2020 (1) TMI 250 - AT - Income Tax

Taxation of retention money not accrued during the year - Accrual of income - as per AO addition has been rightly made during the course of assessment as well as in section 115JB MAT computation - HELD THAT - It is not in dispute that the assessee had paid the impugned retention money as per the terms and conditions of the corresponding agreement with the other parties. Hon ble apex court s landmark decision in Chainrup Sampatram vs CIT 1953 (10) TMI 2 - SUPREME COURT settled the law long back that although anticipated losses can be allowed to be deducted from commercial proceeds at the first sign of its reasonable probability, the converse is not true regarding anticipated profits to be treated as income unless the same are realized going by the principles of conservatism and commercial prudence. The Revenue fails to rebut the clinching fact that there is no surety about the impugned retention money to be finally refunded to the taxpayer. We therefore affirm the CIT(A) s above extracted detailed reasoning. Coming to MAT computation, this tribunal s coordinate bench s decision in DCIT vs. M/s. Mcnally Bharat Engineering Ltd. 2020 (1) TMI 203 - ITAT KOLKATA has already decided the issue against the department that such an amount does not partake the character of taxable income till the time mutual obligations are not fully satisfied. This first substantive ground is rejected therefore. Capital gains addition - Gain accrued in assessee s heads on accrual of transfer of plant and machinery of product division - HELD THAT - Assessee had received consideration by way of equity shares only. Hon ble Bombay high court s judgment in CIT vs. M/s. Bharat Bijlee Ltd. 2014 (5) TMI 512 - BOMBAY HIGH COURT has relied upon in the CIT(A) s order, holds that capital gains as slump rate do not arise in such an instance. CIT(A) has rightly deleted the impugned capital gains addition made by the assessing authority by invoking section 50B of the Act. The Revenue fails in its second substantive grievance as well. Provision for leave encashment disallowance - AO invoked section 43B(f) of the Act that such a provision is allowable only in case of actual payment - HELD THAT - CIT(A) holds that hon ble jurisdictional high court s decision in Exide Industries Ltd. vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT quashed the statutory provision itself as ultra vires. Hon'ble apex court has stayed operation thereof vide order dated 08.05.2009. He has therefore directed the Assessing Officer to follow their lordships final call on this issue. We notice in this backdrop of facts that there is no prejudice caused to the department in facts and circumstances of the case qua this last issue as well.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Deletion of retention money addition.
3. Capital gains addition on the transfer of product division.
4. Provision for leave encashment disallowance.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The Revenue filed a condonation petition explaining a delay of 49 days in filing the appeal due to procedural formalities and compilation of necessary records. The assessee raised no objection to this delay. Therefore, the tribunal condoned the delay and proceeded to adjudicate the Revenue’s appeal on its merits.

2. Deletion of Retention Money Addition:
The Revenue contested the CIT(A)’s decision to delete the addition of ?71,46,55,726/- related to retention money made by the Assessing Officer (AO). The AO argued that the retention money should be taxable based on the percentage completion method. However, the CIT(A) found that retention money does not accrue until the final execution of the work, as supported by the Calcutta High Court in Simplex Concrete Piles (India) P. Ltd. and other cases. The tribunal affirmed CIT(A)’s reasoning, noting that there was no certainty about the retention money being refunded to the taxpayer. The tribunal also referenced the Supreme Court's decision in Chainrup Sampatram vs. CIT, which established that anticipated profits should not be treated as income unless realized.

Regarding the MAT computation, the tribunal cited its coordinate bench’s decision in DCIT vs. M/s. Mcnally Bharat Engineering Ltd., which held that such amounts do not partake the character of taxable income until mutual obligations are fully satisfied. Therefore, the tribunal rejected the Revenue’s first substantive ground.

3. Capital Gains Addition on the Transfer of Product Division:
The AO levied a capital gain of ?23,73,49,836/- on the transfer of the product division, which the CIT(A) deleted. The AO considered the transfer as a slump sale, while the assessee argued that it received equity shares in exchange, not a monetary consideration. The CIT(A) relied on the Bombay High Court’s decision in Bharat Bijlee Ltd., which held that such a transfer is an exchange, not a sale, and thus not subject to capital gains tax under section 50B.

The tribunal found no merit in the Revenue’s argument that the value of land and building could be easily quantified. The tribunal upheld the CIT(A)’s decision, noting that the assessee received consideration in the form of equity shares, consistent with the jurisdictional high court’s decision. The tribunal concluded that the CIT(A) rightly deleted the capital gains addition made by invoking section 50B of the Act.

4. Provision for Leave Encashment Disallowance:
The AO disallowed the provision for leave encashment amounting to ?82,13,368/- under section 43B(f) of the Act, which allows such a provision only upon actual payment. The CIT(A) referenced the Calcutta High Court’s decision in Exide Industries Ltd. vs. Union of India, which quashed section 43B(f) as ultra vires. Although the Supreme Court stayed the operation of this decision, the CIT(A) directed the AO to follow the Supreme Court’s final ruling on the issue. The tribunal noted that there was no prejudice to the department regarding this issue and upheld the CIT(A)’s direction.

Conclusion:
The tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s decisions on all substantive grounds. The order was pronounced in the open court on 31.12.2019.