ITAT rules retention money to be taxed in the year of the receipt
ITAT rules retention money to be taxed in the year of the receipt
The revenue department objected that the assessee excluded the security deposit from the computation of income
The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that the retention money is to be offered for taxation in the year of the receipt.
The tribunal observed this after an appeal was filed by the revenue department for the Assessment Year 2017-2018 against the March 2020 order of the Commissioner of Income Tax (Appeals). It was on the November 2019 assessment framed by the assessing officer (AO) under the Income Tax Act.
The assessee, a resident corporate, is engaged in the business of designing, engineering, supplying, erecting, and commissioning cooling towers and air-cooled condensers.
The AO observed that the assessee excluded the retention amount of Rs.1173.90 lakhs from the computation of income. However, since the expenditure was not excluded, he held there was a distortion of profits. Thus, while allowing the net profit rate of 4.71 percent on the receipts, he added the balance of Rs.1118.61 lakhs to the assessees' income.
Aggrieved by it, the assessee appealed before the CIT(A), who concurred with the assessee's submission. He held that the assessee could claim expenses on an accrual basis and the expenditure would be allowed.
The CIT(A) directed the AO to quantify and pass the order based on the directions given by the tribunal during the previous years. Unconvinced, the revenue department approached ITAT.
The contention was whether it was correct to direct the AO to quantify the retention money payment only on an accrual basis and not on an actual payment basis.
The tribunal comprising V. Durga Rao (judicial member) and Manoj Kumar Aggarwal (accountant member) dismissed the appeal of the revenue department.
The bench observed, "The nature of the assessee's work is such that a part of the contract amount is retained by the customers. It is released on the satisfactory performance of the project. Following the consistent method of accounting, the assessee defers the same and recognizes these revenues on a receipt basis. So far as the expenditure is concerned, the same is claimed on an accrual basis."
ITAT further stated, "As rightly noted by the Ld. CIT(A), this methodology has been approved by the coordinate bench of the tribunal in the assessee's own case for earlier years. Nothing on record suggests that the decisions were reversed in any manner. No change in facts is before us this year. Since the Ld. CIT(A) merely followed the adjudication of the tribunal, it cannot be faulted."
