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Mumbai Tribunal upholds taxability of retention money on receipt basis for pending contracts under transitional provisions of ICDS
In the case of Hindustan Construction Company Ltd.[1] (Taxpayer), the question raised before the Mumbai Tribunal was on the taxability of retention money on construction contracts entered before 31 March 2016 on percentage of completion method (POCM) basis.
The Taxpayer was engaged in the business of construction of technically complex and high–value projects across all business segments i.e., construction of roads and expressways, tunnels, bridges, dams and barrages. Since the retention money is released to the customer at the end of the contract after settling disputes/recoveries, the taxpayer offered the retention money on receipt from customers. It relied on the transitional provision of Income Computation and Disclosure Standards (ICDS)-III dealing with construction contracts to contend that the retention money can be offered to tax as per regular method of accounting followed prior to ICDS for pre-ICDS construction contracts i.e., the contracts which commenced but not completed on or before 31 March 2016. The tax authority sought to accelerate the taxation of retention money on POCM basis as it forms part of contract receipts. It contended that provisions of Income Tax Laws (ITL), which require construction contract to be recognized basis POCM, do not contain such transitional provision and thereby, it is in conflict with ICDS-III. As per preamble to ICDS, in case of conflict between ITL and ICDS, the provisions of ITL shall prevail.
The Tribunal noted that the provisions of the ITL and ICDS-III which require retention money to be recognized on POCM basis is applicable from 1 April 2017. ICDS-III contains transitional provision which allows the taxpayer to recognize contract revenue of pre-ICDS construction contracts, basis regular method of accounting followed prior to ICDS-III. The Tribunal agreed with the Taxpayer’s contention that in the present case since the contracts are entered prior to 31 March 2016 and are incomplete on that date, retention money from such contracts can be recognized as per the regular method of accounting adopted earlier. Thus, it upheld the recognition of retention money on receipt from customers based on the transitional provisions of ICDS-III. It held that there is no conflict in the provision of the ITL which requires income from construction contract to be recognized basis POCM and ICDS-III. The ITL requires that construction contracts should be recognized as per ICDS-III which includes transitional provision.
In view of the above, the Tribunal allowed the profit-linked deduction by holding that the Taxpayer satisfies the requirement of acting as developer, and the Taxpayer’s activity qualifies as “development” of project (and not mere “work-contract”).