No tax liability arises if there is diversion of income at source itself, by overriding title: HC
JAMMU : THE issue before the Bench is – Whether no tax liability arises if there is diversion of income at source itself by overriding title. YES is the answer.
Facts of the case
The Assessee, a joint venture(JV) of M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd. Entered into two separate JV agreements with an objective of submission of two tenders for construction. Of two tunnels of Northern Railway on the Katra-Reasi Section of Udhampur-Srinagar-Baramullah rail link project. However, it was only M/s Soma Enterprises Ltd. Which had the necessary experience under the Notice Inviting Tender floated by Northern Railways. The Assessee had filed its return with two TDS certificates showing that northern railways. Had deducted tax at source in respect of aggregate payments made.
The AO compute the income at Rs.12,09,55,137 as against the income which was declare to be NIL. It was also observ by the AO that the tax was deduct at source on the payments make by the railway authorities treating the Assessee as contractor, hence, the Assessee had sub-contract the execution of the work in the ratio of 97:3 and thus provisions of Section 40(a)(ia) are attract. Thereby, the AO disallow an amount paid by the Assessee to the joint venturers as per the provisions of Section 40(a)(ia). It was further hold that contention of the Assessee that it do not carry out any business during the relevant AY was factually incorrect.
Aggriev Assessee file an appeal before the CIT(A), where the same is dismiss by confirming the assessment order. Later, again another appeal was preferr by the Assessee before the Tribunal, wherein, it was held that income had accru to the Assessee and it was not a case of diversion of income by overriding title because all payments were received and duly credited in the books.
It was further held that the Assessee was liable for deduction of tax at source in respect of payments made to M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd u/s 194 C and 194 J. It was also held that the payments made by the Assessee to M/s TRG Industries (P) Ltd and M/s Soma Enterprises Ltd were not eligible for deduction in view of Section 40(a)(ia). Thereupon, a miscellaneous application was filed u/s 254(2) by the Assessee and prayed for correction of the mistakes which had crept in the records, however, the same was not decided.
On appeal, the High Court held that,
Whether no tax liability arises if there is diversion of income at source itself by overriding title – YES: HC
++ from the relevant clauses of the agreement, it is evident that the Assessee is form only for the purposes of submission of tender and it is agree between the two companies namely M/S TRG Industries (P) Ltd and M/s Soma Enterprises Ltd that in case the JV is award the work by the employer, a more detail joint venture base on the agreement shall be sign. Admittedly, M/s Soma Enterprises Ltd was the lead party of the JV and was suppos to execute the agreement. The Assessee has admittedly not execute the agreement. For the purpose of execution of the agreement, thereafter admittedly, the side agreements were execute;
++ it is pertinent to note that neither the existence nor the genuineness of side agreements have been dispute or even doubt by the Revenue. There is no finding by the AO that the members of the JV had authority to interfere with or comment on the work executed by the other member or that both the members have jointly executed the work. It is pertinent to note that neither amount would have be receive by the Assessee from the northern railways for no work perform by it nor it could be state that the Assessee has perform any activity but still the income has accru. We are aware that the definition of income as provid u/s 2(24) is inclusive and wide, yet the fact remains that the income divert at source before it accures to the Assessee cannot be regard as an income;
++ admittedly, the Assessee had not incurr any expenditure and the work admitt was execut by M/s Soma Enterprises Ltd. It is also hold by the Apex Court that true test of diversion of income. By overriding title is whether the amount sought to be deduct. In truth, never reach the Assessee as his income.
To apply the doctrine of diversion of income by overriding title. The first and foremost condition to be satisfy is the nature of Assessee’s obligation. Whether by the obligation, the income is divert before it reaches the Assessee. Or whether the income is require to be apply to discharge an obligation after such income reaches the Assessee. In the instant case, there is diversion of income at the source itself. Therefore, the instant case is diversion of income by overriding title. The receipt of amount of Rs.12,09,55,137/- . Could not be treat as income of the Assessee and it was the case of diversion of income . By overriding title. Accordingly, the first substantial question of law is answer in favour of the Assessee.