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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri G Manjunatha & Shri Ravish Sood
O R D E R Per G Manjunatha, Accountant Member
This appeal filed by the Revenue is directed against order of the CIT(A)-22, Mumbai, dated 07.11.2016, and it pertains to assessment year 2013-14. The Revenue has raised following grounds of appeal:-
1) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting sum of Rs 3,07,33,668/- being the retention moneys of various projects, which as per the terms of contracts, did not accrue during the previous year relevant to A.Y. 2013-14
2. The brief facts of the case are that the assessee company, which is engaged in the business of design, engineering, integration, supply installation and commissioning of state -of-art telecommunication systems, filed its return of income for A.Y. 2013-14 on 26.11.2013, declaring total income of ` 3,05,77,860/-. The case has been selected for scrutiny and the assessment has been completed u/s. 143(3) of the Act on 16.03.2016 determining total income at ` 6,13,11,530/-, inter alia, making additions towards disallowance of claim of retention money deducted from the total income in the statement of total income. The relevant finding of the Assessing Officer is extracted below:
4.1 On perusal of the all submissions made by assessee it was found that the assessee is following this practice from A.Y.2003-04 onwards. Generally 10% of the contract amount is retained by the customers against which assessee releases a PBG of equivalent amount. The amount which assessee retains is offered in the year of expiry of retention period. The main argument of the assessee company is that there is no right to receive the amount retained by its customers till the expiry of period of satisfactory performance of the contract terms, after the completion of the contract and the delivery of the equipment.
4.5.2 It was observed that as and when contract completes assessee gets payment as per contractual terms except retention amount which is also accrued and received in most of the cases on the furnishing of PBG of equivalent amount. On verification of the contracts submitted by the assessee it was observed that the retention money is nothing but towards the warranty provided by assessee to customer for the satisfactory performance of contract. It is also noted that no services are left to be provided by the assessee to its customer during the said warranty period. The amount retained or the PBG submitted by the assessee company is not towards any services left to be provided during the said performance period. It is merely retained by the customer to ensure that after handing over of the equipment, it continues to get any after service support in case there are any issues connected with the performance of the delivered equipment. It is essential to note that the as per the terms of the contract, the contract is entered into by the assessee company with its customers for installation, commissioning of telecommunication equipment. This can be compared with the sale of any product wherein after the sale of the product, there is often a warranty clause which makes it obligatory on the part of the seller to provide the services during the said warranty period. In all such cases of after sales warranty or performance guarantee, if the terms of the warranty provide for free repair of replacement of any part or the entire product, invariably a warranty provision is created by the company based on the reasonable scientific estimate of the probable outflow of the resources and the same is debited to the P & L account as allowable expense. But, in no way can it be interpreted to be construed that the sale consideration of the product sold has not accrued to the assessee. The deferment of the part of the consideration which is estimated to be allocated for the warranty provided by a person against any future problem that may or may not arise in the product cannot be said to have been not accrued to it by any stretch of imagination.
4.5.3 In this background, it becomes important to first examine the materiality of occurrence of the event of actual forfeiture of the amount retained by the customers out of various contracts completed by it during the previous 3 years and next 3 years. During the course of "assessment proceedings, the AR of the assessee company was asked to submit the details of instances of the non-performance of conditions of contract and forfeiture of the retention money or invocation of the PBG by its clients in previous 3 years and next 3 years.
4.5.4 The required details were filed by the assessee company. It is seen from the perusal of the details filed by the assessee company that in about four instances of the PBG given by the assessee company for the performance guarantee, in not even a single case the PBC provided by the assessee company has been actually invoked. It has merely been extended for a further period based on the mutual discussions between the assessee company and its customers. Further, it is seen from the copies of the correspondences made between the assessee company and its clients that the amount is retained only to guard against any probable defect/omission in the product supplied, which is only contingent and is dependent from case to case. However, it has been seen in the case of the assessee company from the details filed by it that it has been able to resolve any disputes with its clients in some of the cases cited by it and there has been no actual forfeiture of the PBC. Hence, even on the probability of occurrence of the event of actual forfeiture of the PBC or retention money is very rare in the case of the assessee company on the basis of the past and future experience as can be seen from last 3 years and next 3 years data submitted by it. 4.5.5 Another very important aspect which requires mention here is that the assessee company has shown the entire contract value including the retained part of the PBC as the sates in its books of account maintained as per the Companies Act which have been prepared after taking into consideration the relevant accounting standards. It has also been claimed by the assessee company in the Para 6 of the Auditor's report that balance sheet and P & L account comply with the accounting standards referred to in section 2n(3C) of the Companies Act, 1956. This clearly shows that the assessee company has also complied with the accounting standard -9 (AS-9) dealing with the revenue recognition. As per the AS-g, Revenue from sales or service transactions should be recognized when the requirements as to performance are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. The assessee company by apparently following this accounting standard has recognized the entire contract value as sales in its books of account, thereby leading to obvious inference that at the time of performance it is not unreasonable to expect its ultimate collection, which is also the case when seen from the facts of the case noted above. Though, the entries in the books of account may not be always determinative of the income of the assessee company, but at the same time the entries in the books of account cannot be simply brushed aside by the assessee company at its own convenience. The stand of the assessee of excluding retention money from the total income is based on the inaccurate appreciation of the clear facts of the case, which clearly suggests that the position adopted by the assessee contrary to the entries in the books of account is incorrect. The assessee company cannot adopt exactly stand with regard to the same issue of reasonableness of ultimate collectability of the retained amount while making book entries and while computing total income as per the provisions of the Income Tax Act. This is particularly not allowable when it is quite clear from the facts of the case noted in preceding paragraphs that in none of the cases wherein the sale has been recognized by the assessee company retained amount or PBG has not been collected by it. This clearly shows that the contentions of the assessee that as per the Income Tax Act the amount retained or corresponding to PBG is not accrued, is only self-serving statement which is contrary to the facts of the case.
4.5.6 Retention is merely a warranty to assure client for the satisfactory performance of contract. It is just like after sale service provided by the supply of product which is altogether different from completion of contract. There is a difference between completion of contract and assurance for satisfactory performance of contract. This fact is evident from the submission of the assessee.
4.5.7 Further the instances of occurrence of forfeiture on non- performance are none and therefore it should be deducted in the year of forfeiture of PBG, if any. Further at some instances pci iod of PBG was increased by the assessee on demand of the customer, it is to be noted that actual forfeiture was not done only period was extended which in any case does not support the assessee's contention of deferment of income to subsequent years on the probability of occurrence of the contingent events on the basis of which the assessee company has sought to defer a substantial portion of the revenue.
4.5.8 In view of above facts of the case let us discuss as to what would constitute accrual of income in the instant case and as to whether on the facts and circumstances of the case it can be said that the retention money has not accrued to the assessee company. In this regard, it is fair to also refer to decisions of the Hon'ble Apex Court in the case of E.D. Sassoon & Co. Ltd. Vs. CIT (Supra) & CIT Vs. Govind Prasad Prabhu Nath (Supra) wherein the Hon'ble Apex court laid down some basic tests for deciding the accrual of income and it was held as under: -
"Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.
4.5.9 In the instant case, the right to receive the total value of the contract gets vested in the assessee company at the time of completion of the contract and the handing over of the equipment after its installation and commissioning. As it has been discussed in the preceding paragraphs, the part of amount retained by way of PBG is only towards ensuring the safety of the assessee's customers against any future contingencies and which may or may not occur. But it cannot be said in any case that there is there is no right vested in the assessee company to receive such amount, what has actually happened is that the part of amount is retained as PBG which only defers the receipt of the assessee company at the best and does not affect its right to receive. In any case, such few instances of actual forfeiture of the PBG also, if any, would not defer the accrual of the receipt in all the cases. The assessee company is free to claim any such loss on account of such forfeiture as expense in its books of account in the year when it is actually incurred rather than artificially postponing the accrual of entire receipt. It has also been discussed above that the situation is akin to warranty provided by the assessee company for satisfactory performance post the completion of the contract but it differs from the completion of the contract upon which a definite debt owed to the assessee company by its customers is created. However, to have greater flexibility in its dealing with the assessee company, a portion of such accrued sum is retained by way of PBG by its customers.
4.5.10 Further, the plea of the assessee that the year of taxability is not material as the company is taxable at flat rate, do not hold any substance as the determination of total income under the Income Tax Act is for a particular assessment year. The plea that the assessee company has not incurred any losses till date is also irrelevant as the AO is duty bound to determine the correct total income of a particular year.
4.5.11 The reliance placed by the assessee company on the various case laws cited in Para 5.2 of the order above on the issue of retention money is also misplaced as the facts of the case relied upon are distinguishable from the facts of the instant case. It has already been discussed above that on the facts of the case having regard to past and future experiences; it is not unreasonable to expect ultimate collection of the amount retained. Rather, in this case, the assessee company has already received the full amount and there is only bank guarantee for performance provided for the assurance of the customer. The assessee has also accepted this fact while recognizing the revenue in its books of account as per the accounting standards.
4.5.12 Further, similar issue arose in the A.Y.2012-13, wherein in the assessment order u/s. 143(3) of the Act, the assessee's claim for deduction of retention money was rejected after elaborate discussion. Since the facts and circumstances for A.Y. 2012-13 being same, the claim made by the assessee is not found to be acceptable.” Aggrieved by the assessment order assessee preferred appeal before the CIT(A).
Before the CIT(A) the assessee has submitted that the Assessing Officer erred in making additions towards retention money without appreciating the fact that said receipt did not accrue to the assessee during the previous year relevant to A.Y. 2013-14. The assessee also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Associated Cables (P) Ltd. (286 ITR 596). It was further submitted that the Assessing Officer has made similar additions in assessment years 2010-11, 2011-12 and 2012-13 and the learned CIT(A) has deleted the additions made by the Assessing Officer by following the decision of Hon’ble Jurisdictional High Court in the case of Associated Cables (P) Ltd. (supra). The CIT(A) after considering the relevant submissions of the assessee and also following the decision of Hon’ble Jurisdictional High Court in the case of Associated Cables (P) Ltd. deleted the addition made by the Assessing Officer towards addition on account of retention money of ` 3,07,33,668/-
At the time of hearing the learned AR for the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai Bench ‘C’, in asessee’s own case for A.Ys 2010-11 to 2012-13 in 4340 & 4873/Mum/2015, wherein on similar set of facts, the ITAT has deleted the additions made by the Assessing Officer towards retention money. The learned DR for the Revenue also accepted that the ITAT has deleted the additions made by the Assessing Officer towards retention money for earlier years in the cases referred to by the learned AR.
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:
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.
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, 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 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. 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 Design, engaged in the manufacture Engineering, integration, of instrumentation cables as testing, supply, installation and per the specifications of the commissioning state of the art Customers. telecommunication system as per customers' specific requirements The contract provided that Terms of Contract varies from 10% of the price shall be project to project, payments paid on acceptance of the are made on milestone basis, Contract and 80% of the but typically, in such projects price on presentation of the 10 % of the total contract despatch of goods and the value is either actually retained balance 10% on receipt and until the expiry of the defect acceptance of goods subject liability period; or alternatively, to a performance and released on furnishing workmanship Bank guarantee irrevocable Performance Bank for that 10% Guarantee of equivalent amount that would expire after defect liability period.
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. 26. In the result appeal of the Revenue is dismissed.”
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 the result, the appeal filed by the Revenue is dismissed
Order pronounced in the open court on this day of 25th July 2018.