Section 57 of the Income-tax Act, 2025

Where this section sits

Section 57 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.

← Section 56  ·  Section 58 →

What this section does

Sub-section (1) fixes the method for recognising profits and gains from a construction contract or a contract for providing services: the percentage of completion method, as per the income computation and disclosure standards notified under section 276(2), and subject to sub-section (2).

Sub-section (2) carves two service-contract cases out of that default — the project completion method where the duration of the service contract is not more than ninety days, and the straight line method where the contract involves an indeterminate number of acts over a specified period of time.

Sub-section (3) settles two computation points applying to all three methods: contract revenue must include retention money, and contract costs must not be reduced by any incidental income in the nature of interest, dividends or capital gains.

Why it is there

Long-running contracts let profit be pushed into a later year by choosing when to recognise revenue, so the section removes the choice and prescribes the method by contract type. Sub-section (3) shuts the two adjustments most often used to soften the result — deferring retention money until it is released, and netting incidental income against cost.

Who it applies to

• A person deriving profits and gains from a construction contract
• A person deriving profits and gains from a contract for providing services, including one of not more than ninety days
• A person under a service contract involving an indeterminate number of acts over a specified period
• The Assessing Officer testing the method of accounting followed for such contracts

The figures, and what each one turns on

What this means in practice

The method is not the assessee's to choose. A construction contract is on percentage of completion in every case, and only a service contract can leave that default — to project completion if it runs ninety days or less, or to straight line if the acts are indeterminate in number over a specified period. Sub-section (3) then bites whichever method applies: retention money is contract revenue, and incidental interest, dividend or capital gains cannot be set against contract costs. The working of each method is in the income computation and disclosure standards notified under section 276(2), so the section has to be read with that notification.

An example

A firm has two contracts running in the tax year. The first is a construction contract spanning two years on which it has incurred 40% of estimated costs; under sub-section (1) it must recognise profit on percentage of completion, and under sub-section (3)(a) the retention money of Rs. 15 lakh withheld by the customer goes into contract revenue even though it will only be released on final certification. The second is a service contract of eighty days straddling the year end; under sub-section (2)(a) no profit is recognised until the project is complete. Interest of Rs. 2 lakh earned on the mobilisation advance cannot be netted off against contract costs under sub-section (3)(b).

Where you meet this section

In the method of accounting disclosed in the return and the tax audit report, and in a scrutiny assessment where the Assessing Officer recomputes contract profit on percentage of completion or adds back deferred retention money.

The words themselves

What people get wrong

• Applying the ninety-day project completion rule to a construction contract. Sub-section (2) opens with "a contract for providing services" only.
• Deferring retention money until it is released. Sub-section (3)(a) requires contract revenue to include it.
• Netting incidental interest or dividend against contract costs. Sub-section (3)(b) forbids it.
• Treating the choice of method as the assessee's. Sub-sections (1) and (2) prescribe it by the nature and duration of the contract.
• Working from the section alone. Sub-section (1) makes the method operate as per the standards notified under section 276(2).

What this replaced

• 43CB - Computation of income from construction and service contracts

See the full 1961 to 2025 concordance.

Case law carried across

Explainers

• ICDS govern the computation, not the books — and ICDS II is where that bites first tagged s.43CB
  Which of my clients do the icds actually bind, what do the ten standards cover, and what does icds II change about the way I value inventory?
• You choose the method; he has to prove it distorts profits tagged s.43CB
  Can the Assessing Officer simply substitute a different method of accounting because he thinks it reflects my income better?
• s.43CB: percentage of completion, and the ninety-day service contract tagged s.43CB
  My construction client wants to offer profit only when the project is handed over. Can he, and does the same rule apply to a service contract?

Read with

• Section 276