s.43CB — Construction and service contracts: percentage of completion
Profits from a construction contract or a contract for services are computed on the percentage of completion method under the income computation and disclosure standards, with narrow exceptions for short and indeterminate service contracts.
Inserted by section 15 of the Finance Act, 2018, deemed to have been inserted with effect from 1 April 2017, after the Delhi High Court's decision in Chamber of Tax Consultants v. Union of India of 8 November 2017. The counterpart in the Income-tax Act, 2025 is section 57, which refers to the standards notified under section 276(2).
Income-tax Act, 1961
s.43CB
Income-tax Act, 2025
s.57
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 43CB(1) of the Income-tax Act, 1961 provides that the profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of the percentage of completion method in accordance with the income computation and disclosure standards notified under section 145(2). Its single proviso applies the project completion method to a service contract of not more than ninety days and the straight line method to a service contract involving an indeterminate number of acts over a specific period. Sub-section (2) provides that for these methods the contract revenue includes retention money and the contract costs are not reduced by incidental income in the nature of interest, dividends or capital gains. The section was inserted by section 15 of the Finance Act, 2018 with retrospective effect from 1 April 2017. The relevant standard, ICDS III, applies to a construction contract of a contractor, and the Board's FAQs of 23 March 2017 state that no standard has been notified for real estate developers. The Ahmedabad Tribunal in Aaryan Buildspace LLP (March 2025) and Vyapti Enterprise (July 2025) and the Chennai Tribunal in BSR Builders (January 2026) held that the section does not reach a developer. The counterpart in the Income-tax Act, 2025 is section 57, whose sub-section (2) carries the former proviso and whose sub-section (3) carries the retention money and incidental income rules.
What the provision does
Makes percentage of completion mandatory for construction contracts and most service contracts, ties it to the income computation and disclosure standards, includes retention money in revenue and forbids netting incidental income against cost. It does not prescribe a method for a real estate developer selling its own units, and it does not override a method regularly followed for contracts commenced before 1 April 2016 that the transitional provisions of ICDS III preserve.
Threshold questions
- Is the contract a construction contract specifically negotiated for the construction of an asset, or a contract for providing services, rather than a sale of units by a developer
- Is the assessee a contractor within the scope of ICDS III, or a developer outside it on the Board's FAQs of 23 March 2017
- Did the contract commence before 1 April 2016, so that the transitional provision of ICDS III preserves the method previously followed
- Is a service contract of ninety days or less, or one involving an indeterminate number of acts, so that the proviso applies
- Has retention money been included in contract revenue and has incidental income been kept out of contract cost
In practice
The recurring disputes.
Whether the section reaches a real estate developer
The developer's argument is that it sells completed units under contracts of sale and has no contract specifically negotiated for the construction of an asset with anyone; ICDS III applies to a construction contract of a contractor; and the Board said in its FAQs of 23 March 2017 that no standard is notified for developers. The Ahmedabad Tribunal in Aaryan Buildspace and Vyapti Enterprise and the Chennai Tribunal in BSR Builders accepted this, consistently with the Delhi High Court's reliance in Paras Buildtech on an unchallenged finding that the assessee was a developer and not a contractor. The Revenue's argument is that the section and the standard are framed by reference to the nature of the contract, not the label of the assessee, and that a developer whose agreements with buyers fix the specification and price construction stages is in substance constructing to order. No High Court has decided the point since the section was enacted.
Whether the rehab component of a redevelopment is a construction contract
In a redevelopment the developer builds the society's members new flats on the society's land to a specification the development agreement fixes, with a completion period and often a penalty and bank guarantee. The Revenue's argument is that this is a contract specifically negotiated for the construction of an asset, with development rights as consideration, so that the section mandates percentage of completion on the rehab component even if the free-sale component follows project completion. The developer's argument is that the agreement is a single bargain in which the rehab flats are the price of development rights, not a separately priced construction job, and that one project cannot carry two methods, as the Mumbai Tribunal held in the slum context in Chembur Trading Corporation. The point has not been decided.
The retrospective insertion and assessment years before 2017-18
The section is deemed to have been inserted from 1 April 2017, which corresponds to assessment year 2017-18, the first year of the standards. The assessee's argument is that for earlier years the method regularly followed under section 145(1), protected by Bilahari Investment, governs, and Tribunals have recorded decisions holding the section applicable only from assessment year 2017-18. The Revenue's argument for earlier years must rest on distortion of profits under the general law rather than on the section. For later years the open question is the scope of the transitional provision of ICDS III for contracts commenced on or before 31 March 2016.