2008 (10) TMI 396 - AT - Income Tax

Professional fees and Drama receipts - Method of accounting - Rejection of accounts - CIT Sustained the addition received during the previous year relevant to the AY 2001-02 and also sustained the balance of the b/f advances outstanding without appreciating the assessee s method of accounting and the policy in respect of income recognition - Assessee follows Mercantile system of accounting and the income recognition in respect of advances received for professional fee is only when the film is either completed or released - HELD THAT - There is no dispute on the regularly employing of the method of accounting and therefore the same is irrelevant to this case. Regarding the completeness of accounts it refers not only to the accounting entries for all the transactions done in the previous year but also to the list of books of account. Thus the completeness refers to list of books of account and entries therein and the accuracy refers to the quality of the accounts of the assessee. The scope of the provisions of section 145 conclusively establishes the fact that what is important for rejection of books is the AO being not satisfied about the correctness or completeness of the accounts as specified in section 145(3) and it is not the question of assessee establishing the method applied is fit enough to deduce from the accounts the correct profits. Therefore we proceed to examine the fact where the rejection was done merely without any finding on the correctness or completeness of the books of account. In our opinion the rejection the books of account u/s 145 while accepting the books as correct and complete is an invalid assumption of jurisdiction by the AO. On merits we find that the assessee has finally recognized the un-refunded advances as income of the assessee in the later years. Therefore we are of the opinion that the order of the CIT(A) is set aside and the addition made by the AO are deleted. Above views are fortified by the Madras Bench decisions in the cases of S. Kamalahasan 1988 (2) TMI 128 - ITAT MADRAS-C and S. Priyadarshan 2001 (7) TMI 298 - ITAT MADRAS-B . Accordingly the ground of the assessee in this regard is allowed. Recognition of Income - AO has invoked the provisions of section 145 without jurisdiction and additions are made arbitrarily thrusting the cash system of accounting on the assessee with regard to the advances from the producers. Resultantly the ground of the revenue is dismissed. In the result appeal of the assessee is allowed and appeal of the revenue is dismissed.

Issues Involved:
1. Treatment of professional advances as income.
2. Rejection of books of account under Section 145 of the Income-tax Act.
3. Income recognition based on the completion or release of films.
4. Validity of the method of accounting followed by the assessee.
5. Obligation to refund advances if the film is not produced or released.

Issue-wise Detailed Analysis:

1. Treatment of Professional Advances as Income:
The primary issue in the case was the treatment of professional advances received by the assessee, a film actor, as income for the year. The Assessing Officer (AO) added Rs. 1,79,55,000 to the assessee's income, arguing that these advances should be treated as income of the year. The assessee's method of accounting deferred income recognition until the completion or release of the film. The CIT(A) partially upheld the AO's decision but provided relief for advances where shooting had not commenced or was incomplete.

2. Rejection of Books of Account under Section 145:
The AO rejected the assessee's books of account under Section 145 of the Income-tax Act, citing that the system of accounting did not deduce correct profits. The assessee argued that they consistently followed the mercantile system of accounting, which was necessitated by an amendment to Section 145(1) effective from the assessment year 1997-98. The CIT(A) did not explicitly address the invocation of Section 145 but focused on the specifics of income recognition.

3. Income Recognition Based on Completion or Release of Films:
The assessee's method recognized income only upon the completion or release of the film, reflecting advances as liabilities in the balance sheet until then. The CIT(A) held that advances where shooting had not begun should not be considered income, while advances where shooting had partially occurred should be proportionately recognized. The CIT(A) sustained additions for certain advances, considering them accrued income based on the shooting progress.

4. Validity of the Method of Accounting Followed by the Assessee:
The assessee contended that their method of accounting, which recognized income upon film completion or release, was consistently followed and should not be disturbed. The CIT(A) partially accepted this method but made adjustments based on the shooting status of the films. The tribunal examined the scope of Section 145, emphasizing that the AO must be dissatisfied with the correctness or completeness of the accounts to invoke this section.

5. Obligation to Refund Advances if the Film is Not Produced or Released:
The assessee highlighted their obligation to refund advances if the film was not produced or released, as per contracts with producers. The CIT(A) acknowledged this obligation and provided relief for advances where shooting had not commenced or was incomplete. The tribunal upheld this view, noting that the assessee recognized un-refunded advances as income in later years.

Judgment:
The tribunal found that the AO's rejection of the books of account under Section 145 was invalid, as there was no finding on the correctness or completeness of the accounts. The tribunal concluded that the assessee's method of accounting was appropriate and that income should be recognized based on the completion or release of the film. Consequently, the tribunal allowed the assessee's appeal and dismissed the revenue's appeal, deleting the additions made by the AO.

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