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The Tax Publishers Taxability of retention money - Consequential to ICDS amendments *Facts :* Assessee a contractor did not offer income of Rs. 11.59 crores which was retention money not yet received citing that even ICDS does not permit revenue recognition if the receipt is not certain due to Delhi high court and other high courts also ruling against ICDS - III that they do not advocate advancing the taxation if the receipt is not certain. AO and CIT(A) read that the retention money was indeed taxable under the Act. On higher appeal by the assessee. Held in their favour by remanding the case to CIT(A) that a proper reading was not given of the principles on the topic given the insertion of Section 43CB w.r.e.f. 1-4-2017. 43CB. Computation of income from construction and service contracts.--(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145: Provided that profits and gains arising from a contract for providing services,-- (i) with duration of not more than ninety days shall be determined on the basis of project completion method; (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1) -- (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. "For recognition of 'retention money' as revenue Prior to ICDS III, the predominant judicial view has been that retention money accrues to the taxpayer only when the related performance conditions are fulfilled by the contractor/taxpayer. In fact, in a host of judicial rulings, retention money was held to be not taxable in absence of satisfaction of related performance conditions despite the same being recognised in books of accounts -- (CIT v. Ignified Boilers (2006) 283 ITR 295 (Mad) : 2006 TaxPub(DT) 1176 (Mad-HC), CIT v P&C Constructions (P) Ltd. (2009) 318 ITR 113 (Mad) : 2009 TaxPub(DT) 1889 (Mad-HC), CIT v. India Fruits Ltd. (2014) 369 ITR 586 (AP) : 2015 TaxPub(DT) 0053 (AP-HC), ACIT v. B.G.R. Energy Systems Ltd. (2014) 47 taxmann.com 266 (Hyd Trib) : 2014 TaxPub(DT) 3912 (Hyd-Trib), KEC international Limited v. ITO (ITA No. 2939/Bom/85), ADIT v. Ballast Nedam Dredging (2013) 154 TTJ 280 (Mum-Trib) : 2013 TaxPub(DT) 1357 (Mum-Trib), Amarshiv Construction Pvt. Ltd v. DCIT(2014) 45 taxmann.com 429 (Guj)) : 2014 TaxPub(DT) 1771 (Guj-HC). ICDS III provides that retention money shall form part of contract revenue and therefore, needs to be recognised as income as per POCM, even if related performance conditions are yet to be satisfied. To illustrate, if total contract revenue is Rs.10 Cr and retention money is Rs. 1 Cr payable after one year from completion of contract on satisfactory performance of the asset, the retention money should be included in 'total revenue' while computing revenue, costs and profit on POCM basis. If 50% of the contract is complete, revenue should be taken at Rs. 5 Cr and not Rs. 4.50 Cr. This will have direct effect of increasing taxable income by Rs. 0.50Cr. The Circular reiterates that retention money, being part of overall contract revenue, shall be recognized as revenue subject to reasonable certainty of its ultimate collection, While one may consider condition of reasonable certainty of ultimate collection for accounting purposes, what is relevant for tax purposes is the 'accrual' of income i.e. perfected entitlement al legal right to receive such income as per Section 4 and Section 5 of the Income Tax Act. *Case:* KSA Powerinfra (P) Ltd. v. Asstt. CIT 2023 TaxPub(DT) 2281 (Chen-Trib)

The Tax Publishers

Taxability of retention money - Consequential to ICDS amendments

Facts :

Assessee a contractor did not offer income of Rs. 11.59 crores which was retention money not yet received citing that even ICDS does not permit revenue recognition if the receipt is not certain due to Delhi high court and other high courts also ruling against ICDS - III that they do not advocate advancing the taxation if the receipt is not certain. AO and CIT(A) read that the retention money was indeed taxable under the Act. On higher appeal by the assessee.

Held in their favour by remanding the case to CIT(A) that a proper reading was not given of the principles on the topic given the insertion of Section 43CB w.r.e.f. 1-4-2017.

43CB. Computation of income from construction and service contracts.--(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145:

Provided that profits and gains arising from a contract for providing services,--

(i) with duration of not more than ninety days shall be determined on the basis of project completion method;

(ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method.

(2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1) --

(i) the contract revenue shall include retention money;

(ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.

"For recognition of 'retention money' as revenue Prior to ICDS III, the predominant judicial view has been that retention money accrues to the taxpayer only when the related performance conditions are fulfilled by the contractor/taxpayer. In fact, in a host of judicial rulings, retention money was held to be not taxable in absence of satisfaction of related performance conditions despite the same being recognised in books of accounts --

(CIT v. Ignified Boilers (2006) 283 ITR 295 (Mad) : 2006 TaxPub(DT) 1176 (Mad-HC), CIT v P&C Constructions (P) Ltd. (2009) 318 ITR 113 (Mad) : 2009 TaxPub(DT) 1889 (Mad-HC), CIT v. India Fruits Ltd. (2014) 369 ITR 586 (AP) : 2015 TaxPub(DT) 0053 (AP-HC), ACIT v. B.G.R. Energy Systems Ltd. (2014) 47 taxmann.com 266 (Hyd Trib) : 2014 TaxPub(DT) 3912 (Hyd-Trib), KEC international Limited v. ITO (ITA No. 2939/Bom/85), ADIT v. Ballast Nedam Dredging (2013) 154 TTJ 280 (Mum-Trib) : 2013 TaxPub(DT) 1357 (Mum-Trib), Amarshiv Construction Pvt. Ltd v. DCIT(2014) 45 taxmann.com 429 (Guj)) : 2014 TaxPub(DT) 1771 (Guj-HC). ICDS III provides that retention money shall form part of contract revenue and therefore, needs to be recognised as income as per POCM, even if related performance conditions are yet to be satisfied. To illustrate, if total contract revenue is Rs.10 Cr and retention money is Rs. 1 Cr payable after one year from completion of contract on satisfactory performance of the asset, the retention money should be included in 'total revenue' while computing revenue, costs and profit on POCM basis. If 50% of the contract is complete, revenue should be taken at Rs. 5 Cr and not Rs. 4.50 Cr. This will have direct effect of increasing taxable income by Rs. 0.50Cr. The Circular reiterates that retention money, being part of overall contract revenue, shall be recognized as revenue subject to reasonable certainty of its ultimate collection, While one may consider condition of reasonable certainty of ultimate collection for accounting purposes, what is relevant for tax purposes is the 'accrual' of income i.e. perfected entitlement al legal right to receive such income as per Section 4 and Section 5 of the Income Tax Act.

Case: KSA Powerinfra (P) Ltd. v. Asstt. CIT 2023 TaxPub(DT) 2281 (Chen-Trib)