2012 (10) TMI 436 - AT - Income Tax

Addition on account of enhancement in respect of Retention Money claimed in revised return to be not accrued Held that - It is trite law that as for as possible the tax should be levied on real income. The issue of warranties can be dealt in two manners. If amounts are received than make a provision for warranties in P & L A/c on reasonable parameters which is conventionally allowed in IT assessments. In case of amounts not received, the second method can be to treat the unpaid amounts as not accrued pending settlement of express warranty issues, which is the situation in assesses case. The appellant has undertaken the project and was duty bound to give satisfactory performance as per warranty. For satisfactory execution of contract as also removal of defects ordained by the contract, certain sum is retained. Had the appellant provided for warranty in the accounts or claimed deduction as such, the same would have been allowed. Since the amount set apart being as per agreed terms and is contractually determined, even such provision would be allowable. Therefore looking from both angles, the retention money not payable to the appellant during the year is not accrued and hence not taxable during this year Decided in favor of assessee Dis-allowance of Work Contract Tax Section 43B Revenue contended that appellant failed to furnish any details/evidence for claim of WCT and hence is not allowable Held that - When the tax is deducted by the client in accordance with WCT Act, so far as appellant being a contractor it can be treated to have paid such tax. The revenue cannot disallow the payment and at same time tax the sum received as refund out of such payment. Amounts are allowable u/s. 43 B - additions are therefore deleted for both the years. Dis-allowance of amount disallowed in A.Y. 2007-08 for nonpayment of TDS u/s. 40(a)(ia), which is paid during the relevant financial year and hence claimed as allowable under proviso to S40(a)(ia) Held that - Having disallowed such sum in A.Y. 2007-08 in view of sec. 40(a)(ia) and not sec. 37, it is not open for A.O. to examine them in AY 2008-09. Amount so disallowed for non deduction or non depositing tax before due date will be allowed as a deduction in computing the income of the previous year in which such TDS was paid to govt Decided partly in favor of assessee

Issues Involved:
1. Addition on account of enhancement by CIT(A) in respect of Retention Money.
2. Validity of the revised return filed by the assessee.
3. Disallowance of Works Contract Tax (WCT).
4. Disallowance of TDS claim.
5. Charging of interest under sections 234D and 244A.
6. Non-admission of additional evidence by CIT(A).
7. Non-allowance of amount on which TDS was paid in the relevant year but disallowed in an earlier year for want of TDS deduction under section 40A(ia).

Detailed Analysis:

1. Addition on Account of Enhancement by CIT(A) in Respect of Retention Money:
The first issue pertains to the enhancement of income by the CIT(A) by Rs. 2,74,42,323/- representing retention money retained by the principal according to the terms of the contract. The appellant follows the percentage completion method of accounting (POCM) for revenue recognition. The CIT(A) held that the retention money recognized as revenue in the accounts should be taxed as income, despite the appellant arguing that the retention money was contingent upon the successful completion of the work and defect liability verification. The CIT(A) relied on various case laws, including ED. Sassoon & Co. Ltd., CIT V. Ashokbhai, CIT V. Thiagraja Chetty, and Vishnu Agencies Pvt. Ltd., concluding that the retention money accrued as income upon completion of the work. The tribunal, however, disagreed, citing decisions like CIT V. Simplex Concrete Piles India P. Ltd., Anup Engineering Ltd., and Ignifluid Boilers P. Ltd., which held that retention money contingent on satisfactory completion of work does not accrue as income until the conditions are met. The tribunal deleted the addition, emphasizing that real income, not hypothetical income, should be taxed.

2. Validity of the Revised Return Filed by the Assessee:
The CIT(A) rejected the revised return on the grounds that it can only be filed to correct an omission or wrong statement, not for claims where two views are possible. The tribunal overruled this, stating that the revised return was filed to correct a mistake in recognizing retention money as income, which is permissible under section 139(5). The tribunal emphasized that income should not be taxed merely based on accounting entries but on actual accrual.

3. Disallowance of Works Contract Tax (WCT):
For both assessment years, the CIT(A) disallowed WCT claims due to a lack of evidence. The tribunal admitted additional evidence showing payment advices and deducted WCT amounts, allowing the claims under section 43B, which permits deductions based on actual payment.

4. Disallowance of TDS Claim:
The A.O. denied credit for TDS on retention money not considered as income. The CIT(A) allowed the credit, and since the revenue did not appeal this decision, the tribunal found the issue academic and upheld the allowance of TDS credit.

5. Charging of Interest Under Sections 234D and 244A:
The tribunal held that the charging of interest under these sections is consequential and should be recalculated based on the tribunal's order.

6. Non-Admission of Additional Evidence by CIT(A):
The tribunal admitted additional evidence related to WCT and TDS claims, emphasizing their importance in ascertaining the correct payments and deductions.

7. Non-Allowance of Amount on Which TDS Was Paid in the Relevant Year but Disallowed in an Earlier Year for Want of TDS Deduction Under Section 40A(ia):
The tribunal directed the A.O. to verify the payment of TDS in the relevant year and allow the deduction as per the proviso to section 40(a)(ia), which permits deductions in the year TDS is paid.

Conclusion:
The tribunal's judgment emphasized the principles of real income, the permissibility of revised returns to correct mistakes, and the allowance of deductions based on actual payments. The tribunal allowed the appeals partly, providing relief to the assessee on multiple grounds.

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