Law:

Section:

Section 145, read with section 5(1), of the Income-tax Act, 1961 - Method of accounting - Basis of taxability of business receipt - During assessment years 1958-59 and 1959-60 relevant to calendar years 1958 and 1959, assessee-company received for timber purchase to construct shuttering Rs. 5,00,000 and Rs. 8,00,000, respectively - Assessee debited expenditure incurred each year to relevant profit and loss account but treated said receipts as loan - It credited aggregate receipt of Rs. 13,00,000 in profit and loss account for assessment year 1960-61 - Ito included proportionate amount of Rs. 10,40,000 in assessee's income for assessment year 1959-60 - Whether ITO's action justified - Held, on facts, yes Facts The assessee-company acquired a big contract from HS Ltd. for construction of blast furnaces at Rourkela. During the assessment years 1958-59 and 1959-60, relevant to the calendar years as its previous years, it received Rs. 5,00,000 and Rs. 8,00,000, respectively (in addition to the other payments under the main contract) for purchasing timber for shuttering. The timber purchased with the said amount would belong to HS Ltd. which would get back the entire amount in the event of assessee's default in completing the work within the stipulated time. The assessee debited the expenditure involved in providing the shuttering to its profit and loss account but treated the said sums as loan or advance for the said two years. It, however, credited the entire amount of Rs. 13,00,000 in profit and loss account of the assessment year 1960-61. The ITO observed (i) that, since the assessee was following the mercantile method of accounting, the impugned amount should have been included in the profit and loss account or that work should have been shown as work-in-progress; and (ii) that the impugned amount already received should be spread over 15 months during which the work was actually done. He, accordingly, included in its total income a proportionate amount of Rs. 10,40,000 for the assessment year 1959-60. The AAC deleted the same holding that the assessee was entitled to get the amount only on the completion of the contract which was done in the next year. On…

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