1. The Income-tax Appellate Tribunal has referred the following question for our opinion :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 10,40,000 could be added to the business profits of the assessed for the assessment year 1959-60, by reference to the contract for the civil engineering works in connection with blast furnaces at Rourkela ?'
2. The assessed, a private limited company, was carrying on business as contractor. There was a contract for construction of blast furnaces at Rourkela for M/s. Hindustan Steel Private Ltd. That contract was a big contract for Rs. 4 crores according to the statement of case. The assessed was given two amounts amounting to Rs. 13,00,000 for purchasing timber for shuttering in connection with that contract. There was a separate arrangement regarding this amount. The assessed received Rs. 5,00,000 in the calendar year 1957 corresponding to the assessment year 1958-59, and a sum of Rs. 8,00,000 in the year 1958 corresponding to the assessment year 1959-60. The arrangement with M/s. Hindustan Steel Private Ltd., was that in case the main contract was not completed in accordance with the dates agreed between the parties, then the sum of Rs. 13,00,000 would be refunded to M/s. Hindustan Steel Private Ltd. The procedure adopted by the assessed was to debit the expenditure involved in providing the shuttering to its profit and loss account but the sum of Rs. 13,00,000 was treated as a loan or advance. The entire amount was credited to the profit and loss account in the later accounting period relevant to the assessment year 1960-61.
3. The ITO in making the assessment for the year 1959-60 came to the view that as the assessed was following the mercantile method of accounting the amount due for the shuttering work done should have been included in the profit and loss account, or that work should have been shown as work-in-progress. He noted that the expenditure had been shown but not the receipt. He came to the conclusion that the sum of Rs. 13,00,000 should be spread over 15 months during which the work was actually done and accordingly he included a sum of Rs. 10,40,000 in the year in question as being part of the assessed's total income.
4. On appeal, the AAC deleted this amount holding that the assessed was entitled to get the amount only when the contract was completed and that was in the next year.
5. The department appealed to the Tribunal which came to the conclusion that not only had the sum of Rs. 13,00,000 accrued but it had also been received, so it could not be taken out of the total income. It was also held that the right of M/s. Hindustan Steel Private Ltd., to get back the amount in the event of the assessed failing to complete the contract according to the schedule did not in any manner reduce the income which had already accrued. All the assessed could do subsequently was to claim a deduction on account of any amount that was refunded. It was also observed that as the assessed had debited the expenditure on the work to the trading account, hence the work-in-progress had also to be shown. It was noted that the assessed claimed that the payment was on account, and, thereforee, the actual accrual would take place only when the work was complete. The Tribunal, however, held that the amount could not be ignored in the assessment year 1959-60, the accordingly it was held that the ITO was right in making the addition to the total income.
6. The learned counsel for the assessed challenges the order of the Tribunal and contends that the AAC was quite right in deleting the amount. He claims that the amount of Rs. 13,00,000 could only be adjusted when the main contract was completed within time; he also says that the actual amount has been shown in the following year as having accrued in the financial year 1959 corresponding to the assessment year 1960-61. The present case only involves a question of accounting. No doubt, the sum of Rs. 13,00,000 was received by the assessed and no doubt the said amount has to be taxed as income. As the assessed is a private limited company, it makes very little difference as to which year it is placed in. The assessed claims that the amount is to be taxed in the assessment year 1960-61, whereas the Tribunal has held that the amount of Rs. 10,40,000 is to be included in the assessment year 1959-60. The correctness of the method used may be said to be doubtful because the actual receipt by the assessed was in 1957 to the extent of Rs. 5,00,000 and Rs. 8,00,000 in 1958, whereas nothing was received in the year 1959. Income is either taxed on the basis of the receipt or on the basis of accrual. Normally, it can be said that income accrues on a date earlier than when it is received. But it will be difficult to say that income which is already received can be said to accrue later. No case of this type has been brought to our notice.
7. On general principles, it can be said that as no work was done in 1957, the sum of Rs. 5,00,000 which was received in that year can be treated to be a kind of advance payment. However, in the year 1958, corresponding to assessment year in question, the work was done for 12 months and the expenditure has been debited to the profit and loss account, so it is not understandable how it can be said that the income to the extent noted by the ITO has not actually been received.
8. Learned counsel for the assessment relies only on the fact that in case there is a default in the completion of the whole work, then this amount of Rs. 13,00,000 is refundable. For the purpose of seeing the correct position, documents relating to the arrangement have been filed on record and are annexs.'A', 'B' and 'C' attached to the statement of case. These are records of the minutes of meetings held between the assessed and M/s. Hindustan Steel Private Ltd. It appears that a German company was setting up blast furnaces and the building contractor for this purpose was the assessed. M/s. Hindustan Steel Private Ltd., were anxious that the time schedule should be maintained, so some arrangements were made in these minutes to secure an early completion of the work. One of these terms was that M/s. Hindustan Steel Private Ltd., would compensate the assessed for the extra Expenditure incurred on account of timber for shuttering. In the minutes of the meeting held on October 26, 1957, it was stated that a sum of Rs. 13,00,000 would be paid to M/s. Uttam Singh Duggal & Co. Private Ltd., (the assessed). This payment was over and above other payments under the main contract. It was also provided that the shuttering timber and scaffolding would be returned to M/s. Hindustan Steel Private Ltd., at the end of the work. Thus, the timber which was to be purchased would belong to M/s. Hindustan Steel Private Ltd., at the end of the work. It was then stated :
'If the contractor fails to adhere to the dates of completion to be agreed in Germany, the payment now agreed will be refunded to Hindustan Steel Private Ltd., in full.'
9. Thus, in case of default by the contractor the amount could come back to M/s. Hindustan Steel Private Ltd. It appears on true construction of this contract that the sum of Rs. 13,00,000 was payment for the timber which was to belong to M/s. Hindustan Steel Private Ltd. If the contractor failed to perform the work in time, this amount was refundable. This latter term appears to be a kind of penalty, but it cannot be said that the money paid for the timber was not a payment toward the timber to be supplied. Thus, it cannot be said that the sum of Rs. 13,00,000 was an advance. Rather, it was payment for work to be done or goods to be supplied. In the event of the amount becoming refundable due to a default, then the question whether it had to be written back in the account, etc., would have to be considered. No doubt, the income had accrued and also been received by the assessed, and, hence, the Tribunal has rightly held that the sum of Rs. 10,40,000 was taxable in the assessment year 1959-60.
10. The learned counsel has referred to two decisions, namely, CIT v. A. Gajapathy Naidu : 53ITR114(SC) and Amar Nath Khandelwal v. CIT  126 ITR 322 (Delhi), to submit that the accrual of the income took place only on the completion of the work, i.e., when the amount was no longer refundable. But, these two cases are cases in which the question was as to when the income accrues. The actual receipt was later. In the present case, the receipt is earlier. So we are not so much concerned with as to when the income accrued, but as to when the payment became converted into income. Clearly, in 1957, when the work had not started, the sum of Rs. 5,00,000 could be treated as an advance payment for the timber, but when the work was actually done in the calendar year 1958, the amount received had to be accounted for in the profit and loss account as being payment for work done. Those judgments have, thereforee, no relevance to the present case.
11. In the circumstances, we would answer the question referred to us in the affirmative which is against the assessed and in favor of the department. The department to get costs.