THE HONOURABLE MR v. M/s.East Coast Constructions & Ind. Ltd.Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 21.01.2006Coram :THE HONOURABLE MR.JUSTICE P.D.DINAKARANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJATax Case (Appeal) Nos.127 and 128 of 2003The Commissioner of Income Tax,Chennai...Appellant in both the casesVsM/s.East Coast Constructions & Ind. Ltd.Chennai. ..Respondent in both the casesAppeals under Section 260-A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras, 'B' Bench inI.T.A. Nos.1720 and 1721/Mds/2002 dated 13.03.2003, for theassessment years 1997-98 and 1998-99. ITAs No.84/2000-2001 dated21.8.2002, and 109/2001-2002,dated 21.8.2002 respectively on the fileof the Commissioner of Income Tax, Appeals XI, Chennai-34 againstG.I.No.1-E/97-98 dted 24.3.2000 and G.I.No.1-E/98-99, dated 31.5.2001respectively on the file of the Joint Commissioner of Income Tax, Spl.Range V, Chennai -34.For Appellant : Mr.J.NarayanaswamyFor Respondent : Mr.Ramachandran, Senior Counsel for Ms.Anitha Sumanth JUDGMENT(Judgment of the Court was delivered by P.P.S.Janarthana Raja, J.)The present appeals are filed under Section 260-A of the IncomeTax Act, 1961 by the Revenue, in I.T.A. Nos.1720 and 1721/Mds/2002dated 13.03.2003, passed by the Income Tax Appellate Tribunal, Madras"B" Bench raising the following substantial question of law. https://hcservices.ecourts.gov.in/hcservices/ "Whether in the facts and circumstances of thecase, the Tribunal was right in holding that moneysretained by the contractee, as a percentage of thebills raised to be paid after the contract iscompleted is to be treated as income only when themoneys are actually received, even though theappellant is following a mercantile system ofaccounting?"2.The facts leading to the above question of law are as under: i)The relevant Assessment years are 1997-98 and 1998-99 and theaccounting years ended on 31.03.1997 and 31.03.1998, respectively.The assessee is a company, carrying on business of construction invarious places. The assessee filed a Return of income. It appearsthat 10% of the contract amount is retained by the parties as retentionmoney and would pay after the completion of the contract. TheAssessing Officer had included the retention money for the purpose ofcomputing the total income, on the ground that since the assesseefollowed the mercantile system of accounting, he ought to have offeredthe retention money for assessment. ii)Aggrieved by the order of the Assessing Officer, the assesseefiled an appeal before the Commissioner of Income Tax (Appeals), whoconfirmed the addition made on the ground that, where mercantile systemis followed, the income accrued, though not received, is liable toincome tax. Aggrieved by that order, the assessee filed an appealbefore the Income Tax Appellate Tribunal. The Income Tax AppellateTribunal allowed the appeal holding that the retention money wasaccrued to the assessee only after completion of the contract andtherefore, cannot be included in the total income for the assessmentyears in consideration, since the contract was not yet completed. iii)The learned counsel appearing for the Revenue contended thatthe retention money accrues only when the contract is complete. Healso further submitted that the said retention money had accrued on theground that the work relating to it had already been done and billed.It is also further submitted that the main feature of the mercantilesystem of accounting is that, regardless of whether an amount isreceived or not, it is accounted as a receipt as soon as it hadaccrued. In the case of retention money, the amount already billed,but not received, should be treated as income for the period when ithad been billed. The learned counsel for the respondent submitted thatsuch money will be realised only when the customer is satisfied aboutthe completion of the work entrusted to the appellant. The assesseehad treated the amount as a contingent amount receivable and offeredthe same only on receipt basis. https://hcservices.ecourts.gov.in/hcservices/

3.We heard the arguments of the learned counsel. 10% of theretention money was withheld by the parties on the ground that theamount would be realised only after completion of the contract. Thesaid amount is payable after completion of the contract. The saidretention money accrues to the assessee only after the completion ofthe contract. The said amount is payable to the assessee only afterinspection by the other party. If the other party is not satisfiedwith the work done by the assessee, the said retention money is notpayable. The assessee is entitled to receive the retention money aftercompletion of the contract. On the date of bills, no enforceableliability had accrued or arisen. When the assessee has no right toreceive the same by virtue of the contract between the parties and theassessee also has no right to enforce for payment, it cannot be saidthat the right to receive payment of the remaining 10% of the value ofjob done, accrues as soon as it is completed. Recently, we have alsoconsidered the similar issue in another Assessee's case in Tax CaseNo.1428 of 2005 dated 05.01.2006 wherein it was held that the retentionmoney is realisable only if the customer is satisfied about thecompletion of the work entrusted to the assessee and hence, it istaxable only on receipt basis. The Calcutta High Court, in the case ofC.I.T. Vs. M/s.Simplex Concrete Piles (India) Pvt. Ltd. (179 ITR 8) atPage No.15, held as follows:"Having regard to the facts and circumstances ofthe case, we are of the view that on the terms andconditions of the contract as examined by theTribunal, it cannot be held that either 10 per centor 5 per cent, as the case may be, being theretention money, became legally due to the assesseeon the completion of the work. Only after theassessee fulfils the obligation under the contract,that the retention money would be released and theassessee would acquire the right to receive suchretention money. Therefore, on the date when thebills were submitted, having regard to the natureof the contract, no enforceable liability hasaccrued or arisen and, accordingly, it cannot besaid that the assessee had any right to receive theentire amount on the completion of the work or onthe submission of bills. The assessee had no rightto claim any part of the retention money till theverification of satisfactory execution of thecontract."The facts in the instant case are more or less similar to the aboveCalcutta High Court Judgment and we agree with the same. https://hcservices.ecourts.gov.in/hcservices/

4.In view of the foregoing conclusions, we find no error in theorder of the Tribunal and requires no interference. Hence, we answerthe question in favour of the assessee, against the Revenue and theabove tax cases are dismissed. No costs. Consequently, the connectedTCMP No.180 of 2003 is closed. Sd/Asst.Registrar/true copy/Sub Asst.RegistrarkmTo1. THE ASST. REGISTRAR,INCOME TAX APPELLATE TRIBUNAL,RAJAJI BHAVAN, BESANT NAGAR,CHENNAI -90.2. THE COMMISSIONER OF INCOMETAX, CHENNAI.3. THE JOINT COMMISSIONER OFINCOME TAX ,SPL. RANGE V, CHENNAI -34.4. THE COMMISSIONER OF INCOME -TAX, (APPEALS) XI, CHENNAI -34.+1cc to Mrs.Pushya Sitaraman, Advocate Sr 2600+1cc to Mrs. Anita Sumanth, Advocate Sr 2137MM (CO)km/5.6.Tax Case (Appeal) Nos.127and 128 of 2003