AI Drafter 
TaxTMI 
TaxTMI 
2025 (8) TMI 738
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.... Construction Contracts. 3. The learned authorities below ought to have considered the fact that the appellant has followed the mercantile system as well as ICDS, where under both income recognition should be done at a time when there is a reasonable certainty of its ultimate collection. Collectable amounts of the performance guarantee retentions are not ascertainable at the time of completion of the contract, and they are recognized as income when there is reasonable certainty about its collection, i.e., on expiry of the performance guarantee period as mentioned in the agreement. 4. The learned authorities below ought to have considered that certainty about the ultimate collection of Rs. 1,02,24,936 which is withheld as performance guarantee accretion is ascertained during the FY 2018-19 and FY 2019-20 where the performance guarantee period has expired and the appellant has offered the receipts for the FY 2016-17 as income of the FY 2018-19 for Rs. 99,71,078 and in the FY 2019-20 for Rs. 3,18,125 and assessing income in the AY 2017-18 result in taxing the same income twice which is against natural justice. 5. The learned authorities below ought to have u....
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..... Thereafter the case was taken up for scrutiny. The main reason for selection was "Real-estate business with high closing stock and higher turnover reported in service tax returns compared to ITR". Accordingly, notices u/s. 143(2) as well as 142(1) of the Act was issued along with a questionnaire asking to submit various details and information. During the course of assessment proceeding, the assessee submitted a reconciliation statement for Service tax return (Rs. 13,08,66,198/-) and ITR (Rs. 12,16,47,953/-). The AO observed that the assessee had omitted Rs. 1,02,24,936/- being retention withheld and added Rs. 10,06,691/- being retention received during the current year for the past year. In the opinion of AO these are to be accounted in the mercantile system only and therefore held that the retention money withheld is to be taken as income of FY 2016-17. Accordingly, the income credited in the ITR was enhanced by Rs. 1,02,24,936/-. However, for want of details as to whether the retention money received (Rs. 10,06,691/-) now has been accounted for in any earlier year, the deduction is not allowed. Thereafter the AO completed the Assessment u/s 143(3) of the Act on a total assesse....
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....nd closing stock of the year is to be valued by applying the same methodology. The ld. DR also submitted that when the specific provision U/s 43CB has been brought into the Act w.e.f. the AY 2017-18 that the contract revenue shall include the retention money, then there is no question of retention money being excluded from the turnover. 9. We have heard the rival submissions and perused the materials available on record. The dispute in the present case is with regard to the taxability of performance retention. It is an undisputed fact that the assessee is following the accrual method of accounting consistently wherein, once there is reasonable certainty of the ultimate collection of the retention money, it is included in the income. The revenue has also accepted the method of accounting followed consistently by the assessee in the past. During the year under consideration, the performance retention against the contracts completed during the FY 2016-17 is Rs. 1,02,24,936/-. The AO added Rs. 1,02,24,936/- as retention money withheld as income of the assessee. The assessee claims that the ultimate collection of Rs. 1,02,24,936/- which is withheld as performance retention is ultimat....
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.... para 10 thereof states that retention money would be a part of the contract and the same has to be assessed to tax based on "proportionate computation" method. This is reiterated in answer to Question No. 11 in Circular No. 10 of 2017. 70. The above justification is contrary to the law explained in the following decisions: (i) CIT v. Simplex Concrete Piles India (P) Ltd (1988) 179 ITR 8 (ii) CIT v. P & C Constructions (P) Ltd (2009) 318 ITR 113 (iii) Amarshiv Construction (P) Ltd v. DCIT (2014) 367 ITR 659 and (iv) DIT v. Ballast Nedam International (2013) 355 ITR 300 which followed the decision in Anup Engineering Limited v. CIT (2000) 247 ITR 114. 71. All the above decisions hold that the retention money does not accrue to an Assessee until and unless the defect liability period is over and the Engineer-in-Charge certifies that no liability is attached to the Assessee. 72. The ICST Committee noted what was sought to be done by the Tax AS proposed as ICDS as under: "AS-7 is silent about treatment of accrual of income in respect of the retention money. There are some judicial pronouncements holding that the retention money is n....
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....contract cost shall not be reduced by incidental interest, dividend and capital gains. 9.5 The purposes of inserting 43CB with retrospective effect from 01.04.2017, is to apply the same in relation to AY 2017-18 and subsequent assessment years is provided in the memorandum explaining the provisions in the Finance Bill, 2018 as under: "Recent judicial pronouncements have raised doubts on the legitimacy of the notified ICDS. However, a large number of taxpayers have already complied with the provisions of ICDS for computing income for assessment year 2017-18. In order to regularize the compliance with the notified ICDS by a large number taxpayers so as to prevent any further inconvenience to them, these amendments take effect retrospectively with effect from 1st April, 2017 i.e. the date on which the ICDS was made effective and will, accordingly, apply in relation to assessment year 2017-18 and subsequent assessment years." 10. After going through the above, we are of the considered opinion that the assessee was following Mercantile system of accounting and had to account for all the receipts on accrual basis and accordingly, the retention money could not be excluded s....