Gujarat H.C : The retention money does not form part of income

High Court Of Gujarat

Director Of Income-Tax ( International Taxation) vs. Ballast Nedam International

Assessment Year : 2003-04

Section : 5

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal No. 145 Of 2013

March 28, 2013

ORDER

Akil Kureshi, J. – Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 20.7.2012 raising following questions for our consideration:

“[A] Whether the Appellate Tribunal has substantially erred in holding that the retention money does not form part of income?

[B] Whether the Appellate Tribunal has substantially erred in holding that the ratio of decision in the case of Amarshiv Construction Pvt. Ltd. (88 ITD 381) would not be applicable in the instant case”

2. Short issue is whether a sum of Rs.14.31 crores (rounded off), which represented retention money for fulfillment of the contract by the assessee should be treated as accrued income.

3. For the Assessment Year 2003-04 the assessee, during the course of assessment, pointed out that said sum of Rs.14.31 crores should not be considered as income of the assessee being retention money relating to the satisfactory execution of the contract. It was pointed out that in terms of the contract between the assessee and the companies awarding the contracts to the assessee, amount at the rate of 10% on the onshore activities and at the rate of 15% on the construction and erection activities was withheld towards retention money. It was contended that the assessee had no right on such retention money till completion of the work and submission of mechanical certificate. Such amount was, therefore, not considered as income while computing the assessee’s total income. The same would be recognized only on satisfaction of the terms of the contract.

4. Assessing Officer, however, did not accept the assessee’s stand and while framing the assessment held that such amount represented assessee’s accrued income.

5. Against such order of assessment, assessee carried the issue in appeal before CIT (Appeals). CIT (Appeals) deleted the addition upon which the Revenue approached the Tribunal. The Tribunal in the impugned order referred to and relied upon various decisions of the Tribunal including in case of this very assessee and confirmed the view of CIT (Appeals). The Tribunal held and observed as under:-

“We further find that the facts of the case relied by the Revenue in the case of DCIT v. Amarshiv Construction (P.) Ltd. (supra) are different than that of the present case. The issue in the case of DCIT v. Amarshiv Construction (P.) Ltd. (supra) decision was regarding the year in which the income has accrued whereas the issue in the case of the assessee is the accrual of the income. This would be clear from reading of para 21 of DCIT v. Amarshiv Construction (P.) Ltd. (supra) decision which reads as under:-

“In all these three cases, the Supreme Court held that there was no real income and, therefore, not eligible to income-tax whereas in the present case, it is nobody’s case that no income has resulted at all. The question is only as to in which year it accrued to the assessee. According to the Revenue, it was in the year when the bills were presented and passed for payment and the assessee received the money by furnishing bank guarantee and as per the assessee it was the year after the performance liability clause was over and the bank guarantee were released and ceased to be operative.”

8. We further find that DCIT v. Amarshiv Construction (P.) Ltd. (supra) decision dealt with the issue whether the assessee had in fact received the amount of security deposit by furnishing bank guarantee which is clear from para 15 of that decision which reads as under:

In our opinion, it accrued to the assessee and retained by way or additional security and in fact received by the assessee by furnishing a bank guarantee

9. In the instant case there is no dispute about the fact that assessee has received any money out of the amount retained as retention money by the contractee. These are some of the distinguishing features between the case of the assessee and DCIT v. Amarshiv Construction (P.) Ltd. case (supra). Therefore, we have no hesitation in holding that reliance placed by the A.O, on the decision in the case of DCIT v. Amarshiv Construction (P.) Ltd. (supra) was misplaced.

10. In view of the above discussions, we feel no need to interfere with the order passed by Ld. CIT(A) and the same is hereby upheld.”

6. Having heard learned counsel for the Revenue and having perused the documents on record, we find that the issue under consideration is squarely covered by the decision of this Court in the case of Anup Engineering Ltd. v. CIT [2001] 247 ITR 457/114 Taxman 584.

7. In the said case the agreement that the assessee entered into for execution of a contract for supply and erection of plant specified that full amount would not be paid if the plant was defective. The assessee had debited the sum of Rs. 3 lakhs by crediting the same to the warranty account as some dispute had arisen with respect to the execution of the contract. In such background, the Court considered whether such amount represented assessee’s accrued income. In this context, it was held and observed as under:

“For the purpose of ascertaining whether income had, in fact, accrued, one has to also see whether there is a real income. It has been also observed by the Hon’ble Supreme Court in CIT v. Bokaro Steel Ltd. 236 ITR 315, that no matter by adopting what method the assessee maintains his accounts, it may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements, or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases, unless there is real income, there cannot be any income tax. In the instant case also, there is no real income so far as Rs. 3 lacs are concerned because no debt has been created in favour of the assessee by virtue of clause No. 14 of the contract and as the assessee did not get any right to receive the said amount during the previous year in question, it cannot be said that income in respect of the amount in question had been accrued to the assessee during the previous year in question.

Looking to the facts of the present case and in the light of the law laid down by the Hon’ble Supreme Court in the cases referred to hereinabove, it is very clear that unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him. A debt must have come into existence and the assessee must have acquired a right to receive the payment. In the instant case, the assessee did not get any right to receive a sum of Rs. 4 lacs which could have been retained by Godrej in pursuance of clause No. 14 of the contract. One has to look at the contract and not at the entries made in the books of account. If, upon construction of the contract, one comes to a conclusion that the assessee could not have received Rs. 4 lacs from Godrej, by no stretch of imagination it can be said that the said amount had accrued by way of income to the assessee in the previous year in question. As the plant was not up to the satisfaction of Godrej, Gorej had a right to retain Rs. 4 lacs. It is not in dispute that during the previous year in question the dispute as to quality of the plant had arisen and the assessee had also felt that quality of the plant was not up to the mark and, therefore, believing that Godrej might ultimately retain Rs.3 lacs or under the warranty clause the assessee might have to pay Rs. 3 lacs, the assessee made a provision for Rs. 3 lacs by deducting the said amount from the sales account. In fact, in the previous year in question, the assessee had no vested right to receive Rs. 4 lacs and therefore it cannot be said that income to that extent had accrued to the assessee. We can test the above conclusion in a different manner too. Whether Godrej was liable to pay Rs. 4 lacs to the assessee in spite of the fact that quality of the plant was admittedly not up to the mark? Did the assessee get a vested right to get the said amount? Answer to these questions would be in negative and, therefore, as observed hereinabove, it cannot be said that income had accrued to the assessee.

A similar question had arisen in case of CIT. v. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8, (Cal.). Having regard to the facts and circumstances of the case, it was held in that case that, when there is a clause with regard to retention money, the assessee gets no right to claim any part of the retention money till the verification of satisfactory execution of the contract is concluded and, therefore, if there is no immediate right to receive the retention money, the said amount cannot be said to have accrued to the assessee. Even in the instant case, so far as retention money is concerned, the assessee had not to receive the same and therefore it cannot be said that the amount of Rs. 3 lacs had accrued to the assessee.”

8. In the result, this Tax Appeal is dismissed.

[Citation : 355 ITR 300]

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