Retention Money to be offered to Tax in the Year of Receipt: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai Bench, has recently in an appeal filed before it, held that retention money is to be offered to tax in the year of receipt.

The aforesaid observation was made by the Tribunal when an appeal was preferred before it by the Revenue, for Assessment Year (AY) 2017-18, as against the order of the learned Commissioner of Income Tax (Appeals)-6, Chennai [CIT(A)] dated 23-03-2020, in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 19-11-2019.

The facts of the case being that the assessee was a resident corporate who was engaged in the business of designing, engineering, supply, erection and commissioning of cooling towers and air-cooled condensers, it was observed by the AO that the assessee excluded retention amount of Rs.1173.90 Lacs from the computation of income.

However, the assessee having not excluded the expenditure, it was held by the AO that there was distortion of profits, due to which he, while allowing net profit rate of 4.71% on these receipts, added the balance Rs.1118.61 Lacs to the income of the assessee.

Aggrevied by the same the assesse preferred an appeal before the CIT(A), who Concurring with assessee’s submissions, held that the assessee could claim expenses on accrual basis and the expenditure is to be allowed as and when it is incurred.

Subsequently, he directed the AO to quantify and pass order in terms of directions given by Tribunal in earlier years, and it is by being aggrieved by the same that the Revenue has preferred the instant appeal before the Tribunal.

The ground of the Revenue’s appeal being the question as to whether on the facts and in the circumstances of the case and in law, it was right in directing the AO to quantify the retention money payment only on accrual basis and not on actual payment basis, whereas the disallowance was made on the expenditure relatable to withheld amount, the Tribunal consisting of V. Durga Rao, the Judicial Member and Manoj Kumar Aggarwal, the Accountant Member, observed as follows:

“It could be seen that the nature of assessee’s work is such that a part of the contract amount is retained by the customers and the same is released on satisfactory performance of the project. Therefore, the assessee, following consistent method of accounting, defer the same and recognizes these revenues on receipts basis. So far as the expenditure is concerned, the same is claimed on accrual basis.”

“As rightly noted by Ld. CIT(A), this methodology has been approved by coordinate bench of Tribunal in assessee’s own case for earlier years. There is nothing on record to suggest that the aforesaid decisions have been reversed in any manner. No change in facts is before us in this year. Since Ld. CIT(A) has merely followed the adjudication of Tribunal, the same could not be faulted with. We order so”, dismissing the Revenue’s appeal they ruled.

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