CORP CIRCLE-1(2), CHENNAI vs. CCCL-EDAC ENERGY LTD, CHENNAI

O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

3. The ld.CIT(A) failed to appreciate that the assessee was incorrect in taking a dual stand on receipt and payment of retention money by excluding from its income the retention money receivable from its contractees while including the retention money payable to its sub-contractors in its expenses. She further failed to appreciate that these sub-contractors were fully owned subsidiaries of the assessee who were on the one hand not offering income for taxation while on the other hand were claiming expenses against income so not offered for taxation.”

4. Only one issue is involved in this appeal which is the treatment to be accorded to the retention money payable shown as outstanding in the Balance Sheet of the appellant company. The appellant is a public limited company engaged in EPC contracts for setting up of power generation plants. The Assessing Officer observed that the appellant had paid substantial amounts as subcontract and special agency charges aggregating to Rs. 18.89 crores. Out of the said amount, a sum of Rs. 10.90 crores was shown as retention money payable as part of current liability in the Balance Sheet. It was explained that out of the total amount of subcontracting charges a part was retained as retention money though the entire amount, both paid as well as payable, was debited as subcontract charges in the P & L account. The Assessing Officer further observed that when the appellant performed the contract for its principal and the principal retained some retention money, the appellant did not offer as income, the retention money receivable that had been retained by its principal. The Assessing Officer observed that a sum of Rs.2.02 crores shown as retention money receivable had been reduced by the appellant company from its computation of income. Relying on the matching principle, the Assessing Officer held that the retention payable at the end of the year was not allowable as deduction as similar retention money receivable has not been offered to tax by the appellant. An addition of Rs.40,55,043/- was made accordingly. While making the Assessing Officer further referred to the decision of the CIT(A) in dated 30.12.2013 wherein a disallowance of retention money payable in the case of Consolidated Construction Consortium Ltd. (parent company of the appellant) for A. Y. 2009-10 was confirmed.

5. In the course of appeal, the appellant placed on record its detailed submissions vide letter dated 23.10.2017 and placed reliance upon the ITAT decision in the case of Consolidated Construction Consortium Ltd. for A.Y. 2006- 07, 2007-08 to 2009-10 wherein the Hon'ble ITAT, after considering all the arguments, has held that retention money payable and retention money receivable are governed by different principles as one relates to accounting for income and other relates to accounting for expenses and losses. The ITAT held that subcontracting expense to the extent of provision is also an allowable deduction and the same should be allowed on accrual basis and not on actual payment basis. In arriving at this conclusion the ITAT noted that the amount shown as payable was determined on a scientific basis and no deduction was claimed on actual payment. The appellant also placed on record the order of the CIT(A) in the case of Consolidated Construction Consortium Ltd. for A. Y 2012-13 wherein the decision of the Hon'ble ITAT has been followed and the addition made for A. Y, 2012-13 has been deleted. Respectfully following the decision of the ITAT in the case of Consolidated Construction Consortium Ltd., the addition made by the Assessing Officer is deleted.

6. Respectfully following the same, this ground of appeal is allowed.”

raised. Before us, the ld.counsel for the assessee filed copy of Tribunal order in assessee’s own case for assessment year 2010-11 in ITA No.205/Mds./2016 dated 30.11.2016, wherein a consistent view has been taken by Tribunal and directed that the retention money is to be allowed on accrual basis and not on actual payment basis. The Tribunal relied on the earlier year judgment, wherein it is held as under:-

6. This issue came for consideration for earlier assessment year in ITA No.1824/Mds./2014 for assessment year 2006-07 & ITA No.592/Mds./2014 for assessment year 2007-08 in assessee's own case vide order dated 06.01.2016, the Tribunal held as under:-

“12. We have heard both the parties and perused the material on record. Generally, the expenditure which is actually incurred or is incurred in a relevant year would be allowed as deduction while computing the income from business. Such a liability has to be in praesenti. However, at the same time, it relates to the works undertaken by the assessee, completed contract method of accounting is followed which is consistent with the Accounting Standards and these Accounting Standards also laid down the norms indicting the particular point of time when the provisions for all known liabilities and losses have to be made. The making of such a provision by the assessee appears to be justified more so when the assessee had recognized gain as well on such project during the assessment year under consideration. This appears to be in consonance with the principle of matching cost and revenue as well. The reason given by the Department is that the retention money which is receivable was not recognized as income as such, retention payment also cannot be allowed as deduction while computing the income of the assessee. As rightly argued by the assessee, both these are governed by different Accounting Standards. Retention payment is governed by AS-7 issued by ICAI, New Delhi. On the other hand, retention money receivable is governed by AS-9. What is applicable to retention money receivable cannot be applied to retention money payable as these are governed by different Accounting Standard. Further it is undisputed that whenever assessee incurred expenditure on the project it is admissible for deduction. The only dispute raised by the Revenue is regarding the year of liability of expenditure. Considering that the assessee- company is assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. We are reminded of the classic observation made by the Bombay High Court in the case of CIT vs Nagri Mills Co. Ltd, 33 ITR 681 which reads as under:

“ We have often wondered why the income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other."

12.1 The aforesaid observation of the Bombay High Court was reiterated by the Delhi High Court in the case of CIT vs Shri Ram Pistos and Rings Ltd, 220 CTR 404, as under:

"Finally, we may only mention what has been articulated by the Bombay High Court in CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom) as follows : . . .

In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expand so much time and energy only to determine the year of taxability of the amount."

12.2 Further, in our opinion, the provision for accrued liability which has to be discharged at a future date by the assessee is an allowable expenditure. In the case of CIT vs Micro Land Ltd, 347 ITR 613 High Court], the assessee claimed deduction u/s 37 of the Act for provision for future warranty. The Assessing Officer opined that provision for future warranty is contingent liability and cannot be allowed. The Supreme Court in the case of Rotork Controls India Pvt. Ltd vs CIT, 314 ITR 62, held that the provision made by the assessee for warranty claims on the basis of past experience is allowable deduction u/s 37 of the Act. In the case of Bharat Earth Movers vs CIT, 245 ITR 428, the Supreme Court held that where the assessee has incurred expenditure which is more than the provision for warranty obligation made in the books of account, it cannot be said that the provision made by the assessee is not capable of being estimated with the reasonable certainty though actual quantification was not possible and therefore, the Tribunal was justified in allowing the deduction. The Delhi High Court in the case of CIT vs Ericssion Communications P. Ltd, 318 ITR 340, held that provision for warranty claims on scientific basis which is consistently applied by the assessee for its business was allowable as deduction. The Madras High Court in the case of CIT vs Luk India Pvt. Ltd, 239 CTR 440, held that provision for warranty claimed by applying the settled principles of having regard to the fact that claim was based on a scientific approach and it was worked out on the average of previous year’s warranty settlement is allowable expenditure. Same view was taken by the jurisdictional High Court in the case of Kone Elevator India Pvt. Ltd vs ACIT, 340 ITR 46. Further, the Supreme Court in the case of Calcutta Co. Ltd vs CIT, 37 ITR 1, held that where the assessee was following the mercantile system of accounting is entitled for deduction of the expenditure which is incidental to the business on accrual basis though it was not actually incurred during the relevant accounting year. The Kerala High Court in the case of CIT vs Indian Transformers Ltd, 270 ITR 259, held that provision created by the assessee for after sales services based on warranty was towards a definite and ascertained liability. On the basis of relevant facts the provision cannot be treated as a contingent liability and therefore, the same was allowable as deduction. Same view was taken by the Delhi High Court in the case of CIT vs Whirlpool of India Ltd, 242 CTR 245, wherein held that the assessee consistently making provision for warranty on the basis of actuarial valuation in respect of machines sold during the year could not be precluded from revising this provision after taking into consideration that warranty period of the goods sold under warranty was exceeding and provision already provided in a particular year is falling short of the expected claim that may be received. Such a provision is based on scientific study and actuarial basis and to be allowed as a business expenditure. Hence, in our opinion, the provision for payment made by the assessee towards sub-contract is allowable expenditure as the assessee recognized the revenue from the said contract as income in the assessment year under consideration. Further, we make it clear that the assessee cannot claim the same expenditure on actual payment basis, otherwise it amounts to double deduction – one on the basis of accrual and another on the basis of actual payment. Hence, we direct the Assessing Officer to allow this retention money payment only on accrual basis and not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification. This ground is partly allowed.

As the issue is squarely covered in favour of assessee, respectively following Tribunal’s order in earlier year, as noted above in assessee’s own case, we confirm the order of CIT(A) deleting the addition.

Order pronounced in the open court on 14th December, 2022 at Chennai.