Retention Money Taxable Only on Receipt; IBC Liquidation Noted by Supreme Court

Retention Money Taxable Only on Receipt; IBC Liquidation Noted by Supreme Court

Issue

Whether “Retention Money” withheld by a contractee (Power Grid Corporation) pending satisfactory completion of a project accrues as income in the year it is retained, or if it is taxable only in the year it is actually received, especially when the right to receive it is contingent on future certification.

Facts

• Assessment Year: 2014-15.

• The Contract: The assessee entered into a contract with Power Grid Corporation for commissioning a transmission line.

• Retention Clause: The contract allowed Power Grid Corporation to withhold a certain percentage of the consideration. This amount would only be released after the conclusion of the project and certification of satisfactory performance.

• AO’s Stand: The Assessing Officer (AO) treated the retention money as income accrued during the current assessment year, arguing it was “deemed” to be income despite being withheld.

• Appellate Ruling: Both the Commissioner (Appeals) and the Tribunal ruled in favor of the assessee. They held that retention money is a deferred payment contingent on future events (satisfactory completion). Therefore, the assessee had no vested right to receive it in the year of retention. It should be taxed only in the year of actual receipt.

• High Court: The High Court upheld the Tribunal’s view, stating the Revenue failed to provide grounds to interfere with the factual and legal position established by the lower authorities.

• IBC Context: Subsequent to the tax dispute, the assessee underwent liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) and was sold as a going concern.

Decision (Supreme Court)

• Contingent Income: The Supreme Court affirmed the principle that retention money is contingent income. Until the condition (satisfactory completion) is met, there is no “debt owed” to the assessee, and thus no accrual of income under Section 5.

• No Interference: The Court found no reason to interfere with the findings of the High Court and Tribunal, noting that they had correctly applied the legal position to undisputed facts.

• Disposal: The Special Leave Petition (SLP) filed by the Revenue was disposed of without being considered on merits, effectively confirming the lower courts’ rulings in favor of the assessee.

Key Takeaways

• Accrual vs. Receipt: Retention money is a classic example of “contingent income.” It does not accrue when the bill is raised if a portion is contractually withheld pending future performance. It accrues only when the defect liability period ends or the certification is issued.

• Impact on MAT: While not explicitly detailed in the short summary, the reference to Section 115JB implies that this principle applies to Book Profits as well—if it’s not income in the books due to contingency, it shouldn’t be in MAT either.

• IBC Realities: The Court’s acknowledgment of the IBC proceedings highlights the practical reality that taxing “paper income” (retention money) which might never be received (due to liquidation or disputes) is unjust.