CHANDRAGIRI CONSTRUCTION CO vs. THE DY.COMMISSIONER OF INCOME TAX

ITA No.192 of 2012 arises from the assessment year ('AY' for brevity) 2003-04 under Section 143(3) of the Income Tax Act, 1962. Later, the Commissioner, under Section 263, suo motu revised the same and issued some directions, which was considered and additions made by the Assessing Officer ('AO' for brevity). ITA No. 134 of 2012 -15- arises from the order of the Tribunal from the assessment made under Section 143 (3) r/w Section 263. ITA Nos.139 and 243 of 2012 arise from the AYs 2004-05 and 2005-06. 3. The only issue arising in the appeal from the original AY 2003-04 is the agricultural income disallowed by the AO. The assesseee declared an agricultural income of Rs.24,98,737/-. However, there was no evidence produced in respect of the yield, sale amount, expenses etc. The AO, hence, allowed the agricultural income only to the extent of Rs.5,00,000/-. The balance Rs.19,98,737/- was treated as income from other sources. In First Appeal, the Commissioner of Appeals accepted Rs.10,00,000/- as agricultural income and the balance as income from other sources. There was a remand made by the Tribunal to the First Appellate Authority. The CIT (Appeals) on remand, by Annexure B order relied on the order of the Settlement Commission which considered a -16- block assessment, the last year of which was AY 2001-02. The Settlement Commission had permitted capitalisation of Rs.89,12,515/-. The amount disallowed as agricultural income coming to Rs.14,98,737/- was allowed to be adjusted against the accepted cash balance as on 31.3.2001; as allowed by the Settlement Commission. The matter went again before the Tribunal and by the common order, a decision was rendered by one of the members (the Accountant Member). The Judicial Member, however, dissented from the same and followed the findings of the Tribunal in an earlier appeal of the Department as against the very same assessee for the AY 2002-03 in I.T.A.No.831/Cochin/2008. The Third Member agreed with the judicial member and found that the order of the Settlement Commission created certain consequences with respect to the subsequent years also, which has to be adhered to in making assessments for the subsequent years.

It is submitted by the learned Standing Counsel for -17- the Government of India (Taxes) that the Revenue has filed an application to declare the order of the Settlement Commission void, before the Commission itself, on grounds of fraud and misrepresentation and the same is still pending.

In the above circumstances, it can only be said that the issue would be regulated by the finding of the Settlement Commission. If the Settlement Commission's order is sustained, we find no reason to defer from the order of the Tribunal which confirmed the First Appellate Authority's order. However, if the Settlement Commission declares its own order to be void on grounds of fraud and misrepresentation, necessarily, the amount of Rs.14,98,737/-, which is allowed to be adjusted against the accepted cash balance as on 31.3.2001, would have to be treated as income from other sources, since no evidence is forthcoming as to the agricultural income derived by the asessee and then the CIT Appeal's order dis-allowing 90% would have to be sustained.

Herein, the issue arising are common in nature. The questions of law refer to the aspect of retention amounts being directed to be treated as amounts accrued on the completion of the contract by the AO; as upheld by the Accountant Member, revising the order of the CIT (Appeals). The Judicial Member and the Third Member, however, followed the order of the Tribunal itself in the case of the assessee in ITA No.831/Cochin/2008. Yet another issue which arose was with respect to the work-in-progress and the bills receivable, which we find from the assessment order and the appellate orders, are with respect to specific amounts sought -19- for deduction by the assessee and added on by the AO. The issue is on facts and the same has been remanded by the Accountant Member to the AO. However, the Judicial Member dissented on the question of the bills receivable, since the same has also been decided in ITA No.831/Cochin/2008. The Third Member concurred with the Judicial Member. The remand hence does not survive. The questions of law thus arising in the appeals are re-framed as follows: (i) Whether the retention amounts retained by the awarder under the terms of a contract are to be treated as accrued in the year of completion of the contract and offered for taxation by the assessee, especially, since the assessee had been following the Mercantile System of accounting? (ii) Whether the additions made on the basis of the work-in-progress and the bills receivable should follow the order of the Settlement Commission or not?

On the first issue (i), we notice that the Tribunal members deferred, but, however, the same was not decided on the basis of the decision of the Settlement Commission. The Tribunal, by majority, followed its own order in the case of the assessee for the AY 2002-03 in ITA No.831/Cochin/2008. 8. The Accountant Member who was one of the members deciding the question in the AY 2002-03, however, deferred, which practice, we deprecate, since if at all there was a difference of opinion from the earlier order, it was appropriate that it be referred to a Larger Bench. In any event, the Third Member to whom the issue was referred, concurred with the Judicial Member, who followed the earlier verdict of the Tribunal itself. Earlier order of the Tribunal, though challenged before this Court, was withdrawn on the basis of litigation policy. Hence, the question is left open.

We see from the records and also a specimen contract produced before the Tribunal that there is a defect -21- liability period which is reckoned from the completion date for which period the awarder retains certain amounts for the purpose of ensuring that there arises no defect in the work executed by the awardee. In the earlier order, for the AY 2002-03, the Tribunal had relied on M/s.Janatha Contract Company v. CIT [105 (1) ITR 627] (Ker.), East Coast Construction (India) Ltd v. CIT [283 ITR 297 (Mad.), CIT v. Ignifluid Boilers (I) Ltd [283 ITR 295] (Mad.) and CIT v. P&C Constructions (P) Ltd [318 ITR 113) (Mad.), to find that the assessee on completion of contract would not have any right to receive the money as per the specific terms enabling retention of a percentage of the contract amount with the awarder. The Accountant Member has taken a different opinion on the premise that there is an accrual of the amounts on completion of the contract itself. The Accountant Member further observed that the mere fact that the amounts were kept apart for the purpose of curing any defects that may later -22- occur in the work, cannot be permitted to be exempted from taxation, especially when the assessee is following the mercantile system.

We perfectly agree with the findings of the Accountant Member that 'accrual' and 'receipt' are two independent incidents, and their matching or correspondence in time in a given case, if so occurring, is purely a matter of coincidence, both immaterial and irrelevant for the purpose of determining the fact of accrual, which has to be on its own terms. However, even applying the said principle to the present facts, we do not think that there was any accrual on the completion of contract. The specific terms of the agreement provided that the amounts due to the awardee would be retained after completion for a specific period to ensure that if defects arise in the work executed, the same is rectified with the retained amounts which would also be the responsibility of the awardee to rectify as per the specific terms. Hence, the -23- amounts are not set apart by the assessee for an apprehended defect. By the specific terms of the contract itself, the awarder is entitled to retain the said amounts so as to rectify any defects arising in the period in which as per the terms of the contract the amount is retained. There can be no accrual found on the completion of contract, since the assessee's right to such amount would depend on there being no defects arising in the subsequent period during which the awarder is enabled retention of such amounts. The accrual if at all happens, occurs only on completion of the retention period. We hence answer the first question of law against the Revenue and in favour of the assessee.

As to the work-in-progress and the bills receivable, the Accountant Member had remanded most of the issues for consideration before the AO. The Judicial Member and the Third Member, however, deferred since there were certain consequences arising from the order of the Settlement -24- Commission. Even de hors the Settlement Commission's order, we find that the order of the Accountant Member was only on the various adjustments made. There arises no question of law and the issues revolve around facts. The consequence arising from the order of the Settlement Commission as recognised by the Judicial Member and the Third Member, necessarily has to be accepted by the Department in making assessments for the subsequent years, subject, however, to the Settlement Commission's order being sustained. As of now, we would not express anything on that, since the issue is pending before the Settlement Commission itself and is not agitated before us. We, however, answer the question of law framed by us in favour of the assessee and against the Revenue. If at all the order of the Settlement Commission is set aside, then on this question, the Revenue could file an application before the Tribunal for restoring the appeal to consider questions afresh. Be that as it may, the Settlement Commission's order in existence for the time being has to be -25- reckoned by the department in making the assessments for the subsequent years. We, hence, reject the appeals of the Revenue, answering the questions of law in favour of the assessee and against the Revenue, subject to the reservation of the right of the Revenue to approach the Tribunal to consider the matter afresh if the Settlement Commissions order is set at naught. I.T.A.Nos. 202 of 2012, 8 of 2013, 231 of 2013 & 132 of 2014

The questions arising in all the above appeals are as in the cases dealt with together. The first question on retention amounts has already been answered in favour of the assessee and against the Revenue. We follow the same in the present appeals also. The second question, on the Tribunal following the Settlement Commissions order, has also been accepted by us and hence that question will also be answered in favour of the assessee and against the Revenue. We also -26- made a reservation in so far as the Revenue being permitted to move the Tribunal, if at all the Settlement Commission’s order is declared void, which we reiterate here.

In ITA No.8 of 2013 for the AY 2007-2008 from an order in a cross appeal, one other issue arises as to whether on the facts of the case, the Tribunal was correct in allowing loss claimed on account of termination of contract when arbitration proceedings are pending and have not become final. The assessee entered into a contract and also furnished a bank guarantee for satisfactory execution of the contract. The contract was cancelled by the awarder and the bank guarantee was encashed. An arbitration proceeding is pending between the awarder and the awardee. The Revenue claims that till the arbitration proceedings is concluded the assessee cannot claim the amount as business loss. As of now, the assessee does not have the amounts with it and the bank guarantee has been encashed and it is a loss occurred in the subject year. If at all in conclusion of the arbitration -27- proceedings, the assessee receives any amount it could be adjusted in the loss of that year. Hence, we answer the said question of law in favour of the assessee and against the Revenue and uphold the allowance of loss made by the Tribunal. We reject the above appeals also with the reservation as above. I.T.A.No.88 of 2014

For the AY 2008-2009 there is one other issue raised, of modification made on the disallowance of expenditure. The AO disallowed 5% of the expenditure. While the CIT (Appeals), following the order of the Tribunal for the earlier assessment year in the case of the assessee itself, confined the disallowance to 1%. The Tribunal confirmed the same. We do not find any reason to interfere with that since it gives rise to no question of law. I.T.A.Nos.61, 62, 63 & 70 of 2015

These are all appeals filed by the assessee against the order of the Tribunal, affirming the penalty imposed -28- under Section 271(1)(c) of the Act. The imposition of penalty relates to AY's 2002-03 to 2005-06. We notice that penalty has been imposed under Section 271(1)(c) on the additions made by the AO; both on retention of amounts as also work in progress and bills receivables. The appeals before the Tribunal had been concluded, rejecting the claim of the Revenue and accepting that of the assessee as to the consequential effect of the order of the Settlement Commission. We have upheld the orders of the Tribunal with a reservation as to the consequence of the Settlement Commission's order being declared void. We were of the opinion that if the Settlement Commission's order is sustained, then the consequence flowing from that order for the subsequent years has to be accepted by the Department. In such circumstance, no penalty can be imposed on the assessee for reason of there being no addition possible. Hence, the orders of penalty are to be set aside. We set aside the orders issued by the lower authorities, answering the -29- question of law in favour of the assessee and against the Revenue. However, we make a reservation, different from that made in the quantum appeals, that if at all the Settlement Commission's order is declared void, then necessarily the penalty imposed under Section 271(1)(c) have to be reconsidered by the AO, on the basis of the additions sustained. However, the issue of retention amount being taxed in the year of completion of contract has been held in favour of the assessee by us, independent of the order of the Settlement Commission, which portion would have to be, even then reduced. With the above observations, the appeals are allowed. K.VINOD CHANDRAN JUDGE V.G.ARUN JUDGE scl/cms/vku -30-