2006 (1) TMI 76 - HC - Income Tax

Court rules retention money not taxable if not received, emphasizing Income-tax Act principles.

Commissioner of Income-Tax Versus Ignifluid Boilers (I) Ltd.

The court ruled in favor of the appellant, an industrial company, regarding the treatment of retention money retained by a principal contractor. The court ... Accural of Income - Under the Income-tax Act, the income accrued or received by the assessee alone is taxable - Income-tax is a levy on income - Tribunal was right in holding that moneys retained by the contractors, as a percentage of the bills raised to be paid after the contract is completed is to be treated as income only when the moneys are actually received, even though the appellant is following a mercantile system of accounting – revenue appeal dismissed Issues:1. Interpretation of whether retention money retained by a principal contractor should be treated as income when actually received.2. Application of the mercantile system of accounting in taxation.3. Taxability of income under the Income-tax Act based on accrual or receipt.Analysis:1. The appellant, an industrial company, entered into a contract with a paper mill for boiler erection, where 10% of the contract price was to be retained by the principal contractor and paid after one month upon satisfactory performance. The Assessing Officer included this 10% retention amount in the appellant's income based on the mercantile system of accounting. However, the Commissioner of Income-tax (Appeals) and the Tribunal, on appeal, ruled in favor of the appellant, stating that the retention money had not been received during the assessment year, and hence, did not accrue as income for taxation purposes.2. The court referred to the principle that income-tax is a levy on income, and income is taxable when it accrues or is received by the assessee. Citing the decision of the Supreme Court in CIT v. Shoorji Vallabhdas and Co., the court emphasized that if income does not materialize, there cannot be taxation, even if it is accounted for hypothetically. In this case, since the retention money was not received by the appellant during the assessment year and was contingent upon successful completion of work, it did not accrue as income for taxation.3. The court upheld the decisions of the appellate authority and the Tribunal, stating that as per the Income-tax Act, only income that has accrued or been received is taxable. Given the specific circumstances of the case and the Supreme Court's precedent, the court concluded that the retention money did not result in income for the appellant during the relevant assessment year. Therefore, the order of the Tribunal, which dismissed the inclusion of the retention amount in the appellant's income, was upheld, and the tax case appeal was dismissed.