TMI Blog1988 (12) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... e of crediting only 90 per cent., deducting the retention money, which resulted in the reduction of income. The Income-tax Officer treated it as a change in the method of accounting. He did not accept the change. This resulted in the addition of Rs. 20,77,161 for the assessment year 1965-66 and Rs. 14,43,479 for the assessment year 1966-67. The assessee-company filed appeals before the Appellate Assistant Commissioner. In the appeal against the assessment for the year 1965-66, the Appellate Assistant Commissioner examined the matter in great detail, both with reference to the law on the subject and the terms of the contract, and held that the retention money did not arise or accrue in the years in which the job was executed but at a later date depending on the completion of the contract and the certificate of the architect/engineer that the work had been satisfactorily completed. Therefore, he allowed the appeal of the assessee-company. Following that order, the appeal for the assessment year 1966-67 was also allowed. The Department challenged both these orders before the Tribunal. It was argued on behalf of the Revenue that the retention money could not be excluded because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Tribunal examined the contracts entered into by the assessee with several parties. The Tribunal observed that a number of contracts were produced before the Tribunal and although the wording in all of them is somewhat different, the net effect is the same in all cases. The Tribunal held as follows: "Taking first of all the contract with the Calcutta Electric Supply Corporation Ltd., it provides that 90 per cent. payment shall be made from time to time against the value of permanent work completed. A further five per cent. shall be paid on issue of the purchaser's certificate of taking over referred to in clause 29, i.e., taking over of the contract work on substantial completion thereof. The work is not to be finally accepted until the expiry of a period of 12 months from the date of taking over under clause 29. During the period, the contractor shall be liable for replacement of any defective parts that may have developed in the work. The contractor shall also bear reasonable cost of minor repairs in this period. The date of final acceptance of the work by the purchaser for payment of the remaining 5 per cent. shall be determined by the purchaser and certified by him to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of part of job while the right to receive 5 per cent. would be deferred by about two years and for remaining 5 per cent. by about three years. It cannot, therefore, be said that the right to receive payment of the remaining 10 per cent. of the value of job done accrues as soon as it is completed. The payment of 10 per cent. is deferred in two stages in some cases and in one stage in some others but the payment is deferred and is contingent on completion of the work, its satisfactory completion, the architect's certificate, removal of defects and payment of damages, if any, and a passage of six months or one year thereafter. Certainly, therefore, there is no warrant for the Income-tax Officer's order that the entire payment becomes due immediately, but 5 or 10 per cent. is withheld as a security. The assessee follows the mercantile system of accounting and, therefore, it must credit the accounts as and when the right to receive a sum accrues and that would be only in respect of 90 per cent. in the first instance when the job is done and the remaining only when it becomes due as per the terms of the contract. It is not clear from the orders of the authorities below as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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. Dr. Pal, the learned advocate appearing for the assessee, has relied on decision of the Patna High Court in the case of CIT v. Chanchani Bros. (Contractors) Pvt. Ltd. [1986] 161 ITR 418. In that case, the assessee-company did contract work for the Irrigation Department of the Bihar Government. For the assessment year 1970-71, the Income-tax Officer found that the assessee had not included a sum of Rs. 1,64,428 in the bills shown as receivable. It was explained that this amount had been withheld by the Irrigation Department pending verification of the satisfactory conclusion of the work to which the payment related. The Appellate Assistant Commissioner held that only the sum of Rs. 80,535 had been admitted by the Irrigation Department in the subsequent years and so only the addition to this extent out of Rs. 1,64,428 could be sustained. The Tribunal upheld the order of the Appellate Assistant Commissioner. On a reference, the Patna High Court held that in respect of the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the expiration of a period during which the contractor is liable for defects or for repairs, payment would not have become due to that contractor. The High Court also held that the explanation given by the executive engineer in this case indicated that at least part of the money retained was of that kind. The facts in the instant case are more or less similar. Having regard to the facts and circumstances of the case, we are of the view that on the terms and conditions of the contract as examined by the Tribunal, it cannot be held that either 10 per cent. or 5 per cent., as the case may be, being the retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfils the obligation under the contract, that the retention money would be released and the assessee would acquire the right to receive such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability has accrued or arisen and, accordingly, it cannot be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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