M/S. KSA POWERINFRA PVT. LTD., CHENNAI V. ACIT, CORPORATE CIRCLE - 4 (2), CHENNAI

ITA 550/CHNY/2020

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The case involves KSA Powerinfra Private Limited, which appealed against the order of the Commissioner of Income Tax (Appeals) 8, Chennai, concerning the assessment year 2017-18. The primary issue was the taxation of retention money amounting to ₹11,59,93,101, which the assessee deducted from its net profit, claiming it as 'Retention money not received'. The Assessing Officer and CIT(A) both upheld the inclusion of this retention money as part of contract revenue, citing the Income Computation and Disclosure Standards (ICDS) and section 43CB of the Income Tax Act, 1961. The Tribunal, however, found that the Assessing Officer and CIT(A) did not adequately examine whether the income had actually accrued to the assessee, leading to the decision to remand the matter for a detailed re-assessment.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134976 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 26-03-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 15-03-2020
• Other Referred Cases: CIT v. Ignified Boilers, CIT v P&C Constructions (P) Ltd., CIT vs. India Fruits Ltd., ACIT vs. B.G.R. Energy Systems Ltd., KEC international Limited vs. ITO, ADIT v. Ballast Nedam Dredging, Amarshiv Construction Pvt. Ltd vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Sale consideration of property below Jantri Value; Opportunity of being heard; Set aside; Capital Gains
• Section: 143(3); 142(1); 143(2); 113

Judgement Text

आयकर अपीलीय अिधकरण, ‘बी’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI ŵी वी. दुगाŊ राव, Ɋाियक सद˟ एवं ŵी मनोज कु मार अŤवाल, लेखा सद˟ के समƗ । Before Shri V. Durga Rao, Judicial Member & Shri Manoj Kumar Aggarwal, Accountant Member आयकर अपील सं./I.T.A. No.550/Chny/2020 िनधाŊरण वषŊ/Assessment Year: 2017-18 KSA Powerinfra Private limited, No. 480, First Floor, Khivraj Complex-1, Anna Salai, Nandanam, Chennai 600 035. [PAN:AACCG9905B] Vs. The Assistant Commissioner of Income Tax Corporate Circle 4(2), Chennai. (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Miss. Amirtha, Advocate ŮȑथŎ की ओर से/Respondent by : Shri D. Hema Bhupal, JCIT सुनवाई की तारीख/ Date of hearing : 27.03.2023 घोषणा की तारीख /Date of Pronouncement : 31.03.2023 आदेश /O R D E R PER V. DURGA RAO, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 8, Chennai dated 21.02.2020 relevant to the assessment year 2017-18. 2. Brief facts of the case are the assessee company filed its return of income for the assessment year 2017-18 on 31.01.2018 admitting an income of ₹.5,95,78,320/-. The case was selected for scrutiny under CASS and notice under section 143(2) of the Income Tax Act, 1961 [“Act” I.T.A. No.550/Chny/20 2 in short] was issued on 11.08.2018. Notice under section 142(1) of the Act dated 14.09.2019 was also issued to the assessee calling for certain details. After following due procedures, the assessment was completed under section 143(3) of the Act dated 19.12.2018. In the assessment order, the Assessing Officer has noted that the assessee has deducted an amount of ₹.11,59,93,101/- as “Retention money not received” from the net profit as per its profit and loss account while arriving at the taxable income. The Assessing Officer has called for explanation from the assessee. The explanations of the assessee are reproduced as under: “3. In reply to explanation called for Assessee submitted as below: “The Central Government, in exercise of its powers conferred under the income tax law [See endnote.1] notified [See endnote. 2], in September 2016, Income Computation and Disclosure Standards (shortly, ’ICDS') that would govern computation of income of an assessee (interchangeably used in this article with 'taxpayer’) under the head 'profits or gains from business or profession’ and 'income from other sources’. 4. The introduction of these standards necessitated a tax payer to take a fresh look at certain issues that were accepted as settled long ago. The subsequent move by the taxpayer to knock the doors of a Writ Court was surely anyone’s foretelling and equally prophetic was the taxman’s response in amending the Income Tax Act, 1961 (shortly, IT Act) to bestow a fresh lease of life to the notified ICDS [See endnote. 3] after the ruling of the Hon’ble Delhi High Court [see endnote, 4]. 5. Taxability of retention monies aka retentions, that was considered settled and so would it have remained but for the amendment in the IT Act read together with the ICDS. 6. Retentions, in common parlance, are contractual amounts withheld by a contractee from a contractor only on completion/’satisfactory’ completion of work undertaken. The general rule of taxability is to tax incomes as and when they 'accrue' or 'arise’ or as and when they are received unless there existed an artificial fiction created under the law deeming such accrual or receipt to have taken place [See endnote. 5]. 7. As per Sampath lyengar’s 'Law of Income Tax’ [ See endnote.6], the two words i.e., accrue and arise, together mean ' to become a present and enforceable I.T.A. No.550/Chny/20 3 right’ and 'to become right of demand’ and that 'both words are used in contra distinction to the word receive and indicate a right to receive. 8. The Courts also have uniformly opined that for an income, to be considered to have 'accrued’ in the hands of the assessee, such assessee must have the right to receive the income [see endnote.7]. In other words, there must be a debt owed by somebody to the assessee acquired right to receive the income. [see endnote.8] Further, merely because entry is made in the book accounts would not in itself, lead to a conclusion that any income had accrued to assessee [See endnote.9]. Applying these principles to the case of taxing retention monies, the Courts held that the same was not taxable until an assessee had the right to receives the same from the contractee [See endnote. 10]. 9 This settled position of taxing retention monies had to be revisited in the wake of introduction of ICDS. Standard III of ICDS deals with construction contracts. The said ICDS provides that contract revenue shall be recognized when there is reasonable certainty of its ultimate collection [See End note.11] and that the contract revenue shall comprise retentions as well [See endnote.12]. Retentions are defined in the Standard to mean 'amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified’. The Standard advocates use of percentage completion method for recognizing contract costs and revenues [See endnote.13] and contract revenue as such is to be recognized when there is a reasonable certainty of its ultimate collection. 10. This inclusion of retention money under contract revenue under ICDS-III was challenged before the Hon’ble Delhi Court on the ground that such an inclusion was contrary to position taken by Courts in this regard. In its ruling, the Hon’ble High Court held that Paragraph 10 of ICDS- III could not be interpreted in a manner seeking to tax retention monies at an earliest possible stage when the receipt of such sum is uncertain or unconditional. 11. The Hon’ble High Court opined that Paragraph 10 of ICDS-III did not state the stage at which the retentions need to be aggregated with contract revenue and thus, the settled principles of accrual would still prevail and only upon such retentions accruing to a taxpayer, should they be considered as part of contract revenue. 12. In an attempt to make the notified ICDS effective even after the Delhi High Court’s ruling, the Finance Act,2018 made certain amendments in the IT Act which included insertion of a new section that dealt with computation of income from construction and service that dealt with computation of income from construction and service contracts[See endnote.14]. the Memorandum explaining the amendments proposed by the Finance Bill,2018 suggested that these amendments were being made 'in order to bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS’. Apart from reiterating that percentage completion method was to be followed, the new section also specified that contract revenue shall include retention money. I.T.A. No.550/Chny/20 4 13. Neither the Standard nor the IT Act has deemed the time of accrual of retention monies to be in the year in which the related work is completed, notwithstanding the fact that such retentions may be payable at a future date. 14. It is nobody’s dispute that contract revenue would include retention monies. However, the subtle aspect, as the Hon’ble High Court had rightly pointed out is whether such retention money has acquired the character of income and if it so did only then it would be included as part of contract revenue and not otherwise. In other words, if retentions can be said to be accruing to taxpayer, the extent of such retentions would be added to contract revenue and if there is no such accrual, the retention money component would be zero. 15. The amendment made in the IT Act has merely stated what was already provided in the ICDS-III but interpreting that to tax retentions at a stage anterior to such accrual appears to be contrary to the scope of taxation under the IT Act. Be that as it may, even under ICDS-III, contract revenue shall be recognized as and when there is reasonable certainty of its ultimate collection. 16. While the term reasonable certainty is not defined in the ICDS, in the context of retention monies, one may argue that there exists a complete uncertainty as to whether a taxpayer would at all be eligible to receive either whole or part of the sum and hence taxing such retentions would therefore tantamount to taxing hypothetical income which is not permissible [See endnote.15], absent a legal fiction to tax the same. 17. Thus, depending on the terms of the contract and surrounding facts and circumstances of this case, we request the learned Assessing officer to consider our contention that the retention money does not accrue until the time of its receipt”. 3. After considering the submissions of the assessee, the Assessing Officer has observed as under: “1. The Assessee is maintaining its books on mercantile basis. 2. This indicates that assessee records incomes as well as expenses on accrual basis. 3. The assessee has deducted an amount of Rs.11,59,93,101/- as “Retention money not received” from its Net Profit as per Profit and Loss account. This clearly shows that this 'Retention money of Rs. 11,59,93,101/- has already been recorded in the books of the assessee on accrual basis. 4. By recording the above amount as income in its books, the assessee has acceded that the Retention money of Rs.11,59,93,101/- has accrued it as income. 5. The opinion of the Hon’ble Delhi High Court in the case relied by the assessee, is the "settled principles of accrual would still prevail, and only I.T.A. No.550/Chny/20 5 upon such retentions accruing to a taxpayer, should they be considered as part of contract revenue”. 6. As the retention money of Rs.11,59,93,101/- has already been recorded in its books by the assessee, it is confirmed that the amount has accrued to its as per the settled principles of accrual. Therefore it forms part of contract Revenue as envisaged in ICDS-III. 7. Further while deducting the above amount from the Net profit, it is described as “Retention money not received” Hence, it is seen that assessee is reducing the amount not “received” from its profit. Given that the mercantile system is being followed, there is no scope for such deduction. There is no provision in the Income Tax Act, 1961 under which such deduction can be allowed.” Therefore the amount of ₹.11,59,93,101/- reduced from the Net Profit as 'Retention money not received’ was disallowed and added back to the total income of the assessee. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer. 4. On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the retention money has not been accrued to the assessee and therefore, the same was not offered for taxation. 5. On the other hand, the ld. DR has submitted that the as per section 43CB of the Act inserted by the Finance Act, 2018 w.r.e.f. 01.04.2017, the retention money has to be taxed as per the above provisions. The relevant provisions of section 43CB of the Act are reproduced as under: Computation of income from construction and service contracts. 43CB.—(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage I.T.A. No.550/Chny/20 6 of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that profits and gains arising from a contract for providing services,— (i) with duration of not more than ninety days shall be determined on the basis of project completion method; (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)— (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. 6. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The Assessing Officer has taxed the retention money not received, which was reduced from the net profit by the assessee. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer by observing as under: 5.1 Retention money added – ₹.11,59,93,101/- For recognition of 'retention money’ as revenue Prior to ICDS III, the predominant judicia1 view has been that retention money accrues to the taxpayer only when the related performance conditions are fulfilled by the contractor/ taxpayer. In fact, in a host of judicia1 rulings, retention money was held to be not taxable in absence of satisfaction of related performance conditions despite the same being recognised in books of accounts (CIT v. Ignified Boilers (2006) 283 ITR 295 (Mad), CIT v P&C Constructions (P) Ltd. (2009) 318 ITR 113 (Mad), CIT vs. India Fruits Ltd. (2014) 369 ITR 586 (AP), ACIT vs. B.G.R. Energy Systems Ltd. (2014) 47 taxmann.com 266 Hyd Trib), KEC international Limited vs. ITO (ITA No. 2939/Bom/85), ADIT v. Ballast Nedam Dredging (154 TTJ (Mumbai) 280), Amarshiv Construction Pvt. Ltd vs. DCIT(2014) 45 taxmann.com 429 (Guj)). ICDS III provides that I.T.A. No.550/Chny/20 7 retention money shall form part of contract revenue and therefore, needs to be recognised as income as per POCM, even if related performance conditions are yet to be satisfied. To illustrate, if total contract revenue is Rs. 10 Cr and retention money is Rs. 1 Cr payable after one year from completion of contract on satisfactory performance of the asset, the retention money should be included in 'total revenue’ while computing revenue, costs and profit on POCM basis. If 50% of the contract is complete, revenue should be taken at Rs. 5 Cr and not Rs. 4.50 Cr. This will have direct effect of increasing taxable income by Rs. 0.50Cr. The Circular reiterates that retention money, being part of overall contract revenue, shall be recognized as revenue subject to reasonable certainty of its ultimate collection, While one may consider condition of reasonable certainty of ultimate collection for accounting purposes, what is relevant for tax purposes is the 'accrual’ of income i.e. perfected entitlement al legal right to receive such income as per s. 4 and s. 5 of the Income Tax Act. The A.O.’s order has also been considered carefully, At the outset the seven points in para no.19 are also reproduced for reference “1. The Assessee is maintaining its books on mercantile basis. 2. This indicates that assessee records incomes as well as expenses on accrual basis. 3. The assessee has deducted an amount of Rs.11,59,93,101/- as “Retention money not received” from its Net Profit as per Profit and Loss account. This clearly shows that this 'Retention money of Rs. 11,59,93,101/- has already been recorded in the books of the assessee on accrual basis. 4. By recording the above amount as income in its books, the assessee has acceded that the Retention money of Rs.11,59,93,101/- has accrued it as income. 5. The opinion of the Hon’ble Delhi High Court in the case relied by the assessee, is the "settled principles of accrual would still prevail, and only upon such retentions accruing to a taxpayer, should they be considered as part of contract revenue”. 6. As the retention money of Rs.11,59,93,101/- has already been recorded in its books by the assessee, it is confirmed that the amount has accrued to its as per the settled principles of accrual. Therefore it forms part of contract Revenue as envisaged in ICDS-III. 7. Further while deducting the above amount from the Net profit, it is described as “Retention money not received” Hence, it is seen that assessee is reducing the amount not “received” from its profit. Given that the mercantile system is being followed, there is no scope for such deduction. There is no provision in the Income Tax Act, 1961 under which such deduction can be allowed.” I.T.A. No.550/Chny/20 8 In the light of the above, I see no reason to interfere in A.O’s order, which is confirmed. This ground therefore stands dismissed.” 6.1 We are of the considered opinion that neither the Assessing Officer nor the ld. CIT(A) has examined as to whether the income is accrued to the assessee or not. Therefore, we set aside the order of the ld. CIT(A) on this issue and direct the Assessing to examine all the details and redo the assessment keeping in view of the provisions of section 43CB of the Act after affording reasonable opportunity of being heard to the assessee. 7. In the result, the appeal filed by the assessee is allowed for statistical purposes. . Order pronounced on 31 st March, 2023 at Chennai. Sd/- Sd/- (MANOJ KUMAR AGGARWAL) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER Chennai, Dated, 31.03.2023 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ (अपील)/CIT(A), 4. आयकर आयुƅ/CIT, 5. िवभागीय Ůितिनिध/DR & 6. गाडŊ फाईल/GF.