Gujarat High Court
O/Taxap/554/2003 Judgment vs The Deputy Commissioner Of Income ... on 19 March, 2014
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/554/2003 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 554 of 2003
With
TAX APPEAL No. 555 of 2003
With
TAX APPEAL No. 1045 of 2005
With
TAX APPEAL No. 1420 of 2005
With
TAX APPEAL No. 959 of 2006
With
TAX APPEAL No. 1093 of 2006
With
TAX APPEAL No. 1165 of 2007
With
TAX APPEAL No. 1348 of 2008
With
TAX APPEAL No. 1670 of 2008
With
TAX APPEAL No. 1182 of 2009
With
TAX APPEAL No. 1154 of 2011
FOR APPROVAL AND SIGNATURE:
HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
================================================================
1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
================================================================ Page 1 of 31 O/TAXAP/554/2003 JUDGMENT M/S. AMARSHIV CONSTRUCTION PVT. LTD.....Appellant(s) Versus THE DEPUTY COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: [Tax Appeal No. 554 of 2003] Mr RK PATEL with Mr BD KARIA & S.R PATEL, ADVOCATES for the Appellant Mr KM PARIKH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI 19th March 2014 COMMON JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) In these Appeals involving the same assessee, identical question of law arises. The facts on all material aspects are common. We may, therefore, refer to the facts and documents from Tax Appeal No. 554 of 2003. The Appeal was admitted for consideration of following substantial question of law : "Whether on the facts and in the circumstances of the case and on appreciation of correct position of law read along with documentary evidence on record the Tribunal's ultimate finding and the conclusion of taxability of Rs. 1,58,70,856/= pertaining to retention money for the year under consideration is contrary to settled position of law and against the documentary evidence on record with the result that the ultimate finding and conclusion is vitiated in the eyes of law ?" Page 2 of 31
O/TAXAP/554/2003 JUDGMENT Such question arose in the following factual background : The assessee is engaged in the business of civil construction work. Assessee was awarded construction contract by Sardar Sarovar Narmada Nigam Limited ["SSNNL" for short] for construction of a part of the Sardar Sarovar dam and other canal and structural works related thereto. We would refer to the detailed terms and conditions of such contract later. At this stage, we may briefly note that out of the running bills raised by the assessee for such construction work, the SSNNL would retain a portion thereof for satisfactory completion of the work. Such accumulated amount upto a certain ceiling would be withheld for a specified period, to be released at the end of such period, upon being certified by the Engineer Incharge that the construction was carried out without any defects. Such terms of the contract were later on modified. In order to permit greater liquidity to the contractors, an option was given to receive such completion warranty amounts also in cash, subject to providing bank guarantee of a matching sum. Such bank guarantee would be encashed to the extent of the dues of SSNNL or any defect found in the construction carried out or discharged at the end of the warranty period.
In the context of income accruing related to the retention money, the question was decided by this Court in case of Anup Engineering Limited v. Commissioner of Incometax, reported in [2001] 247 ITR 457 (Guj), it was held Page 3 of 31 O/TAXAP/554/2003 JUDGMENT that such income would not accrue when the bill was raised but only when amount was paid since there was every possibility of part or full of the amount not being realized in favour of the contractor. In the present case, however, we are concerned with a situation where the assesseecontractor has received such retention money but upon furnishing the bank guarantee. In this context, the Assessing Officer for the A.Y 199293, noticed that the assessee in the return of income had worked out net profit of Rs. 32.02 Crores [rounded off], as per the Profit & Loss account. In the return, the assessee claimed debit of retention money of Rs. 1.53 Crores in computation of income. It was stated that as per the terms of the contract, the money is withheld by the Government pending verification of satisfactory completion of the work, for which the payment is related. The retention money does not arise or accrue to the assessee in the year in which the work was executed or the bills were raised. The assessee placed reliance on a decision of the Calcutta High Court in case of Commissioner of Incometax v. Simplex Concrete Piles {India} Private Limited, reported in 45 Taxman 370 (Cal) in support of the contention.
The Assessing Officer, however, was not impressed. He distinguished the decision of Calcutta High Court in case of Simplex Concrete Piles (I) Private Limited [Supra] on the ground that in the said case, the money was actually retained. The release of the retention money was contingent on satisfactory Page 4 of 31 O/TAXAP/554/2003 JUDGMENT completion of work or removal of defects and payment of damages, if any, arising. He observed that each case has to be decided on facts. In the present case, the assessee had credited receipt in its Profit & Loss account. This cannot be stated to be hypothetical income. The amount was received on furnishing the bank guarantee. This, therefore, was not a case of withholding of retention money but a case where the amount was already released. On such basis, the Assessing Officer taxed the receipt of Rs. 1.58 Crores [rounded off] in the hands of the assessee during the year under consideration when the bill was raised and amount was also received.
Assessee carried the matter in appeal. Commissioner of Incometax [Appeals] reversed the decision of the Assessing Officer. He noticed the terms of contract between assessee and the SSNNL. He held that the right to receive the retention money had yet not accrued. Such right would accrue only after satisfactory completion of the contract and after defect liability period is over and the Engineerincharge certifies that no liability attaches to the assessee. He held and observed as under : "Considering the facts and appellant's submissions discussed in detail above and also considering the terms of the contract stipulated in General Conditions of Contract, it is held that the ratio of the judgments reported in CIT v. Simplex Concrete Piles (India) Limited, 179 ITR 8 (Calcutta); CIT v. Chanchani Bros (Contractors) Private Limited; 161 ITR 418 (Patna) and Janatha Page 5 of 31 O/TAXAP/554/2003 JUDGMENT Contract Company v. CIT, 105 ITS 627 (Kerala) are 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 (SC); 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 EngineerIncharge has certified that no liability attached to the appellant. Accordingly, it is held that the said amount of retention money is not taxable in the assessment year under consideration, but is taxable in the assessment year relevant to the previous year in which the work is completed and relevant conditions of the contracts are fulfilled. Accordingly, it is held that the Assessing Officer has wrongly rejected the appellant's case for deduction of retention money for the assessment year under consideration. Therefore, the Assessing Officer is directed to allow the appellant's claim for retention money of Rs. 1,58,70,856/= for the assessment year under consideration. Therefore, the appellant gets a relief of Rs. 1,58,70,856/= for the assessment year under consideration ie., 199293. However, the Assessing Officer is directed to tax the said retention money in the assessment year relevant to the 'previous year' in which retention money becomes payable to the appellant as per the terms of the contracts ie., after the defect liability period is over and after the EngineerinCharge certifies that no liability attaches to the appellant."
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O/TAXAP/554/2003 JUDGMENT Revenue carried the matter in appeal. Income Tax Appellate Tribunal, Ahmedabad {"Tribunal" for short} reversed the decision of CIT [A] and reinstated that of the Assessing Officer. The Tribunal noted that during the year under consideration, the assessee had received a sum of Rs. 21.37 Crores [rounded off] on which TDS of Rs. 47.71 lakhs [rounded off] on the gross amount was deducted. A sum of Rs. 1.49 Crores [rounded off] was deducted as security deposit from the running bills. However, out of the said amount, the assessee had received a sum of Rs. 1.40 Crores after furnishing bank guarantee during the previous year relevant to the assessment year under consideration. The Tribunal noticed the terms of the agreement between the assesseecontractor and SSNNL. Though Tribunal agreed that indisputably income would accrue only where there is a right to receive income but on the premise that the assessee had actually received the said sum of Rs. 1.40 Crores, the Tribunal held that the said receipt must be taxed during the year under consideration. To arrive at such decision, the Tribunal relied on the following conclusions : [a] That the income had accrued to the assessee and thereafter it was retained by way of an additional security. In fact, the amount was received by the assessee upon furnishing the bank guarantee.
[b] The decision of Calcutta High Court in case of Simplex Concrete Piles
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(India) Private Limited [Supra] was distinguishable because in such case, no right had accrued to receive the retained amount which was released only on completion of the work and upon the assessee fulfilling the obligations under the contract.
[c] Tax was deducted at source on full amount; including the said disputed receipt.
[d] The liability to return the amount may arise in future, if there was insufficient performance of contract. In the present case, no such liability arose, even at a later date.
[e] The Tribunal referred to Clause 10 & 11 of Accounting Standard [9] to further its contention that in case on hand, the Revenue recognition should not be postponed.
[f] The Tribunal also referred to the Accounting Standard [7] which deals with recognition of contract, revenue and expenses and recognizes the percentage completion method in construction business. [g] The assessee had claimed full expenditure and not deferred a portion thereof relatable to the retention money.
On such basis, the Tribunal held that the right to receive the amount had already accrued. The assessee had actually received the amount. The same, therefore, had to be taxed during the year under consideration. Page 8 of 31
O/TAXAP/554/2003 JUDGMENT In a seesaw battle, it was now the turn of the assessee to file further appeal and that is how the assessee is before us. On the material on record, learned counsel for the assessee contended that as per the terms of the contract agreement between the assessee and SSNNL, certain portion of the running bills was withheld for satisfactory completion of construction. Such amount would be released unconditionally only upon completion of the warranty period and upon EngineerinCharge certifying the defect free execution of the contract. In case any claim of the SSNNL arose, the same would be recovered from such retention money. Previously, such amount would be withheld by the SSNNL. However, to provide greater liquidity to the contractors, an option was given to receive the said amount in cash upon furnishing bank guarantee, which would be utilized for the purpose of making recovery during the warranty period; if any need arose. He, therefore, submitted that the right to receive such amount had not accrued till the end of warranty period and the release of the bank guarantee upon certification by the EngineerinCharge. The assessee had offered the said receipt to tax in later year and thus the assessee was subjected to tax in both the years ie., in the present year when the amount was received and at a later point of time, when the amount was released unconditionally by the SSNNL.
In support of his contentions, counsel relied on the decision of Calcutta Page 9 of 31 O/TAXAP/554/2003 JUDGMENT High Court in case of Commissioner of Income Tax v. Simplex Concrete Piles (India) Private Limited [Supra] where the question of income relating to the retention money came up for consideration. The Court held as under : "12. 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. Accordingly, the Tribunal was right in directing the Income Tax Officer to examine the question of retention money from this angle and make adjustments regarding the same, if necessary."
Reliance was placed on a decision of this Court in case of Anup Engineering Limited v. Commissioner of Income Tax, reported in 247 ITR 457 (Guj) wherein Court placed reliance on the decision of Calcutta High Court in case of Simplex Concrete Piles (India) Private Limited [Supra] and held that 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 same had accrued to the assessee.
Counsel pointed out that even the Madras High Court in case of Commissioner of Income Tax v. Ignifluid Boilers (I) Limited, reported in [2006] 238 ITR 295 (Mad), under the similar circumstances, had taken the same view. Page 10 of 31
O/TAXAP/554/2003 JUDGMENT Counsel drew our attention to a decision of this Court in case of Director of Incometax [International Taxation] v. Ballast Nedam International, reported in [2013] 33 Taxmann.com 139 (Guj) in which the decision in case of Anup Engineering Limited [Supra] was followed in the context of taxability of retention money.
Our attention was drawn to a decision of the Bombay High Court in case of Commissioner of Income Tax v. Associated Cables P. Limited, reported in [2006] 286 ITR 596 (Bom) in which the Court rejected the Revenue's appeal against the judgment of the Income Tax Appellate Tribunal. Question before the Tribunal was with respect to taxing the receipt in the hands of the contractor, who received the same by furnishing the bank guarantee, subject to the satisfactory completion of the contract. In view of the dispute between the Judicial and Accounting Members, the same was referred to the thirdmember, who agreed that the income cannot be stated to have accrued to the assessee till completion of the warranty period. It was this judgment that the Bombay High Court confirmed by rejecting the Revenue's appeal.
On the other hand, learned counsel Shri K.M Parikh for the Revenue opposed the appeals contending that the amount was actually received by the assessee. It was, therefore, not a case of deferred payment. Tax was deducted at source on such receipts also. Accounting standards would require that the Page 11 of 31 O/TAXAP/554/2003 JUDGMENT assessee must show the said amount in the Profit and Loss account and cannot defer the revenue recognition. Right to receive such amount thus clearly accrued. The Tribunal was, therefore, right in holding that the amount had to be taxed during the year under consideration. In support his contentions, he relied upon the following decision : [a] In case of Commissioner of Income Tax, Bombay CityI v. Shoorji Vallabhdas & Company, reported in [1962] 46 ITR 144 (SC), the question of accrual of income came up for consideration. Reliance was also placed on a decision of Supreme Court in case of The Cotton Agents Limited, Bombay v. Commissioner of Income Tax, Bombay, reported in [1960] 40 ITR 135 (SC) in which question of accrual of commission income came up for consideration. The agents of the company were to be paid remuneration by way of commission on the specified rate on the gross proceeds of all sales. One of the provisions was that such commission would become due to the Managing Agents at the end of each financial year or other period for which the accounts of the Company were to be laid before the General Meeting and shall be payable and paid immediately after such accounts had been passed by the General Meeting. It was in this context, the Court held that the commission becomes due normally at the end of the financial year but is payable after accounts have been passed at the General meeting.
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O/TAXAP/554/2003 JUDGMENT Having thus heard learned counsel for the parties and having perused the documents on record, we may advert to the relevant terms of the agreement more closely.
Clause 5 of the general conditions of contract provides for the manner of security of performance. The relevant clauses initially read as under : "5.3 In addition to the above initial security deposit, the EngineerinCharge shall deduct from the intermediate bills ie., the running account bills an amount at the rate of ten percent (10%) of the total value of each bills as an additional security deposit subject to the condition that the total amount of such deductions shall not exceed seven and one half percent (7.5%) of the tendered amount as mentioned in the letter of acceptance of the tender.
5.4 If the Contractor expressly requests in writing, he will be permitted 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, Ahmedabad380 061, 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 deposit shall remain valid for atleast twelve months after the date of the completion of the works.
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5.6 The security deposit, less any amounts due, shall be
returned to the Contractor after defects liability period is over and subject to the EngineerinCharge certifying that no liability attaches to the contractor."
Clauses 5.3 and 5.4 were subsequently amended as under : "5.3 In addition to the above initial security deposit, the EngineerinCharge shall deduct from the intermediate bills ie., the running account bills an amount at the rate of ten percent (10%) of the total value of each bills as an additional security deposit subject to the condition that the total amount of such deductions shall not exceed five percent (5%) of the tendered amount as mentioned in the letter of acceptance of the tender. 5.4 If the Contractor expressly requests in writing, he will be permitted to convert Security Deposit recovered from the bills into interest bearing Government/SSNNL. Securities or interestbearing deposits with a Scheduled Indian Bank taken out in the name of EngineerinCharge or into Bank Guarantee in instalments of Rs. 10 lakhs each in the form in Annexure 6 issued by a Vadodara branch of any scheduled Indian Bank or by a foreign Bank acceptable to the SSNNL and confirmed by any Scheduled Indian Bank authorized to deal in foreign exchange."
We are concerned with the amended terms of the agreement. From the above clauses, it could be seen that before amendment, the general Page 14 of 31 O/TAXAP/554/2003 JUDGMENT conditions envisaged that in addition to the initial security deposit, the EngineerinCharge would deduct from the running bills of the contractor, amount @ 10% of the total value of such bills by way of additional security deposit. The total accumulation of such security deposit however should not exceed 7.5% of the tendered amount. The contractor had an option to convert such security deposit into interestbearing SSNNL securities or interestbearing deposits with the scheduled Indian Bank in the name of Executive Engineer, Narmada Project Main Canal Construction Division. As per Clause 5.5, the Bank guarantees, the performance bond, interestbearing securities and the interestbearing deposits would remain valid for at least twelve months after the date of completion of the work. Clause 5.6 which has significance provided that the security deposit minus any amount due from the contractor would be returned after defects liability period is over and subject to the Engineerin Charge certifying that no liability attaches to the Contractor.
Such terms of the contract were later on amended. The relevant amendments were that in para 5.4, wherein the maximum accumulation of additional security deposit was reduced to 5% of the tender amount. In para 5.4, in addition to an option of converting the security deposit into interest bearing security or deposits, a new option was given to the contractor to convert such security deposit into bank guarantee of the specified banks. These Page 15 of 31 O/TAXAP/554/2003 JUDGMENT two were significant changes and both, it can be presumed, were aimed at alleviating the liquidity crunch which the contractors executing construction works of considerable size would encounter. From a maximum additional security deposit which could earlier be accumulated upto a 7.5% of the tender amount, the ceiling was reduced to 5%. Simultaneously, the contractor was given an option to receive the security deposit in cash on giving the bank guarantee. Since withholding of 10% of the running account bills upto a maximum of 7.5% of the tender amount for the entire warranty period of twelve months would cause considerable hardship to the contractors, more lenient terms were offered. These modifications, however, were subject to other conditions; including those contained in para 5.6 of the General Conditions of the Contract, which as noted above, provided that the security deposit minus the amount due would only be returned to the contractor at the end of the defects liability period. This would be subject to EngineerinCharge certifying that no liability attaches to the contractor in terms of the modified conditions contained in para 5.4. Any such recovery of the amount due to SSNNL from the contractor would be made from the bank guarantee offered by the contractor in lieu of the security deposit.
The question, therefore, arises whether in view of such terms of the contract, the amount received by the assessee which otherwise is categorized as Page 16 of 31 O/TAXAP/554/2003 JUDGMENT security deposit, after offering matching bank guarantee, can be said to be the assessee's income. The answer would be in the affirmative, if it is found that the right to receive such income had accrued. The assessee following mercantile system of accounting, this question would be relevant. Even otherwise, as held by the Supreme Court in case of Commissioner of IncomeTax v. Bokaro Steel Limited, reported in 236 ITR 315 unless there is really any income, there can be no tax levied.
The crucial question therefore is can in the present case, the right to receive the income accrued in favour of the assessee. In this context, we may recall that whenever the retention money of a contractor for performance guarantee was actually held back by the employer of the contract, the Courts have taken a view that the right to receive such income not having accrued, the same cannot be taxed at the point of time when the bills are raised. This is precisely what the Calcutta High Court held in case of Simplex Concrete Piles (India) Private Limited [Supra]. This Court in case of Anup Engineering Company Limited [Supra] also took a similar view. In the said case, the facts were that the assessee company was in the business of manufacturing vessels used by chemical industries. The assessee executed a contract for supply and erection of a spray drying plant for a consideration of Rs. 40 lakhs. During the period relevant to A.Y 199798, the plant was erected and the assessee was paid a sum Page 17 of 31 O/TAXAP/554/2003 JUDGMENT of Rs. 34.49 lakhs against the bills raised by the assessee. The assessee, in the books of account, showed a sum of Rs. 40 lakhs to be received from the employer of the contract but debited a sum of Rs. 3 lacs from its sales account by crediting the same to warranty account. As some dispute had arisen with regard to quality of the vessel supplied by the assessee, the assessee apprehended that due to the warranty clause contained in the contract, the assessee might not receive the said amount. It was in this context, the Court held and observed as under: "7. Looking to the legal position referred to hereinabove, one has to see whether a right had been created in favour of the assessee to receive a sum of Rs. 3 lacs, which was claimed by way of deduction by the assessee in the relevant previous year. It is not in dispute that the assessee had shown in his books of account that he had to receive a sum of Rs. 40 lacs from Godrej in pursuance of the contract with regard to supply of spray drying plant for synthetic detergent plant. Relevant entries reflecting the above transaction were made by the assessee in its books of account. Subsequently, on account of certain dispute, which had arisen during the same previous year between the assessee and Godrej due to unsatisfactory quality of the plant, the assessee was of the view that the assessee would not receive the entire amount of Rs. 40 lacs and as per the terms and conditions on which the plant was to be supplied to Godrej, the assessee might receive something less on account of the warranty which had been given to Godrej, especially in view of Page 18 of 31 O/TAXAP/554/2003 JUDGMENT the fact that even Godrej had a right to retain certain amount with it and the amount to be retained was to be paid only when the plant was handed over to it in a perfect condition and when Godrej was satisfied with regard to performance of the plant in all respects.
8. It appears that, on account of the book entries made by the assessee, the revenue has finally decided to assess the assessee for the entire amount which was shown as receivable by the assessee at an initial point of time. As stated hereinabove, and as observed by the Hon'ble Supreme Court in different cases, income accrues only when the assessee gets a right to receive the same and if the right to receive is not established, no income would accrue or arise to the assessee.
9. To ascertain whether Rs. 40 lacs was income of the assessee, one has also to look at the contract in pursuance of which the amount was to be received by the assessee from Godrej. One has to look at the nature of the transaction and the terms and conditions on which the plant was supplied by the assessee to Godrej. Only when the right of the assessee to receive Rs. 40 lacs is established, the income would accrue or arise and not otherwise. It is pertinent to note that the accounting entries are not made in abstract. Entries reflect the transactions which have taken place. So, one has to look at the nature of the transaction and the terms and conditions of the contract under which the revenue believed that the entire income had accrued to the assessee during the previous year in question."
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O/TAXAP/554/2003 JUDGMENT Madras High Court in case of Ignifluid Boilers (I) Limited [Supra] also took a similar view in the context of retention money withheld. It was held and observed as under : "3. 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 percent retention money retained by the principal contractor accrued to the assessee during the relevant assessment year for consideration.
4. 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 & Company [1962] 46 ITR 144 (SC), wherein, it has been held as follows :
"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 substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income' which does not materialize. 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."Page 20 of 31
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6. 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."
Once again, in case of Ballast Nedam International [Supra], this Court followed the decision in case of Anup Engineering Company Limited and dismissed the Revenue's tax appeal in the context of retention money withheld by the employer of the contractor.
It can thus be seen that different High Courts have in the context of withholding of retention money for performance guarantee of a contract has held that the right to receive such amount did not accrued till the performance warranty period was over.
Even in the context of actual release of such amount on furnishing the bank guarantee, subject to the satisfactory completion of the contract, the Bombay High Court confirmed the decision of the Tribunal which by majority view had held that the income cannot be said to have accrued. In our opinion, merely because in the present case, unlike in the cases cited by us; including Anup Engineering Co. Limited [Supra] the amount was realized, would not change this situation. It is undisputed that every receipt is not an income. Whether a receipt is an income or not would depend on whether the right to Page 21 of 31 O/TAXAP/554/2003 JUDGMENT receive the same had accrued to the assessee. The question whether in the present case such right had accrued or not, must be judged on the terms and conditions of the contract between the parties. We have noted such conditions before and after the amendment. Before the amendment, the assessee had to surrender a portion of the running bill amount towards additional performance guarantee deposit. The assessee could request the employer of the contract to convert such amount into interest bearing securities or deposits. The amount would still remain with SSNNL. After amendment, the assessee had an additional option of receiving the amount but converting the security deposit into a bank guarantee. In other words, the assessee would receive the full running bill amount; including 10% to be set apart by way of additional security deposit, upon furnishing the bank guarantee of a matching sum. In either case, namely as in the preamendment scenario where the assessee would not receive 10% of the running bill amount or post amendment, when such amount would be received by the assessee upon furnishing the bank guarantee, para 5.6 of the general conditions remained unchanged. As per the said condition, the security deposit or the security deposit converted into bank guarantee would be returned to the contractor after defects liability period is over. This would be subject to two conditions - firstly, that the employer of the contract would deduct from such amount, any amount due to it and that the Page 22 of 31 O/TAXAP/554/2003 JUDGMENT EngineerinCharge certifies that no liability attaches to the contractor. It can thus be seen that in either of the two cases, SSNNL would recover from the assessee, the amount due to SSNNL and release the rest of the amount out of the security deposit only upon completion of the defects liability period and upon certification by the EngineerinCharge. In case of the preamendment period, such recovery would be from the security deposit/interest bearing securities or deposits; as the case may be. In the post amendment period, if the assessee had so opted and furnished bank guarantee to receive the amount, such recovery would be from the bank guarantee so furnished.
We are at pains to discuss these aspects because in our opinion these features demonstrate that in so far as the assessee's right to receive the said amount is concerned, there has been no change by virtue of the amendment in the general conditions contained in the contract. Either before or after amendment, the right to receive the amount was always subject to the vital conditions of recoveries and adjustments against the dues found due to the SSNNL, completion of the defects liability period and certification by the EngineerinCharge that no liability attaches to the contractor. If therefore in a situation prior to the amendment where the retention money was actually retained by SSNNL, the view of this Court and other Courts was that the right to receive the amount had not accrued, in our opinion after the amendment Page 23 of 31 O/TAXAP/554/2003 JUDGMENT also, such opinion would not change. In various decisions noted by us, the Courts were influenced by the factors that the amount of retention money withheld by the employer of the contract could be released only upon completion of the defects liability and adjustment could be made from such amount, if it is found that there is any amount due and payable to the employer of the contract or that the execution of the work was not satisfactory. In the present case also, SSNNL retained such right to make recovery. Only the source of such recovery changed. Earlier, such recovery could be made from the security deposits of the assessee lying with SSNNL. Post amendment, such recovery could be made from the bank guarantee furnished by the assessee. In either event, the SSNNL could effect recovery without notice to the assessee. The same uncertainty of receiving the full amount of additional security deposit remained the same, either before or after the amendment in the conditions.
It thus emerge that the character of the amount did not change. It still retained the character of retention money. Its temporary release to the assessee on furnishing the bank guarantee cannot be equated with the right to receive such amount and resultantly with accrual of income because the dominant control over the said amount still remained with SSNNL.
In case of Commissioner of IncomeTax v. Govind Prasad Prabhu Nath, Page 24 of 31 O/TAXAP/554/2003 JUDGMENT reported in (1988) 171 ITR 417, the Allahabad High Court observed that the terms "income is received", "accrues" and "arises" have not been defined in the Incometax Act, 1961. Mere receipt of income is not the sole test of chargeability. Receipt of income refers to the first occasion when the recipient gets the money under his own control. The words "accrue" or "arises" do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word "receive" and include a right to receive. Thus, if an assessee acquires a right to receive the income, the income can be said to accrue to him though it may be received later on.
In case of Commissioner of IncomeTax v. Kerala State Drugs & Pharmaceuticals Limited, reported in 192 ITR p.1, the Kerala High Court observed that even under the mercantile system of accounting, it is only the accrual of real income which is chargeable to tax. The income should not be hypothetical income, but real income.
In Commissioner of IncomeTax v. Punjab Tractors Cooperative Multi Purpose Society Limited, reported in {1998} 234 ITR 105, the Punjab & Haryana High Court observed that, "...it is only receipt as "income" which would attract tax. Every receipt by the assessee is, therefore, not necessarily income in his hands. It bears the character of income at the time when it accrues in the hands of the assessee and then it become exigible to tax."
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O/TAXAP/554/2003 JUDGMENT In the context of the question of accrual of income and real income arising, we may refer to a recent decision of Supreme Court rendered in case of Commissioner of Income Tax v. Excel Industries Limited & Anr., reported in (2013) 358 ITR 295 (SC). In the said case, the question considered by the Supreme Court was whether the benefit of an entitlement to make duty free imports of raw materials obtained by an assessee through advance licenses and Duty Entitlement Pass Book issued against export obligations is the income in the year in which the exports are made, or the year in which the duty free imports are made. The assessee, which was following mercantile system of accounting, in the return had claimed deduction of Rs. 12.57 Crores under the head advance licence benefit receivable. The assessee had also claimed a deduction in respect of duty entitlement pass book benefit receivable amounting to Rs. 4.46 Crores. These benefits related to entitlement to import duty free raw material under the relevant import and export policy by way of reduction from raw material consumption. According to the assessee, the amounts were to be excluded from the total income since they could not be said to have accrued until imports were made and the raw materials consumed. It was in this context, the Supreme Court considered above noted question. The Court, referring to the decision in case of CIT v. Shoorji Vallabhdas & Company [Supra] observed that it is wellsettled that incometax cannot be levied on Page 26 of 31 O/TAXAP/554/2003 JUDGMENT hypothetical income. The Court further held and observed as under : "20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
21. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee.
27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic."
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O/TAXAP/554/2003 JUDGMENT Looked from any angle, we see no material change by virtue of the amendment in clause 5.4 to the general conditions in so far as the question of accrual of income is concerned. Right to receive the sum was even before the amendment uncertain and therefore contingent. Upon satisfactory completion of several factors, even after the amendment, the same conditions applied. Same uncertainly and unpredictability prevailed. The assessee had no absolute right to receive the amount. SSNNL had no obligation to release the same before completion of warranty period and even thereafter would release the amount only after making permissible adjustments. Mere fact that in the present case no recoveries were made from the bank guarantee or security deposit is of no consequence. We may now deal with some of the contentions of the Revenue, which found favour of the Tribunal also.
Mere fact that the amount was received by the assessee would not mean that income had accrued. Whether income did accrue or not would depend on the fact whether the right to receive said amount had accrued or not. The fact that tax was deducted at source on said amount also would be of no consequence. Tax was deducted by SSNNL. The assessee had no control over such deduction. Merely whether tax was deductible or not would not decide the taxability of certain receipts. The manner in which the assessee accounted Page 28 of 31 O/TAXAP/554/2003 JUDGMENT for such receipt in its books of account can also not determine its tax liability, as held by the Supreme Court in case of Kedarnath Jute Mfg. Company Limited v. Commissioner of IncomeTax [Central], Calcutta reported in 82 ITR 363. In such decision, the Court held and observed as under : "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 Incometax 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 provision 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.."
Reliance placed by the Tribunal to the Accounting Standards for percentage completion method was misplaced. The assessee did not follow the percentage completion method and the accounting treatment to be accorded in such case therefore was not at issue. The assessee claiming entire expenditure and not excluding expenditure relatable to the withheld security deposit also would not be fatal to the interest of the assessee. The expenditure in toto was incurred. The question only was what would be the total amount that the assessee would receive for carrying out such construction. Ninety percent of the amount was payable or already paid over. Ten per cent of the running Page 29 of 31 O/TAXAP/554/2003 JUDGMENT account bills was adjustable towards the claims of the SSNNL and recoveries arising out of defects; if any. Release of such amount or part thereof would decide the ultimate profit margin of the assessee upon execution of the contract. The expenditure incurred by the assessee could not be proportionately divided into that covering the assessee's ninety per cent of the bill amount and relatable to the rest ten percent.
Under the circumstances, we find that the Tribunal committed an error in allowing the Revenue's appeals. The question is answered in favour of the assessee. The judgment to the extent above in each of the respective appeals is reversed. Resultantly, the judgment of the CIT [A] is reinstated. As a result, consequential directions of the CIT [A] will also stand reinstated. We reproduce such directions, again here :
"However, the Assessing Officer is directed to tax the said retention money in the assessment year relevant to the 'previous year' in which retention money becomes payable to the appellant as per the terms of the contracts ie., after the defect liability is over and after the EngineerinCharge certifies that no liability attaches to the appellant."
Appeals are allowed to the above extent.
{Akil Kureshi, J.}
{Ms. Sonia Gokani, J.}
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O/TAXAP/554/2003 JUDGMENT
Prakash*
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