Income – Accrual of – A. Y. 1996-97 – Mercantile system – Civil construction – Sums retained for payment after expiry of defect free period – Right to receive amount contingent upon there being no defects – Accrual only on receipt of amount after defect free period –

The assessee is a civil contractor. The contract provided for deduction of 7.5% of each bill. Out of this, 5% was payable on successful completion of the work and the balance 2.5% after the expiry of the defect-free period. For the A. Y. 1996-97 the assessee did not include the amount representing 2.5% of the bills. The Assessing Officer held that since the assessee was following the mercantile system of accounting, the amount of 2.5% of the bills could be said to have accrued to it, along with the amount paid under the bills and was liable to be treated as income for that year. The Tribunal held in favour of the assessee.

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

“The right to receive the amount was contingent upon there not being any defects in the work, during the stipulated period. It was then, and only then, that the amount could be said to have accrued to the assessee.”