TMI Blog2006 (6) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... t certain portions of the retention money were received in assessment years 1994-95 and 1995-96 and so on, which were offered for taxation in those years. The case of the learned counsel was that this was not the issue before us and, therefore, it will be dealt with at the appropriate place when discussing the arguments of the learned counsel. Therefore, in view of the aforesaid, we are of the view that there is no need to verify the affidavits by the lower authorities as it does not contain anything which is contrary to the finding of facts given by the learned CIT(A). Apart from that the learned DR did not make any argument on merits of the case of taxation of this amount in this year, except quoting two cases regarding allowability of the future expenditure in performance of the warranty given by the assessee. That issue was not raised by the learned counsel and in any case those decisions go against the revenue. However, we need not go into those cases as the assessee had not made any provision for warranty liability. The first plank of the argument of the learned counsel was that retention money does not accrue as income to the assessee. This argument is supported by the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.09.2003 The assessee moved a miscellaneous application on 21.11.2003 This application was dismissed as withdrawn on 05.04.2005 for the reason that the learned Counsel of the assessee pointed out that the assessee had also carried the matter in appeal to the Hon'ble High Court of judicature at Bombay The Hon'ble Court set aside the order of the Tribunal with a direction to decide the appeal afresh after taking all facts into account A copy of the order of the Hon'ble Court dated 18.01.2005 was also filed In that order, it is mentioned that two important judgments i.e. CIT v. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8 and Anoop Engineering Ltd. v. CIT (2001) 247 ITR 457 were not considered by the Tribunal, though cited before it In view thereof, the order of the Hon'ble ITAT was quashed and set aside and the matter was remanded back to the ITAT to decide the same afresh on all issues That is how this appeal has to be decided afresh on all grounds. 3. The revenue had taken three substantive grounds Ground Nos. 1 2 pertain to the taxation of an amount of Rs. 3,60,404/-, representing retention money Ground no 3 pertains to valuation of closing stock and addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the said relevant previous year ended on 31st March, 1993 as regards the retention money. 5.1 In the course of hearing before us, in relation to ground Nos. 1 2, the learned DR pointed out that since the affidavit has been filed on the date of hearing, the facts mentioned therein require verification by the lower authorities He also referred to the decision in the case of CIT v. Beema Manufacturers (P.) Ltd. (2003) 130 ITR Taxman 400 (Madras); CIT v. Vinitec Corporation (P.) Ltd. (2005) 146 Taxman 313 (Delhi), in which it was inter-alia held that once an assessee, maintaining accounts on mercantile method, incurs liability, which is to be discharged at a future date, the same is allowable in computing profits based upon the accounts of business These cases were decided in connection with deductibility of liability arising on account of future warranty expenses. 5.2 On the other hand, the learned Counsel of the assessee pointed out that the assessee is engaged in the business of manufacturing steam engine equipment. The goods are supplied subject to the warranty that it shall work as per the representation made by the assessee In view of this performance warranty, the buyers pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch matter does not exist before the Tribunal and, therefore, it does not have jurisdiction to go into this matter. For this purpose, he relied on the decision of Hon'ble Calcutta High Court in the case of R.L. Rajgharia v. ITO and Ors. (1997) 107 ITR 347. In that case, the controversy to be resolved before the Tribunal was whether the loss incurred was in the nature of speculation loss or business loss. The Tribunal also went into the question whether the loss was capital or revenue loss. The Hon'ble Court held that the Tribunal clearly acted beyond its jurisdiction and the assessee could not have been denied relief in the writ petition on the ground that alternative remedy was available. The learned Counsel also relied on the decision of Hon'ble Bombay High Court in the case of New India Assurance Co Ltd., v. CIT. [1957] 31 ITR 844. The finding of the first appellate authority in the case was that income on certain insurance policies accrued in the Indian States and, therefore, it could not be taxed in India (British India). On appeal from the revenue, the Tribunal upheld the finding of the first appellate authority, but set aside the assessment and remanded the case d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to these supplies on the ground that retention money would rightly due to the appellant only on satisfactory performance as per agreement. It was pointed out that the income embedded in these amounts was, therefore, only contingent income bereft of certainty. Whereas it was admitted that the appellant company could have received these amounts had it given the (sic) guarantee; it was stated that even then the receipt could not partake the character of income since it could not be appropriated until the guarantee period was over. It was, therefore, urged that the retention money of Rs. 3,60,404/- be excluded from the total income of the appellant. Reliance was placed on the decisions of the Calcutta High Court reported in 179 ITR 8 in support of the said contention. 5.5 From the aforesaid finding of the learned CIT(A), it is clear that 5% to 10% of the billed amount becomes receivable subject to performance and workmanship during the warranty period, which ranged between 12 to 18 months. This amount could be realized on furnishing of the bank guarantee stipulating inter-alia that in case of shortcomings the purchaser will be at liberty to recover the amount from the bank wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el and in any case those decisions go against the revenue However, we need not go into those cases as the assessee had not made any provision for warranty liability. 5.6 The first plank of the argument of the learned Counsel was that retention money does not accrue as income to the assessee. This argument is supported by the decisions reported at 179 ITR 8 and 247 ITR 457. Therefore, we are of the view that since the payment of the retention money is hinged upon the condition of satisfactory performance of the equipment during the warranty period, no debt accrues in favour of the assessee. Therefore, the impugned amount does not accrue as income to the assessee in this year. 5.7 The second issue was regarding accrual of the aforesaid money as income of the assessee. The case of the learned Counsel was that the Tribunal does not have jurisdiction to go into this question. We have considered this matter also. We are of the view that the arguments of the learned Counsel on this issue are not in conformity with the decision of Hon'ble Bombay High Court in the case of New India Life Insurance Company (supra). The decision of the Hon'ble Court was that the Tribunal cannot raise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided on facts where unconditional bank guarantee was furnished for release of retention money. Such is not the case before us as in the sworn affidavit, the financial controller had stated that no bank guarantee was given. 5.9 The result of the aforesaid discussion is that subject to remarks in paragraph 5.7(supra) ground Nos. 1 2 are dismissed. 6. In regard to Ground No. 3, the learned Counsel drew our attention towards the decision of Hon'ble Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384, which was upheld by the Hon'ble Supreme Court in CIT v. Indo Nippon Chemical Co. Ltd. [2003] 261 ITR 275. It was held that it is not permissible for the AO to adopt 'gross method' for valuation of raw material at the time of purchase and 'net retched' for valuation of closing stock. In other words, the decision of both the Hon'ble Courts was that the closing stock has to be valued in the same (sic) in which the cost is valued at the time of purchase. In view thereof, revenue's appeal in this matter is not sustainable. Thus, this ground is dismissed. 7. In result, the appeal of the revenue is dismissed. ITA No. 481/PN/99 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anging between 12 to 18 months. The balance 5/10% was released if the appellant furnished a bank guarantee for the balance amount. The guarantee stipulates performance of the materials supplied and the purchaser was at liberty without referring to the appellant to recover the amount from the bank. Though this amount was received, it was referred to 'retention money' and that is why it was not appropriated until the period of guarantee was over. In support, reliance was placed in the decision of Associated Cables Pvt. Ltd. 49 TTJ 191 (48 ITD 141) and Simplex Concrete Piles Pvt. Ltd. 179 ITR8. However, the contention of the appellant did not find favour with the AO, as according to him, the taxability of a particular receipt does not depend upon the terms and conditions of the payment. The appellant has raised full value of invoice which was accepted by its customers. As per the mercantile system of accounting, the revenue should be recognized on the acceptance of the invoice by the customer. The appellant has paid excise duty as well as sales tax on full invoice value. The turnover therefore could not be different for the purpose of Income-tax. If some part of it is not rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment at the bar that the money was not received in the relevant previous year and that no bank guarantee was furnished. Accepting this statement, a finding of fact is given that retention money, retained by the customers in the previous year relevant to AY 1995-96, was not received by the assessee in that year. Since there was some confusion regarding facts of the receipts of the money, it may be worthwhile to consider the decision of Hon'ble ITAT, Bombay Bench B (TM) in the case of Associated Cables (P) Ltd. v. DCIT (1994) 48 ITD 141. The decision of the Hon'ble Tribunal was that keeping in mind the principles of recognition of income, which is the mercantile method of accounting, the retention money could not be recognized as income as long as performance guarantee remained in force. Otherwise also, in a case where unconditional bank guarantee is furnished to the customer under which he had right to take recovery measures from the bank without reference to the assessee if any shortcoming was found in the workmanship, the money does not accrue as income to the assessee. We may also refer to the decision of Hon'ble ITAT, Ahmedabad Bench C in the case of Kevin Enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will accrue as income only on satisfactory performance of the test and acceptance by the contractee. Our aforesaid findings are in line with the principles recorded in that order. 8.5 The result of the aforesaid discussion is that ground No. 1 of the appeal is allowed. 9. 2nd ground of appeal is against the finding of the learned CIT(A) that excise duty and sales-tax form part of the total turnover for the purpose of computing deduction Under Section 80 HHC. This issue stands covered by the decision of Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemical Industries Ltd. [2000] 245 ITR 769 in favour of the assessee. Respectfully following that decision, this ground is allowed. 10.1 3rd ground of appeal is against the finding of the learned CIT(A) that the expenditure incurred on gift articles given to the employees is not deductible in computing the income of the assessee. In this connection, the learned CIT(A) had pointed out that no business purpose can be served by giving gifts to the employees for the reason that even if employees are motivated by receipt of such gifts, the motivation is of no use unless the business of the assessee is promoted. The business ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the deduction Under Section 80 HHC made by the AO, by including excise duty and sales tax as part of total turnover, and in not following the decisions of ITAT, Bombay, in the case of Ponds (1) Ltd. and of ITAT, Pune Bench, in the case of Sudarshan Chemicals Ltd. The deductions as claimed by the assessee company Under Section 80 HHC may be allowed. 13. The assessee filed a chart showing amounts received out of the retention money. In the course of hearing before us, the learned Counsel pointed out that these grounds are identical with the grounds in ITA No. 481/PN99 for AY 1995-96. No particular argument was made by the learned DR except that he relied on the decision of learned CIT(A). Following our decision in ITA No. 481/PN/99, the appeal of the assessee is allowed. 14 In result, the appeal of the assessee is allowed. ITA No. 288/PN/01 for AY 1997-98-Appeal of the assessee 15. The only substantive ground taken in this appeal is regarding taxation of retention money, amounting to Rs. 11,37,727/-. As mentioned in ITA No. 481/PN/99(supra), the facts mentioned in the order of learned CIT(A) on this issue are somewhat different from the facts mentioned in the combined affidavi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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