2003 (8) TMI 156 - AT - Income Tax

Accrual Of Income - addition on account of retention money of 10% - HELD THAT - On a careful reading of the aforesaid terms and conditions of the tender and the general conditions governing the contract for construction of Sardar Sarovar Main Canal it is evident that the assessee was to make an earnest money deposit along with tender; that the said earnest money was to be refunded on successful bidding and was to be replaced within 30 days by a security deposit for performance; that the said security deposit was to be of Rs. 2, 56, 63, 000 and was made by way of furnishing a bank guarantee and renewed from time to time within an interval of 6 months; that besides the aforesaid initial deposit the assessee was required to give additional security upto 5 per cent of the tender amount which was to be deducted from the running bills at the rate of 10 per cent of billed amount until it reached the said 5 per cent of the tender amount; that for the year 1992-93 it worked out to Rs. 1, 49, 02, 778 and was encashed to the extent of Rs. 1, 40, 00, 000 by furnishing the bank guarantee; that the initial security deposit and the additional security deposit were to be in the form of bank guarantee or performance bond in the former case and in the form of deduction from running bills or at the request of the assessee as an interest-bearing government/SSNNL security or interest-bearing bank deposit or a bank guarantee in instalments of Rs. 10 lakhs each in the latter case; and that the assessee opted for the bank guarantee form of additional security deposit and received the said money deducted from running bills by furnishing bank guarantee. It is thus nothing but a security deposit; and not a retention money which could be said to have not accrued to the assessee. In our opinion it accrued to the assessee and thereafter retained by way of additional security and in fact received by the assessee by furnishing a bank guarantee. It is evident that entire billed amount was to be accounted as revenue and if any uncertainty is there in collection of a part thereof on account of certain contingencies the estimate thereof can be claimed as an expenditure. No uncertainty has been pointed out in the present case and in fact the assessee has been relieved of the bank guarantee in the year 1999-2000 without any liability on account of defect clause of the performance or it might be that such a liability was incurred and met by the assessee in subsequent years and claimed and allowed as an expenditure in those years. If however the assessee establishes that it had actually incurred any expenditure in future year for inefficient performance and that has not been allowed as deduction in those years an estimated liability can be allowed in this year and brought to tax in assessment year 2000-2001. For this limited issue we set aside the order of the Assessing Officer and direct him to consider the claim of the assessee if made. The assessee s claim is that the entire expenditure has been incurred for the purpose of business and in any case the disallowance of 1O per cent was excessive. Looking to the facts and circumstances of the case and the absence of details we do not find any reason to interfere with the disallowance made by the departmental authorities. However the disallowance of 1O per cent seems to be excessive. We are therefore of the opinion that it would meet the ends of justice if the disallowance of 5 per cent is made. The Assessing Officer is therefore directed to reduce the disallowance to 5 per cent. In the result the appeals of the Revenue are allowed pro tanto whereas the appeal of the assessee is partly allowed.

Issues Involved:
1. Taxability of Retention Money
2. Disallowance of Traveling Expenses
3. Disallowance under Section 40A(3)
4. Disallowance under Section 40A(12)
5. Disallowance of Royalty Payment
6. Disallowance of Entertainment Expenditure

Issue-wise Detailed Analysis:

1. Taxability of Retention Money:
The primary issue in the Revenue's appeals for the assessment years 1992-93 and 1993-94 was the deletion of the addition made by the Assessing Officer (AO) on account of retention money. The AO argued that the retention money of 10% claimed by the assessee was taxable, amounting to Rs. 1,58,70,856 and Rs. 36,68,397 respectively. The AO contended that the retention money was not hypothetical income and was released to the assessee on submission of a bank guarantee, thus it accrued and was actually received by the assessee.

The Commissioner of Income-tax (Appeals) [CIT(A)] disagreed, stating that the right to receive the retention money had not accrued to the assessee in the relevant assessment year. The CIT(A) relied on various judgments, including CIT v. Simplex Concrete Piles (India) Pvt. Ltd., CIT v. Chanchani Bros. (Contractors) (P.) Ltd., and Janatha Contract Co. v. CIT, which held that retention money does not accrue until the satisfactory completion of the contract and the defect liability period is over. Therefore, the CIT(A) directed the AO to allow the assessee's claim for deduction of retention money.

The Tribunal, however, reversed the CIT(A)'s order, stating that the retention money was in the nature of additional security and accrued to the assessee when the bills were presented and passed for payment. The Tribunal emphasized that the entire billed amount should be accounted as revenue, and any uncertainty regarding collection could be claimed as an expenditure.

2. Disallowance of Traveling Expenses:
The assessee's appeals included a dispute over the disallowance of Rs. 48,799 and Rs. 48,013 made out of traveling expenses. The AO disallowed 10% of the expenses due to the absence of detailed documentation. The CIT(A) upheld this disallowance.

The Tribunal found the 10% disallowance excessive and directed the AO to reduce it to 5%, considering the facts and circumstances of the case.

3. Disallowance under Section 40A(3):
The AO disallowed Rs. 2,07,047 and Rs. 1,57,196 respectively for the two years under consideration under Section 40A(3), which mandates disallowance of cash payments exceeding a certain threshold. The CIT(A) upheld these disallowances, noting that the assessee failed to substantiate claims of exceptional and unavoidable circumstances for making cash payments.

The Tribunal remitted the matter back to the AO to examine the assessee's claims in light of the reasons provided and to allow the claim in accordance with the law.

4. Disallowance under Section 40A(12):
The assessee did not press the dispute against the disallowance of Rs. 75,000 under Section 40A(12) for the assessment year 1992-93 and Rs. 2,68,903 for royalty payments in the assessment year 1993-94. Consequently, these disallowances were upheld.

5. Disallowance of Royalty Payment:
This issue was not pressed by the assessee and was therefore rejected.

6. Disallowance of Entertainment Expenditure:
The AO disallowed Rs. 50,000 and Rs. 60,000 respectively as entertainment expenditure, citing the absence of proper details. The CIT(A) upheld these disallowances, stating that the quantum of disallowance was not excessive or unreasonable given the lack of detailed documentation.

The Tribunal found no reason to interfere with the CIT(A)'s order, concluding that the disallowance was justified and not excessive.

Conclusion:
The Tribunal allowed the Revenue's appeals regarding the taxability of retention money and upheld the AO's disallowances under Section 40A(3) and for entertainment expenditure, albeit with a reduction in the percentage of disallowed traveling expenses. The assessee's appeals were partly allowed, with the Tribunal directing the AO to reconsider the disallowance under Section 40A(3) based on the assessee's claims. The disallowances under Section 40A(12) and for royalty payments were upheld as they were not pressed by the assessee.

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