2022 (3) TMI 175 - HC - Income Tax

Accrual of income towards retention money - assessee s case was that the retention money is payable after certain period of time on the satisfactory performance of the contract executed by the parties as per the terms of the agreement and could not be said to be accrued to the assessee at the time of raising invoice and could be said to be accrued only after the customer accepts its claim for satisfactory completion of the contract- HELD THAT - The Court noted that only after the assessee fulfilled their obligations under the contract, the retention money would be released and the assessee would secure the right to receive such retention money. Thus, it was held that when the bills were submitted having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of the bills. It was held that the assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. The above decision would apply with full force to the case on hand. That apart the CIT(A) as well as the tribunal have examined the sample contract produced by the assessee which they have entered into with the third party customers/parties and found on facts that the assessee would be entitled to the amount retained only upon satisfactory completion of the work which would be certified by the contracting parties.Hence, the present appeal on the said issue needs to be rejected. Accordingly, substantial question of law no.B is answered against the appellant/revenue.

Summary

Issues:
1. Disallowance for delayed payment of employees' contribution to Provident Fund.
2. Disallowance of retention money.

Analysis:

Issue 1: Disallowance for Delayed Payment of Employees' Contribution to Provident Fund
The primary issue in this case revolves around the disallowance of ?20,38,637 on account of delayed payment of employees' contribution to the Provident Fund. The Revenue contended that the Tribunal erred in deleting this addition, violating provisions of the Income Tax Act. The Tribunal's decision on this matter is pending before the Court, along with two other appeals. However, another issue concerning the disallowance of retention money amounting to ?7,72,10,900 is also at play. If the Court decides in favor of the assessee on the retention money issue, the disallowance for delayed Provident Fund contributions would become insignificant due to a low tax effect. Therefore, the Court decided to leave the questions related to delayed payments open for future consideration.

Issue 2: Disallowance of Retention Money
The second issue pertains to the disallowance of retention money totaling ?7,72,10,900. The assessee argued that retention money is payable after a specific period upon the successful completion of a contract, not at the time of invoicing. The Tribunal examined sample contracts provided by the assessee and considered previous judgments in similar cases. The Court noted that the retention money was contingent upon satisfactory contract completion, as per the terms of the agreement. The CIT(A) granted relief to the assessee based on these findings. The Tribunal upheld this decision, emphasizing that the assessee's right to the retention money only materializes upon fulfilling contractual obligations. Considering past precedents and legal principles, the Court affirmed the Tribunal's decision, dismissing the Revenue's appeal on the disallowance of retention money.

In conclusion, the Court rejected the Revenue's appeal on the disallowance of retention money and left the questions related to delayed Provident Fund contributions open for future consideration. The judgment underscores the importance of contractual terms and the timing of accruals in determining tax liabilities.