Completed contract method: TDS-based disallowance goes to work-in-progress for incomplete projects, while completed projects remain verifiable.
Under the completed contract method, project-related expenditure is carried in work-in-progress and profit is recognised only on completion of the contract. Disallowance for non-payment of tax deducted at source under section 40(a)(ia) should therefore be reflected by adjusting the work-in-progress in the year of completion, not by a mechanical addition to total income in the year of incurrence for incomplete projects. The Assessing Officer may examine and correct the work-in-progress account for this purpose. For completed projects, the disallowance can survive, subject to verification of the computation.
Issues: Whether, in the case of an assessee following the completed contract method, expenditure disallowable for non-payment of tax deducted at source was to be added to total income or adjusted against work-in-progress, and whether disallowance could be sustained in respect of completed projects.
Analysis: Under the completed contract method, project-related expenditure is accumulated in work-in-progress and the profit is determined only on completion of the contract. Expenditure which is otherwise not allowable under section 40(a)(ia) of the Income-tax Act, 1961 does not justify an addition to total income in the year of incurrence in respect of incomplete projects; the correct course is to rectify the work-in-progress so that the disallowance is reflected in the year of completion. The Assessing Officer is entitled to examine and correct the work-in-progress account, but the disallowance cannot be mechanically added to income where the project remains incomplete. In respect of completed projects, the disallowance survives subject to verification of the computation.
Conclusion: The addition made in total income for incomplete projects was unsustainable and had to be deleted, while the disallowance relating to completed project work was left to be verified and maintained as appropriate.
TaxTMI 
AI Drafter ✕
TaxTMI 
