Case Law Details
Brief Facts of the Case and Question
Brief Facts: The assesse has filed its return of income electronically declaring total income of Rs. 41, 60,580/. Then the case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued and served upon the assessee by the Assessing officer. Assessee has claimed retention money of Rs. 7 lacs which has been excluded from the profits.
On appeal, Ld. Commissioner of Income Tax (Appeals) had deleted the addition by observing that same addition was made in the past which has been deleted.
Question Raised:
Whether Retention money should be disallowed which has been excluded from profits.
Contention of the Assessee
The assessee contended that the action of assessing officer is not correct in law. And also contended that the right to receive the retention money was not accrued to the assessee at that time and hence the same was not shown in its income during the year under consideration but it doesn’t mean that retention money of Rs 7 lacs has been excluded from the profits.
The assessee submitted that the retention money which was payable after expiry of plant performance guarantee period is over, did not accrue to it on the supply of plant / equipment, hence the same cannot be considered as income of the assessee as the amount did not accrue or become due at that time.
The assessee had been following a mercantile method of accounting and till assessment year 1996-97 the assessee consistently credited 100% of the amount as sales and accordingly the income was offered for taxation. However, from the assessment year 1997-98 a bona fide change in the method of accounting was adopted by the assessee whereby the retention money was credited separately and the same was offered as an income in the year of receipt as the receipt of the retention money is dependent upon the satisfactory supply and successful commissioning of plant to the customer after the expiry of the warranty period as well.
The AO while disallowing the retention money of the current year Rs. 7,00,000/- contented that the assessee has changed its method of accounting wherein 90% of sale consideration is treated as trading receipt and balance 10% of sale consideration being retention money is to be treated as trading receipt after expiry of guarantee period mentioned in the agreement for performance of plant /equipments supplied to the client, as the actual payment of sale consideration was not received from client. The AO however, did not accept the contention of the assessee that balance 10% being retention money did not accrue to it till the expiry of guarantee period mentioned in the agreement entered in to with the client.
Contention of Revenue:
During the assessment proceedings the Assessing officer disallowed the retention money , The Assessing Officer has issued a notice u/s. 143(2) and 142(1). According to the Assessing Officer, assessee has claimed retention money of Rs. 7 lacs which has been excluded from the profits. The revenue contended that retention money is a part of the sale and it ought to be recognized as revenue. Accordingly the Assessing Officer made an addition of Rs. 7 lacs to the income of the assessee and disallowed the same.
According to the A.O. the assessee was following Mercantile System of accounting and in Mercantile System of accounting the retention money is accrued to the assessee as soon the entries are posted in the books of account.
It was the argument of the AO that there are only two recognized methods of accounting namely the cash method of accounting and the mercantile method of accounting. In mercantile method of accounting, entries are posted in the books of accounts on the date of transaction when the rights accrue or liabilities are incurred, irrespective of the date of payment. It was the finding of the AO that right to receive the said installment has accrued to the assessee and it cannot be diverted on the plea contrary to the accounting practice and with reference to its modus operandi under the Central Excise & Sales Act, Sales Tax Act and under Central Sales Tax Act, since the assessee company is following accrual method of accounting, a part of receipt cannot be taken on piecemeal / receipt basis.
The AO relied upon the following decisions wherein it is held that the transaction cannot be split in to mercantile and cash method of accounting (i) G Padmanabha Chattiyar & Sons vs CIT 182 ITR 1, 5 (Mad.), (ii) Reform Flour Mills Pvt. Ltd. vs CIT 132 ITR 184,196 (Cal) and (iii) CIT v/s A Krishnaswamy Mudaliar & Others 53 ITR 122 (SC).
Further, the AO also relied upon the following cases where the Hon’ble Apex Court had held that the amount receivable has to be credited irrespective of the receipt thereof and the expenditure therefore has to be debited irrespective of the payment thereof in case of mercantile method of Accounting:-
i) Keshav Mills Ltd. Vs CIT (1953) 23 ITR 230,239 (SC)
ii) Calcutta Co Ltd. Vs CIT (1959) 37 ITR 1,3 (SC)
iii) CIT Vs Swadeshi Cotton & Flour Mills Pvt. Ltd. (1964) ITR 134,137 (SC)
Held by ITAT:
ITAT held that It is observed from records that since the right to receive the retention money was not accrued to the assessee at that time and hence the same was not shown in its income during the year under consideration, Since the facts are identical to the facts of assessee’s own case for AY 2006-07 and following the Tribunal order, and the issue is restored back to the file of AO to decide the same in the light of the direction given by the Coordinate Bench in ITA No.1831/Ahd/2009 for AY 2006- 07(supra).
The ITAT held that since the assessee agreed that the issue of set aside to the file of Assessing Officer for re-adjudicating the same in accordance with the issue taken up in earlier years in ITA No.1831/Ahd/2009 for AY 2006- 07(supra). And the Departmental Representative did not raise any objection. So as a result the appeal of the assessee is allowed for statistical purposes.
