Indian Kanoon - Search engine for Indian Law

6.2 During the year under consideration, the assessee excluded retention money of Rs.44.75 crores retained by the customers. However, it included as sum of Rs.95.91 crores, being retention money of earlier years received by the assessee during the year under consideration.

6.3 The AO took the view that the provisions of sec.43CB r.w ICDS -3 mandate inclusion of retention money in Gross contract receipts. Accordingly, he added the retention money of Rs.44.75 crores to the total income of the assessee. The assessee submitted before Ld DRP that the ICDS-3 contains transitory provisions, whereby in respect of contracts commenced on or before 31st March 2016 and not completed by that date, the contract costs may be recognized on the basis of method of accounting regularly followed earlier. However, the Ld DRP concurred with the view taken by the AO. In respect of reliance placed by the assessee on transitory provisions contained in ICDS-3, the Ld DRP expressed the view that such kind of transitory provision is not available in sec. 43CB and accordingly held that the benefit of ICDS-3 cannot be given to the assessee.

6.4 We heard the parties and perused the record. Sec. 43CB was introduced by the Finance Act. 2018 with retrospective effect from 1.4.2017 and hence the same is applicable from AY 2017-18 onwards. The said section reads as under:-

Hindustan Construction Company Limited "Section 43CB: (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145:

Hence on a closure look this issue is not as what it appeared to be. The assessee is protected neither by the principle of conservatism nor principle of consistency or even the favourable judicial rulings in its favour in the past even by the jurisdictional High Court. This is because of change of Law.

In view of the above the action of the Assessing Officer is upheld and objection no.2 of the assessee is rejected."

6.5 The Ld A.R contended that the basic principle that "the income should accrue" to the assessee before recognizing it as income still prevails even after introduction of sec. 43CB and ICDS-III. In this regard, he referred to ICDS-1, wherein it is stated that "revenue to be recognized as they are Hindustan Construction Company Limited 'earned' and also to sec. 5(1)(b) of the Act, which provides for taxation of income which 'accrues or arises or is deemed to accrue or arise...' to the assessee. He also referred to clause 9 of ICDS-III, wherein it is stated that "Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection". Accordingly, he submitted that there is uncertainty about the collection of "retention money", till all claims and disputes relating thereto are settled. Accordingly, he submitted that the term "retentions" used in the meaning of "Contract revenue" should be understood as the "undisputed retentions" over which the assessee has obtained its right of recovery. In this regard, he also invited our attention to Circular No.10/2017 dated 23-03-2017 issued by CBDT, particularly FAQ no.11, which reads as under:-

6.7 The question as to whether the "retention money" has accrued to the assessee or not, in our view, would depend upon the terms and conditions of contract entered between the assessee and the contractee. In the facts of the present case, in our view, the said question need not be gone into for the reasons discussed in the succeeding paragraph. Accordingly, we leave this question open so that it can be considered in appropriate case.

Hindustan Construction Company Limited 6.8 The Ld A.R invited our attention to the Transitory provisions given in ICDS-III. In our view, in the facts of the present case, the question whether the "retention money" should be included in "Contract revenue" or not should be examined by considering the transitory provisions given in clauses 22.1 and 22.2 of ICDS-III. We noticed that the above clauses state that the retention money related to the construction contracts commenced before 31.03.2016 should be recognized in accordance with the method regularly followed by the assessee. In the instant case, it is submitted that the impugned retention money was related to the contracts commenced before 31.3.2016. Hence, in accordance with the transitory provision, referred above, the retention money should be brought to tax in accordance with the accounting method regularly followed by the assessee. We noticed earlier that the assessee has been following cash system of account for accounting retention money and the same should be followed in the current year also. We also agree with the contention of the Ld A.R that there is no conflict between sec. 43CB and ICDS-III as presumed by Ld DRP, since as per the provisions of sec. 43CB, revenue from construction contracts should be recognized as per ICDS-III.