Section 43CB of ITA, 1961 : Section 43Cb: Computation Of Income From Construction And Service Contracts

Explanation using Example

Imagine a construction company, BuildRight Constructions, is working on a multi-year project to construct a residential complex. According to Section 43CB of the Income-tax Act, 1961, BuildRight Constructions must calculate the income from this project using the percentage of completion method. This means that the company will recognize revenue and expenses based on the progress of the construction project during the tax year.

For instance, if the project is 25% complete by the end of the fiscal year, BuildRight Constructions will include 25% of the total expected revenue from the project in its taxable income for that year, adjusting for any retention money as per the contract terms.

However, if BuildRight Constructions had another project, a service contract for maintenance work that was scheduled to last only 60 days, the income from this contract would be recognized using the project completion method, meaning the income would be recognized only when the maintenance project is completed, as long as it falls within the same tax year.