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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 ..... wable. Therefore looking from both angles, the retention money not payable to the appellant during the year is not accrued and hence not taxable during this year – Decided in favor of assessee Dis-allowance of Work Contract Tax – Section 43B – Revenue contended that appellant failed to furnish any details/evidence for claim of WCT and hence is not allowable – Held that:- When the tax is deducted by the client in accordance with WCT Act, so far as appellant being a contractor it can be treated to have paid such tax. The revenue cannot disallow the payment and at same time tax the sum received as refund out of such payment. Amounts are allowable u/s. 43 B - additions are therefore deleted for both the years. Dis-allowance of amount disallowed in A.Y. 2007-08 for nonpayment of TDS u/s. 40(a)(ia), which is paid during the relevant financial year and hence claimed as allowable under proviso to S40(a)(ia) – Held that:- Having disallowed such sum in A.Y. 2007-08 in view of sec. 40(a)(ia) and not sec. 37, it is not open for A.O. to examine them in AY 2008-09. Amount so disallowed for non deduction or non depositing tax before due date will be allowed as a deduction in computing the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of following works of power project: i. Spillway ii. Underground grouting and drainage work iii. Diversion of tunnel plugs. 4.2. The total expected sub contract value was based on unit rates and indicated quantities amounting to about Rs. 232.55 crores to be executed over a period. The contract provided that the final price would be calculated taking into account the total work done and the quantities actually performed as per final billing between ITD and NTPC, which was to be preceded by technical checks and fulfillment of defect liability. Clause 10 of the contract provided for retention of 5% of contract value towards security deposit, further 2.5% of the running bill to be deducted on completion of 12 months period from the date of letter, and further 2.5% of the running bill to be deducted after completion of 24 months from the issued of the letter. Thus the final retention totaling to 10% of the contract value was to be paid after the engineer in-charge has satisfied himself that all the terms of this contract have been duly and fully carried out by the appellant after 90 days after the completion of defect liability period and on submission of the document indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material recovery, works contract tax (WCT) and other recoveries etc. Various case laws were also cited. (v) It was pleaded that entries in the accounts by themselves do not create taxliability which depends on the real nature of the receipts. (vi) The mistake in computation of income can be revised by assessee by filing a revised return of income. Assessee has accordingly revised the return as per the provisions of law. 4.5. The ld. CIT(A) rejected assessee s claim on following parameters: i. time of taxability ii. Quantum iii. Revision of return. 4.6. On the parameter of time of taxability the CIT(A), in para 5.6, concluded that the accrual of income depends on its right to receive the same from the person to whom it has rendered services or sold the goods. The timing of a right to receive the income getting crystallized depends upon the terms of the agreement between the parties and other prevailing facts and circumstances. It was held that retention money has been recognized by assessee as revenue in the accounts. The variation in the estimated price could happen only by invoking escalation clause or calculation of final price as per final billing. Delay in perfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on which two views are possible, revision of return is not permissible. Revision of return, can be only for bona fide and patent mistake which is not the case and hence not permissible. 4.10. Based on these observations CIT(A) rejected that revised return as not being maintainable in terms of sec. 139(5). On merits also it was held that revised claim excluding retention money from receipt was untenable. 4.11. Aggrieved, the assessee is before us. 5. Ld. A.R. invited our attention to the terms of contract, nature of defect warranty and the overriding effect of enforcement of warranty on the accrual of retention money as income. R.A. bills payment advices as approved by ITD and contends that the amount is retained in terms of clause 10 of the contract between the appellant and ITD. It is vehemently contended that: (i) Taxability of income is based on the principles of accrual as per sec. 4 and 5 of the Act and not on the basis of the accounting treatment given in the accounts. (ii) Ld. CIT (A) has recognized the principles of accrual of income by mention in para 5.6 of his order that;- It is trite law that the accrual of income in the hands of an assessee depends upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in anticipation nor they can be waived as per the binding terms of the contract. (vii) This is further evident from the fact that defect liability clause was invoked by the contractor asking assessee to undertake huge corrections of defects. Disputes ensued and till date assessee has not got the retention money and matters are pending in lengthy and tedious arbitration proceedings. The contingent nature of retention money on factual terms is thus clearly demonstrated in assessee s case. 5.1. Various authorities have laid down the proposition in favor of the assessee. Some of the judicial authorities relied are: (a) CIT V. Simplex Concrete Piles India P. Ltd. 179 ITR 8(Cal), Hon ble court has decided the similar issue by holding that: 9. On these facts, we have to consider whether the right to receive the retention money accrued to the assessee on submission of bill. In the case of A. Gajapathy Naidu ( supra) the Supreme Court had occasion to examine the question and laid down that when the ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, viz., (i) what is the system of accountancy adopted by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have received Rs. 4 lakhs from G , by no stretch of imagination it could be said that the said amount had accrued by way of income to the assessee in the previous year in question. As the plant was not up to the satisfaction of G , G had a right to retain Rs. 4 lakhs. It was not in dispute that during the previous year in question, the dispute as to quality of the plant had arisen and the assessee had also felt that the quality of the plant was not up to the mark and, therefore, believing that G might ultimately retain Rs. 3 lakhs or under the warranty clause the assessee might have to pay Rs. 3 lakhs, the assessee made a provision for Rs. 3 lakhs by deducting the said amount from the sales account. In fact, in the previous year in question, the assessee had no vested right to receive Rs. 4 lakhs and, therefore, it could not be said that income to that extent had accrued to the assessee. The above conclusion would be tested in a different manner too. Whether G was liable to pay Rs. 4 lakhs to the assessee in spite of the fact that quality of the plant was admittedly not up to the mark? Did the assessee get a vested right to get the said amount? The answer to these q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances, it cannot be said that 10 per cent retention money retained by the principal contractor accrued to the assessee during the relevant assessment year for consideration? Under the Income-tax Act, the income accrued or received by The assessee alone is taxable. This position is fortified by/the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 wherein it has been held as follows (page 148): "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranties. In this case also so far the retention money has not been given and assessee has been embroiled in disputes and arbitration proceedings. 5.7. Further reliance is placed on: - CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144(SC) - Godhra Electricity Co. Ltd 226 ITR 746(SC) 5.8. The concept of provision of warranty is well recognized in accounting and allowed under income tax provisions; various judicial authorities have held the provision for future warranty as allowable deduction provided it is quantified in scientific manner. Thus the amount of warranty, even not spent but provided for, in books as a warranty provision is allowed as expenditure provided it is based on scientific method. If the retention amount is sought to be taxed on accrual basis in that case an equal amount should alternatively be allowed as provision for warranty. The calculation is based on scientific working i.e. an enforceable contract. Consequently if the amount is added in receipts an equal amount is alternatively eligible to be treated as provision for warranty, which will lead to same taxable income in this behalf. 5.9. Hon ble Supreme Court in RotarkControls (India Pvt. Ltd) 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a over the years also indicated that being sophisticated items no customer was prepared to buy valve actuators without a warranty. Therefore, warranty became an integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. Therefore, warranty provision needed to be recognized because the assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate could be made of the amount of the obligation. In short, all the three conditions for recognition of a provision were satisfied in the instant case. [Para 12] In the instant case, one was concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust, then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. Hence, on the facts and circumstances of the instant case, provision for warranty was rightly made by the assessee because it had incurred a present obligation as a result of past events. There was also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the assessee had incurred a liability during the relevant assessment years and it was entitled to deduction under section 37. Therefore, all the three conditions for recognizing a liability for the purpose of provisioning stood satisfied in the instant case. There are four important aspects of provisioning, viz., provisioning which relates to present obligation; it arises out of obligating events; it involves outflow of resources; and lastly, it involves reliable estimation of an obligation. Keeping in mind all the four aspects, the High Court should not to have interfered with the decision of the Tribunal in the instant case. [Para 13] From analysis of the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts to wrong statement in the return while computing the taxable income under the head income from business. Therefore, assessee has a right to revise of such return. 5.14. CIT (A) has wrongly interpreted sec. 139(5) same as akin to sec. 154, which are two different provisions and deal with distinct situations. Sec. 154 is applied when AO or any other authority has already passed an order and such order contains any mistake apparent on record . 139(5) prescribes revising of a return which is an act of assessee prior to passing of any order. The words of both sections are conspicuously different. The case laws relied upon by ld. CIT(A) are not applicable to facts of present cases, the cases of Hon ble Calcutta and Bombay high court relied on are not discussed at all there is a mere mention in order i.e. para no. It is accordingly prayed that addition made in this regard be deleted. 5.15. It is pleaded that in the next year i.e. AY 2007-08 retention money was excluded from the receipt which has been allowed to assessee in 143(3) assessment by AO. 5.16. On a query from the bench as to when income in respect of retention money are not taxable, how corresponding expenses can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared policy in accounts. Original return was filed based on these accounts which were admittedly prepared on the basis or revenue recognition as per its accounting policy. There is no mistake in original return as it was filed according to the declared accounting policy. In the absence of any mistake assessee can not revise the return as it pleases. 6.2. It is further pleaded that sec 139(5) reads as under: [(5) If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier : Provided that where the return relates to the previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.] 6.3. A plain reading of this section reveals that a return can be revised on the basis of any omis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deducted as security deposit from each running bills. Further retention equal to 2.5% of the running bill will be deducted on completion of 12 months period from the date of this letter. A further retention equal to 2.5% of the running bills will be deducted after completion of 24 months from the date of this letter. Thus the final retention will be 10 %( ten percent) of the running bills. The retention shall be returned to MCM after the Engineer in charge has satisfied himself that all terms of this contract have been duly and fully carried out by the MCM or after 90 days after the completion of defect liability period and on submission of the documents indicated in the main contract we have with NTPC under sub-clause 10.1 of conditions of Particular Application. 12.0 Defect Liability The defect liability period shall be 12 months after the certified date of completion of the work. During the said defect liability period, you shall be responsible to make good and remedy at your own expenses any defect which any develop or may be noticed before expiry of the said period. 7.1. As regards merits of the additions, the same is made primarily on the ground that the income thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt Ltd. (283 ITR 295) - The law laid down in simplex case (supra) and Ignifluid case (supra) has been followed in case of CIT v. Associated Cables Ltd. (283 ITR 295) and in CIT v. East coast construction Industries Ltd. (283 ITR 297). 7.5. These judgments have held that retention money depending on contingencies can accrue to assessee when contingencies are over. In the mean time they can not be treated as accrued income as per sections 4 5 of the I.T. Act. 7.6. Hon ble Delhi High Court, in the case of Devsons (P.) Ltd. v. CIT (329 ITR 483) observed thus: 18. . Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. See, CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 , 148 (SC) [Emphasis supplied] 19. The Bombay High Court in the case of H.M. Kashi Parekh Co. Ltd. v. CIT [1960] 39 ITR 706 reiterated if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the representative suits filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assesseecompany had not been able to realize the enhanced charges. No real income having accrued, it was held, the amount due on enhancement was not assessable. 22. In a subsequent decision rendered in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 3151 , the Supreme Court, following its earlier decision in Godhra Electricity Co. Ltd. s case (supra) affirmed the decision of the Patna High Court wherein it was held that the entry in the books of account shown as income from Hindustan Steel Ltd. for the 8 locomotives supplied by the assessee-company to them could not be brought to tax as income since this entry reflected hypothetical income and only the real income could be brought to tax. 23. This court in CIT v. Modi Rubber Ltd. [1998] 230 ITR 817 2, followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only bank guarantee was provided for successful working of the equipment supplied. Even the cases of high court in respect of retention money were found distinguishable on facts of that case and not that new law other than that laid down by Calcutta or Bombay high courts is decided. 7.10. There is another way of looking at the issue. In many cases of technical specification of works, services to be executed the assessee provides provision for warranties which relate to future. Such provisions are also allowed as expenditure if they are made on reasonable parameters. It is trite law that as for as possible the tax should be levied on real income. The issue of warranties can be dealt in two manners. If amounts are received than make a provision for warranties in P L A/c on reasonable parameters which is conventionally allowed in IT assessments. In case of amounts not received, the second method can be to treat the unpaid amounts as not accrued pending settlement of express warranty issues, which is the situation in assesses case. The appellant has undertaken the project and was duty bound to give satisfactory performance as per warranty. For satisfactory execution of contract as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the claim and allowed the same. During the course of appellate proceedings, the appellant was required to furnish the details of payment and proof for same. The appellant submitted that as per Works Contract Tax Act, every client is required to deduct WCT from the bills of a contractor/sub-contractor just like TDS under the income tax Act. The amount is shown as asset in the accounts and is written off only on final assessment. However, under the Incometax Act, u/s. 43B the same is allowable irrespective of method of accounting only on basis of actual payment thereof. Since the amount is already deducted and paid by client to government, same is allowable. Ld. CIT (A) held that in spite of opportunities, the appellant failed to furnish any details/evidence for claim of WCT and hence is not allowable. 9. Ld. Counsel for the appellant submitted that the WC Tax though payable by the appellant, is deducted as per the provision of WCT Act. It is actually to be deducted at time of payment to the contractor. The appellant has provided proof of payment advices showing deduction of such tax which are placed on paper book and before CIT (A). The amount are ultimately to be pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffered which includes unaccrued retention money. Therefore, in any case assessee is eligible for TDS credit. 13. The next issue in appeal for A.Y. 2008-09 raised in ground no. 3 and 4 thereof is against disallowance of Rs.4,48,63,434/-, being amount disallowed in A.Y. 2007-08 for nonpayment of TDS u/s. 40(a)(ia), which is paid during the relevant financial year and hence claimed as allowable under proviso to sec. 40(a)(ia). 13.1. The facts in this regard are that the appellant for financial year relevant to A.Y. 2007-08 incurred various expenses on which TDS was deducted as per scheme of the Act. However, the said TDS was not deposited before the specified dates and hence was not allowable under provision of sec. 40(a)(ia). The appellant itself while filing return disallowed such sum. Such tax was deposited to the credit of government during the financial year relevant to A.Y. 2008-09. Therefore in terms of proviso to sec. 40(a) (ia), such expenses were claimed as allowable. The A.O. in this year proceeded to examine expenses. He called for the details like address, PA no. to ascertain that the nature of expenses for business. The amounts were disallowed alleging details were n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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