Completed contract accounting governs construction income and project-specific interest, requiring matching of costs with completion revenue.

In a cost-plus construction contract, the completed contract approach was applied to recognise contractual profit on completion, rather than allowing deferment merely because the project was unsold or further amenities might later be required. The commentary also treats project-specific interest on borrowed funds as part of contract costs where it is identifiable with the incomplete project, so it must be accumulated and matched with revenue when the project is completed, not deducted as annual revenue expenditure. On that basis, income from the construction work and the related finance cost are both brought into account only on completion of the contract work.

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Issues: (i) Whether the assessee, being a contractor, could defer recognition of income by following the Project Completion Method for the construction contract; and (ii) whether interest expenditure identifiable with an incomplete construction project was allowable as a year-to-year deduction or had to be accumulated till completion of the project.

Issue (i): Whether the assessee, being a contractor, could defer recognition of income by following the Project Completion Method for the construction contract.

Analysis: The contract was for construction on a cost-plus basis, under which the assessee earned a fixed profit element linked to the expenditure incurred. The method of accounting could not postpone accrual of the contractual profit merely because the buildings were not yet sold or because additional amenities might be required later. On the facts, the assessee was a contractor and not a builder, and the income from the construction contract accrued on completion of the contracted work. The Project Completion Method was, therefore, not applicable for postponing recognition of that income.

Conclusion: The issue is decided against the assessee and in favour of the Revenue.

Issue (ii): Whether interest expenditure identifiable with an incomplete construction project was allowable as a year-to-year deduction or had to be accumulated till completion of the project.

Analysis: Under the completed contract method, costs attributable to a specific contract are accumulated during construction and matched with revenue when the project is completed. Finance costs, including interest, form part of indirect costs and, where they are identifiable with a particular contract, they are to be treated as contract costs and not as independent annual revenue expenditure. Since the borrowed funds were used in the Girnar Apartments Project and the income from that project was being offered only on completion, the related interest had to receive the same treatment.

Conclusion: The issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeal fails in entirety because the disputed income was taxable on completion of the contract work and the related project-specific interest could not be deducted in the year of incurrence.

Ratio Decidendi: Where income is derived from a construction contract governed by the completed contract approach, income and all identifiable contract-specific costs, including finance costs, are recognized only on completion of the project.

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