Income Tax Appellate Tribunal - Mumbai
Corrosion Control Services (Bombay) ... vs Deputy Commissioner Of Income-Tax on 6 August, 1998
Equivalent citations: [1999]70ITD109(MUM)
ORDER
Vimal Gandhi, V.P.
1. This appeal by the assessee for the assessment year 1988-89 is directed against the order of the CIT(Appeals) upholding addition of retention money of Rs. 22,09,010.
2. The assessee's line of business is to find out whether connections of gas pipes are properly made and this is done through some sort of NDT X-Ray machines. The assessee carried above work as sub-contractor for Spie Capag NKK Toyo Consortium as per agreement dated 21st June, 1986. Similar work was also carried for Dodsal Pvt. Ltd. on the terms and conditions specified in the agreement dated August 7, 1986. The main contractors laid pipelines for the Gas Authority of India (GAIL). The above documents contain scope of work and terms of payment. In the agreement dated June 21, 1986, it is provided that the assessee would raise monthly invoices in respect of services rendered on the contractor for payments. Out of the bill amount 5% retention money would be deducted which will be released as follows :-
"5% will be released after successful completion of hydro test and after CCS have submitted all documents (records, films with approval of GAIL)."
In the other agreement dated 7th August, 1986, 10% of bill raised was to be deducted as retention money to be paid on the satisfactory completion of work. In the period relevant to the assessment year 1988-89, the assessee raised bills for total sum of Rs. 2,69,61,272.27 P. as technical consultancy charges for carrying on aforesaid technical work. The gross amount included the retention money deducted by the parties at Rs. 22,09,010 as provided for in the above agreements. The amount was included in the total receipts but was shown in the Balance Sheet as recoverable from the parties. The assessee claimed that abovesaid retention money did not accrue or arise to the assessee under the contract in the period under consideration. It accrued in the immediately preceding assessment year and was accordingly shown.
3. The Assessing Officer rejected this plea of the assessee and held that the decision of the Hon'ble Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) (P.) Ltd [1989] 45 Taxman 370/179 ITR 8 and other decisions cited on behalf of the assessee were not applicable to the facts of the case. The assessee-company apparently was responsible for release of retention money as it was for the assessee to submit all the documents on completion of the contract. Therefore, accrual of retention money according to the Assessing Officer depended upon the assessee. As gross bill was raised by the assessee for the work carried by it, the assessee had legal claim over the entire amount. The retention money might not have been received by the assessee, but it was vested in the assessee-company. As fulfilment of contractual obligation was entirely in the hands of the assessee, the receipt was in no way contingent. The Assessing Officer also attached lot of importance to certificate of the Auditor who had audited the books of account and held that the credit of retention money reflected true and fair view. Thus, the retention money was held to be chargeable to tax.
4. The assessee impugned the above addition in appeal, but remained unsuccessful. The learned CIT (Appeals) echoed the reasoning of the Assessing Officer to justify the addition. He further held that if advance made to the assessee could be treated as income of the assessee, why retention money was to be given a different treatment. The retention money was not entitled to different treatment under the mercantile system of accounting. The case of Simplex Concrete Piles (India) (P.) Ltd (supra) was held to be distinguishable as in that case the assessee had not credited the retention money in its books of account. The learned CIT(Appeals) accordingly upheld the addition. Hence, this appeal by the assessee.
5. We have heard both the parties. The facts of the case are not in dispute though legal inference to be drawn from above facts is a matter of controversy. It is an accepted position that 5 per cent and 10 per cent were deducted from the monthly bills raised by the assessee and the said sum amounting to Rs. 22,09,010 was paid in the latter part of 1988 after Spie Capag NKK Toyo Consortium and Dodsal had certified vide their certificates dated 26-2-1988 and 2-8-1988 respectively, that the assessee had satisfactorily completed NDT work on the gas pipelines. The retention money was received in the next accounting year and accordingly shown as income in the return. The accounting period of the assessee ended on 31st December, 1987. The relevant provisions under which the amount was deducted and retained by the contractors out of the amount payable to the assessee have already been extracted above.
6. The Assessing Officer and the learned CIT(Appeals) added the retention money amounting to Rs. 22,09,010 for the following reasons :
(1) that the assessee was raising bills for the gross amount of work completed which included retention money. The justification for this was stated to be the fact that T.D.S. was deducted from the full amount of bill.
(2) that the retention money was received and stood vested in the assessee in the period under consideration.
(3) that happening of event relation to issuance of completion certificate was in the hands of the assessee and not a contingent happening.
(4) that the Auditor M/s. M. P. Khanwala & Co. audited the accounts and certified the accounts as true and fair. The accounts contained credit entry of retention money in the Profit & Loss Account. The assessee was following mercantile system of accounting consistently and exclusion of retention money this year would tantamount to change of system of accounting.
(5) that apart from retention money, the contractors also deducted advances wherever paid and the said advances have been treated as income by the assessee. If advances are income, the retention money could not have a different character.
7. The learned Counsel for the assessee drew our attention to the case of Simplex Concrete Piles (India) (P.) Ltd (supra). In that case the assessee carried on business of concrete piles on contract basis and was crediting 100 per cent of job value upto and including the assessment year 1964-65. But for the assessment year 1965-66, it credited only 90 per cent; deducting the retention money @ 10 per cent of job value which resulted in reduction of income. The Assessing Officer added the retention money, but, on appeal, the AAC held that retention money did not accrue or arise in the relevant period in which the job was executed, but on a later date. The Tribunal remanded the matter back for re-examination in terms of the contract. On a reference to the Hon'ble Calcutta High Court, it was observed as under :-
"that having regard to the terms and conditions of the contract, it could not be held that either 10 per cent or 5 per cent, as the case may be, being retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee would acquire the right to receipt such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not 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 no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question."
In the case of Associated Cables (P.) Ltd. v. Dy. CIT [1994] 48 ITD 141 (Bom.) (TM), the learned Member of the Tribunal as per the headnotes, held as under :-
"Section 28(i) of the Income-tax Act, 1961 - Business deduction/loss - Allowability of - Assessment year 1990-91 - Assessee-company was engaged in manufacture of cables as per specifications of customers - According to contract, while 90 per cent of cost of cables was paid up to time of presentation of despatch documents. 10 per cent was paid on receipt and acceptance of goods subject to bank guarantee for that 10 per cent, stipulating that in case of any shortcoming in workmanship, etc., purchases shall, without reference to assessee, recover amount from bank - Assessee-company claimed that this 10 per cent, being retention money, had to be excluded in computing its total income and ought to be accounted for after expiry of guarantee period - Whether keeping in mind principle of income recognition which is basis of mercantile method of accounting, as long as performance guarantee remained and was enforceable without notice to assessee, income from retention money could not be recognised and consequently assessee's claim had to be allowed - Held, yes."
7.1 It can be taken to be well-settled principle that under mercantile system of accounting, it has to be seen whether right to receive amount has accrued to the assessee or not. This right must emerge from the contract between the parties. From the facts set out hereinbefore, we find that the entire amount of bill did not become due immediately upon its submission, but 5 per cent and 10 per cent of the bill amounts, as the case may be, were withheld as security. Having regard to the terms of contract, there can be no dispute that the assessee had no right to receive the retention money which was to become due only on completion of the entire contract and furnishing of requisite certificate. The payment of retention money was deferred as per the contract in spite of job carried and bills submitted. The payment of retention money was contingent on satisfactory completion of work and its certification. Till then there was no admissibility of the liability and no right to receive any part of the retention money accrued to the assessee. The work was completed in the next year and then only income accrued to the assessee. The retention money was liable to be taxed in the next year.
8. The learned Revenue authorities while making and upholding the addition were influenced by extraneous circumstances. Undue importance was given to the entries made by the assessee in the books of account. The income, as noted earlier, accrues on the basis of contract between the parties and not the view which the assessee has taken of the issue manifested through entries in the books of account. Therefore, crediting of the amount in the present case was totally immaterial. It is not the job of the Auditor to give his decision on the accrual of income. The auditor has only to certify regarding truthfulness of accounts with reference to material available on record and not whether income accrued to the assessee or not. The other observations relating to change in the system of accounting, assessability of advances, etc. etc., have nothing to do with determination of the question involved before us and were wrongly taken into account by the Revenue authorities. Regarding the entries in the books of account, we may safely quote the following observations of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 at page 367 :-
"The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provisions 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.
9. The above observations really clinch the issue. The accrual of income has to be determined with reference to contract between the parties and about the terms and conditions, no dispute has been raised by the Revenue. The retention money did not accrue under the contract and it could not be assessed merely on the view of the matter which the assessee had taken inadvertently or otherwise. The retention money accrued in the period relevant to the assessment year 1989-90 and should be assessed in that year. It is directed to be deleted from the assessment of the year under consideration.
10. In the result, the assessee's appeal is allowed.