Section 43CB: Computation of Income from Construction and Service Contracts

Section 43CB of the Income Tax Act, 1961 standardizes the computation of income from construction contracts and service contracts by mandating specific revenue recognition methods. Below is a detailed breakdown of its provisions, applicability, and implications.

1. Key Features of Section 43CB

• Objective: Ensures uniform tax treatment for long-term contracts by aligning with Income Computation and Disclosure Standards (ICDS).
• Methods Prescribed:
  • Percentage of Completion Method (PCM)(default for most contracts).
  • Project Completion Method(for contracts ≤ 90 days).
  • Straight-Line Method(for indeterminate acts over a period).
• Retrospective Effect: Applies from A.Y. 2017–18 onward.

2. Applicability

A.  Covered Contracts

1. Construction Contracts:
   • Building, infrastructure, or asset development projects (e.g., real estate, roads).
   • Includes related services (e.g., architects, project managers).
2. Service Contracts:
   • IT services, consultancy, maintenance, or installation spanning multiple years.

B.  Exceptions

• Short-term service contracts(≤ 90 days): Use Project Completion Method.
• Indeterminate acts(e.g., annual maintenance): Use Straight-Line Method.

3. Methods of Income Recognition

Key Adjustments

• Retention Money: Included in revenue (even if unpaid).
• Incidental Income: Interest/dividends notdeducted from contract costs.

4. Compliance Requirements

1. Documentation: Maintain project progress reports, cost records, and completion certificates.
2. Disclosures in ITR:

• • Method used (PCM/Straight-Line/Project Completion).
  • Retention money and advances received.

3. Consistency: Method must align with ICDS-III(for construction) and ICDS-IV (for services)