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TMI Blog2014 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 1,58,70,856/- 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 ?" Such question arose in the following factual background :The assessee is engaged in the business of civil construction work. Assessee was awarded construction contract by Sardar Sarovar Narmada Nigam Limited ["SSNNL" for short] for construction of a part of the Sardar Sarovar dam and other canal and structural works related thereto. We would refer to the detailed terms and conditions of such contract later. At this stage, we may briefly note that out of the running bills raised by the assessee for such construction work, the SSNNL would retain a portion thereof for satisfactory completion of the work. Such accumulated amount upto a certain ceiling would be withheld for a specified period, to be released at the end of such period, upon being certified by the Engineer Incharge that the construction was carried out without any defects. Such terms of the contract were later on modified. In order to permit greater liquidity to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, was not a case of withholding of retention money but a case where the amount was already released. On such basis, the Assessing Officer taxed the receipt of Rs. 1.58 Crores [rounded off] in the hands of the assessee during the year under consideration when the bill was raised and amount was also received. Assessee carried the matter in appeal. Commissioner of Income-tax [Appeals] reversed the decision of the Assessing Officer. He noticed the terms of contract between assessee and the SSNNL. He held that the right to receive the retention money had yet not accrued. Such right would accrue only after satisfactory completion of the contract and after defect liability period is over and the Engineerincharge certifies that no liability attaches to the assessee. He held and observed as under : "Considering the facts and appellant's submissions discussed in detail above and also considering the terms of the contract stipulated in General Conditions of Contract, it is held that the ratio of the judgments reported in CIT v. Simplex Concrete Piles (India) Limited, 179 ITR 8 (Calcutta); CIT v. Chanchani Bros (Contractors) Private Limited; 161 ITR 418 (Patna) and Janatha Contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant to the assessment year under consideration. The Tribunal noticed the terms of the agreement between the assessee contractor and SSNNL. Though Tribunal agreed that indisputably income would accrue only where there is a right to receive income but on the premise that the assessee had actually received the said sum of Rs. 1.40 Crores, the Tribunal held that the said receipt must be taxed during the year under consideration. To arrive at such decision, the Tribunal relied on the following conclusions : [ a] That the income had accrued to the assessee and thereafter it was retained by way of an additional security. In fact, the amount was received by the assessee upon furnishing the bank guarantee. [b] The decision of Calcutta High Court in case of Simplex Concrete Piles (India) Private Limited [Supra] was distinguishable because in such case, no right had accrued to receive the retained amount which was released only on completion of the work and upon the assessee fulfilling the obligations under the contract. [c] Tax was deducted at source on full amount; including the said disputed receipt. [d] The liability to return the amount may arise in future, if there was insufficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come relating to the retention money came up for consideration. The Court held as under :" 12. The payment of retention money is deferred and is contingent on the satisfactory completion of the work and removal of defects and payment of damages, if any. Till then, there is no admission of liability and no right to receive any part of the retention money accrues to the assessee. Accordingly, the Tribunal was right in directing the Income Tax Officer to examine the question of retention money from this angle and make adjustments regarding the same, if necessary." Reliance was placed on a decision of this Court in case of Anup Engineering Limited v. Commissioner of Income Tax, reported in 247 ITR 457 (Guj) wherein Court placed reliance on the decision of Calcutta High Court in case of Simplex Concrete Piles (India) Private Limited [Supra] and held that so far as retention money was concerned, the assessee had no right to receive the same, and therefore, it could not be said that the same had accrued to the assessee. Counsel pointed out that even the Madras High Court in case of Commissioner of Income Tax v. Ignifluid Boilers (I) Limited, reported in [2006] 238 ITR 295 (Mad), under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provisions was that such commission would become due to the Managing Agents at the end of each financial year or other period for which the accounts of the Company were to be laid before the General Meeting and shall be payable and paid immediately after such accounts had been passed by the General Meeting. It was in this context, the Court held that the commission becomes due normally at the end of the financial year but is payable after accounts have been passed at the General meeting. Having thus heard learned counsel for the parties and having perused the documents on record, we may advert to the relevant terms of the agreement more closely. Clause 5 of the general conditions of contract provides for the manner of security of performance. The relevant clauses initially read as under : " 5.3 In addition to the above initial security deposit, the EngineerinCharge shall deduct from the intermediate bills ie., the running account bills an amount at the rate of ten percent (10%) of the total value of each bills as an additional security deposit subject to the condition that the total amount of such deductions shall not exceed seven and one half percent (7.5%) of the tender ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tendered amount. The contractor had an option to convert such security deposit into interestbearing SSNNL securities or interestbearing deposits with the scheduled Indian Bank in the name of Executive Engineer, Narmada Project Main Canal Construction Division. As per Clause 5.5, the Bank guarantees, the performance bond, interestbearing securities and the interestbearing deposits would remain valid for at least twelve months after the date of completion of the work. Clause 5.6 which has significance provided that the security deposit minus any amount due from the contractor would be returned after defects liability period is over and subject to the EngineerinCharge certifying that no liability attaches to the Contractor. Such terms of the contract were later on amended. The relevant amendments were that in para 5.4, wherein the maximum accumulation of additional security deposit was reduced to 5% of the tender amount. In para 5.4, in addition to an option of converting the security deposit into interest bearing security or deposits, a new option was given to the contractor to convert such security deposit into bank guarantee of the specified banks. These two were significant ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y what the Calcutta High Court held in case of Simplex Concrete Piles (India) Private Limited [Supra]. This Court in case of Anup Engineering Company Limited [Supra] also took a similar view. In the said case, the facts were that the assessee company was in the business of manufacturing vessels used by chemical industries. The assessee executed a contract for supply and erection of a spray drying plant for a consideration of Rs. 40 lakhs. During the period relevant to A.Y 199798, the plant was erected and the assessee was paid a sum of Rs. 34.49 lakhs against the bills raised by the assessee. The assessee, in the books of account, showed a sum of Rs. 40 lakhs to be received from the employer of the contract but debited a sum of Rs. 3 lacs from its sales account by crediting the same to warranty account. As some dispute had arisen with regard to quality of the vessel supplied by the assessee, the assessee apprehended that due to the warranty clause contained in the contract, the assessee might not receive the said amount. It was in this context, the Court held and observed as under: " 7. Looking to the legal position referred to hereinabove, one has to see whether a right had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the revenue believed that the entire income had accrued to the assessee during the previous year in question." Madras High Court in case of Ignifluid Boilers (I) Limited [Supra] also took a similar view in the context of retention money withheld. It was held and observed as under : " 3. 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 such circumstances, it cannot be said that 10 percent retention money retained by the principal contractor accrued to the assessee during the relevant assessment year for consideration. 4. 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 & Company [1962] 46 ITR 144 (SC), wherein, it has been held as follows : "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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional performance guarantee deposit. The assessee could request the employer of the contract to convert such amount into interest bearing securities or deposits. The amount would still remain with SSNNL. After amendment, the assessee had an additional option of receiving the amount but converting the security deposit into a bank guarantee. In other words, the assessee would receive the full running bill amount; including 10% to be set apart by way of additional security deposit, upon furnishing the bank guarantee of a matching sum. In either case, namely as in the preamendment scenario where the assessee would not receive 10% of the running bill amount or post amendment, when such amount would be received by the assessee upon furnishing the bank guarantee, para 5.6 of the general conditions remained unchanged. As per the said condition, the security deposit or the security deposit converted into bank guarantee would be returned to the contractor after defects liability period is over. This would be subject to two conditions - firstly, that the employer of the contract would deduct from such amount, any amount due to it and that the EngineerinCharge certifies that no liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or after the amendment in the conditions. It thus emerge that the character of the amount did not change. It still retained the character of retention money. Its temporary release to the assessee on furnishing the bank guarantee cannot be equated with the right to receive such amount and resultantly with accrual of income because the dominant control over the said amount still remained with SSNNL. In case of Commissioner of Income-tax v. Govind Prasad Prabhu Nath, reported in (1988) 171 ITR 417, the Allahabad High Court observed that the terms "income is received", "accrues" and "arises" have not been defined in the Income-tax Act, 1961. Mere receipt of income is not the sole test of chargeability. Receipt of income refers to the first occasion when the recipient gets the money under his own control. The words "accrue" or "arises" do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word "receive" and include a right to receive. Thus, if an assessee acquires a right to receive the income, the income can be said to accrue to him though it may be received later on. In case of Commissioner of Income-tax v. Kerala State Drugs & Pharm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 21. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. 27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; 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 (the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.." Reliance placed by the Tribunal to the Accounting Standards for percentage completion method was misplaced. The assessee did not follow the percentage completion method and the accounting treatment to be accorded in such case therefore was not at issue. The assessee claiming entire expenditure and not excluding expenditure relatable to the withheld security deposit also would not be fatal to the interest of the assessee. The expenditure in toto was incurred. The question only was what would be the total amount that the assessee would receive for carrying out such construction. Ninety percent of the amount was payable or already paid over. Ten per cent of the running account bills was adjustab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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