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ICDS III : Construction Contracts

Income Tax - Income computation and disclosure standards - 04 - This Income Computation and Disclosure Standard should be applied in determination of income for a construction contract of a contractor. A construction contract is contract negotiated for the construction of an asset or a combination of assets. A construction contract, by nature entails time and resources. A construction contract may be negotiated for the construction of a single asset. A construction contract may also deal with th .....

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e case of a cost plus contract with an agreed maximum price. For example: A contract for rendering of services would be a construction contract provided the service contract is directly related to the construction of the asset. A contract for destruction or restoration of assets, and the restoration of the environment following the demolition of the asset is also to be regarded as a construction contract . This clause covers contracts of demolition of buildings, breaking of ships, clearing of de .....

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entered where it is feasible to measure the underlying asset in terms of units. For example road construction contract. In a road construction contract it is possible to agree to the price on a per kilometer basis. 1. Combining and Segmenting Construction Contracts:- The requirements of this ICDS are to be applied separately to each construction contract. However, in certain circumstances, it would be necessary to apply the ICDS to the separately identifiable components in order to reflect the .....

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ed. A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when - the group of contracts is negotiated as a single package the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin the contracts are performed concurrently or in a continuous sequence. Where a contract provides for the construction of an additional asset at the option of the customer or is a .....

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ultimate collection. The expression reasonable certainty would mean that the contractor should recognize contract revenues only if there is no doubt about collection of such revenues. Contract revenue shall comprise of:- the initial amount of revenue agreed in the contract, including retentions and variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and they are capable of being reliably measured. The ICDS however stipula .....

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satisfied or defects are rectified. No enforceable right arises till the conditions are satisfied or defects are rectified. Till such time the right to receive vis-àvis retentions is contingent in nature. [CIT v P&C Constructions (P) Ltd] [2009 (7) TMI 35 - MADRAS HIGH COURT] Note: Where contract revenue already recognised as income is subsequently written off in the books of account as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of .....

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related to a specific contract, and construction overheads such other costs as are specifically chargeable to the customer under the terms of the contract. These include administration costs and research costs which are agreed to be reimbursed by the contractee. allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs. These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that .....

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ting date. The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. The stage of completion of a contract shall be determined with reference to - the proportion that contr .....

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the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are included in costs incurred upto the reporting date. Contract costs which are excluded are: contract costs that relate to future activity on the contract and advance payment to sub-contractors. During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. The early stage of a cont .....

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sses are allowable under the ICDS. The actual loss made by the tax payers would be eligible for the deduction in compliance with the provision of section 28 or 37 of the Incometax Act. One will also have to make a distinction between incurred loss and expected loss. ICDS only prohibits allowability of expected loss and not an incurred loss. 5. Changes in Estimates:- The percentage of completion method is applied on a cumulative basis in each previous year to the current estimates of contract rev .....

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