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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri S.S. Godara
ITA No. 1169/Kol/2017 Assessment Year: 2007-08 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd…….……...........…………..……………….…...……..…….……...Appellant 41, Chowringhee Road Kolkata – 700 071 [PAN : AAECS 0445 G] Vs. Deputy Commissioner of Income-tax, Circle-1, Kolkata……....................…….…..............Respondent Appearances by: Shri Pankaj Parakh, FCA, appeared on behalf of the assessee. Shri A.K. Nayak, CIT Sr. D/R. appearing on behalf of the Revenue. Date of concluding the hearing : January 24th, 2019 Date of pronouncing the order : March 15th, 2019 ORDER Per J. Sudhakar Reddy, AM :- These appeals filed by the assessee are directed against the common order of the Learned Commissioner of Income Tax (Appeals) - 5, Kolkata, (hereinafter the ‘Ld. CIT(A)’), dt. 23/02/2017, passed u/s 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Years 2007-08, 2008-09 & 2009-10.
As the issues arising in all these appeals are common, for the sake of convenience they are heard together and disposed off by way of this common order.
We have heard Shri Pankaj Parekh, FCA, the ld. Counsel for the assessee and Shri A.K. Nayak, CIT D/R on behalf of the revenue. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:-
2 Assessment Year: 2007-08 ITA No. 1170/Kol/2017 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd 4. The first common issue that arises for consideration in all these appeals is the rejection by the revenue of the claim of the assessee that retention money is not income of the assessee as it has not accrued or arisen during the year. Both the parties have advanced lengthy arguments on the issue. On consideration of the facts and arguments we find that the issue is covered by the decision of the Hon’ble Jurisdictional High Court in the case of Commissioner Of Income-Tax vs Simplex Concrete Piles (India) Pvt. Ltd. 1989 179 ITR 8 Cal, wherein it was held as follows:-
Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1965-66 and 1966-67 - Assessee-company was carrying on construction business and followed mercantile system of accounting - As per terms of contracts entered into with various parties assessee was entitled to get 90 per cent of payment in first instance when work was done and remaining 10 or 5 per cent, as case may be, was to be paid later on after submitting certificates from architects/engineers, removal of defects, payment of damages, etc. - Assessee was crediting 100 per cent of job value in past years but from assessment year 1965-66, it had started practice of crediting only 90 per cent value for work done after deducting retention money -Whether it could be said that on date of submission of bills assessee had no right to receive entire amount on completion of work and retention money did not accrue to it on such date but on later date in accordance with terms of contracts and ITO would be unjustified in making any addition by treating entire contract amount as accrued on submission of bills on completion of work - Held, yes
The decision of the ITAT Mumbai ‘H’ Bench of the Tribunal in the case of Emerson Network Power India (P.) Ltd. v. Assistant Commissioner of Income-tax [2009] 27 SOT 593 (MUM.) relied upon by the ld. D/R is not applicable to the facts of the case, for the reason that, what was considered by the Bench was performance bank guarantee and not retention money as in the case of the assessee company. Even otherwise, we are bound by the judgment of the Hon’ble Jurisdictional High Court in the case of Commissioner of Income-Tax vs Simplex Concrete Piles (India) Pvt. Ltd.
3 Assessment Year: 2007-08 ITA No. 1170/Kol/2017 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd 5.1. We also find that the reliance placed by the ld. D/R on the judgement in the case of E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax [1954] 26 ITR 27 (SC), is also misplaced as the Hon’ble Supreme Court was considering a case where the assessee had acquired the right to receive the income. In the case on hand, the assessee had no right to receive the income.
In view of the above discussion, we uphold the contention of the assessee and direct the Assessing Officer to exclude the retention money included in the sales. This retention money can be brought to tax in the year when the assessee received the same. Accordingly this ground of the assessee is allowed for all the Assessment Years.
In the assessee’s appeal for the Assessment Year 2007-08, the order was passed u/s 143(3) of the Act, in pursuance of an order u/s 263 of the Act passed by the ld. Pr. CIT on 29/03/2012. The ld. CIT(A) partly allowed the appeal of the assessee. Further aggrieved the assessee is in appeal before us. 7.1. After hearing rival contentions, we find that the ld. CIT(A) has considered the submissions of the assessee that retention of money cannot be considered as income of the assessee. At para 1.2. & 1.3. of his order the ld. CIT(A) held as follows:- “1.2. I have gone through the A.O.'s contention and the appellant's submission on the point. As per the judicial decisions relied upon it does appear that the appellant has a case when he claims that retention money has not fallen due in the year when the bill was raised and included in the sales, as the right to claim the said money is contingent on satisfaction of some conditions such as verification of satisfactory execution of the contract involved. But the A.O.'s case also has merit in the sense that AS prescribes booking loss immediately on such realization by the appellant. Excluding the whole of the retention money from the profit figure brings in distortion in the profit in the sense that the profit equal to the retention money is pot offered to tax but postponed to a later year. The whole idea of AS-7 is to correlate the profit to the period of work. This is an improvement over the project completion method which results in distorted profit results where the profit of the whole project gets aggregated in the last year when the long term project are completed. To remove this distortion AS-7 brought in the concept of percentage completion method where the profit is distributed over the years on which the projects continue. The judicial decisions relied upon by the appellant cannot be completely ignored and has to be in fact followed. But in my view the said decisions have not considered the other aspects of computation of profit which is based on matching principles of accounting, 4 Assessment Year: 2007-08 ITA No. 1170/Kol/2017 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd according to which income and cost have to be matched to reach at the realistic profit. To exclude the retention money without considering the adjustment of associated costs is to bring in extreme distortion in the profit and results in a situation even worse than the project completion method which was superseded by the percentage completion method. In the project completion method the profit of the contracts or projects get aggregated in the last year in which the project is completed. Even this financial result was found unreasonable and distorted and, therefore, the percentage completion method was brought in to distribute the profit equitably over the years. The judicial decisions relied upon by the appellant is thus making the situation worse where the profit almost may be equal to the retention money as in most of the cases the net profit on the contract varies in the region 5 to 10%. Thus reduction of the retention money from the profit amounts to postponing the whole of the profit contained in the contract to later years where it is not rightly due. As regards the right to claim the retention money is concerned that cannot be ignored. But reducing the whole of retention money from the profit thus results in the extreme distortion. In my view the above decisions have not factored in the matching principles which means that the income or revenue has associated costs and, therefore, the costs associated to or corresponding to the retention money has also to be considered to make it realistic. I, therefore, hold that the whole of retention money cannot be reduced from the revenue offered to tax. This also goes against the standards AS-7. The A.O. is directed to adjust the profit contained in the retention money which may be worked on the basis of average profit on the gross turnover of the appellant in absence of profitability of the specific contracts. 1.3. As per the appellant’s submission dated 02.12.2009 the amounts of retention money are as under:-
5 Assessment Year: 2007-08 ITA No. 1170/Kol/2017 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd The net profit [PBT Rs.6,06,48,881/-] in the current year is 4.88% of the turnover [Rs.124,23,63,983/-], which is less in percentage terms than the retention money [9.9 % of concerned sales]. The claim that the whole of retention money be taken to later years results in a situation where the profit from the associated contracts are not offered to tax even though the profit has been shown in the P&L A/c. It may be noted that if retention money is excluded from the sales of associated contracts the profit computed as arising by excluding all the retention money results in loss of about 5% [9.96% - 4.88% = 5.08%] on the Sales of the relevant contracts. This distortion needs to be corrected. By applying matching principle to the retention money claimed to be due only in later year the profit contained in the corresponding money so retained is about Rs.16,43, 104/ - computed at the rate of net profit of 4.88%. Thus it is held that the profit of Rs.16,43,104/- out of the money retained be taken to later year(s), when the said money becomes due and thus the profit therein arises. The sum of Rs.3,20,27,063/- being balance out of the retention money is treated as the profit or revenue realizable in the current year. The ground is thus partly allowed.”
7.2. A perusal of the above demonstrates that the ld. CIT(A) has accepted the contention of the assessee. Hence the assessee should not have any grievance on the same. Regarding the finding of the ld. CIT(A), that net profit rate has to be applied, this issue is not challenged by the assessee in its grounds of appeal. The ld. Counsel for the assessee raised oral arguments on this issue without raising any specific ground. In the absence of any specific ground of appeal we cannot entertain these oral submissions.
The ld. Counsel for the assessee submits that he is not pressing all the other grounds raised
by it in all the Assessment Years. Hence all the other grounds for all the three Assessment Years, are dismissed as not pressed.
9. In the result, appeal of the assessee is dismissed.
Kolkata, the 15th day of March, 2019. Sd/- Sd/- [S.S. Godara] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 15.03.2019 {SC SPS} 6 Assessment Year: 2007-08 ITA No. 1170/Kol/2017 Assessment Year: 2007-08 ITA No. 1171/Kol/2017 Assessment Year: 2008- Assessment Year: 2009-10 M/s. Stewarts & Lloyds of India Ltd Copy of the order forwarded to: 1. M/s. Stewarts & Lloyds of India Ltd 41, Chowringhee Road Kolkata – 700 071 2. Deputy Commissioner of Income-tax, Circle-1, Kolkata 3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.