Retention money - Is recognition as contract revenue sufficient to tax it early?
The Central Government, in September 2016, introduced Income Computation and Disclosure Standards (shortly, ‘ICDS’), under the Income tax law, that would govern computation of income of an assessee under the head ‘profits or gains from business or profession’ and ‘income from other sources’ necessitated a taxpayer to take a fresh look at certain issues which were accepted as settled. The Delhi High Court struck down many portions of the ICDS. However by way of amendments to Income Tax Act, 1961 a fresh lease of life has been given to the notified ICDS after the ruling of the Hon’ble Delhi High Court. This article takes a look at one such issue, viz., taxability of retention monies. Retentions, in common parlance, are contractual amounts withheld by a contractee from a contractor, to be paid in future to such contractor only on completion/‘satisfactory’ completion of work undertaken. One may argue that there exists a complete uncertainty as to whether a taxpayer would at all be eligible to receive either whole or part of the sum and hence taxing such retentions would tantamount to taxing hypothetical income which is not permissible, absent a legal fiction to tax the same Depending on the terms of the contract and surrounding facts and circumstances of the case, it may be possible to argue that even after the amendment vide Finance Act, 2018 the retention money does not accrue until the time of its receipt...
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