Section 57 is the substantive equivalent of 1961 s. 43 CB. It mandates Percentage-of-Completion Method (PoCM) for construction contracts and long-duration service contracts (> 90 days), and Project-Completion Method for short-duration…
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ITA 2025 · Section 57
Section 57 — REVENUE RECOGNITION FOR CONSTRUCTION & SERVICE CONTRACTS
Section 57 is the substantive equivalent of 1961 s. 43CB. It mandates Percentage-of-Completion Method (PoCM) for construction contracts and long-duration service contracts (> 90 days), and Project-Completion Method for short-duration service contracts (≤ 90 days). The provision is an ICDS-anchor: PoCM must be applied per ICDS notified u/s 276(2) (1961 ICDS-III for construction; ICDS-IX for revenue recognition). It overrides AS-7 / Ind AS-115 deviations to the extent the latter conflict.
STATUTORY ARCHITECTURE
Section 57 is a method-of-accounting prescription, overriding general accrual / accounting choices. PoCM percentage must be measured per ICDS-III — surveys, costs-incurred-to-date / total-estimated-costs, or technical estimate. For service contracts, the 90-day duration test triggers different methods: short contracts use Completed-Contract; long use PoCM. Where service involves indeterminate number of acts over a fixed period (e.g., AMC contracts), straight-line recognition over the period is mandated.
RETENTION MONEY
Retention money — typically 5%-10% of contract value, retained by the contractee until defect-liability period expires — is NOT recognised under PoCM until entitlement crystallises (i.e., contractor's right to receive becomes unconditional). ITAT / HCs have consistently aligned with Govt's clarificatory FAQs: retention is taxable on entitlement-crystallisation, not on contract-completion. Practitioner caution: revenue-authority's frequent practice of taxing full retention on contract-end is contestable.
CASE LAW
CIT v. Bilahari Investment P. Ltd (SC) — Project-Completion Method permissible for chit funds; not displaced by PoCM unless statute mandates. CIT v. Manish Buildwell P. Ltd (Del HC) — real-estate developer's PoCM upheld where consistent with AS-7 / ICDS. ACIT v. Mahindra Holidays & Resorts India Ltd (ITAT Chennai) — VOM membership-fee — substantial-services-rendered method upheld.
PLANNING NOTES
(i) For EPC contractors, EPC-developers, and infrastructure SPVs, ensure ICDS-III alignment in PoCM measurement — input-cost ratio is most robust. (ii) Retention-money taxation: maintain separate tracking of contractor's certified-but-retained amounts; do NOT include in PoCM revenue. (iii) For service contracts straddling 90-day boundary, document duration determination — use start-date / end-date / extensions. (iv) Consistency requirement: once a method is chosen for a contract type, stick with it across years.
CROSS-REFERENCES