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CMA Final · Direct Tax Laws and International Taxation · Income Computation and Disclosure Standards (ICDS)

Rohan Infra Ltd has a construction contract. Contract revenue as per ICDS includes the agreed price and a retention money of ₹4,00,000 held back by the customer. Contract costs incurred are ₹30,00,000 and the company also earned interest of ₹1,00,000 on temporary investment of contract advances. Under section 57 of the Income-tax Act, 2025, how are these items treated for the contract?

Retention money is included in contract revenue and contract costs stay at ₹30,00,000. Section 57(3) requires revenue to include retention money and prohibits reducing contract costs by incidental interest, dividends or capital gains, so the ₹1,00,000 interest is not netted off.

  1. ARetention money is excluded from revenue and interest reduces contract costs to ₹29,00,000
  2. BRetention money is included in revenue and interest reduces contract costs to ₹29,00,000
  3. CRetention money is excluded from revenue and contract costs stay at ₹30,00,000
  4. DRetention money is included in revenue and contract costs stay at ₹30,00,000Correct

Explanation

Section 57(3)(a) says contract revenue includes retention money. Section 57(3)(b) says contract costs are not reduced by incidental interest, dividends or capital gains. So revenue includes the ₹4,00,000 and costs remain ₹30,00,000. Options reducing costs by ₹1,00,000 breach clause (b).

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