2013 (7) TMI 421 - HC - Income Tax

Accrued income - whether a sum which represented retention money for fulfillment of the contract by the assessee should be treated as accrued income Held that - The assessee had not to receive the sum and therefore it cannot be said that the amount had accrued to the assesse - unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him - A debt must have come into existence and the assessee must have acquired a right to receive the payment - assessee did not get any right to receive the sum which could have been retained in pursuance of the contract - One has to look at the contract and not at the entries made in the books of account - by no stretch of imagination it can be said that the said amount had accrued by way of income to the assessee in the previous year in question. As decided in C.I.T. v. Simplex Concrete Piles (India) Pvt. Ltd., (1988 (12) TMI 52 - CALCUTTA High Court) (Cal.) it was held that case that when there is a clause with regard to retention money, the assessee gets no right to claim any part of the retention money till the verification of satisfactory execution of the contract is concluded and, therefore, if there is no immediate right to receive the retention money, the said amount cannot be said to have accrued to the assesse appeal decided against revenue.

Summary

Issues:
1. Whether retention money should be treated as accrued income.
2. Application of previous judgments to the current case.

Issue 1:
The primary issue in this case was whether a sum of Rs.6.24 crores, representing retention money for contract fulfillment, should be considered as accrued income. The assessee argued that the retention money was withheld as per the contract terms until satisfactory completion and submission of certificates, thus not constituting income until fulfillment. However, the Assessing Officer considered it as accrued income, leading to an appeal by the assessee.

Analysis:
During the Assessment Year 2002-03, the assessee contended that the retention money should not be treated as income until the contract terms were met. The CIT(Appeals) deleted the addition, but the Revenue disagreed and approached the Tribunal. The Tribunal, in its order, emphasized the distinction between the current case and previous judgments, specifically the case of DCIT vs. Amarshiv Construction Pvt. Ltd. The Tribunal highlighted that in the present case, the assessee had not received any money from the retention amount, unlike the situation in the referenced case. Therefore, the Tribunal upheld the decision of the CIT(Appeals, stating that the reliance on the previous judgment was misplaced.

Issue 2:
The second issue revolved around the application of previous judgments to the current case. The Tribunal referred to the decision of the High Court in the case of Anup Engineering Ltd. Commissioner of Income-tax, which dealt with the accrual of income based on contractual terms and the creation of a debt in favor of the assessee.

Analysis:
In the case of Anup Engineering Ltd., the High Court analyzed whether income had accrued based on the existence of a real income and the creation of a debt in favor of the assessee. The Court emphasized that unless a debt was created, and the assessee had a right to receive payment, income could not be deemed to have accrued. This principle was further supported by the judgment in C.I.T. v. Simplex Concrete Piles (India) Pvt. Ltd., which clarified that if there was no immediate right to receive retention money as per the contract terms, it could not be considered as accrued income. The Court dismissed the Tax Appeal based on these principles and the specific circumstances of the case.

In conclusion, the High Court upheld the decision that the retention money should not be treated as accrued income until the contractual obligations were fulfilled, in line with the principles established in previous judgments. The analysis of the contractual terms and the absence of immediate rights to the retention money were crucial factors in determining the accrual of income in this case.