K VISHWANATHAN, PROP: VIJAYA ENTERPRISES,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4(3)(1), BANGALORE

The assessee in ground Nos.1 to 7 challenged the validity of initiation of proceedings u/s. 147 of the Income-Tax Act, 1961 [“the Act”] Act. The facts in this regard are that the assessee, who is an individual and who carries the business of electrical contractor under the name and style of M/s. Vijaya Enterprises, filed a return of income for the AY 2008-09 declaring a total income of 59,27,400. In the computation of total income, the assessee has deducted from the profit as per profit & loss account a sum of Rs.66,65,994 which was retention money retained by the contractors for work done by the assessee and to be released to the assessee only after certain conditions are fulfilled. The assessee was following mercantile system of accounting. The return filed by the assessee was taken up for scrutiny assessment and order of assessment dated 13.12.2010 was passed by the AO in which the total income declared by the Assessee in the return of income was accepted by the AO after disallowance of certain expenses.

The AO issued a notice u/s. 154 of the Act dated 3.5.2013 in which he took the view that retention money which was claimed as a deduction in the computation of total income ought to have been offered to tax, because the assessee was following mercantile system of accounting and the retention money was income that accrued to the assessee. The AO passed an order dated 19.7.2013 u/s. 154 of the Act adding the retention money to the total income determined in the order u/s. 143(3) of the Act.

The assessee filed an appeal against the order u/s. 154 of the Act and the CIT(Appeals) by an order dated 30.01.2015 cancelled the order u/s. 154 of the Act for the reason that issues that are debatable and involve long drawn process of reasoning cannot be said to be mistake apparent on the face of the record and cannot be rectified in proceedings u/s.154 of the Act. The following were the relevant observations of the CIT(A):-

Subsequently, the AO issued a notice u/s. 147 of the Act dated 31.03.2015 for the reason that there was escapement of income in as much as the retention money has not been offered to tax by the assessee in the return of income. In the said order, the AO came to the following conclusion:-

Mercantile System of accounting includes all transactions recorded irrespective of period of amount received or paid. Accordingly, the retention money is a part of sale and is accrued recognized as revenue to the assessee as soon the entries are posted rh the books of account. The accrual of income depends on its right to receive se same from the person to whom it had rendered services or sold goods. The retention was only to ensure that the assessee complied with defect liability clause and other conditions relating fulfilling the conditions as per the Contract. The defect liability clause does not impinge upon the retention amount and therefore is not a permissible deduction from the taxable turnover. It is only a deferred payment that the assessee was entitled to receive the gross amount charged in the RA Bill at a later date. Therefore, since the assessee has followed the mercantile system of accounting such sum is taxable as revenue receipts in this year i.e. A.Y. 2008-09.” 6. On appeal by the assessee, the CIT(Appeals) confirmed the order of AO. On the legality of reopening of assessment, the CIT(Appeals) held as follows:-

The ld. DR, however, submitted that the assessee has not included in the gross contract receipts the retention money and therefore by claiming retention money as deduction, there was a double deduction claimed by the assessee and to this extent, there was a failure of the part of assessee to fully and truly disclose all material facts and therefore, initiation of reassessment proceedings is valid.

The learned counsel for the Assessee brought to our notice a chart showing party-wise break-up of retention money that was not offered to tax but included in the total turnover declared by the Assessee. The same is given as Annexure-2 to this order. The Assessee has also given a break- up of the sales/turnover declared in the profit and loss account and the relevant break up of the turnover like Labour charges, Sales, Works Contract etc. The same is at pages -12 to 17 of the Assessee’s paper book. Perusal of the same together with Annexure-2 shows that the Assessee has declared in the gross receipts of his business the sums which were claimed as retention money and income which did not accrue to the Assessee. Therefore, the contention of the revenue which is based on observations in the order of the AO that the Assessee did not include the retention money in the gross receipts and therefore the Assessee is claiming double deduction, is contrary to facts and not supported by any material on record. On the contrary the Assessee has demonstrated before us that the gross receipts declared in the profit and loss account includes the sum claimed as retention money which was not offered to tax on account of its alleged non-accrual. Therefore, the argument of the learned DR that there was failure on the part of the Assessee to fully and truly disclose all material facts relevant for assessment of his income for the relevant Assessment year is without merit. Consequently, the proviso to Sec.147 of the Act is applicable in the present case. Since there was no failure on the part of the Assessee as is contemplated by the proviso to Sec.147 of the Act and since the Assessment u/s.147 is sought to be made after the period contemplated under the proviso to Sec.147 of the Act, we hold that the initiation of the reassessment is bad in law and the order of reassessment is therefore annulled.

Since the order of assessment is annulled, the other issues of merits does not require any consideration.

In the result, the appeal by the Assessee is allowed.