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September 2019

Income – Accrual of income – Difference between accrual and receipt – Specified amount retained under contract to ensure there are no defects in execution of contract – Amount retained did not accrue to assessee Business loss – Bank guarantee for satisfactory execution of contract – Contract cancelled and bank guarantee encashed – Loss due to encashment of bank guarantee was deductible

By K.B.Bhujle
Advocate
Reading Time 3 mins

42.  CIT vs. Chandragiri Construction Co.; [2019] 415 ITR 63 (Ker.) Date of order: 13th March, 2019; A.Ys.: 2002-03 to 2005-06; and 2007-08

 

Income – Accrual of income – Difference between accrual and receipt – Specified amount retained under contract to ensure there are no defects in execution of contract – Amount retained did not accrue to assessee

 

Business loss – Bank guarantee for satisfactory execution of contract – Contract cancelled and bank guarantee encashed – Loss due to encashment of bank guarantee was deductible

 

The assessee entered into a contract and furnished a guarantee for satisfactory execution of the contract. There was a defect liability period reckoned from the date of completion of the contract for which period the awarder retained certain amounts for the purpose of ensuring that there arose no defects in the work executed by the assessee. The assessee claimed that the amount retained did not accrue to it. This claim was rejected by the AO. The contract was cancelled by the awarder and the bank guarantee was encashed. An arbitration proceeding was pending between the awarder and the awardee. The assessee claimed the bank guarantee amount as business loss. The AO disallowed the claim holding that till the arbitration proceedings were concluded the assessee could not claim the amount as business loss.

 

The Tribunal allowed both the claims of the assessee.

 

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

 

‘i)   Accrual and receipt are two independent incidents and their matching or correspondence in time in a given case, if so occurring, is purely a matter of coincidence, both immaterial and irrelevant for the purpose of determining the fact of accrual, which has to be on its own terms.

ii)    By the specific terms of the contract itself, the awarder was entitled to retain the amount so as to rectify any defects arising in the period in which as per the terms of the contract the amount was retained. There could be no accrual found on the completion of contract, since the assessee’s right to such amount would depend on there being no defects arising in the subsequent period during which the awarder was enabled retention of such amounts.

iii)   The assessee did not have the amounts with it and the bank guarantee had been encashed and it was a loss which occurred in the A.Y. 2007-08. It was deductible.’

 

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