By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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Retention money received pursuant to furnishing of bank guarantee is not taxable until successful completion of the contract and expiration of the guarantee.
Facts:
The taxpayer was a Dutch company. The taxpayer was engaged in execution of a contract awarded by the Government of India. The contract pertained to the construction of breakwaters, dredging and land reclamation. As per the contract, 5% of the amount was to be held as retention money. When retention money reached 2% of the contract price, the taxpayer could ask for release of 1% of the retention money by furnishing bank guarantee.
The taxpayer received certain payments by way of release of retention money by furnishing bank guarantee. The taxpayer did not offer the same for taxation in the year of release. It contended that the payments would be taxable in the year when the taxpayer satisfactorily completed the work and removed the defects. However, the AO held that the payments had accrued to the taxpayer and accordingly, taxed the same.
The CIT(A) held that since the taxpayer did not have an absolute right over the payments, they were not taxable.
Held:
The Tribunal held as follows: As long as performance guarantee remains and is enforceable without notice to the taxpayer, the retention money received cannot be recognised as income and have to be excluded while computing the income until successful completion of the contract and expiration of the guarantee.
