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Income Tax Appellate Tribunal, “C”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI
Date of Hearing 23/07/2019 Date of Pronouncement 23/07/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
This appeal filed by the revenue is directed against the order of the Commissioner of Income Tax Appeals–22, Mumbai, dated 26/02/2018 and it pertains to the Assessment Year 2014-15. The revenue has raised the following grounds of appeal:- 1. "On the facts and hi the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition on account of retention money without appreciating the fact that the assesses had received the entire consideration and no contractual money was retained by its customers. 2."On the facts and m the circumstances of the case and in law, the Ld.CIT(A) erred in relying on the decision of Hon'ble Bombay High Court in the case of M/s, Associated Capsules Pvt. Ltd. in which the money was retained and hence the are clearly distinguishable."
3. The appellant prays that the order of the CIT(A) on the above ground be reversed and that of the Assessing Officer be restored.
M/s. Commtel Networks Pvt.Ltd.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 2. The brief facts of the case are that the assessee is primarily engaged in the business of design, engineering, integration, supply, installation and commissioning of state of the art telecommunication systems. The assessee has undertaken turnkey contracts which involved all above mentioned aspects of turnkey projects. One of the conditions of the contract/agreement entered into by the assessee company with its customers, includes a usual clause for retention of money, which is released only after satisfactory performance during the pre-fixed period after the completion of the project. The amount withheld is retained for a period ranging from 12 to 24 months after the completion of the project.
The assessee has furnished Performance Bank Guarantee (PBG) equivalent to the amount of retention money and taken full amount of work done without any deduction for retention money. Accordingly, deferred revenue recognition, in respect of amount equivalent to Performance Bank Guarantee given to principles. The AO has made additions towards retention money on the ground that the assessee has already received amount, in respect of work executed therefore, the question of postponement of revenue, in respect of amount equivalent to PBG is incorrect. Accordingly, he opined that when the contract value is fully released for the year under consideration, even though, the assessee has secured, the principles by giving PBG to the amount equivalent to retention money, as per terms of agreement, the same cannot be postponed, till the period of such performance guarantee period exists.
M/s. Commtel Networks Pvt.Ltd.
Accordingly, by taking note of accounting standard 9 (AS-9) issued by the ICAI, which deals with revenue recognition and also provisions of section 211 (3c) of the Companies Act, 1956, opined that the assessee company cannot adopt exactly contradictory stand with regard to the same issue of reasonableness of ultimate collection of retain amount, while making books entries and computation total income, as per the provision of the Income Tax Act, accordingly made additions towards claim of retention money of Rs. 4,30,55,538/-.
Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee contended that when the performance guarantee period persist for the year under consideration and also which is supported by PBG, there is no error in postponement of revenue recognition to the extent of claim of retention money for the purpose of taxation, because the assesee does not have absolute right over the amount equivalent to performance guarantee given to cover up retention money. The Ld.CIT(A), after considering relevant submission of the assessee held that this is a recurring issue, which has been considered in the assessee’s appeal for earlier years by predecessors CIT(A), where by following the decision of Hon’ble Bombay High Court in the case of CIT Vs. Associated Cables Pvt.Ltd. (286 ITR 596) deleted additions made by the AO towards disallowance of claim of retention money, accordingly by following his predecessor order deleted additions made by the AO towards disallowance of claim of retention
M/s. Commtel Networks Pvt.Ltd. money. Aggrieved by the CIT(A) order, the revenue is in appeal before us.
4. Ld. DR submitted that the CIT(A) erred in deleting the additions on account of retention money without appreciating the facts that the assessee has received entire consideration and no contractual money was retained by its customers. The ld. DR further submitted that CIT(A) was erred in relying on the decision of Hon’ble Bombay High Court in the case of M/s Associated Capsules Pvt.Ltd, because in that case, the money was retained and hence, the facts of the case are clearly distinguishable. In this case, it is abundantly clear that the assessee has received money in full and but provided PBG to that extent and claimed retention money even though, there was no retention money withheld by the principles. Therefore, the Ld.CIT(A) was incorrect in deleting additions made by the AO, accordingly, the additions made by the AO should be upheld.
5. The Ld. AR for the assesse, on the other hand, submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai, ‘C’ Benches in assessee’s own case for AY 2010-11 to 2013-14, where under an identical facts and circumstances, the Tribunal held that the AO was erred in disallowance of claim of retention money.
The Ld.AR further submitted that the facts involved in the present appeal are identical to, the facts which have been already considered by the Hon’ble Bombay High Court in the case of CIT vs. Associated Cables
M/s. Commtel Networks Pvt.Ltd.
Pvt.Ltd. Therefore, the CIT(A) after considering relevant facts has rightly deleted additions and its order should be upheld.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The issue of additions towards retention money deducted from total income is no longer res-integra. The co-ordinate bench of the ITAT, Mumbai in assessee’s own case for AY 2013-14 had considered an identical issue and by following its earlier decision in assessee’s own case for AY 2010- 11 to 2012-13 held that retention money, equivalent to amount of PBG given to principles cannot be taxed, merely on the basis of entries in the books of accounts, when the same cannot be said to have accrued to the assesee for the impugned assessment year and also when the period of PBG still persist. The relevant findings of the Tribunal are as under:-
We have heard the parties and perused the material available on record. The issue of additions towards retention money deducted from total income is no more res integra. The co-ordinate Bench of the ITAT in assessee’s own case for A.Ys 2010-11 to 2012-13 in 4340 & 4873/Mum/2015 has considered the issue in the light of the decision of Hon’ble Bombay High Court in the case of CIT vs. Associated Cables (P) Ltd. (supra), and held that retention money deducted by the contractee in the work bills cannot be taxed merely on the basis of entries in the books of account when in law the same cannot be said to have accrued for that financial year. The relevant portion of the order of ITAT is extracted below: 15. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the various judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. Only the issue for our consideration is as to year in which retention money to be taxed (Retention money of 10% of Contract Value) to be taxed in the year of completion of contract or when the performance guarantee period is over and the contractee releases the payment. 16. We had carefully gone through the terms of contracts executed by the assessee with contractee i.e., ONGC The contracts show that the right to receive the retention money of the respective projects, did not accrue to,
M/s. Commtel Networks Pvt.Ltd. or vest in, the assessee during the previous year ended 31.3.2012, because the same in terms of time fell beyond that year. Therefore, the retention moneys did not accrue to the assessee during that year, notwithstanding the accounting as revenue in the books of account on completion of work of the respective projects. Accordingly, considering the terms of the contract, unless assessee satisfies the customers as to the performance of the work, during the pre-fixed period after completion of the contract, the assessee has no right to receive retention money. However, AO has failed to appreciate the legal position and erroneously comparing this legal obligation in a manner to post sale warranty obligations. In the post sale warranty obligations the suppliers right to receive the sale consideration is never at stake because he fully collects the same at the time of completion of sale; nor does he give any performance bank guarantee to the customer. His only obligation is to provide after-sales service, and in case he falls therein, the only recourse to the customer is to sue him for the damages; there is absolutely no impact whatsoever on the accrual of sale consideration. But in the assessee's case the client either physically retains the retention money or gets PBG in lieu thereof, which he can unilaterally invoke even without recourse to the assessee and recover the retention money directly from the bank. The conditions of the PBG would clearly show the assessee's precarious position vis-a-vis the customer in this matter. The assessee had submitted relevant terms & conditions of PBG issued by Citi bank to ONGC. Accordingly, even though retention money is physically released against the PEG, the risk does not abate until the PEG expires or is cancelled by the customer. Therefore, during this period the assessee does not have right to receive the retention money as contemplated in the judgement in E. D. Sassoon Ltd. (supra) therefore, there was no accrual qua the retention money in the previous year relevant to the A. Y.2012- 13.
As per our considered view, the Accounting treatment given by the assessee in its books of account cannot decide the accrual of income in law. It is now well settled that accounting entries are not determinative of taxability of income or deductibility of any expenditure. A mere book keeping entry cannot be income unless income has actually resulted. If income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a hypothetical income. Various judicial pronouncements cited by learned AR as quoted above support this contention. Furthermore, income is to be computed as per the provisions of law, and it is not necessary that law should follow the footsteps of accountancy. Income-tax law does not march step by step in the divergent footprint of the accountancy profession - Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 227 ITR 172 (SC).
In view of the above, merely because retention money was accounted for in the books of accounts that same cannot be brought in the tax net without income having been accrued to the assessee. Furthermore, the assessee is consistently following the above practice for the retention moneys year after year since the A. Y.2003-04 and onwards. In the A. Y.2004 05, the then AO after examining the claim in detail and on consideration of detailed submissions, accepted the same. For the first time in A.Y.2010-11 this claim was rejected. It is true that the principles of M/s. Commtel Networks Pvt.Ltd.
res judicata do not apply to tax assessments, yet there ought to be uniformity of treatment and consistency when facts and circumstances are identical. In this context reliance is placed on the decision of the Hon'ble Bombay High Court in CIT vs. Gopal Purohit (2011) 336ITR 287 (Bom).
After comparing the early return income of the assessee vis-à-vis rate of tax, even after exclusion of retention money does not confer on the assessee any permanent" tax benefit, but it is only a deferment of tax liability. There is no issue that it is taxable / income; the only crucial question is whether it is taxable in the year in which ( the relevant work is completed, or in the year in which it accrues to the assessee as per the law when the right to receive vest in it. In other words, this issue is whether the sum is taxable in one or the other year. Such an issue, really speaking, is not material in case of a company, where the income is always taxed at a flat rate.
While deciding the issue, the CIT(A) has relied on the decision of Bombay High Court in case of Associated Cables Pvt. Ltd., wherein also assessee was engaged in the very similar activity and retention money was held to be taxable only in the year of receipt and not in the year when the project is completed. In this case, Hon’ble Bombay High Court held that right to receive retention money accrued only after the conditions under the contract are fulfilled, it will not accrue till that conditions are fulfilled. This income will be assessed as assessee's income only when contractee fulfills all the conditions of the contract and pays the amount.
We are also in agreement with the contention of learned AR that principle of consistency is required to be followed unless facts are different in subsequent years. In the instant case before us, we found that from the assessment year 2003-04 to the assessment year 2009-10, assessee’s method was accepted by the Department, moreover in the A.Y. 2004-05, there was scrutiny assessment wherein after having a detailed discussion, the CIT(A) accepted assessee’s contention regarding retention money. Even for each assessment year being separate unit, what is decided in one year may not apply in the following year, but where a fundamental aspect permeating through the different Assessment Years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not at all be appropriate to allow the position to be changed in a subsequent year". Parashuram Pottery Works Ltd. (1977) 106ITR 1 (SC). Excel industries Ltd (2013) 38 Taxman.com (SC) and Gopal Purohit (2011) 336 ITR 287 (Bom).
Furthermore, in addition to the Hon’ble Bombay High Court in the case of Associated Cables Ltd., (supra), Gujarat High Court in case of Amarshiv Construction (P) Ltd., 45 Taxmann.com 429 and Madras High Court in case of Ignifluid Boilers (I) Ltd., 283 ITR 295 and also in the case of East Coast Constructions Ind. Ltd., 160 Taxmann 399 held that retention money accrues only when the performance period has been successfully completed and the Bank guarantees have been released. We categorically observe that the facts of the assessee’s case is identical to that of the case of the Associated Cables Ltd. Associated Cables were also doing manufacturing Cables as per specifications of the Contractee.
M/s. Commtel Networks Pvt.Ltd.
Assessee is involved in Design, Engineering, integration, testing, supply, installation and commissioning state of the art telecommunication system as per customers' specific requirements. Every fact is identical to the facts of the case of Associated Cables Ltd is identical to the facts in respect of assessee's case.
Furthermore, we observe that assessee is in the 30% bracket in all the years under consideration. Earlier years retention money is taxed in this year and this year’s retention is taxed in the subsequent years. Hence there is no loss of revenue. Therefore, the treatment adopted by the assessee should not be declined. Our view is supported by the decision of Hon’ble Supreme Court in case of Excel Industries Ltd., 358 ITR 295 and by the Jurisdictional High Court in case of Nagri Mills Co. Ltd., 33 IT 681. Furthermore, we also observe that the accounting treatment given by the assessee in its Books of account cannot decide the accrual of income in law. It is now well settled that accounting entries are not determinative of taxability of income or deductibility of any expenditure. A mere book keeping entry cannot be income unless income has actually resulted. If income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a ‘hypothetical income.’ 24. The decision of Hon’ble Supreme Court in case of Shoorji Vallabhdas & Co., 46 ITR 144, Kedarnath Jute Mfg. Co. Ltd., (1971) 82 ITR 363, Birla Gwalior Pvt. Ltd., (1973) 89 ITR 266, 273(SC) and Sutlej Cotton Mills Ltd., (1979) 116 1,5 supports our contention. Further recent decision of Hon’ble Supreme Court in case of Taparia Tools Ltd., dated 23/03/2015 reiterated the above principle. In view of the above, merely because retention money is accounted for in the books of account, that by itself does not make it taxable in A.Y. 2010-11 when in law the same cannot be said to have accrued in that year as discussed above.
We further observe that the facts of the assessee’s case and that of Associated Cables (supra) is identical as narrated below.
Associated Cables Ltd Assessee The assessee was a company Assessee is involved in engaged in the manufacture of Design, Engineering, instrumentation cables as per the integration, testing, supply, specifications of the Customers installation and commissioning state of the art telecommunication system as per customers' specific requirements
The contract provided that 10% of Terms of Contract varies from the price shall be paid on project to project, payments acceptance of the Contract and are made on milestone basis, 80% of the price on presentation but typically, in such projects of the despatch of goods and the 10 % of the total contract balance 10% on receipt and value is either actually acceptance of goods subject to a retained until the expiry of the M/s. Commtel Networks Pvt.Ltd. performance and workmanship defect liability period; or Bank guarantee for that 10% alternatively, released on furnishing irrevocable Performance Bank Guarantee of equivalent amount that would expire after defect liability period.
26. We had also carefully gone through the comparative features brought on record by learned AR that in respect to the facts of the instance case vis-à-vis the facts of Emerson Network Power India Pvt. Ltd., (supra) as relied on by learned DR, we are in agreement that the facts of Emerson Network Power India Pvt. Ltd., (supra) is distinguishable. In view of the above discussion, we do not find any infirmity in the order of CIT(A) for directing the AO to tax the retention money in the year of actual receipt and not in the year of completion of contract.
In the result appeal of the Revenue is dismissed.”
6. In view of the matter and consistent with the view taken by the Co- ordinate Bench, we are of the considered view that the Assessing Officer erred in making additions towards retention money deducted from the total income. The learned CIT(A) after considering the relevant facts has rightly deleted the additions made by the Assessing Officer. We do not find any infirmity in the order of the CIT(A) and are inclined to uphold the same and dismiss the appeal filed by the Revenue.
In this view of the matter and consist with view taken by the Co- ordinate Bench, we are of the considered view that the Ld.CIT(A) was rightly deleted additions made by the AO towards claim of retention money. Hence, we are inclined to uphold findings of the Ld.CIT(A) and dismissed appeal filed by the revenue.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on this 23/ 07/2019