Director of Income Tax (International Taxation) vs Ballast Nedam International

Akil Kureshi, J.—The Revenue is in appeal against the judgment of the income tax Appellate Tribunal dated July 20, 2012, raising following questions for our consideration:

(A) Whether the Appellate Tribunal has substantially erred in holding that the retention money does not form part of income?

(B) Whether the Appellate Tribunal has substantially erred in holding that the ratio of the decision in the case of (2004) 88 ITD 381 would not be applicable in the instant case?

The short issue is whether a sum of Rs. 14.31 crores (rounded off), which represented the retention money for fulfilment of the contract by the asses-see should be treated as accrued income.

For the assessment year 2003-04 the assessee, during the course of assessment, pointed out that the said sum of Rs. 14.31 crores should not be considered as income of the assessee being retention money relating to the satisfactory execution of the contract. It was pointed out that in terms of the contract between the assessee and the companies awarding the contracts to the assessee, amount at the rate of 10 percent, on the onshore activities and at the rate of 15 percent, on the construction and erection activities was withheld towards the retention money. It was contended that the assessee had no right on such retention money till the completion of the work and the submission of mechanical certificate. Such amount was, therefore, not considered as income while computing the assessee''s total income. The same would be recognized only on the satisfaction of the terms of the contract.

The Assessing Officer, however, did not accept the assessee''s stand and, while framing the assessment, held that such amount represented the assessee''s accrued income.

Against such order of assessment, the assessee carried the issue in appeal before the Commissioner of income tax (Appeals). The Commissioner of income tax (Appeals) deleted the addition upon which the Revenue approached the Tribunal. The Tribunal, in the impugned order, referred to and relied upon various decisions of the Tribunal including in the case of this very assessee and confirmed the view of the Commissioner of income tax (Appeals). The Tribunal held and observed as under:

We further find that the facts of the case relied on by the Revenue in the case of Deputy CIT v. Amarshiv Construction (P.) Ltd. (supra) are different than that of the present case. The issue in the case of Deputy CIT v. Amarshiv Construction (P.) Ltd. (supra) decision was regarding the year in which the income has accrued whereas the issue in the case of the assessee is the accrual of the income. This would be clear from the reading of paragraph 21 of Deputy CIT v. Amarshiv Construction (P.) Ltd. (supra) decision which reads as under:

In all these three cases, the Supreme Court held that there was no real income and, therefore, not eligible to income tax; whereas in the present case, it is nobody''s case that no income has resulted at all. The question is only as to in which year it accrued to the assessee. According to the Revenue, it was in the year when the bills were presented and passed for payment and the assessee received the money by furnishing the bank guarantee and as per the assessee it was the year after the performance liability clause was over and the bank guarantee were released and ceased to be operative.

We further find that Deputy CIT v. Amarshiv Construction (P.) Ltd. (supra) decision dealt with the issue whether the assessee had in fact received the amount of security deposit by furnishing the bank guarantee which is clear from paragraph 15 of that decision which reads as under:

In our opinion, it accrued to the assessee and thereafter retained by way of additional security and in fact received by the assessee by furnishing a bank guarantee.

In the instant case, there is no dispute about the fact that the assessee has received any money out of the amount retained as retention money by the contractee. These are some of the distinguishing features between the case of the assessee and Deputy CIT v. Amarshiv Construction (P.) Ltd.''s case (supra). Therefore, we have no hesitation in holding that reliance placed by the Assessing Officer, on the decision in the case of Deputy CIT v. Amarshiv Construction (P.) Ltd. (supra) was misplaced.

In view of the above discussions, we feel no need to interfere with the order passed by learned Commissioner of income tax (Appeals) and the same is hereby upheld.

Having heard learned counsel for the Revenue and having perused the documents on record, we find that the issue under consideration is squarely covered by the decision of this court in the case of Anup Engineering Ltd. Vs. Commissioner of Income Tax, .

In the said case, the agreement that the assessee entered into for execution of a contract for supply and erection of plant specified that the full amount would not be paid if the plant was defective. The assessee had debited the sum of Rs. 3 lakhs by crediting the same to the warranty account as some dispute had arisen with respect to the execution of the contract. In such background, the court considered whether such amount represented the assessee''s accrued income. In this context, it was held and observed as under:

For the purpose of ascertaining whether the income had, in fact, accrued, one has to also see whether there is a real income. It has been also observed by the hon''ble Supreme Court in Commissioner of Income Tax Bihar-II Patna Vs. Bokaro Steel Limited, Bokaro, that no matter by adopting what method the assessee maintains his accounts, it may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements, or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases, unless there is real income, there cannot be any income tax. In the instant case also, there is no real income so far as Rs. 3 lakhs are concerned because no debt has been created in favour of the assessee by virtue of clause No. 14 of the contract and as the assessee did not get any right to receive the said amount during the previous year in question, it cannot be said that income in respect of the amount in question had accrued to the assessee during the previous year in question.

Looking to the facts of the present case and in the light of the law laid down by the hon''ble Supreme Court in the cases referred to hereinabove, it is 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 a sum of Rs. 4 lakhs which could have been retained by Godrej 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 comes to a conclusion that the assessee could not have received Rs. 4 lakhs from Godrej, by no stretch of imagination it can 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 Godrej, Godrej had a right to retain Rs. 4 lakhs. It is 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 quality of the plant was not up to the mark and, therefore, believing that Godrej might ultimately retain Rs. 3 lakhs or under the warranty clause the assessee might have to pay Rs. 3 lakhs, 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 cannot be said that income to that extent had accrued to the assessee. We can test the above conclusion in a different manner too. Was Godrej 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, as observed hereinabove, it cannot be said that income had accrued to the assessee.

A similar question had arisen in case of Commissioner of Income Tax Vs. Simplex Concrete Piles (India) Pvt. Ltd., . Having regard to the facts and circumstances of the case, it was held in that case that, when there is a clause with regard to retention money, the assessee gets no right to claim any part of the retention money till the verification of satisfactory execution of the contract is concluded and, therefore, if there is no immediate right to receive the retention money, the said amount cannot be said to have accrued to the assessee. Even in the instant case, so far as retention money is concerned, the assessee had no right to receive the same and, therefore, it cannot be said that the amount of Rs. 3 lakhs had accrued to the assessee.

In the result, this tax appeal is dismissed.