ACIT, Cochin V. Aarkay Erectors P.Ltd, Cochin

ITA 656/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77462 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2014
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 19-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 14-10-2013
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NO. 656/COCH/2013 ASSESSMENT YEAR: 2007-08 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), KOCHI. VS. AARKEY ERECTION (P) LTD., KOCHI REFINERY ROAD, CHITHRAPUZHA, IRIMPANAM P.O., TRIPUNITHURA-682 309. [PAN: AAECA 8044R] (REVENUE -APPELLANT) (ASSESSEE-RESPONDEN T) REVENUE BY SMT. LATHA V. KUMAR, JR. DR ASSESSEE BY SHRI ANIL D. NAIR, ADV. DATE OF HEARING 19/06/2014 DATE OF PRONOUNCEMENT 27/06/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF THE CIT(A)-III, KOCHI DATED 19-07-2013 FOR THE ASSESSME NT YEAR 2007-08. 2. THE REVENUE HAS RAISED A SOLITARY GROUND THAT T HE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OUGHT TO HAVE CONSIDERED THE FACT THAT THE 10% RETAINED BY THE CONTRACT AWARDER IS A PORTION RETAINED NOT F OR MEETING ANY EXISTING LIABILITY BUT COMPULSORILY WITHHELD TO BE REPAID AT A LATER D ATE, IN OTHER WORDS, IT IS THE INCOME ALREADY ACCRUED TO THE ASSESSEE FOLLOWING ME RCANTILE SYSTEM OF ACCOUNTING. I.T.A. NO.656/COCH/2013 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE A SSESSEE IS A COMPANY WHICH IS IN THE BUSINESS OF EXECUTING CONTRACT WORKS, FOR WHICH AN AGREEMENT HAS BEEN ENTERED INTO WITH BHARAT PETROLEUM CORPORATION LTD. , KOCHI AND CHENNAI PETROLEUM CORPORATION, CHENNAI. DURING THE YEAR UN DER CONSIDERATION, 10% OF THE TOTAL PAYMENTS HAS BEEN RETAINED BY THE PRINCIP AL I.E. BPCL TOWARDS RETENTION MONEY AND THE SAME IS TO BE PAID AFTER 12 MONTHS OF THE DATE OF VIRTUAL COMPLETION OF THE WORK. HOWEVER, THE TDS HAS BEEN DEDUCTED ON THE WHOLE OF THE CONTRACT AMOUNT BUT THE MONEY SO RETAINED HAS N OT BEEN CREDITED TO THE P&L ACCOUNT. THE ASSESSING OFFICER HAS TREATED IT AS A CCRUED INCOME AND ADDED A SUM OF RS.94,54,000/-. 4. ON APPEAL, THE LD. CIT(A) HAS OBSERVED AS UNDER: HAVING GONE THROUGH THE SUBMISSIONS OF THE APPELL ANT AND THE OBSERVATIONS OF THE ASSESSING OFFICER IT HAS BEEN FOUND THAT AS PER CLAUSE 12 OF THE MEMORANDUM OF AGREEMENT, THE TERMS FOR T HE PAYMENT INCLUDE:- 12. PAYMENT : THE COMPANY, IN CONSIDERATION OF THE CONTRACTOR C ARRYING OUT AND COMPLETING THE SAID WORK AT THE COMPANYS S AID REFINERY SITE, TO THE SATISFACTION OF THE COMPANY SHALL PAY THE CONTR ACTOR AS PER THE SAID SCHEDULE OF RATES, SUBJECT TO DEDUCTIONS, RETENTION S AND ABATEMENTS, IF ANY TO BE MADE THEREFROM IN ACCORDANCE WITH THE PRO VISIONS OF THIS AGREEMENT. DURING THE PROGRESS OF THE WORK AND PRO VIDED THE WORK IS PROGRESSING ACCORDING TO THE TIME-TABLE LAID DOWN T O THE CONTRACTOR, THE CONTRACTOR SHALL BE ENTITLED ONCE A MONTH TO RECEIV E ADVANCE PAYMENT ON THE ABOVE MENTIONED SUM PROPORTIONATE TO SUCH PA RT OF THE WORK AS SHALL HAVE BEEN EXECUTED DURING THE PRECEDING MONTH BUT ONLY AFTER SUCH PART OF THE WORK AS HAS BEEN EXECUTED HAS BEEN INSPECTED AND APPROVED BY THE COMPANYS AUTHORIZED ENGINEER. FROM SUCH INTERIM PAYMENTS EACH TIME 10% WILL BE WITHHELD AND THIS 10 % WILL BE PAID TO THE CONTRACTOR SIX MONTHS/TWELVE MONTHS AFTER THE D ATE OF VIRTUAL COMPLETION OF THE WORK PROVIDED THAT ANY DEFECTS AP PEARING DURING THAT PERIOD ARE CORRECTED BY HIM IN ACCORDANCE WITH CLAU SE 13, VIRTUAL COMPLETION SHALL MEAN THAT THE SUBJECT MATTER OF T HE WORK IS IN THE OPINION OF THE COMPANYS AUTHORIZED ENGINEER, FIT TO BE USED FOR THE PURPOSE FOR WHICH IT WAS MEANT. I.T.A. NO.656/COCH/2013 3 OR 100% PAYMENT WILL BE MADE ON THE BASIS OF ACTUAL EX ECUTED QUANTITIES AFTER SATISFACTORY COMPLETION AND DUE CERTIFICATION BY BPCL ENGINEER-IN- CHARGE. IN LIE OF 10% RETENTION MONEY, CONTRACTOR SHALL SUBMIT BANK GUARANTEE OF EQUIVALENT AMOUNT OF RETENTION MONEY ( 10% OF CONTRACT VALUE) BEFORE SUBMISSION OF 1 ST RUNNING ACCOUNT (RA) BILL VALID FOR DEFECTS LIABILITY PERIOD OF SIX MONTHS/TWELVE MONTH S. FURTHER, THE BANK GUARANTEE SHALL HAVE A CLAIM PERIOD OF 3 MONTHS BEY OND THE DATE OF EXPIRY, AND THE SAME SHALL BE MENTIONED CLEARLY IN THE BANK GUARANTEE. 13. DEFECTS AFTER COMPLETION: ANY DEFECTS WHICH MAY APPEAR WITHIN THE PERIOD OF SIX MONTHS/TWELVE MONTHS AS MENTIONED IN CLAUSE 12 SHALL, UPON THE DIRECTIONS IN WRITING OF THE COMPANY AND W ITHIN SUCH REASONABLE TIME AS SHALL BE SPECIFIED THEREIN BE AM ENDED AND MADE GOOD BY THE CONTRACTOR, AT HIS OWN COST UNLESS THE COMPANY SHALL DECIDE THAT THE CONTRACTOR WILL BE PAID FOR SUCH AMENDING AND MAKING GOOD, AND IN CASE OF DEFAULT ON THE CONTRACTORS PART, TH E COMPANY MAY AMEND AND MAKE GOOD OR HAVE AMENDED AND MADE GOOD S UCH DEFECTS AND ALL DAMAGES, LOSSES AND EXPENSES SHALL BE RECOV ERABLE FROM HIM BY THE COMPANY OR MAY BE DEDUCTED BY THE COMPANY FROM ANY MONEYS DUE OR THEREAFTER BECOMING DUE TO THE CONTRACTOR A SUM TO BE DETERMINED BY THE COMPANY SUFFICIENT TO COVER THE C OST OF AMENDING AND MAKING GOOD SUCH DEFECTS, AND IN THE EVENT OF T HE AMOUNT WITHHELD IN ACCORDANCE WITH CLAUSE 12 BEING INSUFFICIENT, RE COVER THE BALANCE FROM THE CONTRACTOR. ALTERNATIVELY, THE COMPANY MA Y, IN LIEU OF SUCH AMENDING AND MAKING GOOD SUCH DEFECTS, AND IN THE E VENT OF THE AMOUNT WITHHELD IN ACCORDANCE WITH CLAUSE 12 BEING INSUFFICIENT, RECOVER THE BALANCE FROM THE CONTRACTOR TOGETHER WI TH ANY EXPENSES THE COMPANY MAY HAVE INCURRED IN CONNECTION WITH SUCH R ECOVERY. SHOULD ANY DEFECTIVE WORK HAVE BEEN DONE OR BAD INFERIOR M ATERIALS SUPPLIED BY ANY SUB-CONTRACTOR EMPLOYED ON THE WORK, HAS BEEN A PPROVED BY THE COMPANY AS PROVIDED IN CLAUSE 15, THE CONTRACTOR SH ALL BE LIABLE TO AMEND AND MAKE GOOD IN THE SAME MANNER AS IF SUCH W ORK OR MATERIALS HAD BEEN DONE OR SUPPLIED BY THE CONTRACTOR. THE CO NTRACTOR SHALL REMAIN LIABLE UNDER THIS CLAUSE NOTWITHSTANDING THE SIGNING BY THE COMPANYS AUTHORIZED ENGINEER OF ANY CERTIFICATE OR THE PASSING OF ANY ACCOUNT. 2.4 THE ASSESSING OFFICER, HOWEVER, INSTEAD OF THE TERMS FOR THE PAYMENT UNDER CLAUSE 12 OF THE SAID MEMORANDUM HAS TAKEN THE REFERENCE CLAUSE 19.1 OF SECURITY DEPOSIT OF THE WO RK ORDER. IN ANY CASE, THE ISSUE REMAINS WHETHER THE 10% OF THE PERIODICAL PAYMENTS OF THE CONTRACT AMOUNT WHICH RETAINED BY THE PRINCIPAL I.E . M/S. BHARAT I.T.A. NO.656/COCH/2013 4 PETROLEUM CORPORATION LTD., FOR A PERIOD OF TWELVE MONTHS AFTER THE DATE OF THE VIRTUAL COMPLETION OF THE WORK SHOULD BE CON SIDERED AS TO HAVE ACCRUED AS INCOME OF THE APPELLANT, FOLLOWING THE M ERCANTILE SYSTEM OF ACCOUNTING. SO FAR AS THE ACCOUNTING IS CONCERNED THE PAYMENTS SO RETAINED WOULD OF COURSE BE TREATED AS TO HAVE ACCR UED ESPECIALLY HAVING REGARD TO THE JUDICIAL PRONOUNCEMENTS. ACCRUAL OF INCOME COULD BE ONE THING YET, THE CONSISTENCY OF ACCOUNTING CARRIES A LOT OF WEIGHT. AT THE ONE HAND, TILL THE FINALITY OF THE CLAIM OF THE WOR K DONE AS PER THE SATISFACTION OF THE PRINCIPAL, IS NOT REACHED THERE ARE ALL POSSIBILITIES OF DEDUCTION FROM SUCH RETAINED AMOUNT. MOREOVER, THE APPELLANT HAS BEEN FOLLOWING THIS SYSTEM OF ACCOUNTING WITH CONSI STENCY AND THE RETAINED AMOUNT IS BROUGHT TO TAX IN THE NEXT YEAR. THEN A SITUATION WOULD ARISE WHEN TAXES HAVE ALREADY BEEN PAID FOR T HE YEARS RETAINED MONEY IN THE NEXT YEAR THERE IS HARDLY ANY NEED TO DISTURB THE SAME. ACCORDINGLY, HAVING REGARD TO THE CONSISTENCY OF AC COUNTING BEING FOLLOWED BY THE APPELLANT, THE ADDITION MADE ON THI S GROUND IS DELETE AND THE APPEAL IS ALLOWED. 5. AGAINST THIS, THE REVENUE HAS FILED THIS APPEAL BEFORE US. 6. WE HAVE HEARD THE PARTIES. THE ISSUE IS WHETHER THE 10% OF THE PERIODICAL PAYMENTS OF THE CONTRACT AMOUNT WHICH WERE RETAINED BY THE PRINCIPAL I.E. M/S. BHARAT PETROLEUM CORPORATION LTD., FOR A PERIOD OF TWELVE MONTHS AFTER THE DATE OF THE COMPLETION OF WORK SHOULD HAVE BEEN ACCRUED AS INCOME OF THE ASSESSEE SINCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. ACCORDING TO THE LD. DR RETENTION MONEY ACCRUES ONLY TO ASSESSEE WHEN TH E CONTRACT IS COMPLETE. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT SAME WAS OFFERED TO TAX IN THE SUBSEQUENT ASSESSMENT YEAR AND TAXING THE SAME IN T HIS ASSESSMENT YEAR AMOUNTS TO DOUBLE TAXATION. THE LD. AR FURTHER SUBMITTED TH AT 10% OF THE RETENTION MONEY WAS WITHHELD BY THE PARTIES ON THE GROUND THAT THE AMOUNT WOULD BE REALIZED ONLY AFTER 12 MONTHS COMPLETION OF THE PROJECT. SUCH AMO UNT IS PAYABLE ONLY AFTER 12 MONTHS OF COMPLETION OF THE PROJECT IF THE OTHER PA RTY IS NOT SATISFIED WITH WORK DONE BY THE ASSESSEE, THE RETENTION MONEY IS NOT PAYABLE . THE ASSESSEE IS ENTITLED TO RECEIVE THE RETENTION MONEY AFTER COMPLETION OF THE CONTRACT. ON THE DATE OF RAISING THE BILLS, NO ENFORCEABLE LIABILITY HAD ACCRUED OR ARISEN. WHEN THE ASSESSEE HAS NO RIGHT TO RECEIVE THE SAME BY VIRTUE OF THE CONTRACT BETWEEN THE PARTIES AND THE I.T.A. NO.656/COCH/2013 5 ASSESSEE HAS ALSO NO RIGHT TO ENFORCE PAYMENT, IT C ANNOT BE SAID THAT THE RIGHT TO RECEIVE PAYMENT OF THE REMAINING 10% OF THE VALUE O F JOB DONE, ACCRUES AS SOON AS IT IS COMPLETED. 7. AFTER CONSIDERING THE VARIOUS JUDGMENTS NAMELY R EPORTED IN THE CASE OF CIT VS. A GAJAPATHY NAIDU (1964) 53 ITR 114 (SC), CIT VS. CHA NCHANI BROTHERS (CONTRACTORS) PVT. LTD.(1986) 161 ITR 418 (PATNA), JANATHA CONTRA CT CO. VS. CIT (1976) 105 ITR 627 (KER.) AND CIT VS. SIMPLEX CONCRETE PILES (INDI A) PVT. LTD. (1989) 179 ITR 8 (CAL.), THE CIT(A) CAME TO THE CONCLUSION THAT THE RETENTION MONEY IS NOT ACCRUED AND IS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE THE ORDER OF THE CIT(A) HAS BEEN CONCURRED WITH THE ABOVE JUDGMENTS. HOWEVER, WE MAK E IT CLEAR THAT WHEN THE ASSESSEE RECEIVED THE AMOUNT RETAINED, IT SHOULD BE OFFERED FOR TAXATION. IT IS THE OBLIGATION OF THE ASSESSING OFFICER TO BRING THE AM OUNT FOR TAXATION IN THE YEAR IN WHICH THE ASSESSEE ACTUALLY RECEIVE. ACCORDINGLY, WITH THESE OBSERVATIONS, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED ACCORDINGLY ON 27-06-2014. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 27TH JUNE, 2014 GJ COPY TO: 1. AARKEY ERECTION (P) LTD., KOCHI REFINERY ROAD, CH ITHRAPUZHA, IRIMPANAM P.O., TRIPUNITHURA-682 309. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCL E-1(1), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-III, KOC HI. I.T.A. NO.656/COCH/2013 6 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN