2013 (5) TMI 363 - HC - Income Tax

Accrual of income - Addition in income including disallowance on account of retention money related to the contract - Held that - In Commissioner of Income Tax vs. Chanchani Brothers (Contractors) Pvt. Ltd, 1986 (2) TMI 26 - PATNA High Court , Commissioner of Income Tax, Simplex Concrete Piles (India) Pvt. Ltd., 1988 (12) TMI 52 - CALCUTTA High Court , it has been held that the right to receive retention money accrues only after the obligations under the contract are fulfilled. Therefore, it will not amount to income of the assessee in the year in which amount is retained. - In view of the consistent view of the different High Courts with there is no substantial question of law involved.

Summary

Issues:
1. Interpretation of Income Tax Act, 1961 regarding treatment of retention money as assessee's income.
2. Disallowance of retention money by Assessing Officer.
3. Applicability of judicial precedents on the accrual of retention money as income.

The High Court judgment pertains to an appeal under Section 260-A of the Income Tax Act, 1961, concerning an order by the Income Tax Appellate Tribunal for the assessment year 1996-97. The main issue raised was whether the retention money of Rs. 4,15,011 retained by the authorities could be treated as the assessee's income for the year despite being assessed on an accrual basis. The respondent, a construction company, had filed its return of income showing a net loss, which included the disallowance of retention money by the Assessing Officer pending successful completion of work. The Commissioner of Income Tax (Appeals) set aside the disallowance, a decision upheld by the Tribunal.

The counsel for the assessee cited various judicial precedents, including cases like Commissioner of Income Tax vs. Chanchani Brothers (Contractors) Pvt. Ltd and others, to support the argument that the right to receive retention money only accrues upon fulfilling contract obligations, hence not constituting income in the year of retention. The High Court concurred with this view, noting the consistent stance of different High Courts on the matter. Consequently, the Court found no substantial question of law warranting consideration and dismissed the appeal.

In conclusion, the judgment clarifies the treatment of retention money under the Income Tax Act, emphasizing the accrual principle and the timing of income recognition. It underscores the importance of contractual obligations in determining the accrual of income, aligning with established judicial interpretations. The decision provides clarity on the tax implications of retention money for businesses engaged in construction activities, offering guidance based on legal precedents and principles of income recognition.