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TMI Blog2012 (10) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... st u/s u/s 234D and mistakes in interest on refund u/s 244A. AY 2008-09 (i) Non admission of additional evidence by CIT(A). (ii) Non allowance of amount of Rs. 4,48,63,434/- on which TDS was paid in this year and was disallowed in earlier year for want of TDS deduction u/s 40A(ia). (iii) Enhancement by CIT(A), rejecting the claim of Works Contract Tax (WCT) of Rs 13,02,848/-. 4. The first issue in appeal for AY 2006-07 relates enhancement of income by the Ld. CIT (A), by an amount of Rs 2,74,42,323/- representing retention money retained by the principal according to the terms of contract. The appellant follows percentage completion method of accounting (POCM) for recognition of revenue in its books of accounts. 4.1. One M/s. Italian Thai development Public Co. Ltd. (ITD for short) was awarded a major contract by NTPC in a project known as Kol Dam Hydroelectric Power Project. Part thereof was sub-contracted by ITD to the appellant, the stipulations provided retention of amounts described herein below by ITD for successful completion of work and defect warranty period of 90 days after the completion of the contract in accordance with terms between NTPC and ITD. Accordingly as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings, the ld. CIT(A) required the appellant to show as to why such retention money should not be brought to tax, the appellant contended that: (i) The retention money is retained by the contractor ITD in terms of the binding agreement and the appellant has no legal right in its favour to claim it until the defect liability verification is completed at the end of original contractor. Thus during the accounting period in question these unpaid amounts are contingent, assessee had no claim over it. and not taxable receipts. (ii) It was, intera lia, contended that since such sum is realizable only on satisfactory completion of the project and also end of defect liability period, the amount is not liable to tax in this year. (iii) The verification of satisfactory completion and compliance of defect liability were tedious and uncertain processes. It required fulfillment of defect liability warrantly, which is legally binding and enforceable on assessee. (iv) The appellant filed copy of relevant contract between ITD and NTPC, ITD and appellant, nature of defect liability as embodied in the contract. Its effect on withholding the amounts by contractor. Copy of running bills demonstrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co. Ltd. (25 ITR 27) - CIT V. Ashokbhai (56 ITR 42) - CIT V. Thiagraja Chetty (24 ITR 525) - Vishnu Agencies Pvt. Ltd. (48 ITR 444) 4.7. Applying the above case laws, it was held that assessee had earned a right to receive the retention money upon completion of the work up to a certain stage. The retention money /security deposit was only to ensure that appellant complies to the defect liability clause. Even if retention money was to be forfeited, it will not affect the accrual of income in first place that happened on performance of the work. 4.8. On the parameter of quantum of retention money, ld. CIT(A) held that since as per revised return claim was of Rs. 2,74,42,323 but the same could not be reconciled, and as per their submissions, the sum is only Rs. 2,70,41,118 the claim is not clear and hence the same is not tenable. 4.9. On the parameter of validity of claim in the revised return, Ld. CIT (A) held that revised return can be filed only when the assessee discovers any omission or wrong statement in the return and not otherwise. The scope of revised return on the ground of mistake is by and large on same basis as rectifying a mistake as in Sec. 154. Since revision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the appellant and retention is only application of income. It has been totally ignored that the retention money is contingent upon technical verification of the contractor and its engineer in charge who has to certify that all minor specifications of contract work have been duly and fully carried out by appellant. The retention money is thus contingent upon uncertain checks, satisfaction of third parties defect warranty and become income only when these formalities are completed. (v) In case of defects found by the contractee and its technical agencies;. If they are not removed at the cost of appellant, the retained amount in this behalf will not be released. Similarly if defect is not found after completion of work, but if defects crop up during the warranty period appellant has to remove such defects at its cost. On failure to so remove the defects, the retained amount is liable to be forfeited. These contingencies have not been disputed (vi) An amount which is liable for forfeiture with other damages can by no stretch of imagination be construed as accrued to assessee. Thus there exist various contingencies for accrual of impugned amounts. The contingency can neither be fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus it has been held that unless the conditions of satisfactory completion of the work are satisfied, no right to receive such amount/income accrued to assessee. Even if assessee follows mercantile system of accounting, the income can not be held to be accrued. 5.3. This judgment has been followed by Hon'ble Gujrat High Court in Anup engineering Ltd. (247 ITR 457), holding as under: "Looking to the facts of the present case and in the light of the law laid down by the Supreme Court in the cases referred to hereinabove, it was very clear that 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. In the instant case, the assessee did not get any right to receive the sum of Rs. 4 lakhs which could have been retained by 'G' in pursuance of clause No. 14 of the contract. One has to look at the contract and not at the entries made in the books of account. If, upon construction of the contract, one came to a conclusion that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the said amount, it was not proper on the part of the revenue to treat the same as income accrued to the assessee. Even if it was assumed that the income had accrued to the assessee, the assessee's liability with regard to repairs of the plant as per the terms of the contract had also arisen in the same previous year. If the liability had also arisen in the same previous year in which the income had accrued, the said amount of liability ought to have been deducted from the amount of income accrued. The said view taken by the Commissioner (Appeals), while allowing the deduction claimed by the assessee, would be correct in that event. Therefore, in any view of the matter, the assessee would be entitled to claim Rs. 3 lakhs by way of deduction and, therefore, the revenue ought not to have disallowed the said claim." 5.4. Hon'ble Madras High Court in the case of CIT v. Ignifluid Boilers P. Ltd. (283 ITR 295) held as under: " The facts are not disputed 10 per cent of the retention money has not been received in respect of the relevant assessment year though the work has been completed. The assessee is entitled to receive the amount only after successful completion of work. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that matter has held that the payment of retention money in the case of contract is deferred and is contingent on satisfactory completion of contract work. The right to receive the retention money is accrued only after the obligations under the contract are fulfilled and, therefore, it would not amount to an income of the assessee in the year in which the amount is retained. The other judgment relied upon is in the case of CIT v. Ignifluid Boilers-(I). Ltd. reported in [2006] 283 ITR 295 (Mad.). In that judgment also, a Division Bench of the Madras High Court has held that the amount retained does not accrue to the assessee and, therefore, the assessee would not be liable. In view of what is stated above, there is no reason to entertain the appeal. The appeal is dismissed". 5.6. Thus various High courts by a series of judgments have held that retention money can not be held to be accrued to assessee unless the conditions governing retention money are satisfied. In assessee case not only ordinary conditions were there, the retention was made on technical conditions about defect warranty and restoration of work. In many cases the assessee ends uploosing more money in such defect w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts), the probability that an outflow will be required in settlement is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item, the provision for warranty can constitute a contingent liability not entitled to deduction under section 37. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative but to settle that obligation. In the instant case, the assessee had been manufacturing and selling valve actuators. It was in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years, the assessee had been manufacturing valve actuators in large numbers. The statistical data indicated that every year some of the manufactured actuators were found to be defective. The statistical data over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortant that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required, particularly if the experience suggests that warranty provisions are generally reversed if they remain unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis, a sensible estimate should be made. The warranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , award is awaited. The figures cannot be exactly tallied, however as per each running bill and payment advices accounted for the amount is retained while releasing the bills the sum was specifically debited to advances accounts which has been certified by auditors also. This leads to a small difference of just 4 lacs only, the claim may be reduced to this extent. 5.12. That facts that the contract has run into trouble, nonpayment of retention money, impending arbitration and invoking of contract clauses and defect liability parameters demonstrate that the payment of retention money depends on various contingencies and this money had not accrued to assessee. 5.13. It is further contended that the revised return can be filed u/s. 139(5) where an assessee either discovers any omission or discovers any wrong statement therein which will include mistake in claiming any deduction or overstatement of income. The interpretation of conditions for filing revised return adopted by CIT(A) is bereft of any legal sanctity and leads to illogical results defeating the provisions of I T Act. As the retention money income did not accrue in favor of appellant, the same amounts to wrong statement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of other grounds, ld. counsel pleaded that additional evidence in respect of works contract, tax & TDS may be admitted which are in the form of challans and accounts in this respect. This is to demonstrate that the liabilities are paid. 5.19. After hearing both the parties, we are of the view that it is in the interest of justice to admit them as they have vital role in ascertaining such payments. 6. The Ld. D.R strongly relied on the order of ld. CIT (A), the enhancement is defended as AO allowed the claim ignoring the provisions for revised return and accounting principles. CIT (A) was not satisfied with the claim and the method by which the claim was made. Enhancement is based on a specific notice which is duly replied by the appellant. Therefore the enhancement is in conformity with provisions of Sec. 250. It empowers the appellate authority to examine the claim and since no new source of income is brought to tax same is permissible in law. Reliance is placed on: - Gurinder Mohan Singh Nindrajog v CIT (2012) (Del) - CIT v Nirbheram Deluram 224 ITR 610 (SC) 6.1. It is pleaded that assessee follows mercantile method of accounting as its declared policy in accounts. Origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as per accounting standards prescribed by ICAI and the receipts are treated as income on mercantile method the accrual cannot be postponed. 6.6. Ld DR in fine pleads that: (i) Enhancement powers have been rightly exercised by Ld CIT(A). (ii) Revised return has been rightly rejected by CIT(A). (iii) Assessee in order to reduce taxable income, has tried to postpone the accrual which is against its own method of accounts. (iv) Contract clauses do not have the effect of making accrued receipt as contingent or not accrued. They are in the nature of security deposits retained by the principal to ensure completion and proper execution of work by the contractor. (v) The receipts accrued as per the ICAI accounting standards and assessee's own method of accounting. (vi) CIT(A) order is relied on this behalf. 7. Before proceeding with the merit of the additions, it is useful to refer the clauses in the agreement regarding retention money and defect liability period contained in clause 10 and clause 12 respectively in the agreement between appellant and ITD. The same are extracted as under.: 10.0 Retention A Retention of 5% shall be deducted as security deposit from each running bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. This view is amplified in the decision of Hon,ble Supreme court in case of Godhra Electricity Co. Ltd. 225 ITR 746. 7.3. In our view for a receipt to accrue as income an accounting entry can not be only decisive factor. If the same is not accrued it cannot be held as income only because of such entry. The retention money is contingent upon the completion and post warranty certificate from the engineer in-charge of NTPC. Neither the work was completed nor the defect liability period was over. It is also fact that subsequently dispute arose between the appellant and ITD and matter is pending before arbitrator. Thus the fate of such retention money is hanging in balance and it did not accrue as income of the appellant. 7.4. Following case laws specifically determining the taxability of 'retention money' cited by ld. Counsel for assesee are as under: - Calcutta High Court in the case of CIT v. Simplex Concrete Piles India Pvt. Ltd. (179 ITR 8) wherein the court observed thus: - Hon'ble Gujarat High Court in case of Anup engineering Ltd. (247 ITR 457). - Hon'ble Madras High court in case of CIT v. Ignifluid Boilers Pvt Ltd. (283 ITR 295) - The law laid down in simplex case (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 . In the said case the Supreme Court after referring to its earlier decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 , which was also a case where the mercantile system of accounting was being followed by the assessee, observed (89 ITR page 273) : "Hence it is clear that this court in Morvi Industriescase did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income." 21. In Godhra Electricity Co. Ltd. v. CIT [1997]225 ITR 746 1, the Supreme Court reiterated the concept of 'real income', emphasizing that even under the mercantile system, a mere claim by the assessee is not sufficient to make income accrue on the basis of 'hypothetical income' - the income must actually become due. In the said case the Supreme Court inter alia examined the cash system and mercantile system of accounting in the context of 'hypothetical income'. Considering the facts before it, the Court said that although the assessee company was following the mercantile system of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings has rightly observed in its order dated 29-7-2005 that the assessee could not be said to have changed its method of accounting from mercantile to cash and cannot be charged with suppressing the receipts to the extent of Rs. 35,39,631." 7.7. Thus Hon'ble Delhi High Court refers a range of case laws on the issue, though in penalty proceedings; after considering all the available case law on accrual of income u/s 4&5 of the IT Act, accounting principles and entries on merits upheld these principles. 7.8. Reading all the decisions cited above and in view of facts and circumstances of the case, the amount of retention money cannot be held to be accrued and brought to tax as income of the assessee. It is trite law that an accounting entry cannot create taxability of a receipt which depends on contingencies and cannot be treated as accrued income. 7.9. As regards reliance by ld. D. R. on the decision of ITAT Mumbai in case of Emerson Network case (supra), the same will not help the case of revenue. In the said case, no amount was retained by the client for any contingency that may arise in future but only bank guarantee was provided for successful working of the equipment supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... das case (supra). Secondly, the CIT(A) wrongly considered eligibility of filing revised return only in case of 'mistake apparent on record' as envisaged in sec. 154 of the Act. The person is entitled to file revised return when he discovers any omission or any wrong statement therein. Offering income which , which can be validly revised u/s. 139(5) of the Act. 7.13. In view of the fore goings, we delete the addition of Rs. 2,74,42,323 i.e. the amount enhanced by ld. CIT (A). Grounds no. 2 to 4 and ground no. 7 raised by assessee in this regard are allowed. 8. The next issue raised in appeal for both the years relates to disallowance of Works Contract Tax (WCT for short) in ground no. 5 and 6 in both the years. In both the years, the addition is made by CIT (A) by way of enhancement. 8.1. The facts in this regard are that the appellant executing the above referred work raised bills on the client ITD. The client while making the payment deducted such tax. For, A.Y. 2006-07, though the claim was not made in the original return, same was claimed in the revised return. For, A.Y. 2008-09, the A.O. accepted the claim and allowed the same. During the course of appellate proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payable to the appellant. We therefore hold that the amounts of Rs. 57,93,465 for A.Y. 2006-07 and sum of Rs. 13,02,848/- are allowable u/s. 43 B of the act. The additions are therefore deleted for both the years. 12. The next issue in appeal for A.Y. 2006-07 raised in ground no. 8 is against denial of credit for income-tax deducted on contract payments but disallowed proportionately to the extent of retention money not considered as income. The A.O. held that since the retention money is not considered as income, corresponding credit for tax of Rs. 6,15,759 deducted will be allowed only in the year such retention money is offered as tax by invoking sec. 199 of the Act. Ld. CIT (A) held that since such retention money is liable to tax, the appellant is entitled to tax credit for such sum deducted at source. Thus the issued stands decided in favor of the appellant and cannot be said to be aggrieved by such order. The revenue has not filed any appeal against such direction. This ground has therefore become only academic which need not be answered. Besides, the income from the contract has been offered which includes unaccrued retention money. Therefore, in any case assessee is eli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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