2019 (5) TMI 2039 - AT - Income Tax

Mobilization advance held recoverable, not taxable income despite TDS shown in Form 26AS; revenue appeal dismissed

ITAT Mumbai upheld the CIT(A)'s finding that the mobilization advance received by the firm was a recoverable advance, not income, and therefore could not ... Addition made of sum received by the assessee firm as mobilization advance from MBMC - AO has not accepted the submission of the assessee on the ground that the assessee has filed belated return of income, as per 26AS MBMC deducted the tax at source from the payment of mobilization advance - assessee did not revised its return in it submitted a revised computation of income and the major part of the funds were utilized by the partners for repayment of loans. HELD THAT:- CIT (A) has pointed out that from the details, it is clear that the mobilization advance is not a payment from MBMC but it is only advances. Since, the mobilization advance is recoverable, the same cannot be income of the appellant. It is apparent from the record that during the year under consideration bills were not raised by MBMC, therefore, no recovery was made. As per the relevant clause in the tender document regarding mobilization advance was given to the extent of 5% of the accepted tender cost at the rate of SBI interest plus 0.5% extra per annum against the submission of bank guarantee amounting to mobilization advance. This clause further contemplates that the mobilization advances will be recovered in four equal installments from 1st to 4th RA Bills of the Contractor. In the case of CIT vs. Narayan singh Gulabsingh [2015 (4) TMI 622 - GUJARAT HIGH COURT] has held that mobilization advance received cannot be treated as revenue receipt of the relevant year. In the case of DCIT vs. Five Star Constructions [2012 (12) TMI 66 - ITAT NEW DELHI] has held that merely because tax at source has been deducted by the builder, the receipt of mobilization money cannot be deemed as income of the assessee for the year under consideration. In the case of Pr. CIT vs. Elsamex-TWS-SNC Joint Venture the Hon’ble Karnataka High Court has upheld the finding of the ITAT that a conjoint reading of section 194C, 199 and 237 of the Act makes it clear that if there is no liability to pay tax the TDS paid is liable to be refunded. Since, the findings of the CIT (A) are in accordance with the decisions of the Hon’ble High Courts and the Tribunal discussed above, we do not find any infirmity in the order of the Ld. CIT (A). We accordingly, uphold the findings of the Ld. CIT (A) and dismiss the sole ground of appeal of the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether an amount received as 'mobilization advance' under a construction contract, payable against submission of a bank guarantee and recoverable from future running/account bills, constitutes income of the recipient in the year of receipt or is a recoverable advance (not taxable as revenue receipt) for that year. 2. Whether deduction of tax at source by the payer on amounts paid as mobilization advance results in treating such advance as income of the recipient for that year or precludes refund/credit of such TDS where there is no corresponding liability to include the amount as income. 3. Whether diversion or transfer of mobilization advance funds into partners' capital accounts (as repayment of loans) and not directly into construction activity alters the character of the mobilization advance so as to render it taxable as income in the year of receipt. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterization of mobilization advance as income vs. recoverable advance Legal framework: Mobilization advance under a contract is governed by the contract/tender terms; revenue recognition for tax purposes depends on whether the receipt is a payment for work done (revenue receipt) or an advance recoverable against future billings (liability/adjusting entry). The contract clause permitting mobilization advance against bank guarantee and its recovery in specified installments informs the nature of receipt. Precedent Treatment: The Tribunal and High Courts have upheld that mobilization advances, when given as recoverable advances under contractual terms and supported by bank guarantees, are not revenue receipts of the year of receipt but are recoverable items to be adjusted against subsequent bills. Interpretation and reasoning: The Tribunal placed primary weight on the tender clause explicitly describing mobilization advance as recoverable (limited to a percentage of accepted tender cost, against bank guarantee, recoverable in four installments from RA bills). Documentary evidence (bills and tender clause) described the receipts as 'Mobilization Advance' rather than payments for executed work. The absence of raised RA bills or recovery during the year under consideration further supports the conclusion that no contractually quantified entitlement to treat the amount as payment had arisen during that year. Ratio vs. Obiter: Ratio - where a contract clearly provides for a refundable mobilization advance (secured by bank guarantee and recoverable from future RA bills), the amount retained as advance is not a revenue receipt in the year of receipt and should not be taxed as income in that year. Observational/obiter - factual matrix (timing of recoveries and subsequent adjustments) may vary case to case. Conclusion: Mobilization advance characterized by the contract as recoverable against future bills is not taxable as income in the year of receipt; it is to be treated as an advance/liability until recovered or adjusted by realization of contractually due payments. Issue 2 - Effect of TDS deduction on characterization of mobilization advance and entitlement to credit/refund Legal framework: Provisions dealing with tax deduction at source require deduction at the time of credit or payment as specified by law; entitlement to TDS credit/refund is governed by the presence or absence of tax liability in the year and the statutory procedures for claiming credit/refund. Precedent Treatment: Authorities have held that the mere fact of TDS having been deducted by the payer does not ipso facto convert an otherwise recoverable advance into taxable income of the payee in that year. Where there is no substantive liability to include the amount in income for that year, the payee is entitled to TDS credit or refund after proper verification/processes. Interpretation and reasoning: The Tribunal noted that TDS was deducted by the payer per 26AS entries but that, on the substantive question of whether the mobilization advance constituted income, the contractual and factual matrix established it as recoverable advance. Consequently, the presence of TDS did not change the legal character of the receipt. The Tribunal further observed that statutory provisions (construed together) support refund/credit of TDS where liability to tax does not arise in that year, subject to due verification and compliance with procedural requirements. Ratio vs. Obiter: Ratio - deduction of TDS by the payer does not itself determine the taxability of a receipt; where contractual and factual evidence show the receipt to be a recoverable advance, the payee is not obliged to treat it as income, and can seek credit/refund of TDS. Observational - procedural compliance (filing returns, verification of 26AS) is necessary to obtain credit/refund. Conclusion: TDS deduction on mobilization advances does not automatically convert them into taxable income; the payee may claim credit/refund of TDS if there is no tax liability for the year, subject to verification and proper procedural steps. Issue 3 - Effect of subsequent utilisation of mobilization funds (e.g., transfer to partners' capital accounts) on tax character Legal framework: Characterization of a receipt for tax purposes depends on the nature of the receipt at the time of receipt and the contractual obligations associated with it. Subsequent utilisation of received funds by the recipient (for repayment of loans, transfer to partners' capital accounts, or other internal uses) is relevant to factual examination but does not automatically alter the original character of a contractually defined recoverable advance. Precedent Treatment: Jurisprudence recognizes that misuse or diversion of recoverable advances may attract scrutiny; however, absent evidence that the payer relinquished contractual recovery rights or that the advance was treated as consideration for services rendered in the year of receipt, characterization as a recoverable advance stands. Interpretation and reasoning: The Tribunal addressed the revenue's contention that funds were siphoned into partners' capital accounts, arguing that such inward/outward movements did not negate the contractual nature of the mobilization advance as recoverable against RA bills. The decisive factor remained the contract terms (bank guarantee, recovery schedule) and the timing/occurrence of recoveries. There was no finding that the payer treated the sum as final payment or that contractual recovery rights were waived; factual entries showing later recoveries further supported the advance character. Ratio vs. Obiter: Ratio - internal utilisation of mobilization funds by the recipient does not per se convert a contractually recoverable advance into taxable income where the payer's contractual rights and the recoverable mechanism remain intact. Observational - facts showing diversion may be relevant to allegations of tax avoidance or fraud and may warrant separate inquiry, but were not determinative here. Conclusion: Diversion of mobilization funds into partners' capital accounts does not, absent additional evidence (e.g., waiver by payer, treatment by parties as final consideration), change the nature of a contractually recoverable mobilization advance into taxable income in the year of receipt. Overall Conclusion The Tribunal affirmed that where contract terms explicitly treat mobilization money as an advance recoverable against future RA bills (secured by bank guarantee and recoverable in installments), such receipts are not revenue receipts in the year of receipt. Deduction of TDS by the payer does not ipso facto make such advances taxable in that year, and the recipient may seek credit/refund where no tax liability arises. Allegations regarding subsequent use of funds did not negate the advance character on the facts before the Tribunal. The revenue's appeal was dismissed.