2020 (2) TMI 346 - AT - Income Tax

Disallowance of expenditure towards retention money/security deposited KID, EOT etc. which resulted in reduction of taxable income - HELD THAT - The assessee in the instant case, claims that a certain portion of bill has been kept as a lien in the custody of the contractee till the fulfillment of the conditions specified in the contract. Naturally, such retention money would accrue only where the terms of the contract stands fulfilled. In the absence of its accrual, the income cannot be taxed under mercantile system of accounting on a hypothetical basis. We find considerable force in the aforesaid plea of the assessee. It is not the case of the Revenue that the work under the contract has been completely fulfilled. The unrealized portion of the bills raised by the contractor assessee is in the league of contingent income until and unless the terms and conditions of the contract stands fulfilled. We find complete merit in the argument laid on behalf of the assessee on this score. When seen differently, we also find substance in the case made out that the assessee has booked the unrealized portion of the bill in the year of realization as and when happened. Therefore, the action of the assessee does not cause any prejudice to the Revenue and is tax neutral. In such circumstances, when seen in combination, we are inclined to accept the claim of the assessee for non-taxability of unrealized income kept in the custody of the contractee as per the terms of the contract. For the reasons narrated, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of expenditure Chargeability of interest u/s 234B - HELD THAT - As relying on M/S ANAND VIHAR CONSTRUCTION PVT. LTD. AND VICE-VERSA. 2018 (11) TMI 1738 - ITAT RANCHI AO is directed to delete the levy of interest under s.234B of the Act.

Summary

Issues Involved:
1. Disallowance of expenditure towards retention money/security deposits.
2. Chargeability of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Towards Retention Money/Security Deposits:
The primary issue concerns the disallowance of ?1,07,35,959/- claimed as expenditure towards retention money/security deposits by the assessee. The assessee, engaged in the business of civil contracts, followed an accounting policy where retention money withheld by contractees was excluded from gross receipts until actual realization. The Assessing Officer (AO) disallowed this deduction, deeming it contingent in nature and not allowable under the Income Tax Act. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who emphasized that the expenditure was not an actual liability but a contingent one. The CIT(A) referenced various legal precedents to support the disallowance, including cases like *Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT* and *Sutlej Cotton Mills Ltd. vs. CIT*. The Tribunal, however, found merit in the assessee's argument that the right to receive the retention money arises only upon fulfilling contractual obligations, making the income contingent until then. The Tribunal held that the accounting practice of recognizing income on actual realization was justified and directed the AO to delete the disallowance.

2. Chargeability of Interest Under Section 234B:
The second issue pertains to the chargeability of interest under Section 234B amounting to ?17,66,016/-. The Tribunal referred to a precedent from the jurisdictional High Court in *Ajay Prakash Verma*, which held that interest under Sections 234A and 234B should be levied on the income declared in the return, not on the assessed income. Following this precedent, the Tribunal directed the AO to recompute the interest based on the income declared by the assessee in the return, thereby deleting the additional interest charged.

Separate Judgments Delivered by the Judges:
The judgment does not indicate separate judgments delivered by different judges; hence, it is treated as a unified decision by the Tribunal.

Conclusion:
In conclusion, the Tribunal allowed the appeals of the assessee for the respective assessment years, directing the deletion of disallowances towards retention money/security deposits and the recomputation of interest under Section 234B based on the declared income. The Tribunal's decision was based on the principles of recognizing income on actual realization and adhering to consistent accounting practices.