Our joint venture AOP reimburses its corporate members for expenses they incurred on the project. Is that caught by s.40(ba)?
Not where the payment is a pure reimbursement with no profit element. The Tribunal, adopting an earlier order of 30 July 2014 which it reproduced in full, accepted that s.40(ba) is very specific and calls for disallowance of payment of any kind by an AOP to its member, but held that the mischief the provision addresses is the enrichment of members through the back door, and that where the member is a company, distinct from its shareholders, and the payment is reimbursement of an expense with no profit element, no question of enrichment arises and s.40(ba) is not attracted. The Revenue's appeal was dismissed.
Decided by the ITAT (Shri R.C. Sharma, Accountant Member and Shri Sandeep Gosain, Judicial Member (ITAT Mumbai Bench 'C'; order per Sandeep Gosain, JM)) on 2018-10-10, reported as I.T.A. No. 3580/Mum/2017 (assessment year 2012-13). It bears on section 40(ba), section 40(a)(ia), section 2(31) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
Joint-venture AOPs in construction and infrastructure live on cross-charges between the JV and its members, and s.40(ba) is drafted so widely — interest, salary, bonus, commission or remuneration, by whatever name called — that the department's reflex is to disallow everything. This order is one of the few that gives the provision a purposive limit, and the limit is the profit element: a payment that merely puts the member back in funds enriches nobody. The corollary is that the argument is only as good as the evidence. Where the JV cannot show that the amount was a reimbursement at cost, or where the cross-charge carries a margin, the provision applies, and payments dressed as technical or leadership fees have been disallowed elsewhere on exactly that footing.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is an unincorporated joint venture assessed in the status of association of persons, PAN AAAJI0262Q, for assessment year 2012-13. The appeal before the Tribunal was by the Revenue against the order of the Commissioner (Appeals)-34, Mumbai dated 3 February 2017. Ground 1 concerned the Commissioner (Appeals)'s deletion of a disallowance of administrative expenses of Rs 1,58,53,457 under s.40(a)(ia) and s.40(ba). The Revenue's grounds included a challenge to the deletion of a disallowance of Rs 1,44,77,018 under s.40(a)(ia), the Commissioner (Appeals) having held that there was no contract at all between the assessee and the JV partners so that no tax was required to be deducted at source on reimbursement of expenditure incurred by the JV partners; the Commissioner (Appeals) had deleted that disallowance on the ground that there is no requirement of deduction of tax at source on reimbursement of expenditure incurred by the joint venture partner. The disallowance in issue in the present appeal is the Rs 1,58,53,457 of administrative expenses in ground 1, together with the Rs 1,44,77,018 under s.40(a)(ia). The s.40(ba) discussion, and the figures of Rs 4,99,19,593 and Rs 2,39,64,463, come from the earlier order dated 30 July 2014 which this Bench reproduced at para 2.1: there the payment in question had been made on account of reimbursement of an expense incurred by a member company and the Tribunal had recorded that there was no profit element. The Tribunal recorded that there was no profit element in the payment.
In the net result the appeal filed by the Revenue was dismissed with no order as to cost (para 8). The Bench reached that result by reproducing at its para 2.1, and following, an earlier Tribunal order dated 30 July 2014. In that reproduced order the Tribunal had held that s.40(ba) is not attracted where the member is a company and the payment is a reimbursement of an expense with no profit element, so that no question of enrichment of a member arises (reproduced paras 21 and 22). The directions to delete a disallowance of Rs 4,99,19,593 (reproduced para 23) and administrative expenses of Rs 2,39,64,463 (reproduced para 55) belong to that earlier order; the only operative direction in the order under this entry is the dismissal of the Revenue's appeal and the consequent affirmation of the Commissioner (Appeals).
The s.40(ba) reasoning is that of the earlier Tribunal order dated 30 July 2014, which this Bench reproduced at its para 2.1 and followed. In that order the Tribunal accepted that s.40(ba) is very specific in that it calls for disallowance of payment of any kind by the association of persons to its member, and said in terms that it would have accepted the arguments of the departmental representative, the Assessing Officer and the Commissioner (Appeals) had the member been an individual, because the provision is aimed at the enrichment of members through the back door. But the member here was a company, a separate juridical person distinct from its shareholders and directors, and the payment had been made on account of reimbursement of an expense made by that company, so that the question of enrichment of a member did not arise, it having already been held that there was no profit element (reproduced para 21). In those circumstances the provision of s.40(ba) did not get attracted (reproduced para 22), and the Tribunal directed that the claim be allowed and the disallowance deleted (reproduced para 23).
Here the question of enrichment of a member does not arise, as has been held earlier that there is no profit element.
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Handle my notice → Ask a CA on WhatsAppNot where the payment is a pure reimbursement with no profit element. The Tribunal, adopting an earlier order of 30 July 2014 which it reproduced in full, accepted that s.40(ba) is very specific and calls for disallowance of payment of any kind by an AOP to its member, but held that the mischief the provision addresses is the enrichment of members through the back door, and that where the member is a company, distinct from its shareholders, and the payment is reimbursement of an expense with no profit element, no question of enrichment arises and s.40(ba) is not attracted. The Revenue's appeal was dismissed. This was decided by the ITAT (Shri R.C. Sharma, Accountant Member and Shri Sandeep Gosain, Judicial Member (ITAT Mumbai Bench 'C'; order per Sandeep Gosain, JM)) and bears on section 40(ba), section 40(a)(ia), section 2(31) of the Income Tax Act 1961. It is reported as I.T.A. No. 3580/Mum/2017 (assessment year 2012-13). Joint-venture AOPs in construction and infrastructure live on cross-charges between the JV and its members, and s.40(ba) is drafted so widely — interest, salary, bonus, commission or remuneration, by whatever name called — that the department's reflex is to disallow everything. This order is one of the few that gives the provision a purposive limit, and the limit is the profit element: a payment that merely puts the member back in funds enriches nobody. The corollary is that the argument is only as good as the evidence. Where the JV cannot show that the amount was a reimbursement at cost, or where the cross-charge carries a margin, the provision applies, and payments dressed as technical or leadership fees have been disallowed elsewhere on exactly that footing. If it applies to you, the first step is this: Document the cross-charge as a reimbursement at cost: the underlying third-party invoice, the member's own books showing no margin, and the JV agreement clause under which the member incurs the expense for the JV.
The assessee is an unincorporated joint venture assessed in the status of association of persons, PAN AAAJI0262Q, for assessment year 2012-13. The appeal before the Tribunal was by the Revenue against the order of the Commissioner (Appeals)-34, Mumbai dated 3 February 2017. Ground 1 concerned the Commissioner (Appeals)'s deletion of a disallowance of administrative expenses of Rs 1,58,53,457 under s.40(a)(ia) and s.40(ba). The Revenue's grounds included a challenge to the deletion of a disallowance of Rs 1,44,77,018 under s.40(a)(ia), the Commissioner (Appeals) having held that there was no contract at all between the assessee and the JV partners so that no tax was required to be deducted at source on reimbursement of expenditure incurred by the JV partners; the Commissioner (Appeals) had deleted that disallowance on the ground that there is no requirement of deduction of tax at source on reimbursement of expenditure incurred by the joint venture partner. The disallowance in issue in the present appeal is the Rs 1,58,53,457 of administrative expenses in ground 1, together with the Rs 1,44,77,018 under s.40(a)(ia). The s.40(ba) discussion, and the figures of Rs 4,99,19,593 and Rs 2,39,64,463, come from the earlier order dated 30 July 2014 which this Bench reproduced at para 2.1: there the payment in question had been made on account of reimbursement of an expense incurred by a member company and the Tribunal had recorded that there was no profit element. The Tribunal recorded that there was no profit element in the payment. The matter was decided on 2018-10-10 by the ITAT (Shri R.C. Sharma, Accountant Member and Shri Sandeep Gosain, Judicial Member (ITAT Mumbai Bench 'C'; order per Sandeep Gosain, JM)). On those facts the ITAT held as follows. In the net result the appeal filed by the Revenue was dismissed with no order as to cost (para 8). The Bench reached that result by reproducing at its para 2.1, and following, an earlier Tribunal order dated 30 July 2014. In that reproduced order the Tribunal had held that s.40(ba) is not attracted where the member is a company and the payment is a reimbursement of an expense with no profit element, so that no question of enrichment of a member arises (reproduced paras 21 and 22). The directions to delete a disallowance of Rs 4,99,19,593 (reproduced para 23) and administrative expenses of Rs 2,39,64,463 (reproduced para 55) belong to that earlier order; the only operative direction in the order under this entry is the dismissal of the Revenue's appeal and the consequent affirmation of the Commissioner (Appeals).
The s.40(ba) reasoning is that of the earlier Tribunal order dated 30 July 2014, which this Bench reproduced at its para 2.1 and followed. In that order the Tribunal accepted that s.40(ba) is very specific in that it calls for disallowance of payment of any kind by the association of persons to its member, and said in terms that it would have accepted the arguments of the departmental representative, the Assessing Officer and the Commissioner (Appeals) had the member been an individual, because the provision is aimed at the enrichment of members through the back door. But the member here was a company, a separate juridical person distinct from its shareholders and directors, and the payment had been made on account of reimbursement of an expense made by that company, so that the question of enrichment of a member did not arise, it having already been held that there was no profit element (reproduced para 21). In those circumstances the provision of s.40(ba) did not get attracted (reproduced para 22), and the Tribunal directed that the claim be allowed and the disallowance deleted (reproduced para 23). In the words reproduced by the source cited on this page: "Here the question of enrichment of a member does not arise, as has been held earlier that there is no profit element."
It was decided by the ITAT on 2018-10-10 and is reported as I.T.A. No. 3580/Mum/2017 (assessment year 2012-13). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 40(ba), section 40(a)(ia), section 2(31), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. In the net result the appeal filed by the Revenue was dismissed with no order as to cost (para 8). The Bench reached that result by reproducing at its para 2.1, and following, an earlier Tribunal order dated 30 July 2014. In that reproduced order the Tribunal had held that s.40(ba) is not attracted where the member is a company and the payment is a reimbursement of an expense with no profit element, so that no question of enrichment of a member arises (reproduced paras 21 and 22). The directions to delete a disallowance of Rs 4,99,19,593 (reproduced para 23) and administrative expenses of Rs 2,39,64,463 (reproduced para 55) belong to that earlier order; the only operative direction in the order under this entry is the dismissal of the Revenue's appeal and the consequent affirmation of the Commissioner (Appeals). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 40(ba), section 40(a)(ia), section 2(31) of the Income Tax Act 1961, and was decided by Shri R.C. Sharma, Accountant Member and Shri Sandeep Gosain, Judicial Member (ITAT Mumbai Bench 'C'; order per Sandeep Gosain, JM). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not rely on nomenclature. Calling a payment a fee for services will attract s.40(ba); the question the Tribunal asked was whether there was a profit element in the member's hands. Note that the reasoning here turns on the member being a company, distinct from its shareholders and directors, so that the payment cannot enrich a member personally. Expect the argument to be harder where the member is an individual — the Tribunal said in terms it would have accepted the Revenue's case in that situation. Keep the s.40(a)(ia) withholding question separate from the s.40(ba) question; both were in issue here and they turn on different facts. Where the AOP is at the maximum marginal rate under s.167B, remember that a s.40(ba) disallowance costs the full rate, so the evidence is worth assembling before the assessment rather than in appeal.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citedby: search returns one hit, ITO v M/s Ganeshsagar Infrastructure Pvt Ltd (ITAT Ahmedabad, 22 November 2021), whose snippet is about ACIT v Shree Cement Ltd and does not engage this order. A second probe on the party name with s.40(ba) returns only orders in the assessee's own case — the earlier order of 30 July 2014 that this one reproduces, and a further order of 7 February 2019. No later decision adopting the holding that s.40(ba) does not reach a pure reimbursement was found, and no Bombay High Court appeal from it was traced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The paragraph numbering in this order is not a reporting artefact and should not be cited as it stands. The order's own paragraphs run 1, 2, 2.1, 2.3, then 3 to 8, ending 'In the net result, the appeal filed by the revenue stands dismissed with no order as to cost' followed by the signatures. At para 2.1 the Bench says 'we are reproducing hereunder the relevant portion from the aforesaid order dated 30/07/2014 for ready reference and analysis', and everything numbered 6, 9, 20, 21, 22, 23 and 55 in the report falls inside that reproduced block — they are the paragraphs of the 30 July 2014 order, not of this one. That is why paragraph 23 reads 'we set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee' although the only appeal before this Bench was the Revenue's. The reproduced block itself contains a further passage numbered 2.3 discussing ITA Nos. 1244, 1245 and 1246/Mum/2015 (M/s ITD ITD CEM JV & M/s ITD CEM JV), appeal numbers that post-date 30 July 2014, so there is at least one further level of nesting inside the quotation. The reproduced text also carries transcription errors: 'the provision has the enrichment of members through back door' at reproduced para 21, and 'does not gel attracted' for 'get attracted' at reproduced para 22. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
In the net result the appeal filed by the Revenue was dismissed with no order as to cost (para 8). The Bench reached that result by reproducing at its para 2.1, and following, an earlier Tribunal order dated 30 July 2014. In that reproduced order the Tribunal had held that s.40(ba) is not attracted where the member is a company and the payment is a reimbursement of an expense with no profit element, so that no question of enrichment of a member arises (reproduced paras 21 and 22). The directions to delete a disallowance of Rs 4,99,19,593 (reproduced para 23) and administrative expenses of Rs 2,39,64,463 (reproduced para 55) belong to that earlier order; the only operative direction in the order under this entry is the dismissal of the Revenue's appeal and the consequent affirmation of the Commissioner (Appeals).
TaxSphere, “ACIT v ITD ITD CEM JV”, https://taxnotice.vittsphere.com/caselaw/case/itd-itd-cem-jv-40ba-reimbursement-to-corporate-member/ (validity last checked 2026-09-08)
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