2018 (6) TMI 1101 - AT - Income Tax

Addition on account of retention money - Year of assessment - method of accounting - Held that - the accounting treatment given by the assessee in its Books of account cannot decide the accrual of income in law. It is now well settled that accounting entries are not determinative of taxability of income or deductibility of any expenditure. A mere book keeping entry cannot be income unless income has actually resulted. 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. Merely because retention money is accounted for in the books of account, that by itself does not make it taxable in A.Y. 2010-11 when in law the same cannot be said to have accrued in that year as discussed above. We do not find any infirmity in the order of CIT(A) for directing the AO to tax the retention money in the year of actual receipt and not in the year of completion of contract.

Issues Involved:
1. Deletion of addition made by AO on account of retention money.
2. Accrual of income in respect of retention money.
3. Principle of consistency in tax treatment across different assessment years.
4. Impact of accounting treatment on taxability of income.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Retention Money:
The Revenue's primary grievance was the CIT(A)'s deletion of the addition made by the AO on account of retention money. The AO had added ?2,66,92,253/- as retention money for the assessment year 2012-13, arguing that it should be assessed in the year when the contract was completed. However, the CIT(A) deleted this addition, referencing the Bombay High Court's decision in CIT vs. Associated Cables P. Ltd., which held that retention money accrues only when it is paid by the contractee, not when the contract is completed. The Tribunal upheld the CIT(A)'s decision, emphasizing that the right to receive retention money accrues only after the conditions under the contract are fulfilled.

2. Accrual of Income in Respect of Retention Money:
The Tribunal examined whether retention money should be considered income in the year it is retained or in the year it is received. It was argued that retention money accrues only when the performance period has been successfully completed, and the bank guarantees have been released. The Tribunal agreed with this view, stating that the right to receive retention money did not accrue during the previous year as the performance guarantee period had not ended. The Tribunal emphasized that accounting entries do not determine the accrual of income; rather, income must actually result for it to be taxable.

3. Principle of Consistency in Tax Treatment Across Different Assessment Years:
The Tribunal highlighted the principle of consistency, noting that the assessee's method of accounting for retention money had been accepted by the department from the assessment year 2003-04 to 2009-10. It was argued that even though res judicata does not apply to tax proceedings, there should be uniformity and consistency in treatment when facts and circumstances are identical. The Tribunal agreed, referencing the Supreme Court's decision in Parashuram Pottery Works Ltd. and the Bombay High Court's decision in CIT vs. Gopal Purohit, which support the principle of consistency in tax treatment.

4. Impact of Accounting Treatment on Taxability of Income:
The Tribunal reiterated that accounting treatment in the books of accounts does not determine the taxability of income. It cited several judicial pronouncements, including the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd., which established that income is to be computed as per the provisions of law, not accounting principles. The Tribunal emphasized that a mere bookkeeping entry cannot be considered income unless the income has actually resulted. The Tribunal also noted that the assessee's consistent practice of accounting for retention money should not be disturbed, especially since there was no loss of revenue to the department.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decision to delete the addition of retention money. The Tribunal concluded that retention money should be taxed in the year of actual receipt, not in the year the contract is completed. The Tribunal also emphasized the importance of consistency in tax treatment and clarified that accounting entries do not determine the accrual of income. The Tribunal's decision aligns with the judicial precedents and principles established by higher courts.

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