ACIT, CIRCLE - 1(1), KOLKATA, KOLKATA vs. M/S. MCNALLY SAYAJI ENGINEERING LIMITED, KOLKATA

O R D E R

PER S.S.Godara, Judicial Member:

ACIT, Cir-1(1), Kol. Vs. M/s McNally Sayajit Engineering Ltd. Page 4 b. Further, once the sale has happened, the seller is bound to recognize the entire amount of sale in the profit and loss account. As per Accounting standard 9, non- recognition of sale happens only when at the time of sale itself the seller is certain that the money will not come to him. c. In case of non-performance, the debtor exercises his right and the Appellant loses the right to claim the retained money and the same is recognized as bad debt in the books of the Appellant. In regard to the above, the Appellant would humbly like to submit as under:- Issue decided in favor of Appellant in its own case for AY 2008-09 and AY 2009-10 2.3.4 At the outset, we would like to bring it to your kind attention that the issue has been decided in favor of the Appellant by the Hon'ble ITAT in Appellant's own case for AY 2008- 09 and AY 2009-10 in and ITA No.927/KoI/2013 vide order dated 10 March 2017. A copy of the order is enclosed as Annexure 3. The relevant extracts of the decision is quoted as under:- "We have heard the rival submissions and perused the materials available on record. We find that the additional evidences filed by the assessee deserves to be admitted in the facts and circumstances of the case as it contains the necessary details of offer of retention money from various projects in the subsequent assessment years. Admittedly the same were not filed by the assessee before the lower authorities as they were not called for by the lower authorities. Once it is proved that the said nature comprises of retention money and the same is offered to tax by the assessee in the subsequent years then the entire findings of the Ld. CIT(A) for the Assessment Year 2009-10 gets answered. In the view of these facts and circumstances, we deem it fit and appropriate, in the interest of justice and fair play, to set aside this issue of addition towards retention money for the Asst. Years 2008-09, 2009-10, to the file of the AO, to verify the correctness of the offer of retention monies in subsequent years and accordingly decide the issue in accordance with law .... " 2.3.5 Accordingly, based on the above submission the claim of retention money should be allowed as deduction in the year under consideration. The Appellant further submits that the appeals filed before the Ld. CIT(A) for AY 2010-11, 2011-12 and 2012-13 involve similar grounds. The hearings for AY 2010-11 and AY 2011-12 have been concluded. However, the order for the same is awaited. Further, the notice of hearing for AY 2012-13 is not yet received. 2.3.6 The above issue has been recently concluded in favour of the Appellant's immediate parent company i.e. McNally Bharat Engineering Co. Ltd., Kolkata by the Hon'ble ITAT, Kolkata in ITA No.100/KoI/2011, where the Hon'ble Tribunal dismissed the department's appeal on the issue and held that retention money should not be included in computing Book Profit ujs.115JB as well as normal provisions (copy enclosed as Annexure 4). The relevant extracts have been reproduced below for your reference: 37. The Ld. Counsel for the assessee while reiterating the plea of the assessee as put forth before CIT(A)· further placed reliance on the decisions of the Hon'ble ITAT, Kolkata Bench in the case of DCIT vs Binani Industries Ltd. in ITA No. 144/Kol/2012 for A.Y. 2009-10 order dated 02.03.2016 wherein the entire case laws on the issue has been discussed. The Tribunal finally concluded in the aforesaid decision that if the receipt is not in the nature of income then it cannot be considered as income for the purpose of book profit ujs.115JB of the Act. On the other hand if a receipt is considered as income but is exempt by virtue of any specific provision of the Act, then the same would be treated a part of the book profit ACIT, Cir-1(1), Kol. Vs. M/s McNally Sayajit Engineering Ltd. Page 5 ujs.115JB of the Act. Thus the Ld. Counsel for the assessee submitted that since the retention money in question was not in the nature of income at all it should not be included as part of the book profit ujs.115JB of the Act.

38. We have given a very careful consideration to the rival submissions. As far as the question with regard to excluding the retention money while computing the total income under the normal provisions of the Act is concerned, it is not disputed by the revenue that the sum in question is in the nature of retention money. In such circumstances we are of the view that the retention money cannot be regarded as income of the assessee. The issue is no longer res integra and has been concluded by the Hon'ble Calcutta High Court in case of CIT Vs. Simplex Concrete (Piles) India Pvt. Ltd. [179 ITR 8]. In the aforesaid decision the Hon'ble Calcutta High Court on identical facts held that having regard to the terms and conditions of the contract, it could not be held that either 10 per cent or 5 per cent as the case may be, being retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee could acquire the right to receive such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not be s aid that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question. In view of the aforesaid decision of the Hon'ble Calcutta High Court rendered on identical facts as that of the Assessee's case, we are of the view that there is no merit in one part of Gr. No.S raised by the Revenue viz., that retention money has to be considered as income for computing total income under the normal provisions of the Act and accordingly the same is dismissed.” Similar issue has been decided in favor of assessee by the High Courts including Jurisdiction High Court 2.3.7 The Appellant also places reliance on decision of the Jurisdictional High Court in the case of CIT -vs- Simplex Concrete Piles (India) P. Ltd.[1989] 179 ITR 8 [Cal] wherein it has been held that the retention money in respect of jobs not completed during the relevant assessment year should not be taken into account in computing the profits for the assessment year in question since the assessee has no right to claim any part of the retention money till the verification of the satisfactory execution of the contract. It was also held that only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee would acquire the right to receive such retention money. 2.3.8 The above ruling has been upheld by Gujarat High Court in case of Amarshiv Construction (P) Ltd. [2014] where the assessee was awarded a construction contract and in terms of contract certain amount was withheld by employer of contract towards retention money for satisfactory execution of contract by assessee, retention money was to be taxed in assessment year relevant to 'previous year' in which it became payable to assessee as per terms of contract i.e. after defect liability was over and after engineer-in-charge certified that no liability was attached to assessee. The Hon'ble Gujarat High Court held as under: "The assessee had no absolute right to receive the amount. SSNNL had no obligation to release the same before completion of warranty period and even thereafter would release the amount only after making permissible adjustments. Mere fact that in the instant case no recoveries were made from the bank guarantee or security deposit is of no consequence. Mere fact that the amount was received by the assessee would not mean that income had accrued. Whether income did accrue or not would depend on the fact whether the right to receive said amount had accrued or not. The fact that tax was deducted at source on said ACIT, Cir-1(1), Kol. Vs. M/s McNally Sayajit Engineering Ltd. Page 6 amount also would be of no consequence. Tax was deducted by SSNNL. The assessee had no control over such deduction. Merely whether tax was deductible or not would not decide the taxability of certain receipts. The manner in which the assessee accounted for such receipt in its books of account can also not determine its tax liability." I have considered the A.Os finding, written submissions and cited decisions. The A.O has disallowed the appellant's claim for deduction of the net amount of retention money of Rs.7,72,10,900/- i.e. the difference between retention money reduced in the computation of total income. Disallowance: Rs.10,12,20,489/- less Rs.2,40,09,589/- disclosed as cash receipts during the relevant assessment year. The A.O held that firstly, Retention money which is forming a part of the sale is always treated as income accrued and arisen in the hands of the Appellant. Secondly, that once the sale has happened, the seller is bound to recognize the entire amount of sale in the profit and loss account. As per Accounting standard 9, non- recognition of sale happens only when at the time of sale itself the seller is certain that the money will not come to him. Thirdly, that in case of non-performance, the debtor exercises his right and the Appellant loses the right to claim the retained money and the same is recognized as bad debt in the books of the Appellant. The Appellant claimed deduction of Rs.10,12,20,489/- towards money retained by the customers as per the agreement between the Appellant and the customers on the ground that the same shall be taxable in the year of receipt and also offered retention money of Rs.2,40,09,589/- to tax representing the amount which was claimed as deduction in earlier years and received during AY 2013-14. The Appellant submitted that no right to claim any part of the retention money gets vested till the verification of satisfactory execution of the contract is concluded and accordingly, the said retention money cannot be said to be accrued until the claim is accepted by customers satisfactory performance of the contract. Hence, the said retention money shall be taxable only in the year of receipt (after the satisfactory performance of the contract). The appellant's AIR has submitted that retention money could not be regarded as income of the assessee. It was also contended that the Appellant has not got any right to enforce the claim on account of retention money in AY 2013-14 and hence the same could not be said to be accrued in FY 2012-13 (relevant to AY 2013-14), and that the. AO has erred in completely disregarding the submissions made by the Appellant that the treatment with respect to retention money has been done based on the settled principles laid down by various Courts in this regard. Reliance was also placed upon the decision of the the Hon'ble Calcutta High Court in case of CIT Vs. Simplex Concrete (Piles) India Pvt. Ltd. [179 ITR 8]. In the aforesaid decision the Hon'ble Calcutta High Court on identical facts held that having regard to the terms and conditions of the contract, it could not be held that either 10 per cent or 5 per cent as the case may be, being retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee could acquire the right to receive such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not be s aid that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question. Reliance was also placed on the decision of the Kolkata ITAT in the case of the appellant's holding company, viz. in. McNally Bharat Engineering Co. Ltd., Kolkata by the Hon'ble ITAT, Kolkata in where the Hon'ble Tribunal dismissed the department's appeal on the issue and held that retention money should not be included in computing Book Profit .:, u/s.115JB as well as normal provisions and held as under:

ACIT, Cir-1(1), Kol. Vs. M/s McNally Sayajit Engineering Ltd. Page 7 "37. The Ld. Counsel for the assessee while reiterating the plea of the assessee as put forth before CIT(A) further placed reliance on the decisions of the Hon'ble ITAT, Kolkata Bench in the case of DCIT vs Binani Industries Ltd. in for A.V. 2009-10 order dated 02.03.2016 wherein the entire case laws on the issue has been discussed. The Tribunal finally concluded in the aforesaid decision that if the receipt is not in the nature of income then it cannot be considered as income for the purpose of book profit u/s.115JB of the Act. On the other hand if a receipt is considered as income but is exempt by virtue of any specific provision of the Act, then the same would be treated a part of the book profit u/s.115B of the Act. Thus the Ld. Counsel for the assessee submitted that since the retention money in question was not in the nature of income at all it should not be included as part of the book profit u/s.115JB of the Act.