Income Tax Appellate Tribunal - Delhi
Mcm Services Pvt. Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI K.D. RANJAN
ITA No. 3485/Del/2011 & 911/Del/2012
A.Yrs. 2006-07 & 2008-09
MCM Services Pvt. Ltd., Vs. DCIT, Cir. 6(1),
9, Saainik Farms, Lane 3, New Delhi.
Khanpur, New Delhi.
PAN/GIR No.: AAACM 7069E
( Appellant ) ( Respondent )
Appellant by : Shri Subodh Gupta CA &
Shri Mukesh Aggrawal CA
Respondent by : Shri Raj Tandon CIT (DR)
ORDER
PER R.P. TOLANI, J.M::
These are two appeals by the assessee against separate orders of CIT(A) relating to A.Ys 2006-07 and 2008-09. These are heard together and being disposed of by a consolidated order for the sake of convenience.
2. One common ground about validity of enhancement by CIT(A) is not pressed hence dismissed.
3. Remaining grounds are as under:
AY 2006-07
(i) Addition on account of enhancement by CIT(A) in respect of Retention Money of Rs.2,74,42,323/- claimed in revised return to be not accrued as income by assessee.
(ii) CIT(A) erred in holding that revised return filed by assessee was not maintainable.
2 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
(iii) Disallowance of Works Contract Tax amounting to Rs.
57,93,465/-
(iv) Disallowance of TDS claim of Rs. 6,15,759/-.
(v) Charging of interest u/s u/s 234D and mistakes in interest on refund u/s 244A.
AY 2008-09
(i) Non admission of additional evidence by CIT(A).
(ii) Non allowance of amount of Rs. 4,48,63,434/- on which TDS was paid in this year and was disallowed in earlier year for want of TDS deduction u/s 40A(ia).
(iii) Enhancement by CIT(A), rejecting the claim of Works Contract Tax (WCT) of Rs 13,02,848/-.
4. The first issue in appeal for AY 2006-07 relates enhancement of income by the Ld. CIT (A), by an amount of Rs 2,74,42,323/- representing retention money retained by the principal according to the terms of contract. The appellant follows percentage completion method of accounting (POCM) for recognition of revenue in its books of accounts. 4.1. One M/s. Italian Thai development Public Co. Ltd. (ITD for short) was awarded a major contract by NTPC in a project known as Kol Dam Hydroelectric Power Project. Part thereof was sub-contracted by ITD to the appellant, the stipulations provided retention of amounts described herein below by ITD for successful completion of work and defect warranty period of 90 days after the completion of the contract in accordance with terms between NTPC and ITD. Accordingly assessee entered into a contract with M/s. ITD for execution of following works of power project:
3 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
i. Spillway
ii. Underground grouting and drainage work
iii. Diversion of tunnel plugs.
4.2. The total expected sub contract value was based on unit rates and indicated quantities amounting to about Rs. 232.55 crores to be executed over a period. The contract provided that the final price would be calculated taking into account the total work done and the quantities actually performed as per final billing between ITD and NTPC, which was to be preceded by technical checks and fulfillment of defect liability. Clause 10 of the contract provided for retention of 5% of contract value towards security deposit, further 2.5% of the running bill to be deducted on completion of 12 months period from the date of letter, and further 2.5% of the running bill to be deducted after completion of 24 months from the issued of the letter. Thus the final retention totaling to 10% of the contract value was to be paid after the engineer in-charge has satisfied himself that all the terms of this contract have been duly and fully carried out by the appellant after 90 days after the completion of defect liability period and on submission of the document indicated in the main contract with NTPC. It may be pertinent to mention that work was in progress during A.Y. 2006-07. 4.3. Assessee filed original return for AY 2006-07 on 30-11-2006 declaring total income of Rs. 1,40,12,210 u/s 139(1). However, on observing that the amount of retention money had not accrued as income which was mistakenly credited as receipt, a revised return u/s 139(5) was filed on 1-2- 08 excluding the retention money from income and declaring loss of Rs.
1,34,30,113/-. Thus though in the accounts the amount of retention money was recognized as revenue receipt, in the revised return, the appellant excluded this sum. The A.O. after verifying the same, accepted the claim in 4 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
this regard and assessment was framed accordingly. The assessment was completed at a total loss of Rs. 1,31,01,310/- which included an addition of Rs 3,28,808 made on account of bad debts and credit of TDS of Rs. 6,15,759 was denied. On these two grounds assessee preferred appeal before CIT(A), who proposed to enhance the retention money by including it in taxable income by issuing an enhancement notice.
4.4. During the course of appellate proceedings, the ld. CIT(A) required the appellant to show as to why such retention money should not be brought to tax, the appellant contended that:
(i) The retention money is retained by the contractor ITD in terms of the binding agreement and the appellant has no legal right in its favour to claim it until the defect liability verification is completed at the end of original contractor. Thus during the accounting period in question these unpaid amounts are contingent, assessee had no claim over it. and not taxable receipts.
(ii) It was, intera lia, contended that since such sum is realizable only on satisfactory completion of the project and also end of defect liability period, the amount is not liable to tax in this year.
(iii) The verification of satisfactory completion and compliance of defect liability were tedious and uncertain processes. It required fulfillment of defect liability warrantly, which is legally binding and enforceable on assessee.
(iv) The appellant filed copy of relevant contract between ITD and NTPC, ITD and appellant, nature of defect liability as
5 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
embodied in the contract. Its effect on withholding the amounts by contractor. Copy of running bills demonstrating gross amount, TDS, retention, advance and material recovery, works contract tax (WCT) and other recoveries etc. Various case laws were also cited.
(v) It was pleaded that entries in the accounts by themselves do not create taxliability which depends on the real nature of the receipts.
(vi) The mistake in computation of income can be revised by assessee by filing a revised return of income. Assessee has accordingly revised the return as per the provisions of law.
4.5. The ld. CIT(A) rejected assessee's claim on following parameters:
i. time of taxability
ii. Quantum
iii. Revision of return.
4.6. On the parameter of time of taxability the CIT(A), in para 5.6, concluded that the accrual of income depends on its right to receive the same from the person to whom it has rendered services or sold the goods. The timing of a right to receive the income getting crystallized depends upon the terms of the agreement between the parties and other prevailing facts and circumstances. It was held that retention money has been recognized by assessee as revenue in the accounts. The variation in the estimated price could happen only by invoking escalation clause or calculation of final price as per final billing. Delay in performing work would invite compensation of maximum of 5% of the value of works. The retention of amount was to ensure that the appellant complied with defect liability clause and other 6 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
conditions relating to expected performance level. The defect liability clause talks of remedying the defect at the appellant's expenses, but does not impinge upon the retention amount. The retention amount was to be ultimately returned to the appellant. It was held that the appellant follows mercantile system of accounting and percentage completion method has accounted these amounts as revenue receipts. Since the appellant has followed one of the recognized method of accounting and is not contrary to the taxation laws, such sum is taxable as revenue receipt in this year. There was no contingency involved in receiving such sum. The security deposit is only utilization of that income and amount has accrued in favor of the appellant. Keeping the amount due to the appellant as security deposit occurs in the second stage after the right to receive the said income has already crystallized in favour of the appellant. CIT(A) relied upon following case laws.
- ED. Sassoon & co. Ltd. (25 ITR 27)
- CIT V. Ashokbhai (56 ITR 42)
- CIT V. Thiagraja Chetty (24 ITR 525)
- Vishnu Agencies Pvt. Ltd. (48 ITR 444) 4.7. Applying the above case laws, it was held that assessee had earned a right to receive the retention money upon completion of the work up to a certain stage. The retention money /security deposit was only to ensure that appellant complies to the defect liability clause. Even if retention money was to be forfeited, it will not affect the accrual of income in first place that happened on performance of the work.
4.8. On the parameter of quantum of retention money, ld. CIT(A) held that since as per revised return claim was of Rs. 2,74,42,323 but the same could 7 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
not be reconciled, and as per their submissions, the sum is only Rs. 2,70,41,118 the claim is not clear and hence the same is not tenable.
4.9. On the parameter of validity of claim in the revised return, Ld. CIT (A) held that revised return can be filed only when the assessee discovers any omission or wrong statement in the return and not otherwise. The scope of revised return on the ground of mistake is by and large on same basis as rectifying a mistake as in Sec. 154. Since revision of return would not be permissible on which two views are possible, revision of return is not permissible. Revision of return, can be only for bona fide and patent mistake which is not the case and hence not permissible.
4.10. Based on these observations CIT(A) rejected that revised return as not being maintainable in terms of sec. 139(5). On merits also it was held that revised claim excluding retention money from receipt was untenable. 4.11. Aggrieved, the assessee is before us.
5. Ld. A.R. invited our attention to the terms of contract, nature of defect warranty and the overriding effect of enforcement of warranty on the accrual of retention money as income. R.A. bills payment advices as approved by ITD and contends that the amount is retained in terms of clause 10 of the contract between the appellant and ITD. It is vehemently contended that:
(i) Taxability of income is based on the principles of accrual as per sec. 4 and 5 of the Act and not on the basis of the accounting treatment given in the accounts.
(ii) Ld. CIT (A) has recognized the principles of accrual of income by mention in para 5.6 of his order that 8 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
'It is trite law that the accrual of income in the hands of an assessee depends upon its right to receive the same from the person to whom it has rendered services or sold the goods. The timing of a right to receive the income getting crystallized depends upon the terms of the agreement between the two parties and the other prevailing facts and circumstances'.
However this principle is not applied to assesses case. The retention money is not to be received on approval of R A. bill but to be retained till successful completion of work and also after compliance of defect liability period which is 90 days after completion of work.
(iii) The addition is made only because the amount is accounted as income in books of accounts by the assessee. A mistake or omission while posting of amounts in P&L A/C or balance sheet can not be the only decisive factors for holding the receipts as income. The receipts have to stand the mandate of sec. 4 & 5 of the I T Act, they being the charging sections, retention money must come within their scope as real income.
(iv) Despite the express defect liability clause in the binding contract which is akin to warranty extend by many business entities, it is wrongly concluded that the retention money first accrued to the appellant and retention is only application of income. It has been totally ignored that the retention money is contingent upon technical verification of the contractor and its engineer in charge who has to certify that all minor specifications of contract work have been duly and fully carried out by appellant. The retention money is thus contingent upon uncertain checks, satisfaction of third parties defect 9 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
warranty and become income only when these formalities are completed.
(v) In case of defects found by the contractee and its technical agencies;. If they are not removed at the cost of appellant, the retained amount in this behalf will not be released. Similarly if defect is not found after completion of work, but if defects crop up during the warranty period appellant has to remove such defects at its cost. On failure to so remove the defects, the retained amount is liable to be forfeited. These contingencies have not been disputed
(vi) An amount which is liable for forfeiture with other damages can by no stretch of imagination be construed as accrued to assessee. Thus there exist various contingencies for accrual of impugned amounts. The contingency can neither be foreseen or quantified in anticipation nor they can be waived as per the binding terms of the contract.
(vii) This is further evident from the fact that defect liability clause was invoked by the contractor asking assessee to undertake huge corrections of defects. Disputes ensued and till date assessee has not got the retention money and matters are pending in lengthy and tedious arbitration proceedings. The contingent nature of retention money on factual terms is thus clearly demonstrated in assessee's case.
5.1. Various authorities have laid down the proposition in favor of the assessee. Some of the judicial authorities relied are:
10 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
(a) CIT V. Simplex Concrete Piles India P. Ltd. 179 ITR 8(Cal), Hon'ble court has decided the similar issue by holding that:
9. On these facts, we have to consider whether the right to receive the retention money accrued to the assessee on submission of bill. In the case of A. Gajapathy Naidu ( supra) the Supreme Court had occasion to examine the question and laid down that when the ITO proceeds to include a particular income in the assessment, 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 mercantile system of accountancy, when has the right to receive that amount accrued.
From the facts, as we have already set out hereinbefore, we do not find any reason to hold that the entire amount became due immediately upon submission of bills, 5 or 10 per cent of the bills as the case may be is withheld as a security. The assessee follows mercantile system of accounting and, therefore, it must credit the accounts as and when the right to receive any sum accrues. There can not be any dispute that only 90 per cent of the bills in the first instance when the job accrues to the assessee and the remaining 10 or 5 per cent becomes due in accordance with the terms of the respective contract. In some cases, as per contract, the right to receive payment of 5 per cent accrues on completion of work and only the remaining 5 per cent is deferred for a further period. The payment of retention money is deferred and is contingent on the satisfactory completion of the work and removal of defects and payment of damages, if any. Till then there is no admission of liability and no right to receive any part of the retention money accrues to the assessee.
11 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
5.2. Thus it has been held that unless the conditions of satisfactory completion of the work are satisfied, no right to receive such amount/income accrued to assessee. Even if assessee follows mercantile system of accounting, the income can not be held to be accrued.
5.3. This judgment has been followed by Hon'ble Gujrat High Court in Anup engineering Ltd. (247 ITR 457), holding as under:
"Looking to the facts of the present case and in the light of the law laid down by the Supreme Court in the cases referred to hereinabove, it was very clear that unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him. A debt must have come into existence and the assessee must have acquired a right to receive the payment. In the instant case, the assessee did not get any right to receive the sum of Rs. 4 lakhs which could have been retained by 'G' in pursuance of clause No. 14 of the contract. One has to look at the contract and not at the entries made in the books of account. If, upon construction of the contract, one came to a conclusion that the assessee could not have received Rs. 4 lakhs from 'G', by no stretch of imagination it could be said that the said amount had accrued by way of income to the assessee in the previous year in question. As the plant was not up to the satisfaction of 'G', 'G' had a right to retain Rs. 4 lakhs. It was not in dispute that during the previous year in question, the dispute as to quality of the plant had arisen and the assessee had also felt that the quality of the plant was not up to the mark and, therefore, believing that 'G' might ultimately retain Rs. 3 lakhs or under the warranty clause the assessee might have to pay Rs. 3 lakhs, 12 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
the assessee made a provision for Rs. 3 lakhs by deducting the said amount from the sales account. In fact, in the previous year in question, the assessee had no vested right to receive Rs. 4 lakhs and, therefore, it could not be said that income to that extent had accrued to the assessee. The above conclusion would be tested in a different manner too. Whether 'G' was liable to pay Rs. 4 lakhs to the assessee in spite of the fact that quality of the plant was admittedly not up to the mark? Did the assessee get a vested right to get the said amount? The answer to these questions would be in negative and, therefore, it could not be said that income had accrued to the assessee.
A similar question had arisen in case of CIT v. Simplex Concrete Piles (India) (P.) Ltd. [1989] 179 ITR 8 (Cal.). Having regard to the facts and circumstances of the case, it was held in that case that when there was a clause with regard to retention money, the assessee got no right to claim any part of the retention money till the verification of satisfactory execution of the contract was concluded and, therefore, if there was no immediate right to receive the retention money, the said amount could not be said to have accrued to the assessee. Even in the instant case, so far as retention money was concerned, the assessee had no right to receive the same and, therefore, it could not be said that the amount of Rs. 3 lakhs had accrued to the assessee.
.....
Looking to the law and the facts and circumstances of the case, it was crystal clear that Rs. 3 lakhs, which was deducted from the sales account by the assessee was rightly claimed by the assessee by way of deduction as the said amount had never become income of the assessee. As the income had not accrued in respect of the said amount, it was not proper on the part of the revenue to treat the 13 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
same as income accrued to the assessee. Even if it was assumed that the income had accrued to the assessee, the assessee's liability with regard to repairs of the plant as per the terms of the contract had also arisen in the same previous year. If the liability had also arisen in the same previous year in which the income had accrued, the said amount of liability ought to have been deducted from the amount of income accrued. The said view taken by the Commissioner (Appeals), while allowing the deduction claimed by the assessee, would be correct in that event. Therefore, in any view of the matter, the assessee would be entitled to claim Rs. 3 lakhs by way of deduction and, therefore, the revenue ought not to have disallowed the said claim."
5.4. Hon'ble Madras High Court in the case of CIT v. Ignifluid Boilers P. Ltd. (283 ITR 295) held as under:
" The facts are not disputed 10 per cent of the retention money has not been received in respect of the relevant assessment year though the work has been completed. The assessee is entitled to receive the amount only after successful completion of work. In such circumstances, it cannot be said that 10 per cent retention money retained by the principal contractor accrued to the assessee during the relevant assessment year for consideration?
Under the Income-tax Act, the income accrued or received by The assessee alone is taxable. This position is fortified by/the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 wherein it has been held as follows (page 148):
"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the 14 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
This is what exactly happened in this case. In view of the categorical pronouncement of the Supreme Court and the facts and circumstances of the case, we are of the view that the appellate authority as well as the Tribunal are correct in their view. The order of the Tribunal requires no interference. 5.5. Further reliance is placed on Hon'ble Bombay High Court judgment in the case of CIT v. Associated Cables P. Ltd. (286 ITR 596)which has inter alia held that:
"The question of law sought to be raised in this appeal is as to whether the retention money could be considered to be the income of the assessee in the year in which the amount was retained. The Income-tax Appellate Tribunal has referred to a judgment of the Tribunal in Associated Cables P. Ltd. v. Deputy CIT [1994] 206 ITR (AT) 48 (Bom.). Mr. Sathe appearing for the respondent has, however, drawn our attention to two judgments, viz., of the Calcutta High Court and the Madras High Court. The Calcutta High Court judgment is reported in CIT v. Simplex Concrete Piles (India) P. Ltd. [1989] 179 ITR 8. A Division Bench of the Calcutta High Court in that matter has held that the payment of retention money in the case of contract is deferred and is contingent on satisfactory completion of contract work. The right to receive the retention money is accrued only after the obligations under the contract 15 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
are fulfilled and, therefore, it would not amount to an income of the assessee in the year in which the amount is retained. The other judgment relied upon is in the case of CIT v. Ignifluid Boilers-(I). Ltd. reported in [2006] 283 ITR 295 (Mad.). In that judgment also, a Division Bench of the Madras High Court has held that the amount retained does not accrue to the assessee and, therefore, the assessee would not be liable.
In view of what is stated above, there is no reason to entertain the appeal. The appeal is dismissed".
5.6. Thus various High courts by a series of judgments have held that retention money can not be held to be accrued to assessee unless the conditions governing retention money are satisfied. In assessee case not only ordinary conditions were there, the retention was made on technical conditions about defect warranty and restoration of work. In many cases the assessee ends uploosing more money in such defect warranties. In this case also so far the retention money has not been given and assessee has been embroiled in disputes and arbitration proceedings.
5.7. Further reliance is placed on:
- CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144(SC)
- Godhra Electricity Co. Ltd 226 ITR 746(SC) 5.8. The concept of provision of warranty is well recognized in accounting and allowed under income tax provisions; various judicial authorities have held the provision for future warranty as allowable deduction provided it is quantified in scientific manner. Thus the amount of warranty, even not spent but provided for, in books as a warranty provision is allowed as expenditure provided it is based on scientific method. If the retention amount is sought to be taxed on accrual basis in that case an equal amount should alternatively 16 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
be allowed as provision for warranty. The calculation is based on scientific working i.e. an enforceable contract. Consequently if the amount is added in receipts an equal amount is alternatively eligible to be treated as provision for warranty, which will lead to same taxable income in this behalf.
5.9. Hon'ble Supreme Court in RotarkControls (India Pvt. Ltd) 314 ITR 62(SC), held that provision for warranty is allowable expenditure by following observations:
"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 of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c ) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. [Para 10] Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise embodying economic benefits. [Para 11] A past event that leads to a present obligation is called as an obligating event which is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events which exist independently of the future conduct of the business of the enterprise, that are recognized as a provision. For a liability to qualify for recognition, there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts), the probability that an outflow will be required in settlement is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item, the provision for warranty can constitute a contingent liability not entitled to deduction under section 37.
17 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative but to settle that obligation. In the instant case, the assessee had been manufacturing and selling valve actuators. It was in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years, the assessee had been manufacturing valve actuators in large numbers. The statistical data indicated that every year some of the manufactured actuators were found to be defective. The statistical data over the years also indicated that being sophisticated items no customer was prepared to buy valve actuators without a warranty. Therefore, warranty became an integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. Therefore, warranty provision needed to be recognized because the assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate could be made of the amount of the obligation. In short, all the three conditions for recognition of a provision were satisfied in the instant case. [Para 12] In the instant case, one was concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options :
(a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act, 1956 as well as by the Accounting Standards which require accrual concept to be followed. In the instant case, the revenue was insisting on the first option which is erroneous as it rules out the 18 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
accrual concept. The second option is also inappropriate, since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on a matching concept. Under the matching concept, if revenue is recognized, the cost incurred to earn that revenue including warranty costs has to be fully provided for. In the instant case, when valve actuators were sold and the warranty cost was an integral part of that sale price, then the assessee had to provide for such warranty cost in its account for the relevant year, otherwise the matching concept would fail. In such a case, the second option is also inappropriate. Under the circumstances, the third option is the most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required, particularly if the experience suggests that warranty provisions are generally reversed if they remain unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis, a sensible estimate should be made. The warranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust, then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. Hence, on the facts and circumstances of the instant case, provision for warranty was rightly made by the assessee because it had incurred a present 19 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
obligation as a result of past events. There was also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the assessee had incurred a liability during the relevant assessment years and it was entitled to deduction under section 37. Therefore, all the three conditions for recognizing a liability for the purpose of provisioning stood satisfied in the instant case. There are four important aspects of provisioning, viz., provisioning which relates to present obligation; it arises out of obligating events; it involves outflow of resources; and lastly, it involves reliable estimation of an obligation. Keeping in mind all the four aspects, the High Court should not to have interfered with the decision of the Tribunal in the instant case. [Para 13] From analysis of the various decision of the Supreme Court, in which a similar issue was decided, the principle which emerges is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and if the facts established show that defects existed in some of the items manufactured and sold, then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. It would all depend on the data systematically maintained by the assessee. [Para 17] Therefore, the impugned judgment of the High Court was liable to be set aside and the appeal filed by the assessee was to be allowed in its favour. [Para 18] 5.10. Thus the claim of the assessee is even alternatively allowable as deduction for provision for warranty which is quantifiable on the basis of terms of contract itself.
5.11. In respect of minor difference in retention money amount, ld. A.R. explained that the same is as accounted in the books; there are various 20 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
disputes regarding the execution of contract; the work stands abandoned now and the record is old the assessee is not able to respond. The disputes are referred to arbitrator, award is awaited. The figures cannot be exactly tallied, however as per each running bill and payment advices accounted for the amount is retained while releasing the bills the sum was specifically debited to advances accounts which has been certified by auditors also. This leads to a small difference of just 4 lacs only, the claim may be reduced to this extent.
5.12. That facts that the contract has run into trouble, nonpayment of retention money, impending arbitration and invoking of contract clauses and defect liability parameters demonstrate that the payment of retention money depends on various contingencies and this money had not accrued to assessee.
5.13. It is further contended that the revised return can be filed u/s. 139(5) where an assessee either discovers any omission or discovers any wrong statement therein which will include mistake in claiming any deduction or overstatement of income. The interpretation of conditions for filing revised return adopted by CIT(A) is bereft of any legal sanctity and leads to illogical results defeating the provisions of I T Act. As the retention money income did not accrue in favor of appellant, the same amounts to wrong statement in the return while computing the taxable income under the head income from business. Therefore, assessee has a right to revise of such return.
5.14. CIT (A) has wrongly interpreted sec. 139(5) same as akin to sec. 154, which are two different provisions and deal with distinct situations. Sec. 154 is applied when AO or any other authority has already passed an order and 21 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
such order contains any 'mistake apparent on record'. 139(5) prescribes revising of a return which is an act of assessee prior to passing of any order. The words of both sections are conspicuously different. The case laws relied upon by ld. CIT(A) are not applicable to facts of present cases, the cases of Hon'ble Calcutta and Bombay high court relied on are not discussed at all there is a mere mention in order i.e. para no. It is accordingly prayed that addition made in this regard be deleted.
5.15. It is pleaded that in the next year i.e. AY 2007-08 retention money was excluded from the receipt which has been allowed to assessee in 143(3) assessment by AO.
5.16. On a query from the bench as to when income in respect of retention money are not taxable, how corresponding expenses can be claimed on matching principle, Ld. counsel for the appellant explained that the expenses are incurred in the course of business and hence allowable as per sec. 28 to 37 of the Act. The expenses incurred are irretrievably gone and hence not contingent upon earning of any income. In cases of losses also business expenditure is allowed as it a certain outgoing. Apropos amount of retention money, if work is not satisfactorily performed or defects (technical or routine) are found vis a vis express technical specifications, the the retention money is not paid till defects are made good by the appellant at its own expenses to be further incurred. The quality of work and defect liability warranty was extend to ITD which in turn depended on the acceptance and satisfaction of principal contractor i.e. NTPC. Thus the accrual of retention money stood postponed to the concurrence of not one but two agencies ITD and NTPC.
22 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
5.17. Therefore, incurring of expenses is not postponed and they are accrued and allowable. What is postponed is retention money which is excluded from income by the assesee. Even CIT(A) has not invoked the issue of matching principles and hence no new issue may be raised at this stage.
5.18. In respect of other grounds, ld. counsel pleaded that additional evidence in respect of works contract, tax & TDS may be admitted which are in the form of challans and accounts in this respect. This is to demonstrate that the liabilities are paid.
5.19. After hearing both the parties, we are of the view that it is in the interest of justice to admit them as they have vital role in ascertaining such payments.
6. The Ld. D.R strongly relied on the order of ld. CIT (A), the enhancement is defended as AO allowed the claim ignoring the provisions for revised return and accounting principles. CIT (A) was not satisfied with the claim and the method by which the claim was made. Enhancement is based on a specific notice which is duly replied by the appellant. Therefore the enhancement is in conformity with provisions of Sec. 250. It empowers the appellate authority to examine the claim and since no new source of income is brought to tax same is permissible in law. Reliance is placed on:
- Gurinder Mohan Singh Nindrajog v CIT (2012) 18 taxman.com 176 (Del)
- CIT v Nirbheram Deluram 224 ITR 610 (SC) 6.1. It is pleaded that assessee follows mercantile method of accounting as its declared policy in accounts. Original return was filed based on these accounts which were admittedly prepared on the basis or revenue 23 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
recognition as per its accounting policy. There is no mistake in original return as it was filed according to the declared accounting policy. In the absence of any mistake assessee can not revise the return as it pleases.
6.2. It is further pleaded that sec 139(5) reads as under:
[(5) If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier :
Provided that where the return relates to the previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.] 6.3. A plain reading of this section reveals that a return can be revised on the basis of any omission or wrong statement contained therein. There is no omission consequently the next category is of wrong statement, there is no wrong statement in original return as it is filed on the basis of assesses own accounts certified by the auditors. Therefore, CIT(A) was right in refusing assesses revised return. Reliance is placed on Golden Insulation and Eng.
Ltd. v CIT (2007) 305 ITR 427(Delhi).
6.4. Ld CIT(DR) vehemently argues that there is no contingency involved in the accrual of retention money. Accrual and receipt are two deferent terms. Merely because there are certain conditions for receipt of money accrual of income cannot be postponed. It depends on assessee's right to 24 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
receive the same. In this case assessee entered into a regular type of construction contract; terms of agreement are similar to routine contract agreements where security deposit is retained by the contractor for some time after completion of the contract. TDS has also been deducted on the entire amount which indicates that retention money accrued as income to the assessee.
6.5. Reliance is placed on ITAT Mumbai judgment in the case of Emerson Network Power India v. ACIT (2009) SOT 593 (MUM) for the proposition that when the accounts are maintained as per accounting standards prescribed by ICAI and the receipts are treated as income on mercantile method the accrual cannot be postponed.
6.6. Ld DR in fine pleads that:
(i) Enhancement powers have been rightly exercised by Ld CIT(A).
(ii) Revised return has been rightly rejected by CIT(A).
(iii) Assessee in order to reduce taxable income, has tried to postpone the accrual which is against its own method of accounts.
(iv) Contract clauses do not have the effect of making accrued receipt as contingent or not accrued. They are in the nature of security deposits retained by the principal to ensure completion and proper execution of work by the contractor.
(v) The receipts accrued as per the ICAI accounting standards and assessee's own method of accounting.
(vi) CIT(A) order is relied on this behalf.
7. Before proceeding with the merit of the additions, it is useful to refer the clauses in the agreement regarding retention money and defect liability 25 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
period contained in clause 10 and clause 12 respectively in the agreement between appellant and ITD. The same are extracted as under.:
10.0 Retention A Retention of 5% shall be deducted as security deposit from each running bills. Further retention equal to 2.5% of the running bill will be deducted on completion of 12 months period from the date of this letter. A further retention equal to 2.5% of the running bills will be deducted after completion of 24 months from the date of this letter. Thus the final retention will be 10 %( ten percent) of the running bills. The retention shall be returned to MCM after the Engineer in charge has satisfied himself that all terms of this contract have been duly and fully carried out by the MCM or after 90 days after the completion of defect liability period and on submission of the documents indicated in the main contract we have with NTPC under sub-clause 10.1 of conditions of Particular Application.
12.0 Defect Liability The defect liability period shall be 12 months after the certified date of completion of the work. During the said defect liability period, you shall be responsible to make good and remedy at your own expenses any defect which any develop or may be noticed before expiry of the said period.
7.1. As regards merits of the additions, the same is made primarily on the ground that the income though is recognized in the accounts as also offered in the original return; same is reduced only by way of filing revised return of income. In our opinion the controversy in hand is answered by Hon,ble Supreme court in case of Shoorji Vallabhdas & co. (46 ITR 144) wherein the court at page 148 observed thus:
"Income tax is levy on income. No doubt the income tax Act takes into account two points of time at which the liability to 26 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
tax is attracted viz, the accrual of income or its receipt, but the substance of the matter is the income. If income does not result at all, there can not be a tax; even though in book keeping an entry is made about a "hypothetical income", which does not materialize. Where income has, in fact ,been received and subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
7.2. Under the scheme of the Act, what is taxable is the income that has accrued in favor of the assessee, i.e. real income and not notional. This view is amplified in the decision of Hon,ble Supreme court in case of Godhra Electricity Co. Ltd. 225 ITR 746.
7.3. In our view for a receipt to accrue as income an accounting entry can not be only decisive factor. If the same is not accrued it cannot be held as income only because of such entry. The retention money is contingent upon the completion and post warranty certificate from the engineer in-charge of NTPC. Neither the work was completed nor the defect liability period was over. It is also fact that subsequently dispute arose between the appellant and ITD and matter is pending before arbitrator. Thus the fate of such retention money is hanging in balance and it did not accrue as income of the appellant. 7.4. Following case laws specifically determining the taxability of 'retention money' cited by ld. Counsel for assesee are as under:
- Calcutta High Court in the case of CIT v. Simplex Concrete Piles India Pvt. Ltd. (179 ITR 8) wherein the court observed thus:
- Hon'ble Gujarat High Court in case of Anup engineering Ltd. (247 ITR 457).
27 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
- Hon'ble Madras High court in case of CIT v. Ignifluid Boilers Pvt Ltd. (283 ITR 295)
- The law laid down in simplex case (supra) and Ignifluid case (supra) has been followed in case of CIT v.
Associated Cables Ltd. (283 ITR 295) and in CIT v. East coast construction & Industries Ltd. (283 ITR 297).
7.5. These judgments have held that retention money depending on contingencies can accrue to assessee when contingencies are over. In the mean time they can not be treated as accrued income as per sections 4 & 5 of the I.T. Act.
7.6. Hon'ble Delhi High Court, in the case of Devsons (P.) Ltd. v. CIT (329 ITR 483) observed thus:
"18. .... Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. See, CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 , 148 (SC)" [Emphasis supplied]
19. The Bombay High Court in the case of H.M. Kashi Parekh & Co. Ltd. v. CIT [1960] 39 ITR 706 reiterated if the accounts are maintained under the mercantile system, what has to be seen is as to whether the income can be said to have really accrued to the assessee-company.
"The two rules that income-tax is annual in its structure, meaning thereby that for computation each year is a distinct self-contained unit, and the other that the income to be taxed is the real income of the assessee are not incompatible or 28 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
irreconcilable : they permit of harmonious application.
The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language."
20. The aforesaid view of the Bombay High Court was approved by the Supreme Court in a number of subsequent decisions including CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 . In the said case the Supreme Court after referring to its earlier decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 , which was also a case where the mercantile system of accounting was being followed by the assessee, observed (89 ITR page 273) :
"Hence it is clear that this court in Morvi Industriescase did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income."
21. In Godhra Electricity Co. Ltd. v. CIT [1997]225 ITR 746 1, the Supreme Court reiterated the concept of 'real income', emphasizing that even under the mercantile system, a mere claim by the assessee is not sufficient to make income accrue on the basis of 'hypothetical income' - the income must actually become due. In the said case the Supreme Court inter alia examined the cash system and mercantile system of 29 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
accounting in the context of 'hypothetical income'. Considering the facts before it, the Court said that although the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the representative suits filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee- company had not been able to realize the enhanced charges. No real income having accrued, it was held, the amount due on enhancement was not assessable.
22. In a subsequent decision rendered in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 3151 , the Supreme Court, following its earlier decision in Godhra Electricity Co. Ltd.'s case (supra) affirmed the decision of the Patna High Court wherein it was held that the entry in the books of account shown as income from Hindustan Steel Ltd. for the 8 locomotives supplied by the assessee-company to them could not be brought to tax as income since this entry reflected 'hypothetical income' and only the real income could be brought to tax.
23. This court in CIT v. Modi Rubber Ltd. [1998] 230 ITR 817 2 , following the decisions of the Supreme Court in Godhra Electricity Co. Ltd's. case (supra) and Shoorji Vallabhdas & Co's. case (supra), held that a mere unilateral act of the assessee debiting the books of account, the liability for payment whereof was not accepted or agreed to by the debtor, did not amount to income accrued to the assessee.
24. It may be noted at this juncture that the reliance placed by Mr.Sanjeev Sabharwal, the learned counsel for the Revenue on the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 1023 wherein the effect of the decision of State Bank of Travancore's case (supra) was specifically considered and explained by the Court.
25. In our considered view, therefore, the Tribunal was not right in holding that there was a change in the method of accounting by the assessee company. The assessee company had submitted 30 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
the details of all the bills to the Assessing Officer. The Assessing Officer as well as the Tribunal, in our view, erred in holding that the appellant had declared receipts on the basis of the amount actually received which was contrary to the system of accounting maintained by the assessee company, viz., the mercantile system. We are, therefore, of the view that the Tribunal in the penalty proceedings has rightly observed in its order dated 29-7-2005 that the assessee could not be said to have changed its method of accounting from mercantile to cash and cannot be charged with suppressing the receipts to the extent of Rs. 35,39,631."
7.7. Thus Hon'ble Delhi High Court refers a range of case laws on the issue, though in penalty proceedings; after considering all the available case law on accrual of income u/s 4&5 of the IT Act, accounting principles and entries on merits upheld these principles.
7.8. Reading all the decisions cited above and in view of facts and circumstances of the case, the amount of retention money cannot be held to be accrued and brought to tax as income of the assessee. It is trite law that an accounting entry cannot create taxability of a receipt which depends on contingencies and cannot be treated as accrued income.
7.9. As regards reliance by ld. D. R. on the decision of ITAT Mumbai in case of Emerson Network case (supra), the same will not help the case of revenue. In the said case, no amount was retained by the client for any contingency that may arise in future but only bank guarantee was provided for successful working of the equipment supplied. Even the cases of high court in respect of retention money were found distinguishable on facts of 31 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
that case and not that new law other than that laid down by Calcutta or Bombay high courts is decided.
7.10. There is another way of looking at the issue. In many cases of technical specification of works, services to be executed the assessee provides provision for warranties which relate to future. Such provisions are also allowed as expenditure if they are made on reasonable parameters. It is trite law that as for as possible the tax should be levied on real income. The issue of warranties can be dealt in two manners. If amounts are received than make a provision for warranties in P & L A/c on reasonable parameters which is conventionally allowed in IT assessments. In case of amounts not received, the second method can be to treat the unpaid amounts as not accrued pending settlement of express warranty issues, which is the situation in assesses case. The appellant has undertaken the project and was duty bound to give satisfactory performance as per warranty. For satisfactory execution of contract as also removal of defects ordained by the contract, certain sum is retained. Had the appellant provided for warranty in the accounts or claimed deduction as such, the same would have been allowed in view of the decision of Hon,ble Supreme Court in case of Rotork Controls (India) Pvt. Ltd. (314 ITR 62). Since the amount set apart being as per agreed terms and is contractually determined, even such provision would be allowable. Therefore looking from both angles, the retention money not payable to the appellant during the year is not accrued and hence not taxable during this year.
32 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
7.11. As regards the difference of the sum, the claim of the entire sum could not have been disallowed. The same is not tenable in view of fact that the amount of retention money is arrived as per the accounts and is also certified by the auditors.
7.12. Apropos the denial of claim on the ground that such claim was made in the revised return, we have no difficulty in overruling such objection of CIT (A). Firstly, it is settled law that income is not taxable only on the basis of entry or absence thereof in the books of accounts. What is essential for charging section 5 is that income should have accrued to the appellant. This is made clear by Hon,ble Supreme Court in Shoorji Vallabhdas case (supra). Secondly, the CIT(A) wrongly considered eligibility of filing revised return only in case of 'mistake apparent on record' as envisaged in sec. 154 of the Act. The person is entitled to file revised return when he discovers any omission or any wrong statement therein. Offering income which , which can be validly revised u/s. 139(5) of the Act.
7.13. In view of the fore goings, we delete the addition of Rs. 2,74,42,323 i.e. the amount enhanced by ld. CIT (A). Grounds no. 2 to 4 and ground no. 7 raised by assessee in this regard are allowed.
8. The next issue raised in appeal for both the years relates to disallowance of Works Contract Tax (WCT for short) in ground no. 5 and 6 in both the years. In both the years, the addition is made by CIT (A) by way of enhancement.
33 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
8.1. The facts in this regard are that the appellant executing the above referred work raised bills on the client ITD. The client while making the payment deducted such tax. For, A.Y. 2006-07, though the claim was not made in the original return, same was claimed in the revised return. For, A.Y. 2008-09, the A.O. accepted the claim and allowed the same. During the course of appellate proceedings, the appellant was required to furnish the details of payment and proof for same. The appellant submitted that as per Works Contract Tax Act, every client is required to deduct WCT from the bills of a contractor/sub-contractor just like TDS under the income tax Act. The amount is shown as asset in the accounts and is written off only on final assessment. However, under the Income- tax Act, u/s. 43B the same is allowable irrespective of method of accounting only on basis of actual payment thereof. Since the amount is already deducted and paid by client to government, same is allowable. Ld. CIT (A) held that in spite of opportunities, the appellant failed to furnish any details/evidence for claim of WCT and hence is not allowable.
9. Ld. Counsel for the appellant submitted that the WC Tax though payable by the appellant, is deducted as per the provision of WCT Act. It is actually to be deducted at time of payment to the contractor. The appellant has provided proof of payment advices showing deduction of such tax which are placed on paper book and before CIT (A). The amount are ultimately to be paid by the client and hence appellant is not is possession of such challans. However, it cannot be said that the tax is not paid by the appellant. As per sec 43 B any tax cess etc. are allowable 34 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
as deduction in the year in which the same are paid. Since so far as appellant is concerned, the same amounts as paid, the deduction is allowable.
10. Ld. D. R. on the other hand relied on the arguments of the CIT(A).
11. We have heard rival contentions and gone through the relevant material available on record. On appellant has produced payment advices showing deduction of WCT. The same are at pages of 17 to 32 with summary thereof on page 42 of the paper book. When the tax is deducted by the client in accordance with WCT Act, so far as appellant being a contractor it can be treated to have paid such tax. If any amount is refunded to the appellant, the same is taxable which the appellant has offered as income in A.Y. 2008-09 amounting to Rs.47,87,756/-. Same is as per statement of income which is on page 35 of paper book. The revenue cannot disallow the payment and at same time tax the sum received as refund out of such payment. The amount received as refund and offered for tax itself is a testimony for payment of tax by the client when it deducted such tax from the amount payable to the appellant. We therefore hold that the amounts of Rs. 57,93,465 for A.Y. 2006-07 and sum of Rs. 13,02,848/- are allowable u/s. 43 B of the act. The additions are therefore deleted for both the years.
12. The next issue in appeal for A.Y. 2006-07 raised in ground no. 8 is against denial of credit for income-tax deducted on contract payments but disallowed proportionately to the extent of retention money not 35 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
considered as income. The A.O. held that since the retention money is not considered as income, corresponding credit for tax of Rs. 6,15,759 deducted will be allowed only in the year such retention money is offered as tax by invoking sec. 199 of the Act. Ld. CIT (A) held that since such retention money is liable to tax, the appellant is entitled to tax credit for such sum deducted at source. Thus the issued stands decided in favor of the appellant and cannot be said to be aggrieved by such order. The revenue has not filed any appeal against such direction. This ground has therefore become only academic which need not be answered. Besides, the income from the contract has been offered which includes unaccrued retention money. Therefore, in any case assessee is eligible for TDS credit.
13. The next issue in appeal for A.Y. 2008-09 raised in ground no. 3 and 4 thereof is against disallowance of Rs.4,48,63,434/-, being amount disallowed in A.Y. 2007-08 for nonpayment of TDS u/s. 40(a)(ia), which is paid during the relevant financial year and hence claimed as allowable under proviso to sec. 40(a)(ia).
13.1. The facts in this regard are that the appellant for financial year relevant to A.Y. 2007-08 incurred various expenses on which TDS was deducted as per scheme of the Act. However, the said TDS was not deposited before the specified dates and hence was not allowable under provision of sec. 40(a)(ia). The appellant itself while filing return disallowed such sum. Such tax was deposited to the credit of government during the financial year relevant to A.Y. 2008-09. Therefore in terms of 36 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
proviso to sec. 40(a) (ia), such expenses were claimed as allowable. The A.O. in this year proceeded to examine expenses. He called for the details like address, PA no. to ascertain that the nature of expenses for business. The amounts were disallowed alleging details were not filed. AO held that merely deducting tax and depositing same, the appellant cannot claim them as allowable expenses. The same was confirmed by ld. CIT (A) and hence this ground.
13.2. Learned counsel for the assessee reiterates the submissions made before lower authorities, counsel for revenue relies upon impugned order.
13.3. We have heard the counsels on both the sides and perused the record. The appellant deducted TDS on various payments claimed as expenses incurred for A.Y. 2007-08. As TDS was not deposited in the government treasury before specified due date, they were added back to income as provided by sec. 40(a)(ia) of the Act. It is pertinent to mention that proviso to sec. 40(a)(ia) provides that the amount so disallowed for non deduction or non depositing tax before due date will be allowed as a deduction in computing the income of the previous year in which such TDS was paid to govt. .
13.4. The expenses primarily relate to financial year relevant to A.Y. 2007-08 but disallowed because of operation of sec. 40(a)(ia). If the expenses are not allowable u/s. 37 of the act, i.e whether same are incurred for the purpose of business/are not capital/personal in that case there was no question about applying sec. 40(a)(ia). Consequently the 37 ITA nos. 3485/D/11 & 911/D/12 MCM Services Pvt. Ltd.
issue of verification of expenses was applicable for A.Y. 2007-08 and not for the subsequent year. As they were disallowed on the basis of proviso to sec. 40(a)(ia) and not u/s 37, it implies they were business expenses. Consequently if the TDS is paid in A.Y. 2008-09, by the same provisions, the deduction is to be given in the year of deposit of TDS. Having disallowed such sum in A.Y. 2007-08 in view of sec. 40(a)(ia) and not sec. 37, it is not open for A.O. to examine them in AY 2008-09. We therefore agree with the appellant contention. The A.O. in accordance with proviso to sec. 40(a)(ia) in AY 2008-09 shall only verify, and if TDS is found to be deposited in this year it shall be accordingly allowed.
14. The next issue in appeal for A.Y. 2006-07 is against charging interest u/s. 234 D u/s 244A of the act. The same are consequential to the appeal and A.O. shall charge the same in accordance with law after giving effect to this order.
15. In the result both the appeals of the assessee are partly allowed.
Order pronounced in open court on 17-07-2012.
Sd/- Sd/- ( K.D. RANJAN ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 17-07-2012. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR