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CMA Intermediate · Direct and Indirect Taxation · Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Patel Infra Ltd undertakes a construction contract. Contract price is ₹2,00,000 less retention money of ₹20,000 held by the client, so ₹1,80,000 was billed for payment. Contract costs are ₹1,20,000, and the company earned interest of ₹5,000 on temporary deposits of advances. Assuming the contract is treated as complete, and applying section 57(3) of the Income-tax Act, 2025, what profit arises from the contract?

The profit is ₹80,000. Contract revenue includes the ₹20,000 retention money, giving ₹2,00,000, and contract costs of ₹1,20,000 are not reduced by the ₹5,000 interest, as section 57(3) provides. Revenue less costs equals ₹80,000.

  1. A₹80,000Correct
  2. B₹60,000
  3. C₹85,000
  4. D₹65,000

Explanation

Section 57(3)(a) includes retention money in contract revenue, so revenue is ₹2,00,000 (₹1,80,000 + ₹20,000). Under 57(3)(b), costs are not reduced by incidental interest, so costs stay ₹1,20,000. Profit is ₹2,00,000 - ₹1,20,000 = ₹80,000. Excluding retention money gives ₹60,000; reducing costs by interest gives ₹85,000.

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