Retention Money

O/TAXAP/554/2003 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 554 of 2003
With
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FOR APPROVAL AND SIGNATURE:

HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
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1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the

interpretation of the Constitution of India, 1950 or any order made
thereunder ?
5 Whether it is to be circulated to the civil judge ?
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TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
M/S. AMARSHIV CONSTRUCTION PVT. LTD.....Appellant(s)
Versus
THE DEPUTY COMMISSIONER OF INCOME TAX....Opponent(s)
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Appearance: [Tax Appeal No. 554 of 2003]
Mr RK PATEL with Mr BD KARIA & S.R PATEL, ADVOCATES for the Appellant
Mr KM PARIKH, ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
19th March 2014
COMMON JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
In these Appeals involving the same assessee, identical question of law
arises. The facts on all material aspects are common. We may, therefore, refer to
the facts and documents from Tax Appeal No. 554 of 2003. The Appeal was
admitted for consideration of following substantial question of law :
“Whether on the facts and in the circumstances of the
case and on appreciation of correct position of law read
along with documentary evidence on record the
Tribunal’s ultimate finding and the conclusion of
taxability of Rs. 1,58,70,856/= pertaining to retention
money for the year under consideration is contrary to
settled position of law and against the documentary
evidence on record with the result that the ultimate
finding and conclusion is vitiated in the eyes of law ?”
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Such question arose in the following factual background :
The assessee is engaged in the business of civil construction work.
Assessee was awarded construction contract by Sardar Sarovar Narmada
Nigam Limited [“SSNNL” for short] for construction of a part of the Sardar
Sarovar dam and other canal and structural works related thereto. We would
refer to the detailed terms and conditions of such contract later. At this stage,
we may briefly note that out of the running bills raised by the assessee for such
construction work, the SSNNL would retain a portion thereof for satisfactory
completion of the work. Such accumulated amount upto a certain ceiling would
be withheld for a specified period, to be released at the end of such period,
upon being certified by the Engineer Incharge that the construction was carried
out without any defects. Such terms of the contract were later on modified. In
order to permit greater liquidity to the contractors, an option was given to
receive such completion warranty amounts also in cash, subject to providing
bank guarantee of a matching sum. Such bank guarantee would be encashed to
the extent of the dues of SSNNL or any defect found in the construction carried
out or discharged at the end of the warranty period.
In the context of income accruing related to the retention money, the
question was decided by this Court in case of Anup Engineering Limited v.
Commissioner of Incometax, reported in [2001] 247 ITR 457 (Guj), it was held
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that such income would not accrue when the bill was raised but only when
amount was paid since there was every possibility of part or full of the amount
not being realized in favour of the contractor. In the present case, however, we
are concerned with a situation where the assesseecontractor has received such
retention money but upon furnishing the bank guarantee. In this context, the
Assessing Officer for the A.Y 199293, noticed that the assessee in the return of
income had worked out net profit of Rs. 32.02 Crores [rounded off], as per the
Profit & Loss account. In the return, the assessee claimed debit of retention
money of Rs. 1.53 Crores in computation of income. It was stated that as per the
terms of the contract, the money is withheld by the Government pending
verification of satisfactory completion of the work, for which the payment is
related. The retention money does not arise or accrue to the assessee in the year
in which the work was executed or the bills were raised. The assessee placed
reliance on a decision of the Calcutta High Court in case of Commissioner of
Incometax v. Simplex Concrete Piles {India} Private Limited, reported in 45
Taxman 370 (Cal) in support of the contention.
The Assessing Officer, however, was not impressed. He distinguished
the decision of Calcutta High Court in case of Simplex Concrete Piles (I) Private
Limited [Supra] on the ground that in the said case, the money was actually
retained. The release of the retention money was contingent on satisfactory
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
completion of work or removal of defects and payment of damages, if any,
arising. He observed that each case has to be decided on facts. In the present
case, the assessee had credited receipt in its Profit & Loss account. This cannot
be stated to be hypothetical income. The amount was received on furnishing
the bank guarantee. This, therefore, was not a case of withholding of retention
money but a case where the amount was already released. On such basis, the
Assessing Officer taxed the receipt of Rs. 1.58 Crores [rounded off] in the hands
of the assessee during the year under consideration when the bill was raised
and amount was also received.
Assessee carried the matter in appeal. Commissioner of Incometax
[Appeals] reversed the decision of the Assessing Officer. He noticed the terms
of contract between assessee and the SSNNL. He held that the right to receive
the retention money had yet not accrued. Such right would accrue only after
satisfactory completion of the contract and after defect liability period is over
and the Engineerincharge certifies that no liability attaches to the assessee. He
held and observed as under :
“Considering the facts and appellant’s submissions discussed in
detail above and also considering the terms of the contract
stipulated in General Conditions of Contract, it is held that the
ratio of the judgments reported in CIT v. Simplex Concrete Piles
(India) Limited, 179 ITR 8 (Calcutta); CIT v. Chanchani Bros
(Contractors) Private Limited; 161 ITR 418 (Patna) and Janatha
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
Contract Company v. CIT, 105 ITS 627 (Kerala) are directly
applicable to the appellant’s case. Therefore, considering the
totality of the facts and appellant’s submissions discussed above
and following the principles laid down in the judgments
reported as 53 ITR 114 (SC); 179 ITR 8 (Calcutta); 161 ITR 418
(Patna) and 105 ITR 627 (Kerala), it is held that the income
represented by retention money has not accrued in the previous
year in which the running account bills have been submitted,
but the said income accrues only after the completion of the
contract and after the defect liability period is over and after
EngineerIncharge has certified that no liability attached to the
appellant. Accordingly, it is held that the said amount of
retention money is not taxable in the assessment year under
consideration, but is taxable in the assessment year relevant to
the previous year in which the work is completed and relevant
conditions of the contracts are fulfilled. Accordingly, it is held
that the Assessing Officer has wrongly rejected the appellant’s
case for deduction of retention money for the assessment year
under consideration. Therefore, the Assessing Officer is directed
to allow the appellant’s claim for retention money of Rs.
1,58,70,856/= for the assessment year under consideration.
Therefore, the appellant gets a relief of Rs. 1,58,70,856/= for the
assessment year under consideration ie., 199293. However, the
Assessing Officer is directed to tax the said retention money in
the assessment year relevant to the ‘previous year’ in which
retention money becomes payable to the appellant as per the
terms of the contracts ie., after the defect liability period is over
and after the EngineerinCharge certifies that no liability
attaches to the appellant.”
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Revenue carried the matter in appeal. Income Tax Appellate Tribunal,
Ahmedabad {“Tribunal” for short} reversed the decision of CIT [A] and
reinstated that of the Assessing Officer. The Tribunal noted that during the year
under consideration, the assessee had received a sum of Rs. 21.37 Crores
[rounded off] on which TDS of Rs. 47.71 lakhs [rounded off] on the gross amount
was deducted. A sum of Rs. 1.49 Crores [rounded off] was deducted as security
deposit from the running bills. However, out of the said amount, the assessee
had received a sum of Rs. 1.40 Crores after furnishing bank guarantee during
the previous year relevant to the assessment year under consideration. The
Tribunal noticed the terms of the agreement between the assesseecontractor
and SSNNL. Though Tribunal agreed that indisputably income would accrue
only where there is a right to receive income but on the premise that the
assessee had actually received the said sum of Rs. 1.40 Crores, the Tribunal held
that the said receipt must be taxed during the year under consideration. To
arrive at such decision, the Tribunal relied on the following conclusions :
[a] That the income had accrued to the assessee and thereafter it was
retained by way of an additional security. In fact, the amount was received by
the assessee upon furnishing the bank guarantee.
[b] The decision of Calcutta High Court in case of Simplex Concrete Piles
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(India) Private Limited [Supra] was distinguishable because in such case, no right
had accrued to receive the retained amount which was released only on
completion of the work and upon the assessee fulfilling the obligations under
the contract.
[c] Tax was deducted at source on full amount; including the said disputed
receipt.
[d] The liability to return the amount may arise in future, if there was
insufficient performance of contract. In the present case, no such liability arose,
even at a later date.
[e] The Tribunal referred to Clause 10 & 11 of Accounting Standard [9] to
further its contention that in case on hand, the Revenue recognition should not
be postponed.
[f] The Tribunal also referred to the Accounting Standard [7] which deals
with recognition of contract, revenue and expenses and recognizes the
percentage completion method in construction business.
[g] The assessee had claimed full expenditure and not deferred a portion
thereof relatable to the retention money.
On such basis, the Tribunal held that the right to receive the amount
had already accrued. The assessee had actually received the amount. The same,
therefore, had to be taxed during the year under consideration.
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
In a seesaw battle, it was now the turn of the assessee to file further
appeal and that is how the assessee is before us. On the material on record,
learned counsel for the assessee contended that as per the terms of the contract
agreement between the assessee and SSNNL, certain portion of the running
bills was withheld for satisfactory completion of construction. Such amount
would be released unconditionally only upon completion of the warranty
period and upon EngineerinCharge certifying the defect free execution of the
contract. In case any claim of the SSNNL arose, the same would be recovered
from such retention money. Previously, such amount would be withheld by the
SSNNL. However, to provide greater liquidity to the contractors, an option
was given to receive the said amount in cash upon furnishing bank guarantee,
which would be utilized for the purpose of making recovery during the
warranty period; if any need arose. He, therefore, submitted that the right to
receive such amount had not accrued till the end of warranty period and the
release of the bank guarantee upon certification by the EngineerinCharge. The
assessee had offered the said receipt to tax in later year and thus the assessee
was subjected to tax in both the years ie., in the present year when the amount
was received and at a later point of time, when the amount was released
unconditionally by the SSNNL.
In support of his contentions, counsel relied on the decision of Calcutta
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High Court in case of Commissioner of Income Tax v. Simplex Concrete Piles (India)
Private Limited [Supra] where the question of income relating to the retention
money came up for consideration. The Court held as under :
“12. The payment of retention money is deferred and is
contingent on the satisfactory completion of the work and
removal of defects and payment of damages, if any. Till
then, there is no admission of liability and no right to
receive any part of the retention money accrues to the
assessee. Accordingly, the Tribunal was right in directing
the Income Tax Officer to examine the question of
retention money from this angle and make adjustments
regarding the same, if necessary.”
Reliance was placed on a decision of this Court in case of Anup
Engineering Limited v. Commissioner of Income Tax, reported in 247 ITR 457
(Guj) wherein Court placed reliance on the decision of Calcutta High Court in
case of Simplex Concrete Piles (India) Private Limited [Supra] and held that so far
as retention money was concerned, the assessee had no right to receive the
same, and therefore, it could not be said that the same had accrued to the
assessee.
Counsel pointed out that even the Madras High Court in case of
Commissioner of Income Tax v. Ignifluid Boilers (I) Limited, reported in [2006]
238 ITR 295 (Mad), under the similar circumstances, had taken the same view.
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Counsel drew our attention to a decision of this Court in case of
Director of Incometax [International Taxation] v. Ballast Nedam
International, reported in [2013] 33 Taxmann.com 139 (Guj) in which the
decision in case of Anup Engineering Limited [Supra] was followed in the context
of taxability of retention money.
Our attention was drawn to a decision of the Bombay High Court in
case of Commissioner of Income Tax v. Associated Cables P. Limited, reported
in [2006] 286 ITR 596 (Bom) in which the Court rejected the Revenue’s appeal
against the judgment of the Income Tax Appellate Tribunal. Question before
the Tribunal was with respect to taxing the receipt in the hands of the
contractor, who received the same by furnishing the bank guarantee, subject to
the satisfactory completion of the contract. In view of the dispute between the
Judicial and Accounting Members, the same was referred to the thirdmember,
who agreed that the income cannot be stated to have accrued to the assessee
till completion of the warranty period. It was this judgment that the Bombay
High Court confirmed by rejecting the Revenue’s appeal.
On the other hand, learned counsel Shri K.M Parikh for the Revenue
opposed the appeals contending that the amount was actually received by the
assessee. It was, therefore, not a case of deferred payment. Tax was deducted at
source on such receipts also. Accounting standards would require that the
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assessee must show the said amount in the Profit and Loss account and cannot
defer the revenue recognition. Right to receive such amount thus clearly
accrued. The Tribunal was, therefore, right in holding that the amount had to
be taxed during the year under consideration. In support his contentions, he
relied upon the following decision :
[a] In case of Commissioner of Income Tax, Bombay CityI v. Shoorji
Vallabhdas & Company, reported in [1962] 46 ITR 144 (SC), the question of
accrual of income came up for consideration. Reliance was also placed on a
decision of Supreme Court in case of The Cotton Agents Limited, Bombay v.
Commissioner of Income Tax, Bombay, reported in [1960] 40 ITR 135 (SC) in
which question of accrual of commission income came up for consideration.
The agents of the company were to be paid remuneration by way of
commission on the specified rate on the gross proceeds of all sales. One of the
provisions was that such commission would become due to the Managing
Agents at the end of each financial year or other period for which the accounts
of the Company were to be laid before the General Meeting and shall be
payable and paid immediately after such accounts had been passed by the
General Meeting. It was in this context, the Court held that the commission
becomes due normally at the end of the financial year but is payable after
accounts have been passed at the General meeting.
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Having thus heard learned counsel for the parties and having perused
the documents on record, we may advert to the relevant terms of the agreement
more closely.
Clause 5 of the general conditions of contract provides for the manner
of security of performance. The relevant clauses initially read as under :
“5.3 In addition to the above initial security deposit, the
EngineerinCharge shall deduct from the intermediate bills ie.,
the running account bills an amount at the rate of ten percent
(10%) of the total value of each bills as an additional security
deposit subject to the condition that the total amount of such
deductions shall not exceed seven and one half percent (7.5%) of
the tendered amount as mentioned in the letter of acceptance of
the tender.
5.4 If the Contractor expressly requests in writing, he will be
permitted to convert quarterly Security Deposit recovered from
his bills into interest bearing SSNL Securities or Interest bearing
deposits with a Scheduled Indian Bank in the name of Executive
Engineer, Narmada Project Main Canal Construction Division
No. 11, Ahmedabad380 061, Gujarat State (India).
5.5 The Bank Guarantee, the performance bond, the interest
bearing SSNNL securities and the interest bearing SSNNL
securities and the interest bearing deposit shall remain valid for
atleast twelve months after the date of the completion of the
works.
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5.6 The security deposit, less any amounts due, shall be
returned to the Contractor after defects liability period is
over and subject to the EngineerinCharge certifying that no
liability attaches to the contractor.”
Clauses 5.3 and 5.4 were subsequently amended as under :
“5.3 In addition to the above initial security deposit, the
EngineerinCharge shall deduct from the intermediate bills ie.,
the running account bills an amount at the rate of ten percent
(10%) of the total value of each bills as an additional security
deposit subject to the condition that the total amount of such
deductions shall not exceed five percent (5%) of the tendered
amount as mentioned in the letter of acceptance of the tender.
5.4 If the Contractor expressly requests in writing, he
will be permitted to convert Security Deposit recovered from
the bills into interest bearing Government/SSNNL.
Securities or interestbearing deposits with a Scheduled
Indian Bank taken out in the name of EngineerinCharge or
into Bank Guarantee in instalments of Rs. 10 lakhs each in
the form in Annexure 6 issued by a Vadodara branch of any
scheduled Indian Bank or by a foreign Bank acceptable to
the SSNNL and confirmed by any Scheduled Indian Bank
authorized to deal in foreign exchange.”
We are concerned with the amended terms of the agreement. From
the above clauses, it could be seen that before amendment, the general
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conditions envisaged that in addition to the initial security deposit, the
EngineerinCharge would deduct from the running bills of the contractor,
amount @ 10% of the total value of such bills by way of additional security
deposit. The total accumulation of such security deposit however should not
exceed 7.5% of the tendered amount. The contractor had an option to convert
such security deposit into interestbearing SSNNL securities or interestbearing
deposits with the scheduled Indian Bank in the name of Executive Engineer,
Narmada Project Main Canal Construction Division. As per Clause 5.5, the
Bank guarantees, the performance bond, interestbearing securities and the
interestbearing deposits would remain valid for at least twelve months after
the date of completion of the work. Clause 5.6 which has significance provided
that the security deposit minus any amount due from the contractor would be
returned after defects liability period is over and subject to the Engineerin
Charge certifying that no liability attaches to the Contractor.
Such terms of the contract were later on amended. The relevant
amendments were that in para 5.4, wherein the maximum accumulation of
additional security deposit was reduced to 5% of the tender amount. In para
5.4, in addition to an option of converting the security deposit into interest
bearing security or deposits, a new option was given to the contractor to
convert such security deposit into bank guarantee of the specified banks. These
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two were significant changes and both, it can be presumed, were aimed at
alleviating the liquidity crunch which the contractors executing construction
works of considerable size would encounter. From a maximum additional
security deposit which could earlier be accumulated upto a 7.5% of the tender
amount, the ceiling was reduced to 5%. Simultaneously, the contractor was
given an option to receive the security deposit in cash on giving the bank
guarantee. Since withholding of 10% of the running account bills upto a
maximum of 7.5% of the tender amount for the entire warranty period of
twelve months would cause considerable hardship to the contractors, more
lenient terms were offered. These modifications, however, were subject to other
conditions; including those contained in para 5.6 of the General Conditions of
the Contract, which as noted above, provided that the security deposit minus
the amount due would only be returned to the contractor at the end of the
defects liability period. This would be subject to EngineerinCharge certifying
that no liability attaches to the contractor in terms of the modified conditions
contained in para 5.4. Any such recovery of the amount due to SSNNL from the
contractor would be made from the bank guarantee offered by the contractor in
lieu of the security deposit.
The question, therefore, arises whether in view of such terms of the
contract, the amount received by the assessee which otherwise is categorized as
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security deposit, after offering matching bank guarantee, can be said to be the
assessee’s income. The answer would be in the affirmative, if it is found that the
right to receive such income had accrued. The assessee following mercantile
system of accounting, this question would be relevant. Even otherwise, as held
by the Supreme Court in case of Commissioner of IncomeTax v. Bokaro Steel
Limited, reported in 236 ITR 315 unless there is really any income, there can be
no tax levied.
The crucial question therefore is can in the present case, the right to
receive the income accrued in favour of the assessee. In this context, we may
recall that whenever the retention money of a contractor for performance
guarantee was actually held back by the employer of the contract, the Courts
have taken a view that the right to receive such income not having accrued, the
same cannot be taxed at the point of time when the bills are raised. This is
precisely what the Calcutta High Court held in case of Simplex Concrete Piles
(India) Private Limited [Supra]. This Court in case of Anup Engineering Company
Limited [Supra] also took a similar view. In the said case, the facts were that the
assessee company was in the business of manufacturing vessels used by
chemical industries. The assessee executed a contract for supply and erection of
a spray drying plant for a consideration of Rs. 40 lakhs. During the period
relevant to A.Y 199798, the plant was erected and the assessee was paid a sum
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of Rs. 34.49 lakhs against the bills raised by the assessee. The assessee, in the
books of account, showed a sum of Rs. 40 lakhs to be received from the
employer of the contract but debited a sum of Rs. 3 lacs from its sales account
by crediting the same to warranty account. As some dispute had arisen with
regard to quality of the vessel supplied by the assessee, the assessee
apprehended that due to the warranty clause contained in the contract, the
assessee might not receive the said amount. It was in this context, the Court
held and observed as under:
“7. Looking to the legal position referred to hereinabove, one
has to see whether a right had been created in favour of the
assessee to receive a sum of Rs. 3 lacs, which was claimed by
way of deduction by the assessee in the relevant previous year.
It is not in dispute that the assessee had shown in his books of
account that he had to receive a sum of Rs. 40 lacs from Godrej
in pursuance of the contract with regard to supply of spray
drying plant for synthetic detergent plant. Relevant entries
reflecting the above transaction were made by the assessee in its
books of account. Subsequently, on account of certain dispute,
which had arisen during the same previous year between the
assessee and Godrej due to unsatisfactory quality of the plant,
the assessee was of the view that the assessee would not receive
the entire amount of Rs. 40 lacs and as per the terms and
conditions on which the plant was to be supplied to Godrej, the
assessee might receive something less on account of the
warranty which had been given to Godrej, especially in view of
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the fact that even Godrej had a right to retain certain amount
with it and the amount to be retained was to be paid only when
the plant was handed over to it in a perfect condition and when
Godrej was satisfied with regard to performance of the plant in
all respects.
8. It appears that, on account of the book entries made by
the assessee, the revenue has finally decided to assess the
assessee for the entire amount which was shown as receivable
by the assessee at an initial point of time. As stated hereinabove,
and as observed by the Hon'ble Supreme Court in different
cases, income accrues only when the assessee gets a right to
receive the same and if the right to receive is not established, no
income would accrue or arise to the assessee.
9. To ascertain whether Rs. 40 lacs was income of the assessee,
one has also to look at the contract in pursuance of which the
amount was to be received by the assessee from Godrej. One
has to look at the nature of the transaction and the terms and
conditions on which the plant was supplied by the assessee to
Godrej. Only when the right of the assessee to receive Rs. 40 lacs
is established, the income would accrue or arise and not
otherwise. It is pertinent to note that the accounting entries are
not made in abstract. Entries reflect the transactions which have
taken place. So, one has to look at the nature of the transaction
and the terms and conditions of the contract under which the
revenue believed that the entire income had accrued to the
assessee during the previous year in question.”
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
Madras High Court in case of Ignifluid Boilers (I) Limited [Supra] also
took a similar view in the context of retention money withheld. It was held and
observed as under :
“3. The facts are not disputed. 10 per cent of the retention
money has not been received in respect of the relevant
assessment year though the work has been completed. The
assessee is entitled to receive the amount only after successful
completion of work. In such circumstances, it cannot be said
that 10 percent retention money retained by the principal
contractor accrued to the assessee during the relevant
assessment year for consideration.
4. Under the Income Tax Act, the income accrued or
received by the assessee alone is taxable. This position is
fortified by the decision of the Supreme Court in the case of CIT
v. Shoorji Vallabhdas & Company [1962] 46 ITR 144 (SC), wherein,
it has been held as follows :
“Income Tax is a levy on income. No doubt, the Income
Tax Act takes into account two points of time at which
the liability to tax is attracted viz., the accrual of the
income or its receipt; but the substance of the matter is
the income. If income does not result at all, there cannot
be a tax, even though in bookkeeping, an entry is made
about a ‘hypothetical income’ which does not
materialize. Where income has, in fact, been received
and is subsequently given up in such circumstances that
it remains the income of the recipient, even though
given up, the tax may be payable. Where, however, the
income can be said not to have resulted at all, there is
obviously neither accrual nor receipt of income, even
though an entry to that effect might, in certain
circumstances, have been made in the books of account.”
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
6. This is what exactly happened in this case. In view of the
categorical pronouncement of the Supreme Court and the facts
and circumstances of the case, we are of the view that the
appellate authority as well as the Tribunal are correct in their
view. The order of the Tribunal requires no interference.”
Once again, in case of Ballast Nedam International [Supra], this Court
followed the decision in case of Anup Engineering Company Limited and
dismissed the Revenue’s tax appeal in the context of retention money withheld
by the employer of the contractor.
It can thus be seen that different High Courts have in the context of
withholding of retention money for performance guarantee of a contract has
held that the right to receive such amount did not accrued till the performance
warranty period was over.
Even in the context of actual release of such amount on furnishing the
bank guarantee, subject to the satisfactory completion of the contract, the
Bombay High Court confirmed the decision of the Tribunal which by majority
view had held that the income cannot be said to have accrued. In our opinion,
merely because in the present case, unlike in the cases cited by us; including
Anup Engineering Co. Limited [Supra] the amount was realized, would not
change this situation. It is undisputed that every receipt is not an income.
Whether a receipt is an income or not would depend on whether the right to
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receive the same had accrued to the assessee. The question whether in the
present case such right had accrued or not, must be judged on the terms and
conditions of the contract between the parties. We have noted such conditions
before and after the amendment. Before the amendment, the assessee had to
surrender a portion of the running bill amount towards additional performance
guarantee deposit. The assessee could request the employer of the contract to
convert such amount into interest bearing securities or deposits. The amount
would still remain with SSNNL. After amendment, the assessee had an
additional option of receiving the amount but converting the security deposit
into a bank guarantee. In other words, the assessee would receive the full
running bill amount; including 10% to be set apart by way of additional
security deposit, upon furnishing the bank guarantee of a matching sum. In
either case, namely as in the preamendment scenario where the assessee
would not receive 10% of the running bill amount or post amendment, when
such amount would be received by the assessee upon furnishing the bank
guarantee, para 5.6 of the general conditions remained unchanged. As per the
said condition, the security deposit or the security deposit converted into bank
guarantee would be returned to the contractor after defects liability period is
over. This would be subject to two conditions – firstly, that the employer of the
contract would deduct from such amount, any amount due to it and that the
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
EngineerinCharge certifies that no liability attaches to the contractor. It can
thus be seen that in either of the two cases, SSNNL would recover from the
assessee, the amount due to SSNNL and release the rest of the amount out of
the security deposit only upon completion of the defects liability period and
upon certification by the EngineerinCharge. In case of the preamendment
period, such recovery would be from the security deposit/interest bearing
securities or deposits; as the case may be. In the post amendment period, if the
assessee had so opted and furnished bank guarantee to receive the amount,
such recovery would be from the bank guarantee so furnished.
We are at pains to discuss these aspects because in our opinion these
features demonstrate that in so far as the assessee’s right to receive the said
amount is concerned, there has been no change by virtue of the amendment in
the general conditions contained in the contract. Either before or after
amendment, the right to receive the amount was always subject to the vital
conditions of recoveries and adjustments against the dues found due to the
SSNNL, completion of the defects liability period and certification by the
EngineerinCharge that no liability attaches to the contractor. If therefore in a
situation prior to the amendment where the retention money was actually
retained by SSNNL, the view of this Court and other Courts was that the right
to receive the amount had not accrued, in our opinion after the amendment
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
also, such opinion would not change. In various decisions noted by us, the
Courts were influenced by the factors that the amount of retention money
withheld by the employer of the contract could be released only upon
completion of the defects liability and adjustment could be made from such
amount, if it is found that there is any amount due and payable to the employer
of the contract or that the execution of the work was not satisfactory. In the
present case also, SSNNL retained such right to make recovery. Only the source
of such recovery changed. Earlier, such recovery could be made from the
security deposits of the assessee lying with SSNNL. Post amendment, such
recovery could be made from the bank guarantee furnished by the assessee. In
either event, the SSNNL could effect recovery without notice to the assessee.
The same uncertainty of receiving the full amount of additional security
deposit remained the same, either before or after the amendment in the
conditions.
It thus emerge that the character of the amount did not change. It still
retained the character of retention money. Its temporary release to the assessee
on furnishing the bank guarantee cannot be equated with the right to receive
such amount and resultantly with accrual of income because the dominant
control over the said amount still remained with SSNNL.
In case of Commissioner of IncomeTax v. Govind Prasad Prabhu Nath,
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
reported in (1988) 171 ITR 417, the Allahabad High Court observed that the
terms “income is received”, “accrues” and “arises” have not been defined in the
Incometax Act, 1961. Mere receipt of income is not the sole test of
chargeability. Receipt of income refers to the first occasion when the recipient
gets the money under his own control. The words “accrue” or “arises” do not
mean actual receipt of profits or gains. Both these words are used in
contradistinction to the word “receive” and include a right to receive. Thus, if an
assessee acquires a right to receive the income, the income can be said to accrue
to him though it may be received later on.
In case of Commissioner of IncomeTax v. Kerala State Drugs &
Pharmaceuticals Limited, reported in 192 ITR p.1, the Kerala High Court
observed that even under the mercantile system of accounting, it is only the
accrual of real income which is chargeable to tax. The income should not be
hypothetical income, but real income.
In Commissioner of IncomeTax v. Punjab Tractors Cooperative Multi
Purpose Society Limited, reported in {1998} 234 ITR 105, the Punjab & Haryana
High Court observed that, “...it is only receipt as “income” which would attract tax.
Every receipt by the assessee is, therefore, not necessarily income in his hands. It bears
the character of income at the time when it accrues in the hands of the assessee and then
it become exigible to tax.”
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
In the context of the question of accrual of income and real income
arising, we may refer to a recent decision of Supreme Court rendered in case of
Commissioner of Income Tax v. Excel Industries Limited & Anr., reported in
(2013) 358 ITR 295 (SC). In the said case, the question considered by the
Supreme Court was whether the benefit of an entitlement to make duty free
imports of raw materials obtained by an assessee through advance licenses and
Duty Entitlement Pass Book issued against export obligations is the income in
the year in which the exports are made, or the year in which the duty free
imports are made. The assessee, which was following mercantile system of
accounting, in the return had claimed deduction of Rs. 12.57 Crores under the
head advance licence benefit receivable. The assessee had also claimed a
deduction in respect of duty entitlement pass book benefit receivable
amounting to Rs. 4.46 Crores. These benefits related to entitlement to import
duty free raw material under the relevant import and export policy by way of
reduction from raw material consumption. According to the assessee, the
amounts were to be excluded from the total income since they could not be said
to have accrued until imports were made and the raw materials consumed. It
was in this context, the Supreme Court considered above noted question. The
Court, referring to the decision in case of CIT v. Shoorji Vallabhdas & Company
[Supra] observed that it is wellsettled that incometax cannot be levied on
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
hypothetical income. The Court further held and observed as under :
“20. It follows from these decisions that income accrues when it
becomes due but it must also be accompanied by a
corresponding liability of the other party to pay the amount.
Only then can it be said that for the purposes of taxability that
the income is not hypothetical and it has really accrued to the
assessee.
21. In so far as the present case is concerned, even if it is
assumed that the assessee was entitled to the benefits under the
advance licences as well as under the duty entitlement pass
book, there was no corresponding liability on the customs
authorities to pass on the benefit of duty free imports to the
assessee until the goods are actually imported and made
available for clearance. The benefits represent, at best, a
hypothetical income which may or may not materialise and its
money value is therefore not the income of the assessee.
27. Applying the three tests laid down by various decisions of
this Court, namely, whether the income accrued to the assessee
is real or hypothetical; whether there is a corresponding liability
of the other party to pass on the benefits of duty free import to
the assessee even without any imports having been made; and
the probability or improbability of realisation of the benefits by
the assessee considered from a realistic and practical point of
view (the assessee may not have made imports), it is quite clear
that in fact no real income but only hypothetical income had
accrued to the assessee and Section 28(iv) of the Act would be
inapplicable to the facts and circumstances of the case.
Essentially, the Assessing Officer is required to be pragmatic
and not pedantic.”
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
Looked from any angle, we see no material change by virtue of the
amendment in clause 5.4 to the general conditions in so far as the question of
accrual of income is concerned. Right to receive the sum was even before the
amendment uncertain and therefore contingent. Upon satisfactory completion
of several factors, even after the amendment, the same conditions applied.
Same uncertainly and unpredictability prevailed. The assessee had no absolute
right to receive the amount. SSNNL had no obligation to release the same
before completion of warranty period and even thereafter would release the
amount only after making permissible adjustments. Mere fact that in the
present case no recoveries were made from the bank guarantee or security
deposit is of no consequence. We may now deal with some of the contentions of
the Revenue, which found favour of the Tribunal also.
Mere fact that the amount was received by the assessee would not
mean that income had accrued. Whether income did accrue or not would
depend on the fact whether the right to receive said amount had accrued or not.
The fact that tax was deducted at source on said amount also would be of no
consequence. Tax was deducted by SSNNL. The assessee had no control over
such deduction. Merely whether tax was deductible or not would not decide
the taxability of certain receipts. The manner in which the assessee accounted
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
for such receipt in its books of account can also not determine its tax liability, as
held by the Supreme Court in case of Kedarnath Jute Mfg. Company Limited
v. Commissioner of IncomeTax [Central], Calcutta reported in 82 ITR 363. In
such decision, the Court held and observed as under :
“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 Incometax 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 provision 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..”
Reliance placed by the Tribunal to the Accounting Standards for
percentage completion method was misplaced. The assessee did not follow the
percentage completion method and the accounting treatment to be accorded in
such case therefore was not at issue. The assessee claiming entire expenditure
and not excluding expenditure relatable to the withheld security deposit also
would not be fatal to the interest of the assessee. The expenditure in toto was
incurred. The question only was what would be the total amount that the
assessee would receive for carrying out such construction. Ninety percent of
the amount was payable or already paid over. Ten per cent of the running
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
account bills was adjustable towards the claims of the SSNNL and recoveries
arising out of defects; if any. Release of such amount or part thereof would
decide the ultimate profit margin of the assessee upon execution of the contract.
The expenditure incurred by the assessee could not be proportionately divided
into that covering the assessee’s ninety per cent of the bill amount and relatable
to the rest ten percent.
Under the circumstances, we find that the Tribunal committed an
error in allowing the Revenue’s appeals. The question is answered in favour of
the assessee. The judgment to the extent above in each of the respective appeals
is reversed. Resultantly, the judgment of the CIT [A] is reinstated. As a result,
consequential directions of the CIT [A] will also stand reinstated. We
reproduce such directions, again here :
“However, the Assessing Officer is directed to tax the said
retention money in the assessment year relevant to the
‘previous year’ in which retention money becomes payable
to the appellant as per the terms of the contracts ie., after
the defect liability is over and after the EngineerinCharge
certifies that no liability attaches to the appellant.”
Appeals are allowed to the above extent.
{Akil Kureshi, J.}
{Ms. Sonia Gokani, J.}
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM
Prakash*
TAX APPEAL/554/2003 02/04/2014 01:38:02 PM

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O/TAXAP/554/2003 JUDGMENT

FOR APPROVAL AND SIGNATURE:

1 Whether Reporters of Local Papers may be allowed to see the judgment ?

2 To be referred to the Reporter or not ?

4 Whether this case involves a substantial question of law as to the

5 Whether it is to be circulated to the civil judge ?

COMMON JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)

along with documentary evidence on record the

Tribunal’s ultimate finding and the conclusion of

taxability of Rs. 1,58,70,856/= pertaining to retention

money for the year under consideration is contrary to

settled position of law and against the documentary

evidence on record with the result that the ultimate

The assessee is engaged in the business of civil construction work.

Assessee was awarded construction contract by Sardar Sarovar Narmada

order to permit greater liquidity to the contractors, an option was given to

terms of the contract, the money is withheld by the Government pending

detail above and also considering the terms of the contract

(India) Limited, 179 ITR 8 (Calcutta); CIT v. Chanchani Bros

(Contractors) Private Limited; 161 ITR 418 (Patna) and Janatha

Contract Company v. CIT, 105 ITS 627 (Kerala) are directly

applicable to the appellant’s case. Therefore, considering the

and following the principles laid down in the judgments

but the said income accrues only after the completion of the

appellant. Accordingly, it is held that the said amount of

to allow the appellant’s claim for retention money of Rs.

1,58,70,856/= for the assessment year under consideration.

the assessment year relevant to the ‘previous year’ in which

and after the Engineer­in­Charge certifies that no liability

[b] The decision of Calcutta High Court in case of Simplex Concrete Piles

with recognition of contract, revenue and expenses and recognizes the

[g] The assessee had claimed full expenditure and not deferred a portion

would be released unconditionally only upon completion of the warranty

then, there is no admission of liability and no right to

receive any part of the retention money accrues to the

the Income Tax Officer to examine the question of

retention money from this angle and make adjustments

Reliance was placed on a decision of this Court in case of Anup

same, and therefore, it could not be said that the same had accrued to the

Counsel drew our attention to a decision of this Court in case of

Director of Income­tax [International Taxation] v. Ballast Nedam

International, reported in [2013] 33 Taxmann.com 139 (Guj) in which the

[a] In case of Commissioner of Income Tax, Bombay City­I v. Shoorji

The agents of the company were to be paid remuneration by way of

“5.3 In addition to the above initial security deposit, the

bearing SSNNL securities and the interest bearing SSNNL

returned to the Contractor after defects liability period is

“5.3 In addition to the above initial security deposit, the

5.4 If the Contractor expressly requests in writing, he

the bills into interest bearing Government/SSNNL.

Securities or interest­bearing deposits with a Scheduled

conditions envisaged that in addition to the initial security deposit, the

Engineer­in­Charge would deduct from the running bills of the contractor,

Bank guarantees, the performance bond, interest­bearing securities and the

Such terms of the contract were later on amended. The relevant

5.4, in addition to an option of converting the security deposit into interest

works of considerable size would encounter. From a maximum additional

amount, the ceiling was reduced to 5%. Simultaneously, the contractor was

guarantee. Since withholding of 10% of the running account bills upto a

twelve months would cause considerable hardship to the contractors, more

The question, therefore, arises whether in view of such terms of the

recall that whenever the retention money of a contractor for performance

assessee company was in the business of manufacturing vessels used by

a spray drying plant for a consideration of Rs. 40 lakhs. During the period

and after the EngineerinCharge certifies that no liability

Director of Incometax [International Taxation] v. Ballast Nedam

[a] In case of Commissioner of Income Tax, Bombay CityI v. Shoorji

Securities or interestbearing deposits with a Scheduled

EngineerinCharge would deduct from the running bills of the contractor,

Bank guarantees, the performance bond, interestbearing securities and the

either case, namely as in the preamendment scenario where the assessee

In case of Commissioner of IncomeTax v. Kerala State Drugs &