TMI Blog2003 (8) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... of the work for which the payment related; the said retention money did not arise or accrue nor any right accrued or arisen to receive until the satisfactory completion of the work or removal of the defect and payment of damages, if any. Reliance was placed on the decision of Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) (P.) Ltd. [1989] 45 Taxman 370 and in the case of CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC). 4. The Assessing Officer did not accept the assessee's claim. He held that in Simplex Concrete Piles (India) (P.) Ltd. net of retention money was credited and debited in the profit and loss account whereas in the assessee's case the gross contractual receipts were credited though the assessee claimed the debit in the return of income of the amount retained. Shoorji Vallabhdas Co.'s case talked about the nature of income and it held that hypothetical income cannot be taxed and retention money is not hypothetical income and only the point of time of taxability was attached. He further held that 10 per cent deduction was as security performance and was immediately released to the assessee on submission of bank guarantee. In fact, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is the mercantile system of accountancy, when has the right to receive the particular income accrued. From the facts of the appellant's case discussed in detail supra, it is clear that right to receive the retention money has not accrued to the assessee in the previous year relevant to the assessment year under consideration. As discussed above, right to receive retention money accrues to the appellant only after the satisfactory completion of the contract and after the defect liability period is over and after engineer-in-charge has certified that no liability attaches to the appellant. However, as discussed above, it is the appellant's contention inter alia that the relevant works are still not completed, and that the right to receive retention money has not accrued so far. It is also relevant to note that in its judgment reported as CIT v. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8, Calcutta High Court had referred to the Supreme Court's judgment reported as 53 ITR 114, and had held that having regard to the terms and conditions of the contract, it could not be held that the retention money became legally due to the assessee on the completion of the work. Only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 (Supreme Court), 179 ITR 8 (Calcutta), 161 ITR 418 (Patna) and 105 ITR 627 (Kerala), it is held that the income represented by retention money has not accrued in the previous year in which the running account bills have been submitted, but the said income accrues only after the completion of the contract and after the defect liability period is over and after engineer-in-charge has certified that no liability attached to the appellant. Accordingly, it is held that the said amount of retention money is not taxable in the assessment year under consideration, but is taxable in the assessment year relevant to the previous year in which the work is completed and relevant conditions of the Contracts are fulfilled. Accordingly, it is held that the Assessing Officer has wrongly rejected the appellant's claim for deduction of retention money for the assessment year under consideration. Therefore, the Assessing Officer is directed to allow the appellant's claim for retention money of Rs. 1.58,70,856 for the assessment year under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retained the company had claimed deduction of security deposit of Rs. 1,49,02,778 from the total income for assessment year 1992-93. The learned Assessing Officer rejected our claim for deduction. In appeal the learned CIT(A) allowed our claim of deduction for security deposit. As per the terms of contract the defects liability period was fixed as the period of twelve months commencing from the day following the date of completion of work. The defects liability period expired during financial year 1999-2000 relevant to assessment year 2000-2001 as per the terms of the contract. The amount of security deposit therefore accrued and was receivable by the company during the financial year 1999-2000. The return for assessment year 2000-2001 is therefore revised to include the security deposit of Rs. 1,49,02,778." 8. Besides the cases relied upon and referred to by the CIT(A) he also relied upon the decision of the Supreme Court in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524 and submitted that a receipt on bank guarantee is not income. He also submitted that the case of Dhorajia Construction Co. was a case of security deposit and not of rete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of: (i) Bank draft or certified cheque or irrevocable letter of credit amounting to Rs. 8.50 million for package Rs. 4.30 million for each slice of any Schedule Indian bank or a Foreign Bank approved by the Reserve Bank of India. Or (ii) Bank guarantee for Rs. 8.50 million for package Rs. 4.30 million for each slice in the form prescribed in Annexure-4 from a Schedule Indian Bank or a Foreign Bank approved by the Reserve Bank of India. Or (iii) In the shape of Bid bond in the form prescribed in Annexure-S from a company acceptable to the SSNL and confirmed by any schedule Indian Bank in the case of a Joint Venture the Earnest Money Deposit will be accepted only from the Joint Venture or from one of the parties on behalf of that Joint Venture" 10. This tender money was to be returned on furnishing of security deposit for performance. Clause 10.4 and clause 10.5 dealing with this read as under: "10A. The Earnest Money Deposit will be returned promptly to the unsuccessful tenderers. The Earnest Money Deposit will be returned to the successful tenderer after he furnishes security deposit for performance and duly enters into the contract. 10.5 Within thirty days fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on No. 11, Ahmedabad-380051, Gujarat State (India). 5.5 The Bank guarantee, the performance bond, the interest bearing SSNNL Securities and the interest-bearing SSNNL Securities and the interest-bearing deposits shall remain valid for at least twelve months after the date of the completion of the works. 5.6 The security deposit, less any amounts due, shall be returned to the Contractor after the defects liability period is over and subject to the Engineer-in-Charge certifying that no liability attaches to the Contractor." 12. The said clauses 5.1, 5.3 and 5.4 were amended subsequently as under:-- "5.1 Within thirty days from the date of issue of the letter accepting his tender, the contractor shall furnish an initial security deposit in the denominations and proportions of the currencies of payments required as per clause 11-11.2 in the form of (a) Bank Guarantee for five per cent of the tendered amount mentioned in the letter of acceptance of the tender in the form in Annexure 6 from a Vadodara branch of Scheduled Indian Bank or from a Foreign Bank acceptable to SSNNL and confirmed by any Scheduled Indian Bank authorised to deal in foreign exchange; or (b) A performa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is evident that the assessee was to make an earnest money deposit along with tender; that the said earnest money was to be refunded on successful bidding and was to be replaced within 30 days by a security deposit for performance; that the said security deposit was to be of Rs. 2,56,63,000 and was made by way of furnishing a bank guarantee and renewed from time to time within an interval of 6 months; that besides the aforesaid initial deposit the assessee was required to give additional security upto 5 per cent of the tender amount which was to be deducted from the running bills at the rate of 10 per cent of billed amount until it reached the said 5 per cent of the tender amount; that for the year 1992-93 it worked out to Rs. 1,49,02,778 and was encashed to the extent of Rs. 1,40,00,000 by furnishing the bank guarantee; that the initial security deposit and the additional security deposit were to be in the form of bank guarantee or performance bond in the former case and in the form of deduction from running bills or at the request of the assessee, as an interest-bearing government/SSNNL security or interest-bearing bank deposit or a bank guarantee in instalments of Rs. 10 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of interest shown by the assessee were reversed in the next year since the supplier had replaced 8 locomotives lent by the assessee company to it by new ones. The entire nature of transaction was changed between the parties. There was a resolution of the assessee company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. 21. In all these three cases, the Supreme Court held that there was no real income and, therefore, not exigible to income-tax; whereas in the present case, it is nobody's case that no income has resulted at all. The question is only as to in which year it accrued to the assessee. According to the Revenue, it was in the year when the bills were presented and passed for payment and the assessee received the money by furnishing bank guarantee and as per the assessee it was the year after the performance liability clause was over and the bank guarantee were released and ceased to be operative. 22. A. Gajapathy Naidu's case was a case of a receipt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept bills presented by the assessee and in this context it was held that the income accrued when the bills were accepted and work done beyond contract. In Janatha Contract Co.'s case the contention was that the retention money shall not be released before the expiry of 3/6 months or issue of certificate of completion or when the final bill has been prepared whichever is later. It was thus a case of interim bill where the retention money was withheld whereas in assessee's case each part of the work was final in itself. 26. In Apollo Industries' case, supply of Hot Mix Plant supplied was to be installed by the assessee. 90 per cent of the payment was to be made on proof or inspection and despatch and balance 10 per cent was to be paid after the receipt in store in good condition and final inspection as per clause 17(a) which was done after the close of the year. The Tribunal had noted the condition of erection and commissioning by the assessee and it was held to be a case covered by the decision of Calcutta High Court in the case of Simplex Concrete Piles (India) (P.) Ltd. 27. In Kevin Enterprises case, the assessee was engaged in manufacture of Mark transformer equipments us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax deduction at source and retention as security deposit of 10 per cent of the value of the contract subject to a maximum of Rs. 10 lakhs. This retained money as security deposit was refunded to the assessee only on the basis of the receipt and after a certificate of satisfactory completion of the work and the defect liability period of 6 to 12 months was over. The assessee claimed that until the certificate of satisfactory completion of the work, the retained amount as security deposit did not accrue to the assessee. The Tribunal held that the deduction of 10 per cent of the contract value subject to a maximum of Rs. 10 lakhs was a security deposit and the mode of payment was by deducting from running bills as prescribed under the agreement and that it was an income accrued to the assessee. The relevant observations of the Tribunal are as under:-- "Security Deposit is thus 1 per cent of the contract value subject to a maximum Rs. 10 lakhs. It is to be deposited by the assessee. The mode of the payment is by deduction from running bills. This is only one of the modes prescribed thereunder. As per the terms of the agreement it may be deposited by the assessee in cash or in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the amount had already accrued to the assessee and the deposit was made as an application thereof. It is stated by the learned counsel for the assessee that the amount has been assessed in the subsequent year on receipt basis and, therefore, if the amount is added again here, it would amount to double taxation. It might be true, but the assessment is on the true income of the assessee for the year under consideration and if any part thereof has been offered or assessed in the subsequent year, that would not be in accordance with law and the assessee would be entitled to seek necessary relief from the appropriate authority. Subject to these remarks, we reverse the order of the CIT (Appeals) and restore that of the Assessing Officer on this issue." 30. Retention money in this case also is against satisfactory performance which in fact was released to the assessee on furnishing of bank guarantee. The assessee opted for furnishing bank guarantee instead of allowing it to remain as withheld money. Furthermore, like in that case of Dhorajia Construction the tax has been deducted at source on the full amount without deduction of the said retention money of 10 per cent. This also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 32. The Judicial Member held that under the terms of the contract the assessee had right to receive the amount and, therefore, it could not be excluded in computing the total income whereas the Accountant Member held that until the guarantee period was over the assessee had no right to 10 per cent of the amount and hence it should be excluded from the total income. The Third Member agreed with the Judicial Member in saying that under the terms of the contract, the assessee had a right to receive the balance 10 per cent on furnishing bank guarantee. He, however, also agreed with the Accountant Member that because of the bank guarantee the assessee did not have an unconditional right to appropriate the said sum even though it could receive the amount and in that connection, the Third Member referred to the Accounting Standard of the Institute of Chartered Accountants referred to above and observed that. "In the present case even though the assessee had received the balance of 10 per cent, the bank guarantee for performance clearly shows that the receipt was at the risk of losing the amount if there was any defect in the goods. It would appear that this situation was a contingen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the reasonable precision and the same can be provided for in the financial statements prepared by the enterprise. Now in the instant case the claim of the assessee; that warrantee provision is revenue deductible is clearly in conformity with the Accounting Standard 4 and therefore deserves to be accepted," 34. Clauses 10 and 11 of Accounting Standard (9) referred to in the case of Associated Cables (P.) Ltd. and Kevin Enterprise's case are as under:-- "10. Revenue from sales or service transactions should be recognised when the requirement as to performance set out in para-11 and 12 are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. 11. In a transaction involving the sale of goods performance should be regarded as being achieved when the following conditions have been fulfilled. (i) The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract is recognised as an expense immediately in accordance with paragraph 35. 27. When an uncertainty arises about the collectibility of an amount already included in contract revenue, and already recognised in the statement of profit and loss, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment of the amount of contract revenue. 31. When the outcome of a construction contract cannot be estimated reliably: (a) revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and (b) contract costs should be recognised as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. 32. During the early stages of a contract it is often the case that the outcome of the contract cannot be estimated reliably. Nevertheless, it may be probable that the enterprise will recover the contract costs incurred. Therefore, contract revenue is recognised only to the extent of costs incurred that are expected to be recovered. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion money had not accrued. Therefore, even if it is held that the retention money had not accrued, normally the profit from construction business is 8 per cent to 10 per cent and at that rate only 1 per cent of billed money at the highest could be postponed to assessment year 2000-2001 and not the entire retention money. However, since we have held that the entire billed amount has accrued to the assessee, we need not give any direction in this regard. 38. The facts and circumstances appearing in assessment year 1993-94 are stated to be similar with regard to addition of Rs. 36,68,397 and for the reasons aforesaid, we reverse the order of the CIT(A) on this issue in both the years and restore those of the Assessing Officer--subject to our directions in paragraph 36 above. We also leave it open to the assessee to seek appropriate relief from the concerned authority for the assessment of those income offered in subsequent years if so advised and in accordance with law. 39. In the assessee's appeals, the common dispute is against the disallowance of Rs. 48,799 and Rs. 48,013 made out of travelling expenses. In the absence of details filed, the Assessing Officer disallowed 10 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,408 3. Prakash Steel Corporation Rs. 14,300 4. Shree Krishna Cement, Savalia Rs. 22,000 5. Nathalal P. Shah, Savalia Rs. 25,000 6. Shree Diesel Pump Services Rs. 25,000 7. The Panchmahal District Co-op. Milk Producers Union Ltd. Rs. 11,840 8. -do- Rs. 10,880 9. -do- Rs. 11,760 10. Ghanshyam Co., Bombay Rs. 18,120 11. The Panchmahal District Co-op. Milk Producers Union Ltd. Rs. 17,600 12. Manan Engineers, Ahmedabad Rs. 15,751 13. The Panchmahal District Co-op. Milk Producers Union Ltd. Rs. 10,080 14. Pramukh Swami Hospital Debited to Medical Expenses Rs. 10,040 15. Velani Chemicals - Debited to Malsaman Rs. 12,330 16. Cummins Diesel Sales Services Ltd. Rs. 14,009 17. Cyclo Transmission Ltd. Rs. 10,246 -------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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