREEMENT WAS EXECUTED COULD BE TAXED. WE HAVE ALREADY HELD THAT NO AOP CONTINUED TO BE IN EXISTENCE AFTER 2-9-2002 AS ONE MEMBER HAS LOST INTEREST IN EAR NING INCOME FOR ITSELF. UNLESS BOTH THE PARTIES HAVE COMMON INTEREST IN E ARNING INCOME NO AOP CAN BE SAID TO BE IN EXISTENCE. IN VIEW O F THIS IF ANY TAX OR INTEREST HAS BEEN PAID BY JOINT VENTURE DURING A.Y. 2003-04 OR EVEN AFTER 2004-05 THE CREDIT OF THE SAME SHOULD BE T RANSFERRED TO PEL WHERE THAT INCOME IS ASSESSABLE. OUR VIEW IS THAT CRE DIT OF TDS CAN BE GIVEN ONLY IN THE HANDS WHERE INCOME THERE-FRO M IS SUBJECTED TO TAX. IF ACCRUAL OF INCOME IN RESPECT OF THE RECEIPTS R ECEIVED DE-JURE BY JOINT VENTURE IS SHIFTED TO A MEMBER OF THE JOINT VENTURE THROUGH AN OVERRIDING TITLE THEN CREDIT OF TDS IN RESPECT OF SUCH RECEIPTS SHOULD BE CONSIDERED IN THE HANDS OF THAT MEMBER OF THE JOINT VENTURE IN WHOSE HANDS SUCH INCOME IS FOUND ASSESSABLE. GROUND NO.5 IS ACCORDINGLY DISPOSED OF IN FAVOUR OF THE ASSESSEE. 39. IN RESPECT OF GROUND NO.1 LD. AR FOR THE ASSESSEE AR GUED THAT NO INCOME CAN BE TAXED IN THE HANDS OF JOINT VENTURE A S ENTIRE RECEIPTS OF RS.1 14 82 97 211/- IS TRANSFERRED TO PEL AND ACCORD INGLY ALL INCOME THERE FROM IS ACCORDINGLY SHIFTED TO PEL BY VIRTUE OF A GREEMENT DT.2-9- 2002 WHICH CREATED AN OVERRIDING TITLE IN FAVOUR OF P EL. NO REAL INCOME ACCRUED TO JOINT VENTURE AFTER THIS AGREEMENT. A CCORDING TO HIM IT WAS NOT A CASE WHERE INCOME WAS SHIFTED AFTER IT ACCR UED TO THE AOP. IT WAS NOT A CASE OF APPLICATION OF ANY INCOME BUT PRIOR TO INCOME ACCRUING AGREEMENT BETWEEN THE TWO PARTIES CREA TED AN OVERRIDING CHARGE IN FAVOUR OF PEL AND ACCORDINGLY JO INT VENTURE COULD NOT BE ASSESSED ON ANY PORTION OF THE INCOME RESULTING FR OM RECEIPTS OF RS.114.82 CRORES. HE SUBMITTED THAT LGE & C HAS TRAN SFERRED HIS SOURCE OF INCOME TO PEL AT A CONSIDERATION OF RS.2.6 CRORE S. THE LD. AR REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN C IT VS. M/S. SHOORJI VALLABHDAS & CO. 46 ITR-114 (SC) WHEREIN I T IS HELD THAT EVEN SUBSEQUENT AGREEMENT ALTERING THE RATE OF COMMISSI ON IN SUCH A WAY AS TO MAKE THE INCOME WHICH REALLY ACCRUED TO THE ASSE SSEE DIFFERENT FROM WHAT HAS BEEN ENTERED IN THE BOOKS OF ACCOUNT THEN LESSER AMOUNT RECEIVED BY THE ASSESSEE IN SPITE OF THE BOO K ENTRIES WOULD ALONE BE TAXABLE. IN OTHER WORDS EVEN A SUBSEQU ENT AGREEMENT COULD REDUCE THE REAL TAXABLE INCOME IN THE HANDS OF TH E ASSESSEE. FROM THIS POINT OF VIEW AN AGREEMENT PRIOR TO THE TR ANSACTION TAKING PLACE OR WORK BEING CARRIED OUT COULD ENABLE THE ASSESSEE TO EARN LESSER INCOME OR NO INCOME AS IN THE PRESENT CASE. HONBLE SUPREME COURT TOOK SIMILAR VIEW IN THEIR DECISION IN CIT VS. CH AMANLAL MANGALDAS & CO. (1960) 39 ITR-8 (SC) WHERE AN AGREE MENT ENTERED INTO BY THE PARTIES DURING THE ACCOUNTING YEAR WAS CONSI DERED AS INTEGRATED AND INDIVISIBLE WHOLE WITH EARLIER AGREEM ENT AND MANAGING AGENTS COMMISSION WAS CONSIDERED DETERMINABLE AND ACCRUED WHEN THE YEAR WAS OVER. THUS SUBSEQUENT AGREEMENT ENTERED I NTO BY THE PARTIES BEFORE THE END OF ACCOUNTING YEAR COULD ENABLE TO REDUCE COMMISSION OF MANAGING AGENT. THE ENTRIES MADE IN THE B OOKS OF ACCOUNTS IN THE MIDDLE OF THE YEAR WERE NOT FOUND DE TERMINATIVE. 40. AGAINST THIS LD. DR RELIEF ON THE ARGUMENTS RAISED BY AO IN HIS ORDER. IN BRIEF HE SUBMITTED THAT (I) GOVERNMENT HAD ENTERED INTO CONTRACT WITH JV. (II) IF THERE BEING NO LGE & C CONTRACT WOULD NOT H AVE PROCURED. (III) RIGHT TO WORK REMAINED WITH THE JOINT VEN TURE. (IV) JOINT VENTRURE CONTINUES TO EXIST PAYMENTS WER E RECEIVED BY JOINT VENTURE GOVT. RECOGNIZES ONLY JOINT VENTURE AND NOT LGE & C OR PEL IN INDIVIDUAL CAPACITY. (V) JOINT VENTURE STILL HAS MOTIVE TO EARN PROFI T. (VI) THE JOINT VENTURE HAS FILED RETURN OF INCOME WITH AUDITED ACCOUNTS. (VII) DURING 2003-04 JOINT VENTURE DECLARED INCOME AS EARNED BY PEL. (VIII) NO RECTIFICATION IS DONE BY PATEL OF BRINGING 7% OF INCOME INTO JOINT VENTURE IN THE A.Y. 2003-04. (IX) THE WORKING IN A.Y. 2004-05 IS THE SAME AND CO MES OUT OF THE SAME CONTRACT AS IN THE A.Y.2003-04 THEREFORE THERE CANNOT BE A DIFFERENT TREATMENT IN A.Y. 03-04 AND 04-05. (X) JOINT VENTURE RECEIVES FUNDS FROM GOVT. (XI) IF THERE IS NO JOINT VENTURE NO CONTRACT WITH THE GOVT WOULD SURVIVED. PAYMENTS ARE STILL CONTINUED TO BE RECEIVED BY JOINT VENTURE. (XII) ALTERNATIVELY PROVISIONS OF SEC. 40A(2)(B) WOULD BE APPLICABLE AS WORK IS GIVEN TO THE PARTNER OF THE JOIN T VENTURE WHOSE WHERE MARKET VALUE IS FURTHER LESSER AS PATEL HAS GIVEN THE SAME WORK TO KNR AT PRICE LESSER BY 7%. (XIII) LIABILITY OF JOINT VENTURE VIS--VIS GOVT. IS STILL NO T OVER. (XIV) AGREEMENT DT.2-9-02 IS ONLY AN INTERNAL AGREEMENT/ARRANGEMENT BETWEEN PATEL & LGE&C. (XV) NHAI IS NOT INVOLVED IN THIS AGREEMENT. (XVI) TDS IS BEING DONE IN THE NAME OF JOINT VENTURE. (XVII) IT IS INCORRECT TO SAY THAT THERE IS NO INCOME TO LGE & C. IN FACT IT HAS RECEIVED A SUM OF RS.2.6 CRORES FROM PATEL AND THEREFORE ALL THIS INCOME SHOULD FORM PART OF INCO ME OF JOINT VENTURE. (XVIII) THERE IS REALLY NO OVERRIDING TITLE. IT IS ONLY APPL ICATION OF INCOME. 41. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL ON RECORD. IN OUT CONSIDERED VIEW THE AGREEMENT DT.2-9-02 CREATED AN OBLIGATION ON LGE & C TO DIVERT INCOME ACCRUING FROM T HE WORK CARRIED OUT AFTER 2-9-02 IN FAVOUR OF PEL & THIS DIVERSION TO OK PLACE BEFORE INCOME REACHED LGE & C. THE INCOME IS CLEARLY DIVERTED A T SOURCE IN AS MUCH AS WHEN IT ACCRUED IT WAS NOT REALLY THE INCOME OF LGE & C AND ACCORDINGLY NO PORTION OF THE INCOME COULD BELONG TO AN Y AOP. THE AGREEMENT DT.2-9-02 CREATED AN OVERRIDING TITLE IN F AVOUR OF PEL SO THAT INCOME GENERATED IN RESPECT OF WORK DONE AFTER 2- 9-02 WAS DIVERTED AT SOURCE AND THEREFORE COULD NOT BE SAID TO B E ACCRUED IN FAVOUR OF LGE & C. PEL BECAME LEGALLY ENTITLED TO RE CEIVE THE AMOUNT FROM J.V. WHICH RECEIVED THE MONEY FROM NHAI AFTER COM PLETION OF WORK BY PEL AND SUBMISSION OF BILLS BY IT AND ACCORDINGL Y INCOME ACCRUED FROM THAT WORK ONLY TO PEL. IN THIS REGARD LD . AR DREW OUR ATTENTION TO THE ARGUMENTS RAISED BY HIM BEFORE THE L D. CIT (A) ALSO WHICH ACCORDING TO HIM WERE NOT CONSIDERED BY THE LD. CI T(A). 42. HONBLE SUPREME COURT IN CIT VS. SHITALDAS TIRTHDA S (1961) 41 ITR-361 HELD THAT WHERE BY APPLICATION MONEY IS DIVE RTED BEFORE IT REACHES THE ASSESSEE THEN IT IS DEDUCTIBLE BUT WHERE THE I NCOME IS REQUIRED TO BE APPLIED TO DISCHARGE OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE THEN THE SAME CONSEQUENCE WILL NOT FOLL OW. IN FACT IT WOULD BE ONLY APPLICATION OF INCOME. HONBLE S. C. IN PROVAT KUMAR MITTER VS. CIT (1961) 41 ITR-624 (SC) HELD THA T WHERE A PERSON ELIMINATED OR ASSIGNED THE SOURCE OF ITS INCOME SO T HAT THE SOURCE IS NO LONGER REST WITH HIM THEN HE MAY NOT BE TA XED UPON THE INCOME ARISING FROM THAT SOURCE ASSIGNED TO SOMEBODY ELSE. SIMILAR VIEW WAS TAKEN BY HONBLE S.C. IN CIT VS. TRAVANCORE SU GAR AND CHEMICALS LTD. (1973) 88 ITR-1 (SC) WHERE IT IS HELD THAT WHEN INCOME IS DIVERTED AT SOURCE SO THAT WHEN IT ACCRUES IT IS NOT REALLY THE INCOME OF THE ASSESSEE BUT SOMEBODY ELSES INCOME THEN IT CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE. IN THE ENTIRE ARRANG EMENT ONE HAS TO FIND OUT THE DETERMINATIVE FACTOR WHICH EFFECTS ASSESSEE S OBLIGATION IN REGARD TO THE AMOUNT IN QUESTION. THUS WHERE A TH IRD PERSON BECOMES ENTITLED TO RECEIVE THE AMOUNT UNDER AN OBLIGA TION EVEN BEFORE ASSESSEE COULD LAY THE CLAIM TO RECEIVE THAT INCOME IT WOULD BE A DIVERSION OF INCOME BY OVERRIDING TITLE. HONBLE S.C . IN CIT VS. SUNIL J. KINARIWALA (2003) 126 TAXMAN 161 (SC) HELD THAT IT IS ONLY WHEN AFTER RECEIPT OF THE INCOME BY THE ASSESSEE IF IT IS PASSED ON TO A THIRD PERSON IN DISCHARGE OF AN OBLIGATION OF THE ASSESSEE ONLY THEN IT WOULD BE AN APPLICATION OF INCOME BY THE ASSESSEE. IN CIT VS. M ADRAS RACE CLUB (1996) 219 ITR 39 (MAD.) THE RACE CLUB CONDUCTED R ACES UNDER AN AGREEMENT WITH THE GOVT FOR CHIEF MINISTERS REHA BILITATION FUNDS AND BEGGERS FUND. ENTIRE NET COLLECTIONS WERE HANDED O VER TO GOVT. ON THESE FACTS IT WAS HELD THAT IT WAS A DIVERSION OF INCOM E AT SOURCE. IN DALMIA CEMENT LTD. VS. CITA (1999) 237 ITR-617 (SC) AN OWNER OF THE FACTORY HAD BY AN AGREEMENT DT. 24-7-62 AGREED TO SALE THE FACTORY SITUATED IN PAKISTAN. SUPPLEMENTARY AGREEMENT IN NOVEMBER 1962 PROVIDED THAT PROFIT FROM 30-9-62 WOU LD BE FOR THE BENEFIT OF TRANSFEREE AND WOULD BE PASSED ON TO HIM O N COMPLETION OF SALE TRANSACTION. THE ACTUAL TRANSFER OF FACTORY HAD TAK EN PLACE ON 30- 9-64 IT WAS HELD THAT INCOME PERTAINING TO PERIOD 1- 10-62 TO 30-9-64 COULD NOT BE ASSESSED IN THE HANDS OF THE ASSESSEE AS IT STOO D DIVERTED TO THE TRANSFEREE BY AN OVERRIDING TITLE. 43. HONBLE BOMBAY HIGH COURT IN GANESH G.K. AZRENKAR (SHRI & SMT.) (1996) 217 ITR 148 (BOM) OBSERVED AS UNDER :- IN DECIDING WHETHER THERE HAS BEEN A DIVERSION OF I NCOME BY OVERRIDING TITLE THE TRUE TEST IS WHETHER THE AMOUNT SOUGHT T O BE DEDUCTED IN TRUTH NEVER REACHED THE ASSESSEE AS HIS INCOME. IT IS THE NATUR E OF THE OBLIGATION WHICH IS THE DECISIVE FACTOR. THERE IS A DIFFERENCE BETWEEN AN A MOUNT WHICH A PERSON IS OBLIGED TO APPLY OUT OF HIS INCOME AND AN AMOUNT WH ICH BY THE NATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF THE INCOM E OF THE ASSESSEE. WHERE BY THE OBLIGATION INCOME IS DIVERTED BEFORE IT REACHE S THE ASSESSEE IT IS DEDUCTIBLE; BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO D ISCHARGE AN OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE THE SAME CONSEQUE NCE IN LAW DOES NOT FOLLOW. IT IS THE FIRST TYPE OF OBLIGATION WHICH DI VERTS INCOME BY REASON OF OVERRIDING TITLE AND NOT THE SECOND. THE SECOND TYP E OF OBLIGATION IS MERELY AN OBLIGATION TO PAY ANOTHER A PORTION OF ONE'S OWN IN COME WHICH HAS BEEN RECEIVED AND IS SINCE APPLIED. 44. THE HONBLE S.C. IN CIT VS. IMPERIAL CHEMICALS IND USTRIES INDIA PVT. LTD. (1969) 74 ITR (SC) HELD AS UNDER :- AN OBLIGATION TO APPLY THE INCOME IN A PARTICULAR W AY BEFORE IT IS RECEIVED BY THE ASSESSEE OR BEFORE IT HAS ACCRUED OR ARISEN TO THE ASSESSEE RESULTS IN THE DIVERSION OF INCOME. AN OBLIGATION TO APPLY INCOME WHICH HAS ACCRUED OR ARISEN OR HAS BEEN RECEIVED AMOUNTS MERELY TO THE APPORTIO NMENT OF INCOME AND THE INCOME SO APPLIED IS NOT DEDUCTIBLE. THE TRUE TEST FOR THE APPLICATION OF THE RULE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE IS WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED IN TRUTH NEVER REACHED THE ASSESSEE AS HIS INCOME. 45. HONBLE ALLAHABAD HIGH COURT IN ADDITIONAL COMMISSIONER OF INCOME-TAX VS. RANI PRITAM KUNWAR (1980) 125 ITR 102 (ALL) HELD AS UNDER:- IN ORDER THAT A PAYMENT SHOULD BE TREATED AS A DIVE RSION AT SOURCE IT IS NECESSARY THAT IT SHOULD HAVE BEEN MADE UNDER SOME LEGAL OBLIGATION. SUCH OBLIGATION MUST ATTACH TO THE SOURCE OF INCOME. IN ORDER WORDS FOR SUCH A PAYMENT THERE SHOULD BE AN OVERRIDING CHARGE A CHA RGE WHICH IS CREATED UNDER ANY LAW FOR THE TIME BEING IN FORCE OR BY VIRTUE OF A COURT'S DECREE OR BY A VOLUNTARY SETTLEMENT OR THE OBLIGATION MUST BE SUCH THAT THOUGH NOT MADE A SPECIFIC CHARGE ON THE PROPERTY IT CAN BE ENFORCED IN A COURT OF LAW. 46. IN CIT VS. RAJARAM JAISWAL (1992) 195 ITR-384 HON BLE ALLAHABAD HIGH COURT HELD AS UNDER :- DURING THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMEN T YEAR 1970-71 THE ASSESSEE RAISED A CLAIM BEFORE THE INCOME-TAX OFFIC ER THAT HE HAD BORROWED CERTAIN AMOUNTS FROM TWO PERSONS NAMELY S AND H WHICH AMOUNT HE INVESTED IN A FIRM IN WHICH HE WAS A PARTNER. THE ASSESSEE H AD ENTERED INTO AN AGREEMENT WITH THE AFORESAID TWO LENDERS SOME TIME IN THE YEA R 1969 WHERE UNDER HE HAD AGREED TO PAY THE SAID TWO PERSONS 7 PER CENT. AND 13 PER CENT. OUT OF THE SHARE INCOME RECEIVED BY HIM FROM THE SAID FIRM. HE ACCO RDINGLY CLAIMED THAT THE AMOUNT REPRESENTING 20 PER CENT. SHOULD NOT BE TREA TED AS HIS INCOME SINCE THAT INCOME WAS DIVERTED TO THE LENDERS BY AN OVERRIDING TITLE. THE ASSESSEE'S CLAIM WAS REJECTED BY THE INCOME-TAX OFFICER BUT ACCEPTED BY THE TRIBUNAL. ON A REFERENCE: _ HELD _ THAT THE AGREEMENTS BETWEEN THE ASSESSEE AND THE SAID LENDERS WERE PRACTICALLY IN THE NATURE OF SUB-PARTNERSHIP. IT WA S NOT A CASE WHERE THE ASSESSEE COULD AT ANY TIME PAY UP THE LOANS AND DISCHARGE/ TERMINATE THE AGREEMENTS. HENCE THE PAYMENTS IN QUESTION CONSTITUTED A CASE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE. 47. SIMILAR VIEW WAS HELD BY HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ARUMUGHAM PILLAI (S) (1969) 73 ITR-382 (M AD.) HELD AS UNDER :- THE ASSESSEE WHO WAS A PARTNER IN B FIRM WAS ALSO A PARTNER IN J FIRM WHICH ADVANCED MONIES TO B FIRM AS AND WHEN NEEDED. THE AMOUNT SO ADVANCED WAS TREATED IN THE BOOKS OF B FIRM AS THE CAPITAL OF THE ASSESSEE. UNDER A WRITTEN AGREEMENT BETWEEN THE ASSESSEE AND THE OTHER TWO PARTNERS OF J FIRM IT WAS AGREED THAT THE INCOME OF THE ASSESSEE FROM THE B FIRM AS ITS PARTNER WAS TO BE SHARED BY THE ASSESSEE AND THE OTHER PART NERS OF J FIRM. THOUGH FOR THE YEARS 1951-52 TO 1957-58 THE ASSESSEE WAS TAXE D ONLY ON ONE-THIRD OF THE SHARE INCOME RECEIVED FROM B FIRM FOR THE YEAR 195 8-59 THE OFFICER HELD THAT THE ENTIRE SHARE INCOME RECEIVED BY THE ASSESSEE WAS AS SESSABLE IN HIS HANDS. THE APPELLATE ASSISTANT COMMISSIONER AND THE TRIBUNAL HOWEVER HELD THAT ONLY ONE- THIRD WAS ASSESSABLE IN THE HANDS OF THE ASSESSEE. HELD THE AGREEMENT HAD THE EFFECT OF MAKING AN EFFECTI VE ALIENATION AT SOURCE OF THE PROFITS BY AN OVERRIDING TITLE CREATED BY IT AN D HENCE THE REAL INCOME OF THE ASSESSEE WAS ONLY ONE-THIRD OF HIS SHARE INCOME IN THE B FIRM. 48. THE ISSUE WAS DISCUSSED IN A MORE EXPLANATORY MANNER B Y HONBLE CALCUTTA HIGH COURT IN K.C. BOSE & CO. VS. CIT (1985) 156 ITR-701 (CALCUTTA) HELD AS UNDER :- THE ASSESSEE WHO WAS A PARTNER IN B FIRM WAS ALSO A PARTNER IN J FIRM WHICH ADVANCED MONIES TO B FIRM AS AND WHEN NEEDED. THE AMOUNT SO ADVANCED WAS TREATED IN THE BOOKS OF B FIRM AS THE CAPITAL OF THE ASSESSEE. UNDER A WRITTEN AGREEMENT BETWEEN THE ASSESSEE AND THE OTHER TWO PARTNERS OF J FIRM IT WAS AGREED THAT THE INCOME OF THE ASSESSEE FROM THE B FIRM AS ITS PARTNER WAS TO BE SHARED BY THE ASSESSEE AND THE OTHER PART NERS OF J FIRM. THOUGH FOR THE YEARS 1951-52 TO 1957-58 THE ASSESSEE WAS TAXE D ONLY ON ONE-THIRD OF THE SHARE INCOME RECEIVED FROM B FIRM FOR THE YEAR 195 8-59 THE OFFICER HELD THAT THE ENTIRE SHARE INCOME RECEIVED BY THE ASSESSEE WAS AS SESSABLE IN HIS HANDS. THE APPELLATE ASSISTANT COMMISSIONER AND THE TRIBUNAL HOWEVER HELD THAT ONLY ONE- THIRD WAS ASSESSABLE IN THE HANDS OF THE ASSESSEE. HELD _ THE AGREEMENT HAD THE EFFECT OF MAKING AN EFFECTI VE ALIENATION AT SOURCE OF THE PROFITS BY AN OVERRIDING TITLE CREATED BY IT AND HENCE THE REAL INCOME OF THE ASSESSEE WAS ONLY ONE-THIRD OF HIS SHARE INCOME IN THE B FIRM. 49. THE HONBLE ALLAHABAD HIGH COURT IN U.P.BHUMI SUD HAR NIGAM VS. CIT (2006) 286 ITR-197 (ALL) LAID DOWN THE PRINC IPLE TO DECIDE AS TO WHEN THERE WILL BE DIVERSION OF INCOME BY OVERRIDI NG TITLE OR WHEN IT WOULD BE APPLICATION OF INCOME AS UNDER :- THE PRINCIPLES RELATING TO DIVERSION OF INCOME BY OVERR IDING TITLE ARE (I) IF A THIRD PERSON BECOMES ENTITLED TO RECEIVE AN AMOUNT UNDER AN OBLIGATION OF AN ASSESSEE EVEN BEFORE HE COULD CLAIM TO RECEIVE IT AS HIS INCOME THERE WOULD BE A DIVERSION OF INCOME BY OVE RRIDING TITLE BUT WHEN AFTER RECEIPT OF THE INCOME BY THE ASSESSEE TH E SAME IS PASSED ON TO A THIRD PERSON IN DISCHARGE OF THE OBLIGAT ION OF THE ASSESSEE IT WILL BE A CASE OF APPLICATION OF INCOME BY THE ASSESSEE AND NOT OF DIVERSION OF INCOME BY OVERRIDING TITLE ; (II) IF INCOME DOES NOT RESULT AT ALL THERE CANNOT BE A TAX EVEN THOUGH IN BOOK-KEEPING AN ENTRY IS MADE ABOUT THE HYPOTHETICAL INCOME WHICH DOES NOT MATERIALISE ; (III) THE EXISTENCE OR ABSENCE OF ENTRIES I N BOOKS OF ACCOUNT CANNOT BE DECISIVE OR CONCLUSIVE IN THE MATTER ; (I V) THE CONCEPT OF REAL INCOME MUST BE APPLIED IN APPROPRIATE CA SES BUT WITH CIRCUMSPECTION AND MUST NOT BE CALLED IN AID TO DEFEAT TH E FUNDAMENTAL PRINCIPLE OF LAW OF INCOME-TAX AS DEVELOP ED. 50. WHEN WE APPLY ABOVE PRINCIPLES TO THE FACTS OF THE PRESENT CASE WE NOTICE THAT LGE & C TOTALLY WITHDREW ITSELF FROM CA RRYING OUT THE WORK AWARDED TO JOINT VENTURE BY NHAI ON THE GROUND OF COMMERCIAL EXPEDIENCY AS IT THOUGHT THAT IT IS INCURRING HEAVY L OSSES IN CARRYING OUT THE WORK ASSIGNED BY JOINT VENTURE TO IT. ACCORDING LY IT IS CONSIDERED BY IT TO INSULATE ITSELF AGAINST THE LOSSES. IN FACT THERE COULD NOT BE ANY TAX AVOIDANCE MOTIVE BECAUSE LGEC ALREADY H AD HEAVY LOSSES AND IT WOULD HAVE BEEN PROFITABLE FOR IT TO GET CERTAIN INCOME FOR ADJUSTING SUCH BROUGHT FORWARD LOSSES IN THE JOINT VENTU RE. WE NOTICE THAT LGE & C HAD LOSSES IN THE PREVIOUS ASSESSMENT YEARS AS R EFERRED TO BY AO IN THE ASSESSMENT ORDER OF THE J.V. FOR THE ASSE SSMENT YEAR 2004-05. 51. IF IT WOULD HAVE BEEN THE INTENTION TO AVOID TH E TAX THEN THERE WAS NO NECESSITY TO TRANSFER ENTIRE INCOME BY THE AGREEME NT DT.2-9-02 TO PEL AND SOME INCOME RESULTING TO JOINT VENTURE WOUL D HAVE BEEN AVAILABLE FOR ADJUSTMENT AGAINST SUCH LOSSES. WE NOTICE THAT EVEN THE AO SET OFF SUCH BROUGHT FORWARD LOSSES OF JOINT VENTURE I N THE ASSESSMENT YEAR 2004-05 AS UNDER :- TOTAL LOSS AS PER COMPUTATION OF TOTAL INCOME. R S.0 94 09 975/- ADD:- DISALLOWANCE/ADDITIONS DISCUSSED ABOVE. 1. 7% OF TOTAL RECEIPTS OF RS./1 14 82 97 211/- RS.8 03 80 805/- 2. EXPENSES CLAIMED BY LGE 7 C. RS.0 89 21 135/ - ------------------ RS.7 98 91 965/- LESS:- SET OFF OF BROUGHT FORWARD LOSSES AS CLAIMED . A.Y. 2002-03 RS.2 78 45 878/- A.Y. 2003-04 RS. 0 58 53 923/- RS.3 36 99 801/- ------------------- TOTAL INCOME .. RS. 4 61 92 164/- SAY .. RS. 4 61 92 160/- =========== 52. THUS THE ASSESSMENT OF JOINT VENTURE WAS DONE AT ONL Y RS.4.61 CRORES AS AGAINST POSSIBLE ASSESSMENT AT RS.8.03 CRORES BEING 7 % OF TOTAL RECEIPT OF 114.82 CRORES WHICH INCOME HAS BEEN OFF ERED BY PEL IN ITS ASSESSMENT. THUS AVOIDANCE OF TAX COULD NOT BE A M OTIVE FOR ENTERING INTO AGREEMENT ON 2-9-02 WITH PEL. ON THE OTHER HAND . THERE IS CONSIDERABLE FORCE IN THE ARGUMENT OF LD. AR T HAT LGE & C BEING KOREAN COULD NOT AFFORD TO CONTINUE TO BEAR LOSSE S AND THEREFORE DESIRED TO GET ITSELF OUT FROM THE PRESENT WORK AND F OR GETTING OUT IT AGREED TO RECEIVE A SUM OF RS.2.6 CRORES FROM PEL. ACC ORDINGLY WE ARE INCLINED TO BELIEVE THAT QUITTING FROM THE EXECUT ION OF THE WORK BY LGE & C WAS A COMMERCIAL DECISION AND WAS NOT MOTIVATED BY ANY TAX AVOIDANCE SCHEME. 53. WE ARE ALSO CONVINCED WITH THE ARGUMENT OF LD. A. R. THAT TAXING JV AS A.O.P. ALSO WOULD AMOUNT TO DOUBLE TAXATION. TH E LD. AR ARGUED THAT IF INCOME FROM THE WORK CARRIED OUT BY PEL AND R ESULTING FROM CONTRACT RECEIPTS OF RS.114.82 CRORES IS ALSO TAXED IN THE H ANDS OF JV AS AN A.O.P. THEN IT WILL AMOUNT TO DOUBLE TAXATION ONCE IN THE HANDS OF THE PEL WHOSE RETURN HAS BEEN ACCEPTED BY THE DEPAR TMENT AND THE OTHER IN THE HANDS OF JOINT VENTURE WHICH IS NOW SAID TO BE ASSESSED BY AO. THIS WILL AMOUNT TO DOUBLE TAXATION IN RESPECT OF THE SAME INCOME. THIS COULD NOT BE THE INTENTION OF THE LEGISLATURE. HON BLE CALCUTTA HIGH COURT IN THE CASE OF GOURANGA LAL CHATTERJEE VS. I.T.O .(2001) 247 ITR- 737 (CAL.) HAS HELD THAT IF AN INCOME IS ASSESSED IN THE H ANDS OF THE MEMBER THE SAME NEED NOT BE ASSESSED AGAIN IN THE CASE OF JOINT VENTURE. TAXING J.V. AT 7% OF THE TOTAL CONTRACT RECE IPTS AFTER 2-9-02 WOULD AMOUNT TO DOUBLE TAXATION OF THE SAME INCOME PA RTICULARLY WHEN IN THE ASSESSMENT ORDER OF JV NO DIRECTION HAS BEEN GIVE N BY THE LD. AO ABOUT SUBSTANTIVE OR PROTECTIVE ASSESSMENT AND ABOUT A DJUSTMENT OF ANY TAX PAID BY PEL ON THAT 7% AGAINST TAX REQUIR ED TO BE PAID BY JOINT VENTURE WHEN IT HAS BEEN ASSESSED ON THAT 7% OF R S.114.82 CRORES. IN ANY CASE ISSUE OF DOUBLE TAXATION IS NOT A DECI DING FACTOR BUT IT IS TO FIND OUT RIGHT PERSON IN WHOSE HANDS 7% RE CEIPTS SHOULD BE TAXED WHICH IS AT THE CORE OF THE ENTIRE DISPUTE. 54. WE NOTICE THAT AGREEMENT DT.2-9-02 WAS EXECUTED M UCH BEFORE ANY INCOME COULD ACCRUE TO JOINT VENTURE. IN FACT INCOME WOULD ACCRUE ONLY WHEN WORK AS PER CONTRACT IS CARRIED OUT BILLS AR E SUBMITTED ON THE BASIS OF WHICH MONEY IS REALIZED FROM NHAI. THEREFOR E IT COULD NOT BE SAID THAT AGREEMENT WAS IN ANY WAY A COLOURABLE D EVICE. IN FACT THERE IS NO SUCH CHARGE LEVELED BY AO. THEREFORE WE RE JECT THIS ARGUMENT OF THE LD. D.R. 55. WE ALSO FIND THAT THERE IS NOTHING IN THE AGREEME NT DT.2-9-02 WHOSE RELEVANT CLAUSES ARE QUOTED EARLIER WHICH COULD IN DICATE THAT THERE WAS ANY OBLIGATION ON LGE & C TO GIVE ANY PART OF ITS INCOME TO PEL THEREBY ENABLING THE A.O. TO INFER THAT IT WAS O NLY AN APPLICATION OF INCOME BY LGE & C OR BY JOINT VENTURE. IN FACT INCOME WOULD ARISE OR ACCRUE ONLY WHEN WORK AS PER CONTRACT WITH NHAI IS CARRIED OUT. IF LGE & C HAS WITHDRAWN ITSELF FROM CARRYING OUT ANY WORK TH EN NO INCOME CAN REALLY ACCRUE TO IT. AS PER THIS AGREEMENT PEL IS CA RRYING OUT THE WORK EVEN THOUGH BILLS WOULD BE FINALLY SUBMITTED BY JOINT VENTURE AND MONEY WOULD BE REALIZED FROM NHAI BY JOINT VENTURE F ROM WHERE THE RECEIPT WOULD BE TRANSFERRED TO PEL BUT THAT ITSELF IS NOT SUFFICIENT TO HOLD THAT INCOME WOULD ALSO ACCRUE TO LGE & C. OR TO J. V. THE CARRYING OUT OF THE ACTUAL WORK AS PER THE CONTRACT WITH NHAI IS NECESSARY TO HOLD THAT ANY INCOME WOULD ACCRUE TO LGE & C. OR TO J. V. THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT IN SPITE OF AGREEMEN T DT.2-9-02 LGE & C HAS ACTIVELY ENGAGED ITSELF IN EXECUTING THE CONTRACT AND IS CARRYING OUT THE WORK BUT IS NOT SHOWING ANY INCOME IN ITS HANDS AND THUS WHATEVER IS GIVEN TO PEL WHOLE OR PART OF IT IS A N APPLICATION OF INCOME. THEREFORE ONLY CONCLUSION IS THAT THE SOURCE OF INCOME ORIGINALLY AVAILABLE TO LGE & C BY WAY OF EXECUTING 75% OF WORK IS TOTALLY SHIFTED AND TRANSFERRED TO PEL BY LGE & C FOR A CONSIDERATION AND THEREFORE THERE IS NO QUESTION OF HOLDING THAT W HAT ACCRUED TO PEL WAS AN APPLICATION OF INCOME BY LGE & C. 56. THEREFORE WE CONCLUDE THAT AGREEMENT DT.2-9-02 ENABLED LGE & C TO TRANSFER THE SOURCE OF INCOME TO PEL IN ITS FAVOUR FOR A CONSIDERATION AND THERE WAS A DIVERSION OF SOURCE AND LGE & C WAS UNDER OBLIGATION TO TRANSFER RECEIPTS FROM NHAI TO PEL. THE INCOME RESULTING FROM CARRYING OUT THE WORK AFTER 2-9-02 NEV ER ACCRUED TO LGE & C. OR TO J.V. AS ITS INCOME AND THEREFORE IT COU LD NOT BE TAXED ON THAT AMOUNT. 57. ALTERNATIVE ARGUMENT TAKEN BY THE AO AND BY LD. CIT(A) AND SUPPORTED BY LD. DR IS THAT IN ANY CASE PROVISIONS OF SECT ION 40A(2)(B) WOULD BE APPLICABLE AS LGE & C AND PEL ARE RELATED PA RTIES AND IF WORK AWARDED TO KNR AT LESS THAN 7% IS CONSIDERED AS MARKET V ALUE OF WORK THEN THE MARKET VALUE OF THE WORK TO BE GIVEN TO PE L WOULD BE LESS THAN 7% OF THE WHOLE AND THEREFORE IF AT ALL PEL I S TO BE ASSESSED IT WOULD BE ASSESSED IN RESPECT OF 93% OF THE RECEIPT AND BAL ANCE 7% WOULD BE ASSESSED IN THE JOINT VENTURE WHICH HAS BEEN ACCOR DINGLY ASSESSED BY THE A.O. 58. WE HAVE HEARD THE PARTIES. WE ARE OF THE CONSIDERE D VIEW THAT ARGUMENT OF THE LD. D.R. ON THIS ISSUE CANNOT BE UPHEL D. SEC. 40A (2)(B) APPLIES WHERE ASSESSEE I.E. AOP IS IN EXISTENCE IT CARRIES ON THE BUSINESS AND IT INCURS AN EXPENDITURE IN RESPECT OF WHI CH PAYMENT HAS BEEN MADE TO THE RELATED PARTY. EVEN THOUGH MEMBER OF THE ASSOCIATION IS HELD AS A RELATED PARTY BUT FIRST TWO COND ITIONS ARE NOT SATISFIED FOR INVOKING SEC. 40A(2)(B) FIRSTLY AOP CANNOT BE SAID TO BE IN EXISTENCE AS HELD BY US. AFTER 2-9-02 LGE & C HAS LOST INTEREST TO CARRY OUT THE CONTRACT AND EARNED INCOME THERE-FROM. T HE ESSENTIAL CONDITION FOR EXISTENCE OF AOP IS THAT THE ALL THE MEM BERS OF AOP SHOULD HAVE EXPLICIT INTEREST IN EARNING INCOME FROM T HE BUSINESS CARRIED OUT BY AOP. FURTHER FOR HOLDING THAT THE AOP HAS INCURRED AN EXPENDITURE THERE SHOULD BE A SOURCE WITH THE AOP FROM WHICH IT HAS EARNED INCOME AND IN RESPECT OF WHICH IT IS INCURRING EX PENDITURE. BUT WHERE SOURCE AS A WHOLE IS TRANSFERRED TO PEL THE QUESTIO N THAT AOP IS CARRYING ON THE BUSINESS AND FOR THIS IT IS INCURRING EX PENDITURE DOES NOT ARISE. IN FACT A.O.P. IS NOT IN EXISTENCE AND IT CAN NOT BE SAID THAT IT IS CARRYING ON ANY BUSINESS. EXISTENCE OF JOINT VENTURE IS ONLY TO THE EXTENT OF SUBMITTING BILLS AND RECEIVING PAYMENTS FROM NHAI AND PASS ON THE SAME TO PEL WITHOUT LGE & C RETAINING ANYTHIN G FOR ITSELF. WE HAVE ALREADY HELD THAT AN A.O.P. CAN BE A JOINT VENT URE BUT ALL JOINT VENTURES CAN NOT BE A.O.P UNLESS ESSENTIAL THREE CONDITIO NS FOR FORMING A.O.P. ARE SATISFIED. EVEN IF ONE CONDITION IS MISSING A.O.P. CANNOT BE SAID TO BE IN EXISTENCE AS DISCUSSED BY US (SUPRA). THEREFORE WE ARE OF THE CONSIDERED VIEW THAT PROVISIO NS OF SEC. 40A (2) (B) CANNOT BE INVOKED ON THE FACTS OF THE PRESENT CA SE. THIS ARGUMENT OF THE DEPARTMENT IS ALSO REJECTED. 59. AS A RESULT GROUND NO.1 IS ALLOWED IN FAVOUR OF TH E ASSESSEE. AS A RESULT APPEAL OF THE ASSESSEE FOR A.Y. 2004-05 IS PARTL Y ALLOWED. ITA.NO.3180/A/2007 (A.Y. 2005-06) . 60. IN THE ASSESSMENT YEAR 2005-06 THE ASSESSEE HAS RAISED TH E FOLLOWING GROUNDS:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE A.O. ERRED IN ASSESSING RS.1 73 99 098/- AS INCOME OF THE APPELLANT BEING 7% OF THE TOTAL RECEIPT FROM NATIONA L HIGHWAY AUTHORITY OF INDIA. (NHAI). 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE A.O. ERRED IN DISALLOWING THE EXPENSES INCURRED BY THE JOINT VENTURE OF RS.1 54 70 622. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE A.O. ERRED IN INITIATING PENALTY PROCEEDINGS U/S. 271( 1)(C ) OF THE ACT. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW T HE A.O. ERRED IN INITIATING PENALTY PROCEEDINGS U/S. 271 (1) OF THE ACT. 5. WITHOUT PREJUDICE IN THE FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW HAVING ASSESSED THE APPELLANT ON POSITIVE INCOME THE A.O. OUGHT TO HAVE ADMITTED APPELLANTS ALTERNATIVE PLEA FOR GRANT OF DEDUCTION U/S. 80IA(4). THE APPELLANT SUBMITS THAT ALL THE CONDITIONS GERMANE TO GR ANT OF DEDUCTION U/S. 80IA(4) ARE FULFILLED. 6. STILL WITHOUT PREJUDICE IN THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW NO TAX OR INTEREST CAN BE RECOVERE D FROM THE AOP UNLESS SUITABLE CREDIT FOR TAX PAID BY THE MEMBER (IN RESPECT OF INCOME ASSESSED AS AOP INCOME) HAS BEEN GRANTED. 61. GROUND NO.1 BEING TAXING 7% OF THE RECEIPT OF AM OUNT RECEIVED FROM NHAI IN THE HANDS OF JOINT VENTURE. FOLLOWING OU R ORDER FOR THE ASSESSMENT YEAR 2004-05 WE DECIDE THIS ISSUE IN FAVOUR OF T HE ASSESSEE. THIS GROUND OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 62. GROUND NO.2 RELATES TO DISALLOWING EXPENDITURE AL LEGEDLY INCURRED BY JOINT VENTURE. FOLLOWING OUR ORDER FOR T HE ASSESSMENT YEAR 2004-05 WE HOLD THAT A.O.P. BEING NOT IN EXISTENCE E XPENDITURE INCURRED WOULD BE BORNE INDIVIDUALLY BY THE TWO MEMB ERS. IN ANY CASE NO EXPENDITURE CAN BE ALLOWED IN A.O.P. THIS GROUND IS DECIDED AGAINST THE ASSESSEE. 63. GROUND NO.3 RELATES TO CHARGING OF INTEREST U/S. 23 4B OF THE ACT. IT IS CONSEQUENTIAL IN NATURE AND WILL DEPEND UPON TH E ASSESSED INCOME OF THE ASSESSEE. THIS GROUND IS ACCORDINGLY REJECTED. 64. GROUND NO.4 RELATES TO INITIATION OF PENALTY PRO CEEDINGS U/S. 271(1) (C) IT IS IN FACT PREMATURE AND ISSUE CAN BE DECIDE D ONLY IN THE PROCEEDINGS RELATING TO LEVY PENALTY. THIS GROUND IS ACCO RDINGLY REJECTED. 65. ISSUE RELATING TO 80IA (4) IS DECIDED AGAINST THE ASSE SSEE AS HELD BY US IN ITA NO.3179A/07 FOR THE A.Y. 2004-05. FOLLO WING THE SAME DECISION ISSUE IS ALSO DECIDED AGAINST THE ASSESSEE THIS YEAR ALSO. 66. GROUND NO.6 IS DECIDED IN FAVOUR OF THE ASSESSEE FOL LOWING OUR ORDER FOR A.Y. 2004-05. THE EXPENDITURE OF TAX AND INTEREST LIVABLE UP TO THE WORK DONE BY THE JOINT VENTURE AS AOP TILL 2- 9-02 COULD BE RECOVERED BY THE REVENUE. BUT NO TAX OR INTEREST CAN B E RECOVERED IN RESPECT OF THE WORK DONE AFTER 2-9-02 AS INCOME WOULD N OT ACCRUE OR ARISE TO A.O.P. AFTER 2-9-02 WHICH IS HELD TO BE NOT IN EXISTENCE THEREAFTER. THE ISSUE IS ACCORDINGLY DECIDED. 67. AS A RESULT APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED. 68. AS A RESULT ALL THE THREE APPEALS ARE PARTLY ALLOW ED. ORDER PRONOUNCED IN OPEN COURT ON 16 /04/2010. SD/- SD/- (T. K. SHARMA) (D.C.AGRAWAL) JUDICIAL MEMBER. ACCOUNTANT MEM BER. AHMEDABAD. DATED:16/ 04 /2010. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNED. 5. THE DR. ITAT AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT AHMEDABAD.