2009 (7) TMI 35 - HC - Income Tax

High Court rules retention money not taxable; must accrue to be taxed

The High Court of Madras ruled in favor of the assessee, holding that retention money and additional security deposit were not taxable during the ... Taxability of an account on which TDS has been deducted - retention money and the additional security deposit - The Assessing Officer found that the assessee omitted to admit the entire contract receipts that had been shown in the TDS Certificate and in the P & L Account – Held that when the assessee had no right to receive the money by virtue of the contract between the parties and the assessee also had no right to enforce payment, it could not be said that the right to receive payment of the remaining retention money or additional security had accrued –the department cannot include the said amount for the assessment year when actually this amount has not been paid to the assessee. Issues:1. Whether retention money and additional security deposit are taxable during the assessment yearRs.Analysis:The High Court of Madras heard appeals filed by the Revenue against the Income Tax Appellate Tribunal's order regarding the taxation of retention money and additional security deposit in the account of the assessee. The Assessing Officer had brought these amounts to tax under Section 143(3) r/w. Section 147. The Commissioner of Income Tax (Appeal) later deleted these additions, leading to the Revenue filing an appeal to the Tribunal. The Tribunal, considering previous court decisions, concluded that the retention money and additional security deposit should not be included in the assessee's income. The Revenue contested this decision before the High Court.The main legal question before the High Court was whether the Tribunal was correct in holding that the retention money and additional security deposit had not accrued to the assessee and were not taxable during the relevant assessment year. The Court analyzed the facts and circumstances of the case, emphasizing that the retention money was withheld by the contractee for the successful completion of the contract. Referring to previous rulings, the Court noted that the assessee was entitled to receive the retention money only after completing the work successfully, and thus, it had not accrued during the assessment year. The Court also applied the same reasoning to the additional security deposit, stating that it would only be repaid after the total completion of the contract.Based on the above analysis and in line with previous court decisions, the High Court concluded that the findings of the Tribunal were reasonable and lawful. The Court held that the Department could not include the retention money and additional security deposit in the assessment year when these amounts had not been paid to the assessee. Therefore, the appeals filed by the Revenue were dismissed, and the Court found no reason to interfere with the Tribunal's order. Consequently, the Court closed the related miscellaneous petition without costs.