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2006 (6) TMI 191 - AT - Income TaxAccrual Of Income - taxation of retention money - character of receipts - whether such money should be taxed in the year in which it accrued as income to the assessee as it was following mercantile method of account - valuation of closing stock and addition made therein of the un-availed Modvat credit - HELD THAT - The learned CIT(A) had pointed out that as per the terms and conditions of the agreement, the assessee could have issued bank guarantee but even on doing so the receipt of retention money will not partake the character of the revenue receipt till the warranty period was over. There was no finding of fact by the learned CIT(A) that the bank guarantee was in fact issued by the assessee to its customers. Thus, there is no reason to disbelieve the contents of the paragraph 6 of the affidavit. Paragraph 4 contains averment of the fact that certain portions of the retention money were received in assessment years 1994-95 and 1995-96 and so on, which were offered for taxation in those years. The case of the learned counsel was that this was not the issue before us and, therefore, it will be dealt with at the appropriate place when discussing the arguments of the learned counsel. Therefore, in view of the aforesaid, we are of the view that there is no need to verify the affidavits by the lower authorities as it does not contain anything which is contrary to the finding of facts given by the learned CIT(A). Apart from that the learned DR did not make any argument on merits of the case of taxation of this amount in this year, except quoting two cases regarding allowability of the future expenditure in performance of the warranty given by the assessee. That issue was not raised by the learned counsel and in any case those decisions go against the revenue. However, we need not go into those cases as the assessee had not made any provision for warranty liability. The first plank of the argument of the learned counsel was that retention money does not accrue as income to the assessee. This argument is supported by the decisions in Simplex Concrete Piles (India) (P.) Ltd.'s case and Anoop Engg. Ltd.'s case. Therefore, we are of the view that since the payment of the retention money is hinged upon the condition of satisfactory performance of the equipment during the warranty period, no debt accrues in favour of the assessee. Therefore, the impugned amount does not accrue as income to the assessee in this year. Accrual of the retention money as income - The learned counsel had initially refused to go into the matter, being outside the jurisdiction of the Tribunal, but later on reluctantly stated that it could be taxed in the year of accrual as well because the assessee was following mercantile method of accounting. Having considered this issue, we are of the view that since the assessee follows mercantile method of accounting, there would be no need to postpone the taxation of the amount to the year of receipt as it is clearly taxable in the year of accrual. Thus, ground Nos. 1 2 are dismissed. Valuation of closing stock - Following the decision of Hon'ble Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. 2000 (8) TMI 69 - BOMBAY HIGH COURT , which was upheld by the Hon'ble Supreme Court in CIT v. Indo Nippon Chemical Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT . It was held that it is not permissible for the Assessing Officer to adopt 'gross method' for valuation of raw material at the time of purchase and 'net method' for valuation of closing stock. In other words, the decision of both the Hon'ble Courts was that the closing stock has to be valued in the same manner in which the cost is valued at the time of purchase. In view thereof, revenue's appeal in this matter is not sustainable. Thus, this ground is dismissed. In result, the appeal of the revenue is dismissed.
Issues Involved:
1. Taxation of retention money. 2. Valuation of closing stock and unavailed MODVAT credit. 3. Inclusion of excise duty and sales tax in total turnover for Section 80HHC deduction. 4. Deductibility of expenses on gift articles to employees. Issue-wise Detailed Analysis: 1. Taxation of Retention Money: The primary issue in several appeals was whether retention money should be taxed in the year it was retained or in the year it was actually received. The Tribunal considered affidavits and precedents, including CIT v. Simplex Concrete Piles (India) Pvt. Ltd. and Anoop Engineering Ltd. v. CIT, which established that retention money does not accrue as income until the performance warranty period lapses. The Tribunal found that the assessee's practice of recognizing retention money as income in the year of receipt was consistent with these precedents. Therefore, it was concluded that retention money retained by customers did not accrue as income in the year it was retained but in the subsequent years when it was received. 2. Valuation of Closing Stock and Unavailed MODVAT Credit: In the revenue's appeal, the issue was whether the addition made by the AO for unavailed MODVAT credit should be included in the closing stock valuation. The Tribunal referred to the decision of the Hon'ble Bombay High Court in CIT v. Indo Nippon Chemical Co. Ltd., upheld by the Supreme Court, which held that the closing stock should be valued in the same manner as the cost at the time of purchase. Consequently, the Tribunal dismissed the revenue's appeal on this ground, finding that the AO's method was not permissible. 3. Inclusion of Excise Duty and Sales Tax in Total Turnover for Section 80HHC Deduction: The assessee contended that excise duty and sales tax should not be included in the total turnover for computing the deduction under Section 80HHC. The Tribunal found this issue covered by the decision of the Hon'ble Bombay High Court in CIT v. Sudarshan Chemical Industries Ltd., which supported the assessee's position. Accordingly, the Tribunal allowed the assessee's appeal on this ground. 4. Deductibility of Expenses on Gift Articles to Employees: The assessee argued that expenses on gift articles given to employees should be deductible as staff welfare expenses. The Tribunal referred to its earlier decision in Maharashtra Scooters Ltd., where similar expenses were allowed as deductible. The Tribunal found no distinction in facts and allowed the assessee's appeal, holding that such expenses were indeed for staff welfare and deductible. Conclusion: The Tribunal dismissed the revenue's appeal regarding the taxation of retention money and valuation of closing stock. It allowed the assessee's appeals concerning the non-inclusion of excise duty and sales tax in total turnover for Section 80HHC deduction and the deductibility of expenses on gift articles to employees. The Tribunal consistently held that retention money does not accrue as income until the performance warranty period lapses, aligning with established legal precedents.
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