TMI Blog2011 (6) TMI 1019X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrue as income of the appellant and was not taxable for the year under appeal. It be so held now and the addition of Rs.78,68,282/- directed by the C. I. T.(A) in Para-7 of his order be deleted. 2. Without prejudice to the above the C. I. T. (A) further erred both in law and on facts in not appreciating that the appellant had been showing the income of the Retention money actually received during the year in the year of receipt and hence reduction of the actual amount received ought to have been given. It be so held now and direction may be given to reduce actual amount received during the year as also to reduce the same when received and offered to tax in future. 3. The learned C.I.T. (A) failed to appreciate the submission made that the facts for Assessment Year 1997-98 were different when there was change in the method for the first time. The learned C. I. T. (A) ought to have accepted the submission that for the year under appeal there is no change in the method of accounting with regard to treatment of Retention money and hence the decision of the I. T. A. T. for asst. Year 1997-98 is not applicable. It be so held now and the addition of Retention money be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is as under:- Payment Schedule The price stipulated in A above shall be payable according to the terms of payment hereunder.- For know-how, Basic Engineering and Detailed Engineering A, 10% at the time of signing the Agreement against submission of Indemnity Bond. A. 10% at the time of signing the agreement against submission of Indemnity Bond. B. 15% after submission of material balance, P I Diagram, Floor-wise Equipment Layout Drawing with Load Data or within 30 days of signing of agreement, whichever is later. C. 65% against submission of various technical documents. D. 10% within 30 days after commissioning and or performance test against Bank Guarantee for like amount towards Performance Guarantee to be effective for twelve months from the data of commissioning. The assessee had been following a mercantile method of accounting and till assessment year 1996-97 the assessee consistently credited 100% of the amount as sales and accordingly the income was offered for taxation. However, from the assessment year 1997-98 a bona fide change in the method of accounting was adopted by the assessee whereby the retention money was credited separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax and excise duty leviable there upon. The AO contented that although the assessee follows mercantile method of accounting; it excludes the retention money treating the same on receipt basis and thereby defers the accrual of income till the final payment is received after commissioning of the equipment. The assessee, following the mercantile method of accounting, effects and enters the sales in the same books of accounts paying indirect taxes thereupon and simply for the purpose of deferment of payment of direct taxes, resorted to such method of accounting which is not permitted. The AO contented that there can never be a piecemeal method of accounting for a common source of income, irrespective of method of accounting followed by the assessee, as there are only two recognized methods of accounting, it cannot be permitted to account for the receipt on piecemeal basis, where the expenditure in relation thereto is claimed in totality. The AO relied upon the following decisions wherein it is held that the transaction cannot be split in to mercantile and cash method of accounting (i) G Padmanabha Chattiyar Sons vs CIT 182 ITR 1, 5 (Mad.), (ii) Reform Flour Mills Pvt. Ltd. vs CIT 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as commissioned and worked for a certain period cannot be considered as income of the appellant as the amount did not accrue or become due at that time. In support of this submission the appellant relied on the decision of Calcutta High Court in the case of CIT V/s. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8 (Calcutta) In this case the company carried on the business of concrete piling for buildings. Up to the A.Y. 1994-95 the company credited 100% of the job value. However, from the A.Y. I965-B6, if credited only 90% deducting the retention money, which resulted in reduction of income. This method was not accepted by the Assessing Officer but the Tribunal accepted the method. The Tribunal held that it could not be said that the right to receive payment of the remaining 10% of the value of the job done accrued as soon as it was complete. The tribunal further held that since assessee was following mercantile system of accounting, it credited its accounts as and when the right to receive the sum accrued and that would be only in respect of 90% in the first instance when the job was done and the remaining only when it became due as per the terms of the contract. When the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that it has been explained to the assessing officer that in cases of one party there were contracts involving retention money of Rs. 7 lacs and the details were given to the AO in the form of statements, copies of statements and a copy of the same was submitted before me. It was submitted that the assessee has shown retention money as its income as soon as it acquired right to receive retention money as per mercantile system of accounting though the appellant had not actually received retention money. The learned Counsel for the assessee also submitted before the learned CIT(A) that none of the cases as relied upon by the AO deals with the question of retention money, and are not relevant since the facts in those cases are different. The assessee submitted before the learned CIT(A) that there was no splitting of sale price and mixed method of accounting as assumed by the AO. The assessee also submitted before the learned CIT(A) that it is well settled principle that when the terms of contracts provide for retention money during the guarantee period, the income comprised in retention money would accrue only when the guarantee period is over and the said amount become due. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO was not justified in making the addition of Rs.7,00,000/- being retention money in respect of the contract work. In the light of various judicial pronouncements stated above and relied upon by the assessee directly apply to the facts of the assessee s case. The disallowance of retention money amounting to Rs. 7,00,000/- may be deleted. It was further submitted by the assessee that if the claim of the assessee is not accepted and addition made by the AO is up held, the AO may be direct to give deduction of retention money Rs. 7,00,000/- credited by the assessee as business receipt in immediately succeeding year i.e. assessment year 2007-08 by passing order u/s 154 of the IT Act of immediately succeeding year. 5. The learned CIT(A) considering the submission of the assessee in the light of the order of the Tribunal in the assessee s own case for assessment year 1997-98 not only confirmed the addition made by the AO but enhanced the addition to Rs.78,68,282/- . His findings in Para 7 and 7.1 are reproduced as under: 7. I have perused the factual matrix of the case, the submission made by the appellant company and the judicial decisions as relied upon by both the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Incometax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than the retention amount. 6.3 The learned Counsel for the assessee submitted that since the above decision are in favour of the assessee; therefore, earlier decision of the Tribunal would no longer apply against the assessee. He has submitted that since the AO did not examine the facts of the case in the light of the above decisions delivered later on after passing of the assessment order, therefore, matter may be remanded to the file of the AO for reconsideration of the decision in accordance with law. 7. The learned DR did not have any objection for remanding the matter to the file of the AO for reconsideration of the issue as per the above decisions. 8. On consideration of the facts of the case it is clear that earlier the issue was decided against the assessee by ITAT Ahmedabad Bench in the case of the assessee itself, copies of the same are filed in the paper book. The authorities below have gone by the findings given against the assessee in the earlier years and confirmed the addition on this issue. Therefore, complete facts of the case were not examined and verified including the amount if any incurred by the assessee for business purpose out of the retention am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that copies of the accounts of these expenses have been produced before him and would support the contention of the assessee to be correct. It was noted that the assessee kept all the details of the expenses and disallowance was made on mere suspicion on the part of the AO. The learned CIT(A), therefore, noted that disallowance out of these expenses and others are restricted to Rs.10,000/- is deleted. It was also noted that the assessee succeeds in this ground of appeal. 10. On consideration of the submissions of the parties, we do not find any justification to sustain even part of the addition. The assessee specifically pleaded before the learned CIT(A) that the assessee kept all the vouchers which were also produced before him for verification. The learned CIT(A) found the submission of the assessee to be correct. The learned CIT(A) also noted that disallowance made by the AO is merely on suspicion. After that the learned CIT(A) held that disallowance out of these expenses are restricted to Rs.10,000/- is deleted and further this ground was allowed. It would, therefore, show that the learned CIT(A) was satisfied with the explanation of the assessee and there is a confusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the amended provisions of law in section 36 (1) (vii) of the IT Act applicable to the assessment year under appeal noted that the assessee has written off the debts as irrecoverable in the books of accounts during the relevant financial year as per law, therefore, claim of the assessee shall have to be allowed. Addition was accordingly deleted. 13. The learned representatives of both the parties submitted that the issue is now covered in favour of the assessee by the judgment of the Hon ble Supreme Court in the case of T. R. F. Ltd. Vs CIT 323 ITR 397 in which it was held as under: This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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