TMI Blog2014 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic. There was no material change by virtue of the amendment in clause 5.4 to the general conditions in so far as the question of accrual of income is concerned - Right to receive the sum was even before the amendment uncertain and therefore contingent - Upon satisfactory completion of several factors, even after the amendment, the same conditions applied - Same uncertainly and unpredictability prevailed - The assessee had no absolute right to receive the amount - SSNNL had no obligation to release the same before completion of warranty period and even thereafter would release the amount only after making permissible adjustments - Mere fact that in the present case no recoveries were made from the bank guarantee or security deposit is of no consequence. Mere fact that the amount was received by the assessee would not mean that income had accrued - Whether income did accrue or not would depend on the fact whether the right to receive said amount had accrued or not - The fact that tax was deducted at source on said amount also would be of no consequence - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the contractors, an option was given to receive such completion warranty amounts also in cash, subject to providing bank guarantee of a matching sum. Such bank guarantee would be encashed to the extent of the dues of SSNNL or any defect found in the construction carried out or discharged at the end of the warranty period. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 Company v. CIT, 105 ITS 627 (Kerala) are directly applicable to the appellant s case. Therefore, considering the totality of the facts and appellant s submissions discussed above and following the principles laid down in the judgments reported as 53 ITR 114 (SC); 179 ITR 8 (Calcutta); 161 ITR 418 (Patna) and 105 ITR 627 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 insufficient performance of contract. In the present case, no such liability arose, even at a later date. [e] The Tribunal referred to Clause 10 11 of Accounting Standard [9] to further its contention that in case on hand, the Revenue recognition should not be postponed. [f] The Tribunal also referred to the Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility 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 the similar circumstances, had taken the same view. Counsel drew our attention to a decision of this Court in case of Director of Income-tax [International Taxation] v. Ballast Nedam International, reported in [2013] 33 Taxmann.com 139 (Guj) in which the decision in case of Anup Engineerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tendered amount as mentioned in the letter of acceptance of the tender. 5.4 If the Contractor expressly requests in writing, he will be permitted to convert quarterly Security Deposit recovered from his bills into interest bearing SSNL Securities or Interest bearing deposits with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 changes and both, it can be presumed, were aimed at alleviating the liquidity crunch which the contractors executing construction works of considerable size would encounter. From a maximum additional security deposit which could earlier be accumulated upto a 7.5% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 created in favour of the assessee to receive a sum of Rs. 3 lacs, which was claimed by way of deduction by the assessee in the relevant previous year. It is not in dispute that the assessee had shown in his books of account that he had to receive a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a hypothetical income which does not materialize. Where income has, in fact, been received a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 attaches to the contractor. It can thus be seen that in either of the two cases, SSNNL would recover from the assessee, the amount due to SSNNL and release the rest of the amount out of the security deposit only upon completion of the defects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Pharmaceuticals Limited, reported in 192 ITR p.1, the Kerala High Court observed that even under the mercantile system of accounting, it is only the accrual of real income which is chargeable to tax. The income should not be hypothetical inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 adjustable towards the claims of the SSNNL and recoveries arising out of defects; if any. Release of such amount or part thereof would decide the ultimate profit margin of the assessee upon execution of the contract. The expe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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