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TMI Blog2003 (8) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... job as expenditure. In the return, however, the assessee claimed that as per the terms of the contract the money was withheld by the government pending verification of satisfactory completion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d laid down that when the Assessing Officer proceeds to tax a particular income, he should ask himself, inter alia, two questions, viz. (i) what is the system of accountancy adopted by the assessee and (ii) 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iles (India) Pvt. Ltd. 179 ITR 8 (Calcutta), CIT v. Chanchani Bros. (Contractors) (P.) Ltd. 161 ITR 418 (Patna) and Janatha Contract Co. v. CIT 105 ITR 627 (Kerala) is 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was withheld by the Government pending verification of the satisfactory completion of work. The amount retained was receivable by the company after the defect liability period was over. Since no right accrued or arose to receive the amount so 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This deposit will be in favour of the Executive Engineer, Narmada Project Main Canal Construction Division No. II, Ahmedabad, C-3, Narmada Vasahat, Gandhinagar-Sarkhej Highway, Ahmedabad-3800S1, Gujarat State (India) and may be in the form 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to convert quarterly, Security Deposit recovered from his bills into interest-bearing SSNL Securities or interest-bearing deposits with a Scheduled Indian Bank in the name of Executive Engineer, Narmada Project Main Canal Construction Division 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 accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishing bank guarantee in previous year under consideration. 15. On a careful reading of the aforesaid terms and conditions of the tender and the general conditions governing the contract for construction of Sardar Sarovar Main Canal, it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it was held that no income resulted at all and the receipt was only a hypothetical income which really never accrued to the assessee. 20. In Bokaro Steel Ltd.'s case, the original agreement ceased to be operative ab initio and the entries regarding income 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act. It was a case of deduction as retention money to be paid on fulfilling the assessee's obligation and not retaining the same as security for ensuring the successful completion of the project. 25. In Chanchani Bros. (Contractors) (P.) Ltd.'s case, the government did not 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We may refer at this stage the decision of the Tribunal in the case of Dhorajia Construction Co.'s case wherein the Tribunal held that the 10 per cent deduction was retained as security deposit and therefore could be said to have not accrued to the assessee. In that case, the receipt was subject 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t withheld was only as a security and not a retention money. Withholding of the money from the running bills and making of deposit for due fulfilment of the contract are two different concepts. In the former case, the right to money accrued only on satisfactory completion of the work whereas in the latter 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 furnishin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the order price of goods despatched within 30 days of receipt of goods at destination subject to inspection and acceptance and receipt of a Satisfactory Bank Guarantee for equal amount valid till the expiry of the guarantee period of the equipment materials and as per specimen attached (proforma 2): 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resulting loss can be made,' Para 7.3 of the Accounting Standard clearly provides that uncertainties creating a contingency may relate to the warranties for products sold. These costs are usually incurred frequently and experience provide a means by which the amount of liability or loss can be estimated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as work-in-progress. In other words, at best, the assessee could say that the profit portion embedded in the said 10 per cent above may not be income of the assessee in the year under consideration and only that part of the amount could be excluded from its income. Therefore, even if it is held that the retention 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 40A(3) stands confirmed Accordingly, the appellant's appeal on this point stands dismissed." 42. In assessment year 1993-94, the Assessing Officer has given the details as under:-- 1. Chamunda Scrap Trade Mart, A'bad Rs. 11,580 2. Kedarnath Khandelwal Road Tax on his behalf Rs. 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 Rs.2,41,464 43. The assessee has given a c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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