2011 (12) TMI 647 - AT - Income Tax

Summary

Issues Involved:
1. Whether the retention money of Rs. 4,14,62,866/- accrued to the assessee is taxable in the assessment year 2004-05.

Summary:

Issue 1: Taxability of Retention Money

The department filed an appeal against the order of the CIT(A) for the assessment year 2004-05, challenging the deletion of retention money amounting to Rs. 4,14,62,866/- accrued to the assessee. The primary issue was whether the retention money should be taxed in the year it was received or in the year the contract was satisfactorily completed.

The assessee, a company incorporated in the Netherlands, was involved in a contract for construction works awarded by the Government of India. The Assessing Officer (AO) noted that the retention money was withheld at 5% from the works executed, and an amount of Rs. 4,14,62,866/- was released against a bank guarantee during the year. The AO brought this amount to tax, arguing that it had accrued to the assessee during the year.

The CIT(A) deleted the addition, referencing decisions from higher courts, including the Hon'ble Mumbai High Court in CIT vs. Associated Cables Pvt. Ltd. 286 ITR 596, which held that retention money does not accrue to the assessee until the contract is satisfactorily completed.

The department argued that since the assessee received the retention money during the year, it should be taxed in that year. They cited the case of DCIT vs. Amarshiv Construction (P) Ltd. 88 ITD 381, where it was held that amounts deducted from running bills as additional security deposit accrued to the assessee in the year the bills were raised.

The assessee contended that the release of retention money against a bank guarantee did not confer an absolute right to the amount, and it should be considered taxable only when the contract was satisfactorily completed. The assessee recognized the retention money as income in the assessment year 2006-07, when the contract was completed.

The Tribunal, after considering the submissions and relevant case laws, upheld the CIT(A)'s order. It observed that similar issues had been considered in the case of Associated Cables Pvt. Ltd., where it was held that retention money does not accrue until the guarantee period is over. The Tribunal also noted that the assessee consistently offered the retention money for taxation in the year the right to receive it accrued unconditionally.

In conclusion, the Tribunal dismissed the department's appeal, affirming that the retention money was not taxable in the assessment year 2004-05.