My contractor client did not offer performance retention withheld by the awarder. The Assessing Officer has added it for AY 2017-18. Can I rely on the accrual cases?
Not for AY 2017-18 onwards. The Tribunal held that where the assessee follows the mercantile system it must account for all receipts on accrual basis, and that retention money could not be excluded when there is an express provision in the Act brought in by the Finance Act 2018 with retrospective effect from 1 April 2017. Section 43CB and ICDS III state that contract revenue shall include retention money, so the earlier case law is not relevant in determining the taxability of retention money in the case of a contractor.
Decided by the ITAT (Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member)) on 2025-01-06, reported as ITA No. 853/Coch/2023, Assessment Year 2017-18 (Income Tax Appellate Tribunal, Cochin Bench). It bears on section 43CB, section 43CB(2), section 145, section 145(2), section 143(3), section ICDS III of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the practical face of the Finance Act 2018 restoration. Before 1 April 2017 there was no mandatory provision on the taxability of retention money and the line of decisions treating it as not accrued until the conditions were satisfied — the line the Delhi High Court preserved in Chamber of Tax Consultants when it struck down para 10(a) of ICDS III — was available. From AY 2017-18 s.43CB(2)(i) puts retention money into contract revenue as a matter of statute and the point is gone. What the Tribunal did give the assessee is the double taxation safeguard: where the same retention was in fact offered to tax in a later year, the matter goes back to the Assessing Officer to verify and delete, with consequential appeal effect orders for all the years concerned. That is the answer for the very common situation where the contractor, following his own method, offered the retention in the year of receipt.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For AY 2017-18 the assessee filed a return declaring total income of Rs.84,04,650. The case was selected for scrutiny, the reason for selection being 'Real-estate business with high closing stock and higher turnover reported in service tax returns compared to ITR'. Notices under s.143(2) and s.142(1) were issued with a questionnaire. During the assessment the assessee filed a reconciliation between the service tax return turnover of Rs.13,08,66,198 and the turnover in the return of income of Rs.12,16,47,953. The Assessing Officer found that the assessee had omitted Rs.1,02,24,936 being retention withheld, and had added Rs.10,06,691 being retention received during the year relating to an earlier year. Holding that these had to be accounted for on the mercantile system and that the retention money withheld was income of FY 2016-17, he enhanced the income credited in the return by Rs.1,02,24,936, and, for want of details whether the retention of Rs.10,06,691 received had been accounted for in an earlier year, allowed no deduction for it. The assessment under s.143(3) was completed on 1 December 2019 at a total income of Rs.1,86,29,586. The Commissioner (Appeals)/NFAC dismissed the appeal by order of 11 October 2023, holding that receipt in a subsequent year was irrelevant because the accounts were on the mercantile basis, and that s.43CB and ICDS III came into effect from AY 2017-18. Before the Tribunal the assessee said the retention of Rs.1,02,24,936 had been offered to tax in AY 2019-20 to the extent of Rs.99,71,078 and in AY 2020-21 to the extent of Rs.3,18,125.
The appeal was partly allowed for statistical purposes. The addition of performance retention of Rs.1,02,24,936 for AY 2017-18 was confirmed, the Tribunal holding, in view of the express provision inserted as s.43CB by the Finance Act 2018 with retrospective effect from 1 April 2017, that contract revenue shall comprise of retention money if any (para 10.2). The issue whether the same amounts had been offered to tax in AY 2019-20 and AY 2020-21 was remitted to the Assessing Officer for the limited purpose of examination, with a direction to delete them if found so offered, since that would amount to double taxation, and to pass consequential appeal effect orders for AY 2017-18, 2019-20 and 2020-21 (para 10.3).
The Tribunal held that the assessee was following the mercantile system of accounting and had to account for all receipts on accrual basis, so that the retention money could not be excluded, especially when there is an express provision in the Act itself brought in by the Finance Act 2018 with retrospective effect from 1 April 2017; that an assessee cannot contend that he will not follow the law and will adopt a particular method of offering retention money to tax despite the change in law by the competent legislature; that it agreed with the Commissioner (Appeals) that actual receipt in subsequent assessment years has no relevance where the accounts are maintained on the mercantile basis; that since a specific provision has been brought into the Act with effect from AY 2017-18 the case law relied on by the assessee is not relevant in determining the taxability of retention money in the case of a contractor; that before 1 April 2017 there was no mandatory provision with regard to the taxability of retention money; and that s.43CB as well as ICDS III, applicable for the relevant assessment years, clearly state that contract revenue shall include the retention money (para 10). The Tribunal recorded that the purpose of inserting s.43CB with retrospective effect from 1 April 2017 was to apply it in relation to AY 2017-18 and subsequent assessment years, as provided in the memorandum explaining the provisions in the Finance Bill 2018 (para 9.5).
Before 01/04/2017 there was no mandatory provision with regard to taxability of the Retention money.
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Handle my notice → Ask a CA on WhatsAppNot for AY 2017-18 onwards. The Tribunal held that where the assessee follows the mercantile system it must account for all receipts on accrual basis, and that retention money could not be excluded when there is an express provision in the Act brought in by the Finance Act 2018 with retrospective effect from 1 April 2017. Section 43CB and ICDS III state that contract revenue shall include retention money, so the earlier case law is not relevant in determining the taxability of retention money in the case of a contractor. This was decided by the ITAT (Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member)) and bears on section 43CB, section 43CB(2), section 145, section 145(2), section 143(3), section ICDS III of the Income Tax Act 1961. It is reported as ITA No. 853/Coch/2023, Assessment Year 2017-18 (Income Tax Appellate Tribunal, Cochin Bench). This is the practical face of the Finance Act 2018 restoration. Before 1 April 2017 there was no mandatory provision on the taxability of retention money and the line of decisions treating it as not accrued until the conditions were satisfied — the line the Delhi High Court preserved in Chamber of Tax Consultants when it struck down para 10(a) of ICDS III — was available. From AY 2017-18 s.43CB(2)(i) puts retention money into contract revenue as a matter of statute and the point is gone. What the Tribunal did give the assessee is the double taxation safeguard: where the same retention was in fact offered to tax in a later year, the matter goes back to the Assessing Officer to verify and delete, with consequential appeal effect orders for all the years concerned. That is the answer for the very common situation where the contractor, following his own method, offered the retention in the year of receipt. If it applies to you, the first step is this: Check the assessment year before anything else. For AY 2016-17 and earlier the older accrual authorities and Chamber of Tax Consultants remain available on retention money; from AY 2017-18 s.43CB(2)(i) governs.
For AY 2017-18 the assessee filed a return declaring total income of Rs.84,04,650. The case was selected for scrutiny, the reason for selection being 'Real-estate business with high closing stock and higher turnover reported in service tax returns compared to ITR'. Notices under s.143(2) and s.142(1) were issued with a questionnaire. During the assessment the assessee filed a reconciliation between the service tax return turnover of Rs.13,08,66,198 and the turnover in the return of income of Rs.12,16,47,953. The Assessing Officer found that the assessee had omitted Rs.1,02,24,936 being retention withheld, and had added Rs.10,06,691 being retention received during the year relating to an earlier year. Holding that these had to be accounted for on the mercantile system and that the retention money withheld was income of FY 2016-17, he enhanced the income credited in the return by Rs.1,02,24,936, and, for want of details whether the retention of Rs.10,06,691 received had been accounted for in an earlier year, allowed no deduction for it. The assessment under s.143(3) was completed on 1 December 2019 at a total income of Rs.1,86,29,586. The Commissioner (Appeals)/NFAC dismissed the appeal by order of 11 October 2023, holding that receipt in a subsequent year was irrelevant because the accounts were on the mercantile basis, and that s.43CB and ICDS III came into effect from AY 2017-18. Before the Tribunal the assessee said the retention of Rs.1,02,24,936 had been offered to tax in AY 2019-20 to the extent of Rs.99,71,078 and in AY 2020-21 to the extent of Rs.3,18,125. The matter was decided on 2025-01-06 by the ITAT (Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member)). On those facts the ITAT held as follows. The appeal was partly allowed for statistical purposes. The addition of performance retention of Rs.1,02,24,936 for AY 2017-18 was confirmed, the Tribunal holding, in view of the express provision inserted as s.43CB by the Finance Act 2018 with retrospective effect from 1 April 2017, that contract revenue shall comprise of retention money if any (para 10.2). The issue whether the same amounts had been offered to tax in AY 2019-20 and AY 2020-21 was remitted to the Assessing Officer for the limited purpose of examination, with a direction to delete them if found so offered, since that would amount to double taxation, and to pass consequential appeal effect orders for AY 2017-18, 2019-20 and 2020-21 (para 10.3).
The Tribunal held that the assessee was following the mercantile system of accounting and had to account for all receipts on accrual basis, so that the retention money could not be excluded, especially when there is an express provision in the Act itself brought in by the Finance Act 2018 with retrospective effect from 1 April 2017; that an assessee cannot contend that he will not follow the law and will adopt a particular method of offering retention money to tax despite the change in law by the competent legislature; that it agreed with the Commissioner (Appeals) that actual receipt in subsequent assessment years has no relevance where the accounts are maintained on the mercantile basis; that since a specific provision has been brought into the Act with effect from AY 2017-18 the case law relied on by the assessee is not relevant in determining the taxability of retention money in the case of a contractor; that before 1 April 2017 there was no mandatory provision with regard to the taxability of retention money; and that s.43CB as well as ICDS III, applicable for the relevant assessment years, clearly state that contract revenue shall include the retention money (para 10). The Tribunal recorded that the purpose of inserting s.43CB with retrospective effect from 1 April 2017 was to apply it in relation to AY 2017-18 and subsequent assessment years, as provided in the memorandum explaining the provisions in the Finance Bill 2018 (para 9.5). In the words reproduced by the source cited on this page: "Before 01/04/2017 there was no mandatory provision with regard to taxability of the Retention money."
It was decided by the ITAT on 2025-01-06 and is reported as ITA No. 853/Coch/2023, Assessment Year 2017-18 (Income Tax Appellate Tribunal, Cochin Bench). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 43CB, section 43CB(2), section 145, section 145(2), section 143(3), section ICDS III, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was partly allowed for statistical purposes. The addition of performance retention of Rs.1,02,24,936 for AY 2017-18 was confirmed, the Tribunal holding, in view of the express provision inserted as s.43CB by the Finance Act 2018 with retrospective effect from 1 April 2017, that contract revenue shall comprise of retention money if any (para 10.2). The issue whether the same amounts had been offered to tax in AY 2019-20 and AY 2020-21 was remitted to the Assessing Officer for the limited purpose of examination, with a direction to delete them if found so offered, since that would amount to double taxation, and to pass consequential appeal effect orders for AY 2017-18, 2019-20 and 2020-21 (para 10.3). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 43CB, section 43CB(2), section 145, section 145(2), section 143(3), section ICDS III of the Income Tax Act 1961, and was decided by Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the retention has already been offered to tax in a later year, put the figures and the years on record and ask for the same relief given here — verification by the Assessing Officer and deletion from the later years, with consequential appeal effect orders. Do not argue that receipt in a later year is relevant where the books are on the mercantile basis; the Tribunal expressly agreed with the Commissioner (Appeals) that it is not. Reconcile the service tax or GST return turnover with the return of income at the assessment stage — this assessment was selected on precisely that mismatch. Remember the other half of s.43CB(2): contract costs cannot be reduced by incidental income in the nature of interest, dividends or capital gains, so an officer applying s.43CB to revenue should be held to it on costs as well.
Searched for later treatment; none was found. That is not the same as a source affirming it. No later decision following, doubting or distinguishing this order has been found, and no appeal under s.260A to the Kerala High Court against it is disclosed. Other Aryacon matters in the Kerala High Court between 2011 and 2024 are electricity-board and state-contract disputes and not income-tax appeals, so there is no judicial treatment of this order. It stands as an uncited single-Bench view, and its force rests on s.43CB(2)(i) itself rather than on any later approval. That is not much of a weakness on the main point, because the statute does the work: s.43CB was inserted by the Finance Act 2018 with retrospective effect from 1 April 2017 and provides in terms that contract revenue shall include retention money, and ICDS III says the same. The older accrual line, including the position the Delhi High Court preserved in Chamber of Tax Consultants when it struck down para 10(a) of ICDS III, survives only for assessment year 2016-17 and earlier; from assessment year 2017-18 it does not answer the addition. Two limits on the entry. The order confirms the addition of Rs 1,02,24,936 for assessment year 2017-18 but is only partly against the assessee: the question whether the same retention had been offered to tax in assessment years 2019-20 and 2020-21 was remitted to the Assessing Officer with a direction to delete it if it had been, since that would be double taxation, and to pass consequential appeal effect orders for all three years. And nothing in the order decides the other half of s.43CB(2), on contract costs, which is left where the section puts it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Tribunal's own reasoning on this issue is at paragraphs 9.5, 10, 10.2 and 10.3. The paragraphs numbered 72, 73 and 74 that appear inside this order are NOT the Tribunal's own: they are an extract from the Delhi High Court's judgment in Chamber of Tax Consultants reproduced within it, and citing them as paragraphs of this order would be a fabricated locator. That trap is worth spelling out because the extract is the very passage a contractor would want to rely on, and an appellate authority that checks the locator will find it belongs to a different court. The report is also inconsistent about the assessee. Paragraph 3.2 refers to 'the assessee firm' while the cause title is Aryacon Contractors and Engineers Pvt Ltd, and the concluding page prints the name as 'Aaryacon'. The order was passed by a Cochin Bench, but the concluding page carries the location 'Bangalore' above the date and the copy-to list names both the Departmental Representative, ITAT, Bangalore and the Assistant Registrar, ITAT, Cochin. None of that affects the holding; all of it should be checked before the order is described in a written submission. On scope, the order decides that from assessment year 2017-18 s.43CB(2)(i) and ICDS III put retention money into contract revenue, so the pre-2017 accrual authorities do not answer the question. It does not decide the treatment of retention on a contract whose revenue was recognised before that year; it does not consider the vires of ICDS notified under s.145(2), which is what Chamber of Tax Consultants was about; and it does not decide whether the same retention had in fact been offered in assessment years 2019-20 and 2020-21 — that was remitted to the Assessing Officer for examination with a direction to delete if found so offered, and with consequential appeal effect orders for 2017-18, 2019-20 and 2020-21. The remit is the practical half of the order and it has to be worked. Take it up with a year-wise retention ledger tying each withheld amount to the bill, the contract clause and the year in which it was eventually offered, because the direction is to delete on verification and the officer will not reconstruct the ledger himself. Two habits avoid the dispute altogether: reconcile the indirect-tax turnover with the turnover in the return before the return goes in, since the mismatch is what selected this case for scrutiny under s.143(3), and offer retention in the year of accrual while claiming the deduction of any amount finally forfeited. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was partly allowed for statistical purposes. The addition of performance retention of Rs.1,02,24,936 for AY 2017-18 was confirmed, the Tribunal holding, in view of the express provision inserted as s.43CB by the Finance Act 2018 with retrospective effect from 1 April 2017, that contract revenue shall comprise of retention money if any (para 10.2). The issue whether the same amounts had been offered to tax in AY 2019-20 and AY 2020-21 was remitted to the Assessing Officer for the limited purpose of examination, with a direction to delete them if found so offered, since that would amount to double taxation, and to pass consequential appeal effect orders for AY 2017-18, 2019-20 and 2020-21 (para 10.3).
TaxSphere, “Aryacon Contractors and Engineers Pvt Ltd v ACIT — retention money is contract revenue from AY 2017-18, whatever the older case law says”, https://taxnotice.vittsphere.com/caselaw/case/aryacon-contractors-v-acit-retention-money-is-contract-revenue-under-43cb/ (validity last checked 2026-09-08)
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