TaxTMI 
TaxTMI 
2013 (9) TMI 372
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....oil and gas industry and process industries and execution of engineering, procurement and construction contracts. It is also engaged in the business s of construction of roads, bridges and power plants in the infrastructure sector. For the assessment year, assessee furnished return of income on 31.10.2007 admitting a total income of Rs.17,73,85,630, as per normal computation and Rs.95,31,48,100 as book profit, as per the provisions of S.115JB. As against this, the Assessing Officer completed the assessment on a total income of Rs.100,02,99,840 as per normal computation, after making various additions and disallowances, vide order passed under S.143(3) of the Act on 31.12.2009. 4. The Assessing Officer inter alia made an addition of Rs.78,67,79,839, which represented the retention money. The assessing Officer noted that the assessee has been taking contradictory stands in the matter of accounting for the retention money. Though it followed mercantile system of accounting, it had recognized retention money to the extent of Rs.78,67,79,889 as revenue for the previous year ended on 31.3.2007 in its accounts, but claimed this as deduction while arriving at the taxable income. It was ....
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.... of the retention money by them to the assessee, in accordance with the terms of the agreement. He submitted that there was receipt-payment mismatch, and the TDS was also effected by the contractees in relation to the retention money. Taking us through the terms of various agreements, it is pleaded that it is not 10% payable after 12 months in all cases and in some cases, it was only a month after the retention money is payable and in some cases, there was not even mention in that regard. He further submitted that the matter has to be examined on contract by contract and case by case basis, and no uniform basis is justified. It is also submitted that what is actually being accounted in the books and what is being actually shown as income finally in the return. It is not a simple case of showing 90% as income and keeping aside 10% on account of retention money and offering it at the end of warranty period. Distinguishing the case-law relied upon by the assessee and referred to in the impugned order of the CIT(A), it is submitted that principles enunciated in those decisions have to be examined in the light of the facts and circumstances of the case on hand. Since the facts in the pr....
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....d., (supra), wherein the Tribunal after detailed consideration of the case-law relied upon by the parties before it, has decided the matter in the following manner- "6. On combined reading of these orders, the following propositions of law emerge regarding mercantile method of accounting: (i) the accrual of income takes place when right to receive income arises [Paragraphs 5.1, 5.2, and 5.3], (ii) in a contract, under mercantile method of accounting, the accrual of income takes place when the assessee gets unconditional legal right to receive money under the agreement [Paragraphs 5.4, 5.7, 5.8 and 5.11], (iii) receipt of money by itself does not lead to accrual of income, especially when the assessee has not rendered corresponding service [Paragraph 5.10], (iv) the principle of matching of income and corresponding expenditure may be an accountant's view, but under the law the expenditure and income can be treated differently, depending upon whether one or both had accrued or not on the basis of method of accounting followed by the assessee. [Paragraph 5.5]; and, (v) receipt of retention money by furnishing unconditional bank guarantee may or may not amount the acc....
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....erial, payment upto 90 per cent of the supplies were made by the contractee, it meant that the full payment was quantified and accepted by the contractee. This is so because without quantification of the full amount, 90 per cent thereof cannot be worked out and paid. Therefore, when the whole price was quantified, the amount receivable was also quantified and, therefore, whole of the amount accrued as income to the assessee. The retention of 10 per cent of the money was in respect of material already* supplied and accepted, and the retention was merely for safeguarding the interest of the contractee. The acceptance of the full liability by the contractee amounts to accrual of income in the hands of the assessee. This view was not upheld by the learned CIT(A). 7.3 We have already considered various case laws which point out that if receipt of retention money is conditional upon performance of a part of contract, this money will accrue as income only when that part of the contract has also been performed. We have also seen that the expenditure incurred in supply of the whole material was for the purpose of business and it constituted a deductible expenditure. Its deduction does no....
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....ccrue only when performance test is satisfactorily undertaken and accepted by the contractee. As pointed out earlier, he has also stated that, - (i) no provision is made for liability in case performance test fails and some expenditure may have to be incurred in the warranty period, and (ii) retention money has been offered for taxation the moment the performance test has been undertaken successfully and accepted by the contractee. Therefore, his case was that he has been following mercantile method of accounting, his past mistaken belief of law cannot be held out against him in this year, and it also cannot be concluded that he has changed method of accounting when he followed the correct legal principles regarding accrual of income while filing the return of income for this year. Looking to the aforesaid discussion we are of the view that there was no change in method of accounting, which continued to be mercantile method of accounting. We are also of the view that the retention money does not accrue as income merely on raising the bill. It accrues as income as per paragraph 7.3 (supra) of this order. The Assessing Officer and the CIT(A) have dealt with the retention money as one....
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....computing the profits of the assessee for the assessment year in question." In the case of Associated Cables (P.) Ltd. v. Dy. CIT [1994] 48 ITD 141 (Bom.) (TM), the learned Member of the Tribunal as per the headnotes, held as under :- "Section 28(i) of the Income-tax Act, 1961 - Business deduction/loss - Allowability of - Assessment year 1990-91 - Assessee-company was engaged in manufacture of cables as per specifications of customers - According to contract, while 90 per cent of cost of cables was paid up to time of presentation of despatch documents. 10 per cent was paid on receipt and acceptance of goods subject to bank guarantee for that 10 per cent, stipulating that in case of any shortcoming in workmanship, etc., purchases shall, without reference to assessee, recover amount from bank - Assessee- company claimed that this 10 per cent, being retention money, had to be excluded in computing its total income and ought to be accounted for after expiry of guarantee period - Whether keeping in mind principle of income recognition which is basis of mercantile method of accounting, as long as performance guarantee remained and was enforceable without notice to assessee, income ....
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....preme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 at page 367 :- "The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. 9. The above observations really clinch the issue. The accrual of income has to be determined with reference to contract between the parties and about the terms and conditions, no dispute has been raised....
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.... to M/s. Crane Environmental INC., USA. It was disallowed by the Assessing Officer on the ground that the payment made by the assessee is in the nature of technical fees and as a result, there has not been any acquisition of any tangible asset within the meaning of S.32(1)(iii) of the Act. 13. On appeal, the CIT(A) noted that as per Appendix to the income Tax Rules, depreciation is admissible in respect of know-how, patents, copy-rights, trade marks, licenses, franchises or any other business of commercial rights of similar nature being intangible rights acquired by the assessee, and this principle has been accepted by the Assessing Officer, who has also not disputed that the know-how acquired by the assessee has been used by it. Placing reliance on the decision of the Apex Court in the case of Mysore Minerals Limited V/s. CIT(239 ITR 775) and of the Madras High Court in the case of CIT V/s. A.Sivasailam & Another(322 ITR 64), the Assessing Officer noted that for claiming depreciation, it is not necessary that the asset should be in the name of the assessee and it is not necessary that the assessee should be a complete owner. Considering the facts of the case on hand, the CIT(A)....
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....evenue in this appeal relates to disallowance of Rs.1,73,25,336, being principal repayment of assets taken on finance lease, as revenue expenditure. 19. The assessee claimed an amount of Rs.1,73,25,336 representing repayment of principal of assets taken on finance lease on the ground that it is a capital expenditure. The assessee claimed that the transaction in question is a finance lease and falls under Accounting Standard 19 issued by the Institute of Chartered Accountants of India, under which any fixed asset taken on finance lease is permitted to be capitalized in the books of account of the company and depreciation charged as per the Companies Act. However, for the calculation of income tax depreciation, these assets were reduced from the block of assets and no depreciation was claimed as per the CBDT Circular No.2/2001 dated 9.2.2001. It is claimed that under the income-tax Act, in all leasing transactions, while the owner of the asset is entitled to the depreciation if the same is used in the business under S.32 of the Income-tax Act, in the case of finance lease, the principal amount paid by the lessee is permitted to be claimed as deduction under S.371(1) of the Act. Ac....
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....certained liability, since it is contingent in nature and as such not allowable under S.37 of the Act. 26. On appeal before the CIT(A), it was the contention of the assessee that it has been providing for warranty in respect of its contracts. It has been recognizing contract revenue in accordance with Accounting Standard 7 dealing with construction contracts. In accordance with this Standard, assessee has been providing for a possible liability in respect of the contract which may or may not crystallize at a future date. Finding merit in the contentions of the assessee and taking note of the case-law relied upon by the assessee before him, more importantly the decision of the Bombay High Court in the case of CIT V/s. Hinditron Services Pvt. Ltd. (321 ITR 263), wherein it has been held that where the assessee was following mercantile system of accounting, estimate of accrued liability to be discharged at a future date is an allowable expenditure and thus provision for estimated costs of rendering warranty services debited to P&L Account is not a contingent liability and the said expenditure is allowable under S.37 of the Act, accepted the contentions of the assessee on this issue....
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....e learned Departmental Representative strongly relying on the order of the Assessing Officer submitted that the CIT(A) was not justified in granting relief to the assessee. Learned counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). 35. We heard both sides and perused the material available on record. We are of the considered opinion that the CIT(A) has deleted the addition made by the Assessing Officer on account of the interest attributable to the advance made by the assessee to its subsidiary, accepting the contention of the assessee that it has already charged interest on the advance made to the subsidiary company, M/s. Progen Systems & Technologies Ltd. This fact, which weighed with the CIT(A) while deleting the addition made by the Assessing Officer, requires verification at the end of the Assessing Officer, who has arrived at an opposite conclusion. We accordingly set aside the impugned order of the CIT(A) on this issue, and restore the matter to the file if the Assessing Officer with a direction to redetermine the issue relating to disallowance of interest after verifying the correctness of the contention of the assessee before the CI....
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.... verify the claim of the assessee of having offered the same to tax in the subsequent years in which the same has been received by the assessee, and accordingly redecide this issue in accordance with law and after giving reasonable opportunity of hearing to the assessee. Revenue's ground on this issue is allowed for statistical purposes. (b) As for the next issue relating to depreciation on technical know, for the detailed reasons discussed in para 17, we uphold the order of the CIT(A) and reject the ground of the Revenue in this appeal. (c) As for the next issue relating to treatment of principal repayment of assets taken on finance lease, for the detailed reasons discussed in para 23 above, we set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer, duly allowing the ground of the Revenue on this issue. (d) As for the next ground of the Revenue relating to allowability of deduction in respect of warranty provisions, for the detailed reasons discussed in para 29 above, we set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer, duly allowing the ground of the Revenue on this issu....
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....ility for payment of liquidated damages as per the terms of the contract would accrue only when the claim for the same is made by the contractee and the assessee has not furnished any evidence that such claims were made by the contractees during the previous year. 9) ...." 41. We heard both the parties and perused the material available on record. Factual background leading to the additions made by the Assessing Officer and deleted by the CIT(A), and disputed in grounds No.2 to 7 of this appeal are, except for the amounts involved, identical to the ones we have considered while dealing with the corresponding additions contested in the Revenue's appeal for assessment year 2007-08, and our decisions in the context of the corresponding grounds in that appeal hold good even in the context of the above grounds of this appeal for assessment year 2009-10. Consequently, it is held as follows- (a) As for addition relating to retention money, for the reasons discussed in paras 9 and 10 above in the context of the corresponding ground for the assessment year 2007-08, we set aside impugned order of the CIT(A) and remit the matter to the file of the Assessing Officer, with a direction ....
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.... amounts represented liquidated damages to be discharged in the event of any delay in the completion of the work, which is a common practice in long-term contracts. It is further stated that the assessee company during the year had to commission and hand over two projects, one to TNEB at Valathur and another to MALCO, Mettur. In the case of TNEB the actual completion of the project was 31.8.2008 whereas as per the purchase order, the scheduled date was 28.2.2008, i.e. delivery took place after a delay of 24 weeks. Similarly in the case of MALCO, the actual completion of the project was 26.2.2009 as against the scheduled date of 19.6.2008, the delay being 32 weeks. Referring to the relevant agreements of the assessee with the concerned parties, attention was invited to 'completion guarantee' clause wherein it was mentioned that in case of delay in delivery of equipment for reasons not attributable to the purchaser, the supplier shall be liable to pay to the purchaser liquidated damages and not by way of penalty, an amount calculated at the rate of 1% of the supply contract price for each week of delay or part thereof, subject to a maximum of 7.5% of supply contract price. It is in a....