TMI Blog2005 (6) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... t was urged that the order of the learned CIT(A) may be vacated. Ground No. 4 is residuary in nature. 2. The issue has been dealt with by the learned CIT(A) in paragraphs 2 to 4 on pages 1 to 10 of his appellate order. In this order, it is mentioned that the assessee has been executing its contract with Maharashtra State Electricity Board (Contractee) for installation of "Ash Handling Plant" (AHP) at Chandrapur Thermal Power Station on turnkey basis. Its responsibility starts from designing of the plant to testing and handing over the plant to the contractee. Its responsibility also extends to any repair or replacement in the warranty period. Under the agreement 10 per cent of the billed amount is payable by the contractee after taking over the plant and after satisfactory completion of contractual work, which includes performance test and final acceptance. The aforesaid part of the contracted price, termed as retention money, amounting to Rs. 74,42,520 was not included by the assessee in its income on the ground that this amount did not accrue to it as income in the relevant previous year. Note 16 of "Notes on Accounts" mentioned that during the year, in pursuance of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the contractee. He also referred to accounting standard Nos. 7 and 9, in which, it was pointed out that the retention money is not to be recognized as income. He also dealt with the Assessing Officer's argument regarding the impugned change amounting to change in method of accounting, and held that there was no such change inasmuch as the assessee continued to follow the mercantile method of accounting. On the basis of this method, he concluded, that right to receive the impugned amount of Rs. 74,42,520 did not accrue to the assessee in this year. Accordingly, he deleted the impugned addition. 3. The learned DR referred to the "Notes on Accounts" and argued that the change made by the assessee amounted to change in method of accounting, which was rejected by the Assessing Officer as not bona fide. He further referred to the finding of the Assessing Officer on page 7 to the effect that as per the agreement, aggregate sum of the contractors' price, broken down, shall be equal to the lump-sum contract price, which shows that price adjustment for various activities has to be done within the limits of total contract price which could not be reduced by any party to the contract. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts and expenditure, leading to a distorted picture of profits of this and other years. Accordingly, he urged that the Assessing Officer had rightly included the retention money in the income of the assessee for this year. 4. The learned counsel of the assessee pointed out that the assessee was installing AHP for the contractee, at their Chandrapur Thermal Power Station. The assessee was entitled to receive 90 per cent of the billed amount and the balance 10 per cent was retained by the contractee, which was to be received after guarantee period. Since the money was not immediately receivable by the assessee on raising the bill, it was argued by him that the assessee did not have the right to receive the retention money. It was further pointed out that the assessee had been following mercantile method of accounting and there was no change in this method in this year also. It was also pointed out that the assessee had been wrongly declaring retention money as income in earlier years though the right to receive the money had not accrued. This wrong was rectified this year. However, as and when the right to receive the money came into existence from this year onward, the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made with the District Magistrate represented income accrued to the assessee. After considering a number of decisions in the matter, including that of Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102, the Hon'ble Court came to the conclusion that basic concept of accrual income is that the assessee must have acquired a right to receive income. Therefore, there must be debt owed to him by somebody. Unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive income or that the income has accrued to him. 5.2 The learned counsel relied on the decision of Hon'ble Supreme Court in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524. The facts of the case-are that certain lands belonging to the assessee were compulsorily acquired by the State Government. The Land Acquisition Officer awarded a sum of Rs. 24,97,249 as compensation. On appeal, the compensation was enhanced to Rs. 30,10,873, on which interest at the rate of 5 per cent was also ordered to be paid from the date of acquisition. The State Government filed an appeal to the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come can be said to accrue to him. 5.4 The Learned counsel relied on the decision of Hon'ble Kerala High Court in the case of CIT v. Kerala State Drugs Pharmaceuticals Ltd. [1991] 192 ITR 1. The facts of the case were that the assessee was engaged in manufacture and sale of pharmaceutical products, and sales were made entirely to the Government of Kerala. The agreement between the assessee and the State Government provided that if the price fixed by the State Government was lower than the price fixed by the assessee, the excess payment would be adjusted against the future supplies. However, if the price fixed was higher, the assessee could prefer a claim to receive balance amount. In the previous year relevant to assessment year 1978-79, the assessee made a claim for Rs. 41,86,349. The claim was not accepted by the Government. The amount had been shown in the profit loss account as amount receivable. During the pendency of proceedings under section 144B, the assessee filed a revised return, excluding the impugned amount. By this time, the State Government had negated the claim of the assessee. The claim of the assessee regarding the exclusion of aforesaid amount from the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the income of assessment year 1970-71. In respect of extra work, the Tribunal found as a matter of fact that the claims were not based on a prior undertaking or agreement. The final decision about the claim had not even been made before the closure of the accounting period. Therefore, this amount also could not be included in the income. The Hon'ble Court observed that it cannot be doubted that in mercantile method of accounting, business expenses are allowable as and when the expenses are incurred. An allowance cannot be postponed as a contract work is one whole work and so the expenses incurred in a particular year have to be allowed on mercantile method of accounting. The learned counsel laid special emphasis on this part of the judgment to canvass his case that receipts and expenditure cannot be linked, as has been argued by the learned DR. The receipts have to be taxed when right to receive amount has income into existence. The expenses are to be allowed as and when incurred because the contract work is one whole work. 5.7 The learned counsel relied on the decision of Hon'ble Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) (P.) Ltd. [1989] 179 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing cables as per specifications of the customers. According to the contract, 10 per cent of the price was to be paid on signing the contract, 80 per cent on presentation of dispatch documents and balance 10 per cent on receipt and acceptance of the goods, subject to performance and workman-ship guarantee. The Assessing Officer noted that the bank guarantee was furnished by the assessee and this balance amount was also realized by the assessee. Accordingly, he held that this amount has accrued as income to assessee. The CIT(A) pointed out that the assessee has changed its method of accounting in this year on this issue and such change would not reflect proper-computation of income. Therefore, he upheld the decision of the Assessing Officer. Judicial Member held that the character of this amount of 10 per cent did not change merely because it was receivable on furnishing bank guarantee. However, the Accountant Member held that since the assessee could raise a bill for 10 per cent only after guarantee period, this amount did not constitute the sale proceeds. The Hon'ble Third Member held that the principle of recognition of income in mercantile method of accounting was that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jab Tractors Co-operative Multi-Purpose Society Ltd. [1998] 234 ITR 105. In this case, the assessee engaged in the business of purchase and sale of tractors, motor cycles and their parts. In the assessment year 1978-79, the assessee made provision of Rs. 2,01,236 for "post warranty service advances". It was explained that the assessee was liable to provide free service in the warranty period of one year, The Hon'ble Court held that the assessee did not become owner of the amount and could not appropriate till the service was rendered in lieu of which the advance was received. The assessee could legally claim the amount after rendering the services. Part of the amount could be treated as income in the year under assessment on the basis of right to appropriate the money. However, as the receipt was relatable to a particular period in future, it would fructify and mature into income in the period and not in the earlier period. 5.11 The learned counsel relied on the decision of ITAT, Pune Bench in the case of G.H. Ajwani Construction (P.) Ltd. v. Jt. CIT [IT Appeal No. 581 (Pune) of 1999, dated 31-10-2001]. The Hon'ble Tribunal, in the light of the facts of the case, held that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw the expenditure and income can be treated differently, depending upon whether one or both had accrued or not on the basis of method of accounting followed by the assessee. [Paragraph 5.5]; and, (v) receipt of retention money by furnishing unconditional bank guarantee may or may not amount the accrual of income which will have to be considered on the basis of terms and conditions of the contract. However, furnishing of unconditional bank guarantee is attendant with significant risks, and where the agreement provides for acceptance test for satisfactory performance in lieu of which certain money was retained by the contractee, that amount will accrue as income only on satisfactory performance of the test and acceptance by the contractee [Paragraph 5.9]. 7.1 We may now consider the facts of the instant case in the light of various case laws and their ratios discussed in the preceding paragraphs. Various terms and conditions of the contract had been narrated by the Assessing Officer in his order from page 6 onward. The assessee agreed to deliver the AHP and all other accessories in all respects for a contract price of Rs. 12,59,06,940. As per the clause 24, all payments during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of a part of contract, this money will accrue as income only when that part of the contract has also been performed. We have also seen that the expenditure incurred in supply of the whole material was for the purpose of business and it constituted a deductible expenditure. Its deduction does not depend upon the corresponding receipt. In other words, the principle of matching of expenditure with receipt does not represent correct legal approach, though it may be an accountant's view. However, that is also not the case here, as accounting standard No. 9, issued by ICAI, lays down that if receipt of retention money is hedged upon future contingencies, it should not be recognized as income. Thus, the expenditure and the corresponding receipt may have to be treated differently, depending upon the terms of the contract. The contract provides that property in goods shall pass to the contractee as soon as those are supplied to it. Therefore, on supply of goods, the expenditure has been incurred because the assessee is no more owner of the goods. Insofar as, retention money is concerned, it will accrue as income in two equal instalments on, - (i) taking over the plant by the contactee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch continued to be mercantile method of accounting. We are also of the view that the retention money does not accrue as income merely on raising the bill. It accrues as income as per paragraph 7.3 of this order. The Assessing Officer and the CIT(A) have dealt with the retention money as one item. But, in fact, it accrues as income on happening of two distinct events. The Assessing Officer may examine whether any part of retention money accrues as income in this year on aforesaid basis. If he is of the view that some portion accrues as income this year, he may hear the assessee and tax that part portion accordingly. 8.1 In view of the aforesaid discussion, various grounds of appeal for assessment year 1991-92 are decided as under: Ground Nos. 1, 2 and 3 are taken as dismissed. 4th Ground of appeal of the assessee does not require any decision from us as it is residuary ground of appeal. The appeal of the revenue is treated as dismissed. 8.2 Grounds for assessment year 1992-93 are identical with the grounds of appeal for assessment year 1991-92 except for the amount of retention money. In view of our finding for assessment year 1991-92, this appeal is also treated as dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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