2005 (6) TMI 267 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of retention money as income.
2. Change in method of accounting.
3. Matching principle of income and expenditure.
4. Residuary ground.

Detailed Analysis:

1. Accrual of Retention Money as Income:
The primary issue was whether the retention money amounting to Rs. 74,42,520 accrued as income to the assessee in the relevant previous year. The assessee argued that under the mercantile method of accounting, the right to receive this amount did not exist in the relevant year as the amount was contingent upon the satisfactory completion of the contract and passing of performance tests. The CIT(A) supported this view, referring to accounting standards and judicial precedents which state that income accrues only when the right to receive it is established. The Tribunal upheld this perspective, noting that the retention money would only accrue as income upon the final acceptance of the plant by the contractee.

2. Change in Method of Accounting:
The Revenue contended that the assessee had changed its method of accounting by not including the retention money as income, which was previously recognized. However, the assessee maintained that it continued to follow the mercantile method and only corrected a past mistake. The Tribunal agreed, stating that the method of accounting had not changed; rather, the correct legal principles were applied in the current year.

3. Matching Principle of Income and Expenditure:
The Revenue argued that not recognizing the retention money would mismatch the income and expenditure, leading to a distorted profit picture. The Tribunal clarified that under mercantile accounting, the principle of matching income with corresponding expenditure is not legally binding. The expenditure incurred is deductible when it is incurred, irrespective of when the corresponding income is recognized.

4. Residuary Ground:
The fourth ground was residuary in nature and did not require a specific decision.

Conclusion:
The Tribunal dismissed the Revenue's appeals for the assessment years 1991-92, 1992-93, and 1993-94. It held that the retention money did not accrue as income in the relevant years as the right to receive it was contingent upon the completion of contractual obligations and satisfactory performance tests. The method of accounting remained consistent, and the principle of matching income with expenditure did not necessitate the inclusion of retention money as income before it was rightfully due.