March 2023

Income Accrual of income Time of accrual Retention money Payment contingent on satisfactory completion of contract Accrued only after obligations under contract were fulfilled Cannot be taxed in year of receipt

K. B. Bhujle, Advocate

81 Principal CIT vs. EMC Ltd
[2023] 450 ITR 691 (Cal)
A. Y.: 2014-15
Date of order: 25th July, 2022
Section 4 of Income-tax Act, 1961

Income Accrual of income Time of accrual Retention money Payment contingent on satisfactory completion of contract Accrued only after obligations under contract were fulfilled Cannot be taxed in year of receipt


The assessee was a contractor. For the A.Y. 2014-15, since the contractee had deducted tax under section 194C of the Income-tax Act, 1961 and the assessee followed the mercantile system of accounting, the AO treated the retention money withheld by the contractee as income in accordance with the terms of contract.

The Commissioner (Appeals) held that the retention money was to be excluded from the income in the A.Y. 2014-15 but the tax deducted at source claimed by the assessee relatable to such retention money was to be allowed in the year in which the assessee declared the retention money as its income. The Tribunal held that the right to receive the retention money accrued only after the obligations under the contract were fulfilled and the assessee had no vested right to receive in the A.Y. 2014-15, and that therefore, it could not be taxed as income of the assessee in the year in which it was retained.

On appeal by the Revenue, the Calcutta High Court upheld the decision of the Tribunal and held as under:

i)    The Commissioner (Appeals) and the Tribunal on consideration of the undisputed facts had applied the correct legal position and had granted relief to the assessee holding that the retention money of  Rs. 142.53 crores did not arise in the relevant A.Y. 2014-15. The Department had not made out any ground to interfere with the order passed by the Tribunal.

ii)    Accordingly, the appeal filed by the Revenue is dismissed and the substantial questions of law are answered against the Revenue.


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