Presently we have been witnessing a
very different trend in relation to the real-estate development. Earlier, a
builder would go for outright purchase of a piece of land from the land-lord
and develop the same at his own cost and risk. The scenario in this regard is
undergoing a change. The land-lord also desires to have a share in the profit
of the project being undertaken by the builder and developer. On his part, the
builder and developer desire(s) to share his risk in the development of the
project. This change in the trend in relation to real-estate development, is
giving rise to a new concept of Joint Venture between the land-lord and the
builder / developer, for the purpose of the development of immovable
properties.
It is often the case that the builder
/ developer is either a limited company or a partnership firm, whereas the land
owner is either an individual or an HUF or a partnership firm.
The question which is often being
asked is as to the status of such a Joint Venture for the purpose of income-tax
and the tax-treatment of various tax-incentives in the case of such a Joint
Venture. Such tax-incentives are provided under Section 80-IA(4)(iii) and
Section 80-IB(10) of the Income-Tax Act, 1961. Another issue which often arises
is regarding the tax-liability of a member of an association of persons (AOP),
if such a Joint Venture is assessed in the status of an AOP.
In order to answer all the aforesaid
queries, the relevant provisions of the Income-Tax Act and case-law, will have
to be closely examined. The same are discussed as follows:-
1. Definitions of the words
‘assessee’ and ‘person’– Section 2(7) and Section 2(31) of the Income-Tax Act
As per Section 80-IA(1), the benefits
of Section 80-IA, are available to an assessee. Similarly, as per Section
80-IB(1), the benefits of Section 80-IB are available to an assessee. The word
“assessee”, is defined under Section 2(7), as a person by whom any tax or any
other sum of money is payable under this Act, etc.
The word ‘person’ is
defined under Section 2(31), which is reproduced as follows:-
Section 2 (31)“person” includes—
(i) an individual
(ii) a Hindu undivided
family
(iii) a company,
(iv) a firm
(v) an association of
persons or a body of individuals whether incorporated or not,
(vi) a local authority, and
(vii) every artificial
juridical person, not falling within any of the preceding sub-clauses.
Explanation.—For the purposes of this clause, an
association of persons or a body of individuals or a local authority or an
artificial juridical person shall be deemed to be a person, whether or not such
person or body or authority or juridical person was formed or established or
incorporated with the object of deriving income, profits or gains.
From the aforesaid provisions of
Section 2(31), it may be seen that a Joint Venture would be covered under clause
(v) of Section 2(31), as an association of persons or AOP, for short.
2. Meaning of the term ‘Association
of persons’
We have now to understand the meaning
of the term ‘Association of persons’ or ‘AOP’. As per the Law Lexicon by P.R.
Aiyer p.158, the term “AOP” has been defined as follows:-
(i) An association of persons must be
one in which two or more persons join in a common purpose or common action, and
as the words occur in a Section which imposes tax on income, the association
must be one the object of which is to produce income, profits or gains-C.I.T.
Vs. Smt. Indira Balakrishnan, [1960] 39 ITR 546,551 (S.C.)
When the business of the import and
distribution of cloth was done by a group on a joint basis, when the sales and
the profits were ascertained on a joint basis and then distributed according to
the capital contributed by each member of the group, the fact that the Deputy
Commissioner of the District had appointed the members constituting of the
group to import and distribute the cloth in the District does not make any
difference in finding this group as the “association of persons”-C.I.T. Vs.
Buldana District Main Cloth Importers Group, [1961] 42 ITR 172(S.C.).
(ii) Association of persons can be
formed only when two or more individuals voluntarily combine together for a
certain purpose. Murugesan & Brothers Vs. C.I.T. [1973] 88 ITR
432(S.C.)
(iii) The term ‘association of
persons’, means an association in which two or more persons join in a common
purpose or common action, and as the words occur in a Section which imposes a
tax on income, the association be one, the object of which is to produce
income, profits or gains. .V. Shanmugam & Co. Vs. C.I.T. [1971] 81 ITR
310 (S.C.).
The term “AOP” has also been dealt
with in a number of judgements under Income-tax Act. An ‘AOP’ must be one in
which two or more persons join in a common purpose or common action, and as the
words occur in a Section which imposes tax on income , the association must be
one, the object of which is to produce income, profits or gains – CIT Vs.
Indira Balakrishnan [1960] 39 ITR 546, 551 (SC)
Some of the other cases laying down
tests or providing criteria of association of persons, are as follows-
(i) Murugesan & Bros. Vs.
C.I.T.[1973] 88 ITR 432 (SC)
It was held in this case that to
constitute an AOP two or more individuals voluntarily combine together for a
certain purpose.
(ii) Ag. I.T. Vs. Raja Ratan Gopal
[1966]59 ITR 728 (SC) and Mohamed Noorullah Vs. C.I.T. [1961] 42 ITR 115(SC)
It was held in these cases that to
constitute and AOP two or more persons should have joined in the promotion of a
joint enterprise with the object of producing income, profits
or gains.
(iii) I.T. Vs. N.V. Shanmugham &
Co. [1966] 62 ITR 701 (Mad.)
It was held in this case that the
association need not necessarily be on the basis of a contract; consent and
understanding may be presumed.
(iv) I.T. Vs. C. Karunakaran [1988]
170 ITR 426, 429-430 (Ker.)
It was held in this case that
wherever individuals employ their assets in a joint enterprise
with a view to make profit, though not as partners, they constitute an
association of persons by reason of their common purpose or common action. In
such an enterprise, the distinction between a firm and an association of
persons may often be thin and sometimes very obscure.
(v) N. Sunanda Vs. C.I.T [1988] 174
ITR 664, 666 (Karn)
It was held in this case that to
constitute and AOP there must be a joining together in a common venture, the
object of which is to produce income, profits or gains.
(vi) I.T. Vs. Chandmal Rajgarhia,
[1995] 213 ITR 789, 793 (Pat)
It was held in this case that the
essential criterian that attracts the label of ‘association of persons’ in the
Income-tax Department is the unity of the income-making purpose rather than the
unity of title in the income yielding asset.
(vii) Sardar Harvinder Singh Sehgal
Vs. Asst. CIT[1997] 227 ITR 512,531 (Gauh)
It was held in this case that in
order to constitute an association of persons, they must join in a common
purpose or common action and the object of the association must be to produce
income.
From the aforesaid discussion, it may
be seen that an ‘association of persons’ means an association in which two or
more persons join in a common purpose or common action. The
word ‘person’ herein is very significant, as ‘person’ may mean any entity as
defined in Section 2(31) of the Income-tax Act. In other words, individuals,
HUFs, companies or firms, etc. may be members of such A.O.P.
3. An important judgement – Birla
Tyres Vs. JCIT [2003] 80 TTJ 915 (Cal.-T) (T.M.)
Recently, the issue relating to the
status of an AOP came up for consideration in the case of Birla Tyres
Vs. JCIT [2003] 80 TTJ 915 (Cal.-T) (TM). The main issue involved in
the aforesaid case was whether loss in the case of an AOP could be carried
forward and adjusted against the income of the following years.
It was held in this case that
conjoint reading of Section 67A and other relevant provisions of the Act,
indicates that an AOP is an independent assessable entity, different and
distinct from its members. In this case, the AOP was constituted by four
members which were companies viz. (i) M/s Century Textiles Inds. Ltd. (ii) M/s
Kesoram Inds. Ltd. (iii) M/s Jayashree Tea & Inds. Ltd. (iv) M/s Bharat
General & Textiles Inds. Ltd. The aforesaid AOP has been treated as an
independent taxable entity distinct from its members. It may be seen in this
case that the AOP in question, was constituted by four companies.
In the aforesaid context, it was held
by the Tribunal that as an AOP is an independent assessable entity, different
and distinct from its members, its loss can be set off only against its own
profits and not against the profits of its members. It was further held that
there is nothing in the Act for dis-qualification of AOP from taking the
benefit of the provisions of Sections 71,72 etc., in its own assessment.
The aforesaid judgement of the ITAT
fully supports the view that an AOP is an independent taxable entity quite
different and distinct from its members, which could be individuals, HUFs,
firms, companies or even other AOPs, etc.
4. Meaning of the term ‘Joint
Venture’
As per Concise Oxford Dictionary,
ninth edition, ‘adventure’ means an enterprise, a commercial speculation
whereas ‘venture’ means risky enterprise, commercial speculation. Thus, for our
purpose, there would be no difference between the terms ‘adventure’ and
‘venture’. In other words, the terms ‘joint adventure’ and ‘joint venture’ will
have the same or similar meaning in the given context. The term ‘joint
adventure’ has been defined on pp.1002 of the Law Lexicon by P.R. Aiyer.
(i) Joint adventure
A joint adventure is a limited
partnership; not limited in a statutory sense as to liability, but as to its
scope and duration.
A joint adventure is an enterprise
undertaken by several persons jointly (Cyclopedic L.Dict).
“A commercial enterprise by several
persons jointly” (English L. Dict.) “A commercial or maritime enterprise
undertaken by several persons jointly.” (Black’s Law Dictionary)
(ii) Joint adventure &
partnership
The subject of joint adventures is of
comparatively modern origin. It was unknown at common law, being regarded as
within the principles governing partnerships. One distinction lies in the fact
that while a partnership is ordinarily formed for the transaction of a general
business of a particular kind, a joint adventure relates to a single
transaction, although the latter may comprehend a business to be continued for
a period of years. Another distinction is that a corporation incapable of
becoming a partner may bind itself by a contract for a joint adventure, the
purposes of which are within those of the corporation.
From the aforesaid definition of
joint adventure it may be seen that joint adventure is a limited partnership
but not exactly a partnership. In a joint venture the liability of the
members/partners is unlimited as in the case of a firm but its scope and
duration are limited.
5. The incentive deduction will be
available to such Joint Venture
As already explained, such Joint
Venture business will be assessable in the status of an AOP.
In this context, it will be necessary
to look at the definition of the term ‘assessee’, as defined under Section 2(7)
of the Income-Tax Act, 1961. As per Section 2(7) ‘assessee’ means a person by
whom any tax or any other sum of money is payable under the Income-Tax Act. As
per Section 2(31) of the Income-Tax Act, the word ‘person’, includes an AOP.
The deductions under Section 80-IA
and Section 80-IB are available to an assessee, subject to certain conditions.
Thus, it is clear that a Joint Venture assessable in the status of an AOP, will
be entitled to the deductions under Section 80-IA (4) (iii) and Section 80-IB
(10) etc. of the Income-Tax Act, 1961.
6. Whether share of a member in the
income of a Joint Venture business, taxed in the status of an AOP, will again
be taxed in the hands of the members.
In order to answer this query, a
number of the provisions of the Income-Tax Act, falling under different
Chapters thereof, will have to be examined. These provisions may be listed as
follows:-
(i) Section 66, with the heading
“Total income”, falling under Chapter – VI.
(ii) Section 67A, with the heading “
Method of computing a member’s share in income of association of persons (AOP)
or body of individuals (BOI)”, falling under Chapter – VI.
(iii) Section 86, with the heading
“Share of member of an association of persons or body of individuals in the
income of the association or body”, falling under Chapter – VII.
(iv) Section 110, with the heading,
“Determination of tax where total income includes income on which no tax is
payable”, falling under Chapter – XII.
(v) Section 167B, with the heading,
“Charge of tax where shares of members in association of persons or body of
individuals unknown, etc”, falling under Chapter – XV.
It may be seen from the heading of
Section 67A that it deals with the computation of a member’s share in the
income of the association of persons (AOP) or Body of individuals (BOI)
First proviso (a) to Section 86
The heading of Section 86 is – “share
of a member of an ‘Association of persons’ or ‘Body of individuals’ in the
income of the association or body.” As the heading of Section 86 suggests,
it deals with the charge of income-tax on the share of a member of an AOP /
BOI, in the income of such AOP/BOI. For our purpose, proviso (a) to Section 86
is relevant. As per the aforesaid proviso (a), where the AOP/BOI is chargeable
to tax on its total income at the maximum marginal rate or any higher rate under
any of the provisions of the Act, the share of a member computed as aforesaid,
shall not be included in its total income.
Second proviso to Section 86
In this context, the second proviso
to Section 86 is also very relevant. As per the aforesaid proviso where no
income-tax is chargeable on the total income of AOP/BOI, the share of a member
computed as aforesaid shall be chargeable to tax as part of his total income.
In this context, the meaning of the expression ‘where no income-tax is chargeable on the total
income of the AOP/BOI’, is relevant. The aforesaid expression means, incomes
which do not form part of the total income. In this connection, it may be
stated that a deduction or relief under Section 80-IA, Section 80-IB, Section
80-I and Section 80-J, cannot be said to be income, profits and gains, not
includible in the total income. In support of this proposition, reliance may be
placed on the judgement in the case of Second ITO Vs. Stumpp, Schuele &
Somappa P. Ltd. [1997] 106 ITR 399 (Karn.).
The aforesaid judgement of the
Karnataka High Court was affirmed by the Apex Court in the case of Second
ITO Vs. Stumpp Schuele & Somappa P. Ltd. [1991] 187 ITR 108 (S.C.)
Thus, the deductions available under
Sections 80-IA and 80-IB do not pose any problem in this respect. Otherwise
also, if the total income of an AOP is entitled to deduction under Section
80-IA or Section 80-IB, then the question of any tax-liability on the share of
a member in the income of the AOP, will not arise, as the income of the AOP or BOI
would be Nil.
Tax-implications of the provisions of
Section167B -‘charge of tax where shares of members in AOP or BOI are known,
etc.’
From the provisions of Section 167B,
it may be seen that Section 167B(1) deals with charge of tax, where the
individual shares of the members of an AOP / BOI, in the whole or any part of
income of such AOP /. BOI, are in-determinate or unknown. In such a case,
income-tax is charged on the total income of the AOP/BOI at the maximum
marginal rate.
Section 167B(2), however, deals with
cases, which do not fall under aforesaid Section 167B(1). In other words,
Section 167B(2) deals with cases where the shares of the members of the AOP /
BOI are determinate or known. As per Section 167B(2)(i), where the total income
of any member of an AOP / BOI, for the previous year, excluding the share from
such AOP / BOI, exceeds the maximum amount which is not chargeable to tax, in
the case of that member, tax shall be charged on the total income of the AOP /
BOI, at the maximum marginal rate.
The term “maximum marginal rate” is
defined under Section 2(29C) of the Act, and it means the rate of income-tax
(including surcharge on income-tax, if any) applicable in relation to the
highest slab of income in the case of an individual , AOP or BOI, as specified
in the Finance Act of the relevant year. It may be clarified here that when
maximum marginal rate is charged on an income, no basic exemption is allowed in
respect of the income and the benefit of lower rate of taxation on the lower
slabs of income, is also not available in such a case.
It may be reiterated here that where
the AOP / BOI, is chargeable to tax on its total income at the maximum marginal
rate or any higher rate under any of the provisions of the Act, then as per
clause(a) of the first proviso to Section 86, the share of a member of such AOP
/ BOI, shall not be included in its / his total income.
7. Conclusion
In the light of the aforesaid
discussion, it may be concluded that-
(a) Income of a Joint Venture
project, may be assessed in the status of an ‘Association of persons’ under the
Income-Tax Act.
(b) The deductions under Section
80-IA or Section 80-IB, etc., will be available to such a Joint Venture
assessable in the status of an AOP.
(c) No share of income of such AOP,
fully deductible under Section 80-IA or 80-IB, would be liable to tax again in
the hands of the members thereof.
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