2014 (3) TMI 940 - HC - Income Tax

Taxability pertaining to retention money - Whether on the facts and in the circumstances of the case and on appreciation of correct position of law read along with documentary evidence on record the Tribunal s ultimate finding and the conclusion of taxability pertaining to retention money for the year under consideration is contrary to settled position of law and against the documentary evidence on record with the result that the ultimate finding and conclusion is vitiated in the eyes of law Held that - The test as to whether the income accrued to the assessee is real or hypothetical and whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view, it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic. There was no material change by virtue of the amendment in clause 5.4 to the general conditions in so far as the question of accrual of income is concerned - Right to receive the sum was even before the amendment uncertain and therefore contingent - Upon satisfactory completion of several factors, even after the amendment, the same conditions applied - Same uncertainly and unpredictability prevailed - The assessee had no absolute right to receive the amount - SSNNL had no obligation to release the same before completion of warranty period and even thereafter would release the amount only after making permissible adjustments - Mere fact that in the present case no recoveries were made from the bank guarantee or security deposit is of no consequence. Mere fact that the amount was received by the assessee would not mean that income had accrued - Whether income did accrue or not would depend on the fact whether the right to receive said amount had accrued or not - The fact that tax was deducted at source on said amount also would be of no consequence - Tax was deducted by SSNNL - The assessee had no control over such deduction - Merely whether tax was deductible or not would not decide the taxability of certain receipts - the manner in which the assessee accounted for such receipt in its books of account can also not determine its tax liability Relying upon Kedarnath Jute Mfg. Company Limited v. Commissioner of Income-tax Central , Calcutta 1971 (8) TMI 10 - SUPREME Court - the expenditure incurred by the assessee could not be proportionately divided into that covering the assessee s ninety per cent of the bill amount and relatable to the rest ten percent - the Tribunal had committed an error in allowing the Revenue s appeals the AO is directed to tax the retention money in the assessment year relevant to the previous year in which retention money becomes payable to the appellant as per the terms of the contracts ie., after the defect liability is over and after the Engineer-in-Charge certifies that no liability attaches to the appellant Decided in favour of Assessee.

Issues Involved:
1. Taxability of retention money received by the assessee upon furnishing a bank guarantee.
2. Determination of the right to receive income under the terms of the contract.
3. Applicability of accounting standards and tax deduction at source (TDS) on the disputed receipt.
4. Interpretation of judicial precedents regarding retention money and income accrual.

Detailed Analysis:

1. Taxability of Retention Money:
The primary issue is whether the retention money amounting to Rs. 1,58,70,856/- received by the assessee upon furnishing a bank guarantee should be taxed in the year of receipt. The Tribunal held that since the amount was received by the assessee, it should be taxed during the year under consideration. However, the High Court reversed this decision, emphasizing that the right to receive such income had not accrued due to the conditions stipulated in the contract.

2. Right to Receive Income:
The High Court examined the terms of the contract between the assessee and SSNNL. It was noted that the retention money would be withheld until the satisfactory completion of the contract and certification by the Engineer in Charge. Even though the assessee received the retention money upon furnishing a bank guarantee, the right to receive the income was contingent upon the completion of the defects liability period and certification of no liability by the Engineer in Charge. The Court held that the right to receive the amount had not accrued, and thus, the income could not be taxed in the year of receipt.

3. Applicability of Accounting Standards and TDS:
The Tribunal had relied on Accounting Standards (AS) 9 and 7 to argue that revenue recognition should not be postponed. However, the High Court found this reliance misplaced, as the assessee did not follow the percentage completion method. The Court also addressed the issue of TDS, noting that the mere deduction of tax at source by SSNNL did not determine the taxability of the receipt. The Court emphasized that the taxability depended on the accrual of the right to receive the income, not on the TDS or the accounting treatment.

4. Judicial Precedents:
The High Court referred to various judicial precedents, including the decisions in Anup Engineering Limited v. Commissioner of Income-tax, Simplex Concrete Piles (India) Private Limited, and Ignifluid Boilers (I) Limited, which held that retention money does not accrue as income until the completion of the contract and the defects liability period. The Court concluded that the character of the retention money remained unchanged despite the amendment allowing the assessee to receive the amount upon furnishing a bank guarantee. The right to receive the amount was still contingent upon the conditions specified in the contract.

Conclusion:
The High Court allowed the appeals, reversing the Tribunal's decision and reinstating the judgment of the Commissioner of Income-tax (Appeals). The Court directed that the retention money should be taxed in the assessment year relevant to the previous year in which the retention money becomes payable to the assessee, i.e., after the defects liability period is over and the Engineer in Charge certifies that no liability attaches to the assessee. The Court emphasized that the right to receive the income had not accrued in the year of receipt due to the contingent nature of the retention money under the contract terms.

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