Madras H.C : Whether, in the facts and circumstances of the case, the Tribunal was right in holding that moneys retained by the contractor, as a percentage of the bills raised to be paid after the contract is completed is to be treated as income only when the moneys are actually received, even though the appellant is following a mercantile system of accounting ?

High Court Of Madras

CIT vs. Ignified Boilers (I) Ltd.

Section 5

Asst. Year 1994-95

K. Raviraja Pandian & P.P.S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 1428 of 2005 (Appeal No. 1423 of 2005)

5th January, 2006

Counsel Appeared

T. Ravikumar, for the Appellant

JUDGMENT

K. Raviraja Pandian, J. :

This appeal has been filed by formulating the following substantial question of law for our consideration “Whether, in the facts and circumstances of the case, the Tribunal was right in holding that moneys retained by the contractor, as a percentage of the bills raised to be paid after the contract is completed is to be treated as income only when the moneys are actually received, even though the appellant is following a mercantile system of accounting ?”

2. The appellant is the industrial company carrying on the business of erection and sales of boilers. In the returns, the assessee worked out the profit before taxation at Rs. 82,43,982. As per the contract, the assessee entered into a contract with M/s Sirpur Paper Mills for erection of boilers wherein there is a specific clause that 10 per cent of the contract price would be retained by the principal contractor and it would be paid after one month subject to the satisfactory performance of the boilers. The AO brought into account 10 per cent of the contract amount, which has been retained by the principal contractor and levied tax on the ground that the assessee was maintaining a mercantile system of accounting and in respect of 10 per cent retention, the bill has been raised on completion of work and brought the same into account on accrual basis. On appeal by the assessee, the CIT(A) deleted that portion of inclusion of amount, which was further confirmed on appeal by the Tribunal at the instance of the Revenue. That order is canvassed before this Court.

3. The facts are not disputed. 10 per cent of the retention money has not been received in respect of the relevant assessment year though the work has been completed. The assessee is entitled to receive the amount only after successful completion of work. In such circumstances, it cannot be said that 10 per cent retention money retained by the principal contractor was accrued to the assessee during the relevant assessment year for consideration.

4. Under the IT Act, the income accrued or received by the assessee alone is taxable. This position is fortified by the decision of the Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) wherein it has been held as follows :

“Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book- keeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”

5. This is what exactly happened in this case. In view of the categorical pronouncement of the Supreme Court and the facts and circumstances of the case, we are of the view that the appellate authority as well as the Tribunal are correct in their view. The order of the Tribunal requires no interference.

6. Accordingly, the Tax Case (Appeal) is dismissed.

[Citation : 283 ITR 295]

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