The ITO, Ward-1(3), Visakhapatnam v. M/s UAN Raju Constructions, Visakhapatnam

ITA 77/VIZ/2010 | 2006-2007
Pronouncement Date: 13-05-2010 | Result: Dismissed

Appeal Details

RSA Number 7725314 RSA 2010
Assessee PAN CEACT2002H
Bench Visakhapatnam
Appeal Number ITA 77/VIZ/2010
Duration Of Justice 3 month(s) 4 day(s)
Appellant The ITO, Ward-1(3), Visakhapatnam
Respondent M/s UAN Raju Constructions, Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 13-05-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 13-05-2010
Assessment Year 2006-2007
Appeal Filed On 08-02-2010
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH: VISAKHAPATNAM BEFORE: SRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SRI B.R. BASKARAN ACCOUNTANT MEMBER I.T.A. NOS. 344/VIZAG/2009 & ITA 77/VIZ/2010 ASSESSMENT YEAR : 2005-06 & 2006-07 ITO WARD-1(3) VISAKHAPATNAM VS. UAN RAJU CONSTRUCTIONS VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AAAAUO 675 L APPELLANT BY : SHRI G.S.S. GOPINATH DR RESPONDENT BY : SHRIT.V.B.S. KISHORE BABU ADVOCATE O R D E R PER B.R. BASKARAN ACCOUNTANT MEMBER : THESE TWO APPEALS FILED BY THE REVENUE ARE DIRECTE D AGAINST THE ORDERS PASSED BY LD CIT (A) VISAKHAPATNAM AND THEY RELATE TO THE ASSESSMENT YEARS 2005-06 AND 2006-07. SINCE BOTH THE APPEALS RELAT E TO THE ASSESSEE AND SINCE ONE OF THE ISSUES AGITATED IN THESE TWO APPEALS IS IDENTICAL IN NATURE WE ARE DISPOSING THESE TWO APPEALS BY THIS COMMON ORDER F OR THE SAKE OF CONVENIENCE. 2. THE COMMON ISSUE IN BOTH THE APPEALS RELATES TO THE INCOME ESTIMATED BY THE AO TOWARDS SUB CONTRACT COMMISSION. IN A.Y 200 5-06 THE AO ALSO MADE ADDITION MADE U/S 40(A)(IA) OF THE ACT. SINCE THE LD CIT (A) DELETED BOTH THE ADDITIONS THE REVENUE HAS FILED THESE APPEALS ASSA ILING THE DECISION OF LD CIT(A) ON BOTH THE ISSUES. 3. THE FACTS OF THE CASE ARE DISCUSSED IN BRIEF. T HE ASSESSEE HEREIN IS A JOINT VENTURE FORMED BY A COMPANY AND A PROPRIETA RY CONCERN. M/S UAN RAJU CONSTRUCTIONS LTD. (HEREIN AFTER UANRCL) IS THE CO MPANY REGISTERED UNDER THE COMPANIES ACT AND M/S VIJAY NIRMAN COMPANY (HEREIN AFTER VNC) IS THE 2 PROPRIETARY CONCERN. THE NAME OF THE PROPRIETOR WAS NOT AVAILABLE ON RECORD. M/S UANRCL IS IN THE BUSINESS OF DESIGN ENGINEERIN G AND CONSTRUCTION WITH SPECIALIZATION IN HIGH WAYS AND BRIDGES. SIMILARLY M/S VNC IS IN THE BUSINESS OF ENGINEERING AND CONTRACTING WITH SPECIALIZATION IN ROAD AND HIGH WAY CONSTRUCTION. THE JOINT VENTURE WAS FORMED IN ORDE R TO COMBINE THEIR RESPECTIVE INDIVIDUAL RESOURCES OF EXPERIENCE KNOW HOW LABOU R FINANCE PLANT AND EQUIPMENT SINCE IT WOULD ENABLE TO PARTICIPATE IN THE TENDER PROCESS WHICH WOULD ULTIMATELY HELP IN GETTING MAJOR CONTRACT WOR KS. THE NAME OF THE JOINT VENTURE HAS BEEN COINED AS U.A.N. RAJU CONSTRUCTIO N VIJAY NIRMAN (JV). THE AGREEMENT WAS ENTERED ON 20-10-2003 WITH THE TITLE JOINT VENTURE PARTNERS AGREEMENT. THE MEMBERS OF THE JOINT VENTURE WERE CALLED AS JOINT VENTURERS. THE JOINT VENTURE OBTAINED FOLLOWING CONTRACT WORK FROM M/S KONKAN RAILWAY CORPORATION AND THE SAME IS ALSO MENTIONED IN THE A GREEMENT UNDER THE DEFINITIONS PART UNDER THE HEADING CONTRACT. CONSTRUCTION OF ROAD OVER BRIDGES IN LIEU OF EXISTING LEVEL CROSSINGS AT (A) GATE NO.:30/B AT KM. 323/35 37 BETWEEN STATI ONS SIMULTALA AND JASIDIH (B) GATE NO. 38 NEAR PAKUR STATION ON EA STERN RAILWAY IN JHARKHAND STATE (PACKAGE VI). HOWEVER THE SAID CONTRACT WAS NOT EXECUTED JOINTLY BY BOTH THE PARTIES. INSTEAD THE TOTAL CONTRACT WAS DIVIDED BETWEEN THE TWO PARTIES IN AN AGREED RATIO. IN THE ACCOUNTS OF THE JOINT VENTURE THE GROSS RECEIPTS OF THE RELEVANT ACCOUNTING YEAR WERE CREDITED TO THE PROFIT & LOSS A/C. THE VALUE OF WORKS ALLOTTED TO BOTH THE MEMBERS WHICH WAS EQUAL TO TH E GROSS RECEIPTS WAS DEBITED TO THE PROFIT & LOSS A/C. THUS NO INCOME WAS SHOW N IN THE HANDS OF THE JOINT VENTURE. THE ASSESSEE FILED RETURNS OF INCOME FOR BOTH THE YEARS IN THE STATUS OF ASSOCIATION OF PERSONS DECLARING NIL INCOME. H OWEVER THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE-AOP SHOULD BE TRE ATED AS THE MAIN CONTRACTOR AND THE MEMBERS TO WHOM THE WORK WAS ALLOTTED SHOUL D BE TREATED AS SUB CONTRACTORS. ACCORDINGLY THE AO OPINED THAT THE AS SESSEE-AOP SHOULD HAVE COLLECTED SUB CONTRACT COMMISSION FROM THE SUB-CO NTRACTORS I.E. FROM BOTH THE 3 MEMBERS OF THE JOINT VENTURE. THE RELEVANT OBSERVAT IONS RECORDED BY THE AO IN THE ASSESSMENT ORDER RELATING TO THE A.Y 2005-06 A RE EXTRACTED BELOW: AS SEEN FROM THE RETURN OF INCOME FILED BY THE ASS ESSEE THOUGH THE ENTIRE RECEIPTS WERE CREDITED TO ITS PROFIT AND LOS S ACCOUNT NO INCOME WAS OFFERED AT LEASE BY WAY OF COMMISSION ON ACCOUNT OF SUB-CONTRACTS GIVEN TO ITS MEMBERS. THE PECULIAR CI RCUMSTANCES PREVAILING IN THIS CASE GIVE SCOPE TO HOLD THAT THE TRANSACTION INVOLVED IN THIS CASE IS NOTHING BUT A SUB-CONTRACT . IN SUCH CIRCUMSTANCES THE ASSESSEE-AOP OUGHT TO HAVE DECLAR ED A REASONABLE PROFIT BEING A SEPARATE ENTITY WHICH I S ABSENT HERE. IT IS A GENERAL PRACTICE IN THE LINE OF CONTRACT BUSINESS THAT WHEN THE MAIN CONTRACTOR ENTERS SUB-CONTRACT WITH OTHERS TH E MAIN CONTRACTOR GETS COMMISSION AT A PRESCRIBED RATE ON SUB-CONTRAC T WHICH IS TO BE DISCLOSED AS INCOME OF THE FORMER IN THE SHAPE OF S UB-CONTRACT COMMISSION. THE SAME LOGIC WILL ALSO APPLY TO THE T RANSACTION INVOLVED IN THE ASSESSEE CASE IRRESPECTIVE OF THE F ACT THAT THE CONTRACTS WERE GIVEN TO ITS OWN MEMBERS. EVIDENTLY AND APPARENTLY THE ASSESSEE AOP HAS NOT DISCLOSED SUCH SUB-CONTRAC T COMMISSION RATHER IT DISTRIBUTED THE ENTIRE CONTRACT RECEIPTS . DURING THE ASSESSMENT PROCEEDINGS RELATING TO THE A .Y 2005-06 THE AO ALSO REFERRED THE MATTER TO THE ADDL. CIT RANGE-1 VISA KHAPATNAM SEEKING HIS DIRECTIONS U/S 144A OF THE ACT. THE ADDL. CIT AGRE ED WITH THE VIEW OF THE AO THAT THERE EXISTED MAIN CONTRACTOR SUB CONTRACTOR RELATIONSHIP BETWEEN THE JOINT VENTURE-AOP AND ITS MEMBERS. HE FURTHER OBSERVED T HAT THE SUB-CONTRACT COMMISSION IS NORMALLY 2% OF THE CONTRACT RECEIPTS. THE ADDL. CIT NOTICED THAT THE PARTNERS OF THE JOINT VENTURE HAD SHOWN A PROFI T IN THE RANGE OF 13.3% AND 18.71% IN THEIR RESPECTIVE HANDS. BEFORE THE ADDL. CIT THE ASSESSEE EXPRESSED ITS CONSENT TO ADOPT A RATE OF 0.5% TOWARDS SUB CON TRACT COMMISSION. HENCE ON A TOTALITY OF FACTS THE ADDL. CIT DIRECTED THE AO TO ASSESS INCOME IN THE HANDS OF THE AOP AT 1% OF THE CONTRACT RECEIPTS. ACCORDINGL Y THE AO COMPUTED THE INCOME OF THE AOP BY TREATING 1% OF THE GROSS RECEI PTS AS THE INCOME OF THE ASSESSEE-AOP BY WAY OF SUB CONTRACT COMMISSION IN B OTH THE YEARS UNDER CONSIDERATION. THE ASSESSEE-AOP HAD DEDUCTED TDS @ 1% U/S 194C(2) OF THE ACT ON MAJOR PORTION OF THE VALUE OF CONTRACT ALLOT TED TO ITS MEMBERS. HOWEVER IN THE A.Y. 2005-06 TDS WAS NOT DEDUCTED ON A CONT RACT AMOUNT EQUIVALENT TO 4 RS.31 54 425/-. HENCE THE AO DISALLOWED THE SAID A MOUNT BY INVOKING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT IN THE ASSE SSMENT YEAR 2005-06. 4. IN THE APPEAL PREFERRED BY THE ASSESSEE THE LD CIT (A) DELETED THE INCOME ESTIMATED TOWARDS SUB CONTRACT COMMISSION W ITH FOLLOWING OBSERVATIONS: THE APPELLANT JOINT VENTURE IS AN ASSESSABLE ENTIT Y AS FOUND BY THE ASSESSING OFFICER. HOWEVER THIS ASSESSABLE ENTITY HAS NOT EARNED ANY INCOME SINCE ENTIRE WORK OBTAINED BY IT HAS ACT UALLY BEEN EXECUTED BY THE TWO CONSTITUENT MEMBERS AND THEY HA VE EARNED THE INCOME. THE QUESTION MAY ARISE AS TO THE USEFU LNESS OR EXISTENCE OF A ASSESSABLE ENTITY IF IT DOES NOT EAR N INCOME AND MERELY BECOMES A CONDUIT FOR EARNING OF INCOME BY O THERS. THE FACT IS THAT THE PURPOSE OF THIS APPELLANT JOINT VE NTURE COMING INTO EXISTENCE IS ONLY TO WIN CONTRACTS AND NOT MAKE ANY PROFIT IN THIS STATUS. PROFIT MOTIVE WAS ENSHRINED IN THE ACTIVIT IES OF THE CONSTITUENT MEMBERS. THE APPELLANT JOINT VENTURE WA S ACTUALLY THE DE JURE CONTRACTOR AND THE CONSTITUENT MEMBERS WERE THE DE FACTO CONTRACTORS WHO ACTUALLY EXECUTED THE WORKS AND UND ERTOOK THE RESPONSIBILITY OF TIMELY EXECUTION OF THE WORKS. TH E APPELLANT JOINT VENTURE ENTRUSTED THE CONTRACTED JOB TO THE CONSTIT UENT MEMBERS IN ITS ENTITY FOR EXECUTION AND THEREFORE THE SAME CANNOT BE TERMED AS A SUB-CONTRACT. IN FACT THE RELATIONSHIP BETWEEN THE APPELLANT JOINT VENTURE AND THE CONSTITUENT MEMBERS CANNOT BE A CONTRACTOR/SUB-CONTRACTOR RELATIONSHIP OR PRINCIPAL TO PRINCIPAL RELATIONSHIP BUT HAS TO BE A RELATIONSHIP WHICH CO ULD BE TERMED AS PRINCIPAL TO AGENT RELATIONSHIP. THIS BEING THE F ACTUAL POSITION THE INCOME HAS TO BE ASSESSED IN THE HANDS OF THE P ERSON WHO HAS EARNED IT I.E. THE DE FACTO CONTRACTOR. IN THE INST ANT CASE SINCE BOTH THE CONSTITUENT MEMBERS WERE ASSESSED TO TAX O N THE ENTIRE CONTRACTUAL RECEIPTS THE QUESTION OF FURTHER ASSES SING THE SAME IN THE HANDS OF THE APPELLANT IS NOT CORRECT AS IT AMO UNTS TO DOUBLE TAXATION IN THE HANDS OF THE APPELLANT JOINT VENTUR E AS WELL AS THE CONSTITUENT MEMBERS. COMING TO THE CASE LAWS IT IS NOTED THAT THE HONB LE CALCUTTA HIGH COURT IN THE CASE REPORTED IN 247 ITR 737 (SUPRA) HELD THAT WHEN TWO FIRMS JOIN TOGETHER FOR A JOINT VENTURE A SING LE ASSESSMENT AS AN AOP OR BOI IS NOT POSSIBLE ESPECIALLY WHERE THE INDIVIDUAL PARTNERS HAD OFFERED THEIR SHARE INCOME OF SUCH JOI NT VENTURE IN THEIR INDIVIDUAL HANDS AND PAID TAX THEREON. IT OBS ERVED THAT A JOINT VENTURE IS NOT UNUSUAL FORM OF BUSINESS OR A DISTINCT IDENTITY SO AS TO ASSESSABLE AS AOP/BOI IN EVERY CASE OF JOI NT VENTURE. IN THE INSTANT CASE THE RATIO OF THE ABOVE DECISION C LEARLY APPLY AS 5 THE CONSTITUENT MEMBERS HAD OFFERED THE INCOME ON T HE ENTIRE CONTRACTUAL RECEIPTS IN THEIR INDIVIDUAL HANDS. NO CONTRACTUAL RECEIPTS HAVE GONE UNTAXED. THE HONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. NAYAN ENGINE ERING WORKS REPORTED IN 248 ITR 596 OBSERVED THAT IT WAS NOT N ECESSARY TO DISTURB THE ASSESSMENTS IN THE HANDS OF THE MEMBERS . THIS WAS A CASE WHERE THE DEPARTMENT ATTEMPTED TO TAX THE AOP DISREGARDING THE FACT THAT SHARE OF PROFITS HAD ALREADY BEEN OFF ERED TO TAX BY THE MEMBERS AND THE SAME HAVE ALREADY BEEN ASSESSED LONG TIME AGO. 5. THE LD CIT(A) ALSO DELETED THE ADDITION MADE UND ER SEC.40(A)(IA) OF THE ACT IN THE A.Y. 2005-06 WITH THE FOLLOWING OBSERVAT IONS. COMING TO THE SECOND GROUND OF APPEAL IT MAY BE N OTED THAT ALREADY A FINDING HAS BEEN GIVEN THAT THE RELATIONS HIP BETWEEN THE APPELLANT JOINT VENTURE AND THE CONSTITUENT MEMBERS WERE NOT THAT OF CONTRACTOR-SUB CONTRACTOR BUT WAS OF PRINCIPAL A GENT. IN THE INSTANT CASE THE APPELLANT AOP WHICH IS A JOINT VE NTURE BETWEEN A PRIVATE LIMITED COMPANY AND AN INDIVIDUAL IS ONLY A FACILITATING ENTITY FOR THE PROCUREMENT OF THE WORK AND THE REAL EXECUTION OF THE WORK WAS UNDERTAKEN BY THE MEMBERS OF THE APPEL LANT AOP. THE FINANCIAL STATEMENT OF THE APPELLANT AOP CLEARL Y AND CATEGORICALLY SHOW THE TRANSFER OF THE ENTIRE TURNO VER AND EXPENSES AND ALSO THE PROFIT THEREON. THE HONBLE PUNJAB & H ARYANA HIGH COURT IN THE CASE OF M/S. ESSKAY CONSTRUCTION COMPA NY REPORTED IN 267 ITR 618 OBSERVED THAT THE PROVISIONS OF SEC. 1 94C(2) WERE NOT APPLICABLE WHERE THE ENTIRE CONTRACT WAS HANDED OVER TO THE MEMBERS OF THE AOP. IT WAS HELD IN THE SAID CASE TH AT ONCE A FINDING HAS BEEN RECORDED THAT THERE WAS NO CONTRA CT BETWEEN THE ASSESSEE AND ITS SISTER CONCERNS THERE SHALL BE NO APPLICABILITY OF SEC.194C(2). FURTHER THE ASSESSEE DID NOT CHARGE A NY COMMISSION FROM ITS ALLEGED SUB-CONTRACTORS AND WHATEVER TAX W AS PAYABLE HAS SINCE BEEN PAID BY THE MAIN CONCERN. THE MERE FACT THAT DEDUCTION OF 1% TDS MADE BY THE APPELLANT JOINT VEN TURE FROM THE PAYMENTS RELEASED TO THE CONSTITUENT MEMBERS DO NO T ITSELF CREATE A CONTRACTOR-SUB-CONTRACTOR RELATIONSHIP WHICH WAS POSSIBLY MADE AS A MEASURE OF ABUNDANT PRECAUTION. SINCE THE REL ATIONSHIP BETWEEN THE APPELLANT JOINT VENTURE AND THE CONSTIT UENT MEMBERS IS NOT THAT OF A CONTRACTOR AND SUB-CONTRACTOR IT IS CONCLUDED THAT THE APPELLANT JOINT VENTURE WAS NOT REQUIRED TO MAK E THE TDS U/S 194C(2) OF THE ACT FOR THE PAYMENTS RELEASED BY THE APPELLANT JOINT VENTURE TO THE CONSTITUENT MEMBERS. HENCE THE PROV ISIONS OF SEC.40(A)(IA) WOULD NOT BE APPLICABLE IN THE INSTAN T CASE. 6 6. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE RECORD. WE HAVE ALSO GONE THROUGH THE JOINT VENTURE PARTNERS AGREE MENT ENTERED BY THE PARTIES ON 20-10-2003 AND ALSO THE CODICIL ENTERED BETWEEN THEM. THE MAIN DISPUTE IS WITH REGARD TO THE ASSESSABILITY OF INCOME IF ANY IN THE HANDS OF THE ASSESSEE- AOP. THE CASE OF THE AO IS THAT THE JOINT VENTURE AND ITS MEMBERS SHOULD BE TREATED AS SEPARATE PERSONS AND HENCE THE CONTRACT ALLOCATED TO THE MEMBERS SHOULD BE TREATED AS SUB-CONTRACTING. HOWEVER T HE CASE OF THE ASSESSEE IS THAT THE JOINT VENTURE HAS COME INTO EXISTENCE ONLY TO PROCURE AND WIN THE CONTRACTS AND SINCE THE CONTRACTS WERE ALLOCATED BE TWEEN THE MEMBERS AND FURTHER THEY WERE EXECUTED SEPARATELY BY EACH OF TH E MEMBERS NO INCOME CAN BE SAID TO HAVE ARISEN IN THE HANDS OF THE ASSESSEE -AOP. 7. IN O UR COUNTRY THE IMPLEMENTATION OF INFRASTRUCTURE PR OJECTS IS TAKING PLACE IN A MASSIVE SCALE. IN THIS CONNECTION GLOBAL TEN DERS ARE INVITED. HENCE TWO OR MORE BUSINESS ENTERPRISES ARE JOINING HANDS BY FORM ING A CONSORTIUM OF JOINT VENTURE IN ORDER TO GET QUALIFIED FOR PARTICIPATING IN TENDER PROCESS. THEY REGULATE THEMSELVES BY ENTERING INTO AN AGREEMENT THE METHODOLOGY TO BE ADOPTED FOR EXECUTING THE CONTRACT OBTAINED. BEFO RE GOING INTO THE MAIN ISSUES WE FEEL THAT IT IS IMPERATIVE TO DISCUSS ABOUT THE STATUS AND LEGAL POSITION OF JOINT VENTURE VIS-A-VIS INCOME TAX ACT. THE JOIN T VENTURES ARE NOT BE GOVERNED BY THE PROVISIONS OF THE INDIAN PARTNERSHIP ACT 1 932. IT IS ALSO A KNOWN FACT THAT THERE IS NO STATUTE WHICH GOVERNS A JOINT VENT URE. HENCE THE ISSUE REGARDING THE RELATIONSHIP BETWEEN THE MEMBERS AND ALSO BETWEEN THE MEMBERS AND THE JOINT VENTURE HAS TO BE DECIDED ON THE BASI S OF THE TERMS OF AGREEMENT ENTERED BETWEEN THE PARTIES. THOUGH THE JOINT VEN TURE AGREEMENTS GENERALLY FALL IN THE CATEGORY OF ASSOCIATION OF PERSONS (A OP) UNDER THE INCOME TAX ACT YET THEIR ASSESSABILITY IN THE STATUS OF AOP WAS NOT FREE FROM DOUBT AND WE NOTICE THAT THE AUTHORITIES HAVE DECIDED THIS ISSUE ON THE BASIS OF FACTS AND CIRCUMSTANCES OF EACH CASE. 7 8. THE HONBLE SUPREME COURT HAS MADE A DETAILE D DISCUSSION ON THE CONCEPT OF JOINT VENTURE IN THE CASE OF FAZIR CHAND GULA TI VS. UPPAL AGENCIES PRIVATE LTD. (2008) 10 SCC 345. THE RELEVANT OBSERVATIONS ARE EXTRACTED BELOW:- 17. THIS COURT HAD OCCASION TO CONSIDER THE NATURE OF `JOINT- VENTURE' IN NEW HORIZONS LTD VS. UNION OF INDIA [19 95 (1) SCC 478). THIS COURT HELD : 'THE EXPRESSION 'JOINT VENTURE' IS MORE F REQUENTLY USED IN THE UNITED STATES. IT CONNOTES A LEGAL ENTITY IN THE NA TURE OF A PARTNERSHIP ENGAGED IN THE JOINT UNDERTAKING OF A P ARTICULAR TRANSACTION FOR MUTUAL PROFIT OR AN ASSOCIATION OF PERSONS OR COMPANIES JOINTLY UNDERTAKING SOME COMMERCIAL ENTER PRISE WHEREIN ALL CONTRIBUTE ASSETS AND SHARE RISKS. IT REQUIRES A COMMUNITY OF INTEREST IN THE PERFORMANCE OF THE SUBJECT MATTER A RIGHT TO DIRECT AND GOVERN THE POLICY IN CONNECTION THEREWIT H AND DUTY WHICH MAY BE ALTERED BY AGREEMENT TO SHARE B OTH IN PROFIT AND LOSSES. [BLACK'S LAW DICTIONARY; SIXTH EDITION P.839]. ACCORDING TO WORDS AND PHRASES PERMANENT EDITION A JOINT VENTURE IS AN ASSOCIATION OF TWO OR MORE PERSONS TO CARRY O UT A SINGLE BUSINESS ENTERPRISE FOR PROFIT [P.117 VOL. 23].'[EMPHASIS SUPPLIED] THE FOLLOWING DEFINITION OF 'JOINT VENTUR E' OCCURRING IN AMERICAN JURISPRUDENCE [2ND EDITION VOL.46 PAGES 19 22 AND 23] IS RELEVANT: 'A JOINT VENTURE IS FREQUENTLY DEFINED AS AN ASSOCI ATION OF TWO OR MORE PERSONS FORMED TO CARRY OUT A SINGLE BUSINESS ENTERPRISE FOR PROFIT. MORE SPECIFICALLY IT IS IN ASSOCIATION OF PERSONS WITH INTENT BY WAY OF CONTRACT EXPRESS OR IMPLIED TO ENGAGE IN A ND CARRY OUT A SINGLE BUSINESS VENTURE FOR JOINT PROFIT FOR WHICH PURPOSE SUCH PERSONS COMBINE THEIR PROPERTY MONEY EFFECTS SKI LL AND KNOWLEDGE WITHOUT CREATING A PARTNERSHIP A CORPOR ATION OR OTHER BUSINESS ENTITY PURSUANT TO AN AGREEMENT THAT THER E SHALL BE A COMMUNITY OF INTEREST AMONG THE PARTIES AS TO THE P URPOSE OF THE UNDERTAKING AND THAT EACH JOINT VENTURE MUST STAND IN THE RELATION OF PRINCIPAL AS WELL AS AGENT AS TO EACH OF THE OTHER COVERTURES WITHIN THE GENERAL SCOPE OF THE EN TERPRISE . JOINT VENTURES ARE IN GENERAL GOVERNED BY THE SAM E RULES AS PARTNERSHIPS. THE RELATIONS OF THE PARTIES TO A JOI NT VENTURE AND THE NATURE OF THEIR ASSOCIATION ARE SO SIMILAR AND CLOS ELY AKIN TO A PARTNERSHIP THAT THEIR RIGHTS DUTIES AND LIABILIT IES ARE GENERALLY TESTED BY RULES WHICH ARE CLOSELY ANALOGOUS TO AND SUBSTANTIALLY THE SAME IF NOT EXACTLY THE SAME AS THOSE WHICH GOVERN PARTNERSHIPS. SINCE THE LEGAL CONSEQUENCES OF A JOINT VENTURE ARE EQUIVALENT TO THOSE OF A PARTNERSHIP THE COURTS FREELY APPLY PAR TNERSHIP LAW TO JOINT VENTURES WHEN APPROPRIATE. IN FACT IT HAS BE EN SAID THAT THE 8 TREND IN THE LAW HAS BEEN TO BLUR THE DISTINCTIONS BETWEEN A PARTNERSHIP AND A JOINT VENTURE VERY LITTLE LAW BE ING FOUND APPLICABLE TO ONE THAT DOES NOT APPLY TO THE OTHER. THUS THE LIABILITY FOR TORTS OF PARTIES TO A JOINT VENTURE AGREEMENT I S GOVERNED BY THE LAW APPLICABLE TO PARTNERSHIPS.' 'A JOINT VENTURE IS TO BE DISTINGUISHED FR OM A RELATIONSHIP OF INDEPENDENT CONTRACTOR THE LATTER BEING ONE WHO E XERCISING AN INDEPENDENT EMPLOYMENT CONTRACTS TO DO WORK ACCORD ING TO HIS OWN METHODS AND WITHOUT BEING SUBJECT TO THE CONTROL OF HIS EMPLOYER EXCEPT AS TO THE RESULT OF THE WORK WHILE A JOINT VENTURE IS A SPECIAL COMBINATION OF TWO OR MORE PERSONS WHERE IN SOME S PECIFIC VENTURE A PROFIT IS JOINTLY SOUGHT WITHOUT ANY ACT UAL PARTNERSHIP OR CORPORATE DESIGNATION.' (EMPHASIS SUPPLIED) TO THE SAME EFFECT IS THE DEFINITION IN CO RPUS JURIS SECUNDUM (VOL. 48A PAGES 314-315): 'JOINT VENTURE ' A TERM USED INTERCHANGEAB LY AND SYNONYMOUS WITH JOINT ADVENTURE' OR COVENTURE HAS BEEN DEFINED AS A SPECIAL COMBINATION OF TWO OR MORE PERSONS WHEREIN SOME SPECIFIC VENTURE FOR PROFIT IS JOINTLY SOUGHT WITHOUT ANY ACTUAL PARTNERSHIP OR CORPORATE DESIGNATION OR AS AN ASSO CIATION OF TWO OR MORE PERSONS TO CARRY OUT A SINGLE BUSINESS ENTERPR ISE FOR PROFIT OR A SPECIAL COMBINATION OF PERSONS UNDERTAKING JOINTLY SOME SPECIFIC ADVENTURE FOR PROFIT FOR WHICH PURPOSE THEY COMBIN E THEIR PROPERTY MONEY EFFECTS SKILL AND KNOWLEDGE........ AMONG THE ACTS OR CONDUCT WHICH ARE INDICATIVE OF A JOINT VENTURE NO SINGLE ONE OF WHICH IS CONTROLLING IN DETERMINING WHETHER A JOINT VENTURE EXISTS ARE: (1) JOINT OWNERSHIP AND CONTROL OF PROPERTY; ( 2) SHARING OF EXPENSES PROFITS AND LOSSES AND HAVING AND EXERCI SING SOME VOICE IN DETERMINING DIVISION OF NET EARNINGS; (3) COMMUN ITY OF CONTROL OVER AND ACTIVE PARTICIPATION IN MANAGEMENT AND D IRECTION OF BUSINESS ENTERPRISE; (4) INTENTION OF PARTIES EXPR ESS OR IMPLIED; AND (5) FIXING OF SALARIES BY JOINT AGREEMENT.' (EMPHAS IS SUPPLIED) BLACK'S LAW DICTIONARY (7TH EDITION PAGE 843) DEFINES `JOINT VENTURE' THUS 'JOINT VENTURE: A BUSINESS UNDERTAKING BY TWO OR MO RE PERSONS ENGAGED IN A SINGLE DEFINED PROJECT. THE NECESSARY ELEMENTS ARE: (1) AN EXPRESS OR IMPLIED AGREEMENT; (2) A COMMON P URPOSE THAT THE GROUP INTENDS TO CARRY OUT; (3) SHARED PROFITS AND LOSSES; AND (4) EACH MEMBER'S EQUAL VOICE IN CONTROLLING THE PR OJECT.' 9. ON A CAREFUL READING OF THE ORDER OF THE HON BLE SUPREME COURT WE NOTICE THE FOLLOWING ESSENTIAL INGREDIENTS FOR A J OINT VENTURE. 9 A) IT CONNOTES A LEGAL ENTITY IN THE NATURE OF A PARTN ERSHIP ENGAGED IN THE JOINT UNDERTAKING OF A PARTICULAR TRANSACTION F OR MUTUAL PROFIT. (OR) B) IT IS IN ASSOCIATION OF PERSONS WITH INTENT B Y WAY OF CONTRACT EXPRESS OR IMPLIED TO ENGAGE IN AND CARRY OUT A SINGLE BUSINESS VENTURE FOR JOINT PROFIT FOR WHICH PURPOSE SUCH PERSONS COMBINE THEIR PROPE RTY MONEY EFFECTS SKILL AND KNOWLEDGE WITHOUT CREAT ING A PARTNERSHIP. (OR) C) A SPECIAL COMBINATION OF TWO OR MORE PERSONS W HEREIN SOME SPECIFIC VENTURE FOR PROFIT IS JOINTLY SOUGHT WITHOUT ANY ACTUAL PARTNERSHIP OR CORPORATE DESIGNATION OR AS AN ASSO CIATION OF TWO OR MORE PERSONS TO CARRY OUT A SINGLE BUSINESS ENTERPRISE F OR PROFIT. D) THAT EACH JOINT VENTURER MUST STAND IN THE RELATION OF PRINCIPAL AS WELL AS AGENT AS TO EACH OF THE OTHER COVERTURES WITHIN THE GENE RAL SCOPE OF THE ENTERPRISE . E) AMONG THE ACTS OR CONDUCT WHICH ARE INDICATIVE OF A JOINT VENTURE NO SINGLE ONE OF WHICH IS CONTROLLING IN DETERMININ G WHETHER A JOINT VENTURE EXISTS ARE: (1) JOINT OWNERSHIP AND CO NTROL OF PROPERTY; (2) SHARING OF EXPENSES P ROFITS AND LOSSES AND HAVING AND EXERCISING SOME VOICE IN DETERMINING DIVISION OF NE T EARNINGS; (3) COMMUNITY OF CONTROL O VER AND ACTIVE PARTICIPATION IN MANAGEMENT AND DIRECTION OF BUSINESS ENTERPRISE; (4) INTENTION OF PARTIES EXPRESS OR IMPLIED; AND (5) FIXING OF SALARIES BY JOINT AGREEMENT.' 10. AS STATED EARLIER IN ORDER TO PARTICIPATE IN T HE GLOBAL TENDER PROCESS SOME OF THE FOREIGN COMPANIES HAVE ESTABLISHED JOIN T VENTURES WITH THE INDIAN COMPANIES. WITH REGARD TO THE ISSUE OF THE ASSESSABILITY OF JOINT VENTURES THE FOREIGN COMPANIES HAVE APPROACHED THE AUTHORITY FOR ADVANCE RULING (AAR). WE DISCUSS BELOW THE DECISION RENDER ED BY AAR IN BRIEF. A) VAN OORD ACZ BV (248 ITR 399): IN THIS CASE THE PAR TIES THEREIN HAD SPECIFICALLY PROVIDED IN THE AGREEMENT THAT EAC H PARTY WILL BEAR ITS OWN LOSS AND RETAIN THE PROFITS SEPARATELY. THE RE WAS ALSO SPECIFIC DECLARATION THAT IT WAS NOT THE INTENTION TO CREATE A JOINT VENTURE TO CARRY ON BUSINESS IN COMMON. THE PARTIES THEREIN HAD UNDERTAKEN SEPARATE SCOPE OF WORKS ACCORDING TO THE IR RESPECTIVE TECHNICAL SKILLS. THERE WAS NO CONTROL AND CONNECT ION BETWEEN THE WORK DONE BY EACH OF THE PARTIES. THUS IT WAS NOTIC ED THAT THERE WAS NO INTENTION TO CARRY OUT ANY BUSINESS IN COMMO N. UNDER THESE FACTUAL CIRCUMSTANCES THE AAR HELD THAT THE CONSORTIUM CANNOT BE TREATED AS ASSOCIATION OF PERSONS UNDER T HE INCOME TAX ACT. IT IS PERTINENT TO NOTE THAT THIS DECISION WA S RENDERED PRIOR TO 1.4.2002 I.E. PRIOR TO THE INSERTION OF THE EXPLAN ATION TO SECTION 2(31). 10 B) GEO CONSULT ZT GMBH (304 ITR 283): IN THIS CASE TH OUGH THE WORK WAS ALLOTTED TO EACH OF THE MEMBERS AND EACH M EMBER HAS TO BEAR ITS OWN COSTS AND EXPENSES YET IT WAS NOTI CED THAT THE AGREEMENT STATED THAT THE MEMBERS WILL COLLABORATE FOR ALL THE WORK ASSOCIATED WITH THE PROJECT WHICH IS TO BE MAN AGED ON A JOINT BASIS BY ALL THE MEMBERS. FURTHER THE AGREEMENT PR OVIDED THAT THE MEMBERS ARE JOINTLY AND SEVERALLY RESPONSIBLE F OR EXECUTION OF PROJECT. THE AAR HAS EXPRESSED OPINION BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F N.V.SHANMUGAM AND CO. V CIT (1971) 81 ITR 301 THAT THE ULTIMATE DIVISION OF PROFITS AMONGST MEMBERS OF THE JOINT ENTERPRISE IS NOT A RELEVANT CRITERION. FINALLY IT WAS HELD THAT THE JOINT VENTURE IS ASSESSABLE AS AOP. C) M/S HYUNDAU ROTEM CO. KOREA AND M/S MITSUBISHI CO. JAPAN (AAR NOS. 798-799 OF 2008 DT. 23-03-2010. IN THIS CASE THE AAR HAS HELD THAT THE CONSORTIUM FORMED BY FOUR MEMBERS IS NOT ASSESSABLE AS AOP SINCE THE AAR HAS FELT THAT THE FACTS OF THE CASE ARE SIMILAR TO THE FACTS RELATING TO VAN OORD ACZ B V SUPRA. SECTION 2(31) OF THE ACT DEFINES THE TERM PERSON WHICH INTERALIA INCLUDES AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS WH ETHER INCORPORATED OR NOT. SINCE THE TERM ASSOCIATION OF PERSONS (AOP) WAS N OT DEFINED IN THE ACT THE COURTS HAVE INTERPRETED TO MEAN THAT IT IS AN ASSOC IATION ESTABLISHED TO PRODUCE INCOME. HENCE THE FINANCE ACT 2002 HAS INSERTED AN EXPLANATION TO SECTION 2(31) ACCORDING TO WHICH AN AOP SHALL BE DEEMED T O BE A PERSON WHETHER OR NOT SUCH AOP WAS FORMED OR ESTABLISHED WITH THE OBJ ECT OF DERIVING INCOME PROFITS OR GAINS. HOWEVER IN THE INSTANT CASE T HERE IS NO DISPUTE WITH REGARD TO THE ASSESSABILITY OF THE JOINT VENTURE PER SE. BOTH THE ASSESSEE AND THE DEPARTMENT HAVE TAKEN THE STAND THAT THE JOINT VEN TURE IS ASSESSABLE IN THE STATUS OF ASSOCIATION OF PERSON. HOWEVER THE I SSUE IS WHETHER THE AO IS RIGHT IN TREATING THE JOINT VENTURE-AOP AS THE MAIN CONTR ACTOR AND ITS MEMBERS AS THE SUB-CONTRACTORS THEREBY ESTIMATING THE INCOME WHIC H WAS NOT EARNED BY THE JOINT VENTURE. 11 11. ON THE BASIS OF THE UNDERSTANDING OF THE CONC EPT OF JOINT VENTURE LET US CONSIDER THE FACTS IN THE PRESENT CASE. THE AMENDED CLAUSE 3 READS AS UNDER: A) THE JOINT VENTURERS SHALL SUBJECT TO THE PROVIS IONS HEREINAFTER CONTAINED BE ENTITLED TO SHARE THE WOR K AS MUTUALLY AGREED ON ITEM WISE DEPENDING ON THE WORK SCHEDULE. SHARING OF THE WORK AND EXECUTION OF THE WORK CAN BE ALTERED AT ANY GIVEN TIME WITH MUTUAL CONSENT OF BOTH THE J.V. PARTNERS. AS PER THE ORIGINAL CLAUSE 3(A) THE MEMBERS OF JOI NT VENTURE WOULD SHARE IN A PRESCRIBED PERCENTAGE IN ALL PROFITS ARISING O UT OF JOINT VENTURE. HOWEVER THE SAID CLAUSE WAS IN CONTRADICTION TO TH E PREAMBLE OF THE AGREEMENT; WHEREIN IT HAD BEEN STATED THAT THE MEMB ERS ARE DESIROUS OF SHARING THE CONTRACT AMOUNT. IN VIEW OF THE ABOVE IT APPEARS THAT THE CLAUSE 3(A) WAS AMENDED IN ACCORDANCE WITH THE ORIG INAL INTENTION OF THE MEMBERS. HOWEVER IN CLAUSE 12 DEALING WITH FINAL A CCOUNTS WE FIND A MENTION ABOUT SHARING OF PROFIT OR LOSS BUT THERE IS NO MENTION ABOUT THE PROPORTION. HOWEVER IN REALITY THE MEMBERS HAVE SHARED THE WORK ONLY AND HENCE THERE WAS NO PROFIT OR LOSS FOR THE JOINT VENTURE. 11.1 FURTHER CLAUSE 9 OF THE AGREEMENT WHICH DE ALS WITH THE RESOURCES SPECIFICALLY STATES THAT EACH JOINT VENTURER SHALL PROVIDE PLANT AND EQUIPMENT REQUIRED FOR THE EXECUTION OF THEIR PORTI ON OF CONTRACT AND SUCH PLANT AND MACHINERY SHALL NOT BECOME ASSET OF THE J OINT VENTURE. THUS THERE IS NO CLEAR PROVISION IN THE JOINT VENTURE WH ICH PROVIDE FOR JOINT EXECUTION OF THE PROJECT AND JOINT REALIZATION OF P ROFIT. 11.2 CLAUSE-4 DEALS WITH THE RELATIONSHIP BETW EEN THE MEMBERS OF THE JOINT VENTURES. SUB-CLAUSES (C) AND (D) ARE RELEVAN T. C. THIS AGREEMENT SHALL NOT BE CONSTRUED BY EITHER JOINT VENTURER HERETO AS CONSTITUTING EACH OF THEM THE AG ENT OF THE OTHER NOR THE JOINT VENTURE AS THE AGENT FOR EITHER OF THEM. 12 E. THE JOINT VENTURERS AGREE THAT THIS AGREEMENT S HALL NOT CONSTITUTE A PARTNERSHIP AND ANY LIABILITIES OF ANY SORT WHATSOEVER WHICH ONE JOINT VENTURER MAY INCUR TOWAR DS OR ON BEHALF OF THE OTHER JOINT VENTURERS SHALL BE IN ACCORDANCE WITH THIS AGREEMENT AND BE THERETO LIMITED AS PER THE CONCEPT OF THE JOINT VENTURE EACH JOINT VENTURER SHALL STAND IN THE RELATION OF A PRINCIPAL AS WELL AS AN AGENT OF THE OTHER. HOWEVER CLAUSE 4(C) OF THE AGREEMENT SPECIFICALLY STATES THAT THE MEMBE RS DO NOT CONSTITUTE THE AGENT OF EACH OTHER. THE SAID CLAUSE ALSO STATES T HAT THE JOINT VENTURE SHOULD NOT BE TAKEN AS THE AGENT OF THE MEMBERS ALS O. THUS ACCORDING TO THE AGREEMENT EACH MEMBER STANDS IN ITS OWN RIGHT AND NO SPECIFIC RELATIONSHIP IS CREATED BETWEEN THE JOINT VENTURE A ND ITS MEMBERS. 12. THUS ON AN UNDERSTANDING OF THE CONCEPT OF THE JOINT VENTURE AND THE TERMS OF AGREEMENT BETWEEN THE MEMBERS OF THE P RESENT CASE WE ARE OF THE VIEW THAT IN THE INSTANT CASE THE CONSORTIUM O F JOINT VENTURE HAS BEEN FORMED ONLY TO PROCURE THE CONTRACT WORKS. BY WAY OF THE AGREEMENT THE PARTIES HAVE ONLY REGULATED THE RELATIONSHIP INTER SE WITH RESPECT TO THEIR JOINT RESPONSIBILITY THAT EXISTED IN RELATION TO THE PRIN CIPAL VIZ. M/S KONKAN RAILWAY. IN REALITY BOTH THE PARTIES HAVE DIVIDED THE CONTRACT WORKS BETWEEN THEMSELVES AND THEY HAVE EXECUTED THEIR SHA RE OF WORK ON THEIR OWN RISKS. IT IS PERTINENT TO NOTE HERE THAT THE A O HAS NOT GIVEN ANY FINDING ON THE ISSUES LIKE THAT EACH MEMBER HAD AUTHORITY T O INTERFERE WITH OR CONTROL THE WORK EXECUTED BY THE OTHER MEMBER; THAT BOTH TH E MEMBERS HAVE JOINTLY EXECUTED THE PROJECT AND THUS PRODUCED THE INCOME J OINTLY. IN OUR OPINION THE FINDING ON THE LINES STATED ABOVE IS CRUCIAL TO DETERMINE THE ISSUE OF AVAILABILITY OF INCOME IN THE HANDS OF JOINT VENTUR E- AOP. ON THE CONTRARY THE AO IS ON RECORD THAT THE EACH OF THE MEMBERS HA S DECLARED THE INCOME DERIVED FROM THEIR RESPECTIVE SHARE OF CONTRACT WOR KS IN THEIR HANDS. IN THIS KIND OF SITUATION WE DO NOT FIND ANY MERIT IN THE PRESUMPTION MADE BY THE AO THAT THE JOINT VENTURE IS THE MAIN CONTRACTOR AND THE MEMBERS ARE THE 13 SUB-CONTRACTORS. ONCE THIS PRESUMPTION HAS BEEN FOUND TO BE WRONG THEN THE QUESTION OF ESTIMATION OF INCOME BY WAY OF SUB- CONTRACT COMMISSION DOES NOT ARISE. SO ALSO THE QUESTION OF DEDUCTION OF TAX U/S 194C(2) OF THE ACT AND THE DISALLOWANCE U/S 40(A)(IA) DOES NOT ARI SE. IN VIEW OF THE FORE GOING DISCUSSIONS WE DO NOT FIND ANY INFIRMITY IN THE DECISION REACHED BY THE LD CIT(A). 13. IN THE RESULT BOTH THE APPEALS OF THE REVE NUE ARE DISMISSED. PRONOUNCED ACCORDINGLY ON 13.5.2010 SD/- SD/- (SUNIL KUMAR YADAV) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE : 13 TH MAY 2010 A COPY OF THIS ORDER IS FORWARDED TO : 01 THE ITO WARD-1(3) VISAKHAPATNAM 02 M/S UAN RAJU CONSTRUCTIONS-VIJAY NIRMAN (JV) D. NO.50-81-25/2 SEETHAMAPETA VISAKHAPATNAM 530 016 03 THE CIT (A) VISAKHAPATNAM 04 THE CIT VISAKHAPATNAM 05 THE DR ITAT VISAKHAPAATNAM 06 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY ITAT VISAKHAPATNAM BENCH