Retention money is not in the nature of income till such time the contractual obligations are fully performed to the satisfaction of the customer by the Assessee. Therefore the retention money cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act.
1. Assessee filed its return of income disclosing the total income as ‘Nil ‘under the normal provisions of the Act besides declaring book profits under the provision of section 115JB of the Act. In the proceedings before CIT(A) the assessee filed an additional ground of appeal where in the assessee claimed that a sum of Rs.28,87,72,022/- was retention money over which the assessee has no rights and therefore the sum in question cannot be considered as income both under the normal provision of the Act as well as while computing the book profit u/s 115JB of the Act. The break up of the retention money over which the assessee does not have a title and therefore cannot be regarded as income is given at page 49 of the assessee’s paper book and the same is given as Annexure-2 to this order. As we have already seen that the assessee executes turnkey contracts. Under the terms of contract a certain percentage of the value of the contract is retained by the persons for whom the assessee executes the contract. This is referred to as retention money and will be given to the assessee only on successful trial run of the final acceptance by the customer. According to the assessee therefore this is an air of suspense over the right of the assessee to the money which it had received unless and until successful trial run and final settlement is obtained. It was the plea of the Assessee that till such time the receipt in question cannot be regarded as income even though the assessee follows mercantile system of accounting. The assessee placed reliance on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Simplex Concrete Piles (India)P.Ltd. 179 ITR 8 (Cal) and several other high courts in support of its claim that the sum in question cannot be regarded as income under the normal provisions of the Act.
2. With regard to the claim of the assessee that the said sum cannot also be regarded as part of the book profits u/s 115JB of the Act. The assessee relied on the following decisions :-
(i) Bangalore ITAT in the case of Syndicate Bank -vs.- ACIT (2006) 7 SOT 51 (Bang) where it has been held that the entry by way of crediting the profit and loss account in respect of zero coupon bond is of notional credit and not in respect of interest accruing during the year. Hence, even though the same has been credited to profit and loss account, it needs to be excluded while computing the book profit as per Section 115JA. If notional income has been credited to P&L account and the said income has not accrued during the year, the same cannot be considered as “to disclose the result of working of the company during the financial year as provided under Part-I and Part- II of Schedule VI to the Companies Act, 1956.”
(ii) Hon’ble Mumbai Tribunal in the case of Hitkari Fibres Ltd. -vs.- JCIT (2004) 90 ITD 654 (Mum) after referring to the case of Bangalore Tribunal, wherein it was held that MAT has to be levied on the real book profits which have been earned by the companies during the relevant assessment years and not on artificial income which has not accrued to the companies but has been credited to the profit and loss account.
(iii) Hon’ble Mumbai Tribunal in the case of ITO -vs.- Frigsales (India) Ltd. (2005) 4 SOT 376 (Mum) wherein it was held that a receipt which is not in the nature of income cannot be taxed as income under section 115JA. When the accounts are prepared in accordance with Part-I1 and Part-Ill of Sch. VI of the Companies Act while making adjustments as per the provisions of s.115JA to compute book profits, the amounts which are not taxable or exempt are excluded, because such amounts do not really reflect a receipt in the nature of income and, therefore, such amounts cannot form part of the profit reflecting real working results. While rendering the above decisions, the Hon’ble Tribunal has referred to the decision of Apex Court in the case of Apollo Tyres -vs.- CIT (2002) 255 ITR 273 (SC) and held that the above decision does not debar the assessee to make the above adjustment in computing Book Profit u/s 115JA/JB.
