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TMI Blog2008 (10) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... nces as income of the year after rejecting books of account under section 145 of the Income-tax Act. 3. 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. In the other words, assessee receives the advances for acting in films and the said advances, when received are not shown as the income of the year and they are reflected in books as the liabilities under advances account in the balance sheet. In the year of completion/release of the film, the said advances from the balance sheet are transferred to the professional fees account to the credit of the Profit and Loss account. Assessee has been following this system of accounting consistently and regularly. 4. During the assessment proceedings, the Assessing Officer noticed that the assessee deferred the chargeability of such advances to tax and accordingly added Rs. 1,79,55,000 to the income returned by the assessee. This amount includes two components, - (1)Rs. 23.5 lakhs refers to the opening balance as on 1-4-2000 not transferred by assessee to Profit and Loss account (Rs. 79,05,555 - Rs. 55,55,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 2002 (Vadh) Archana Entertainment Rs. 15,00,000 No shooting till date Advance returned on 26th Sep., 2002 Mehul Kumar Rs. 11,00,000 No shooting till date Film not released till date Sridevi Films Rs. 40,00,000 19th Feb., 2001 to 16th Mar., 2002 Sept., 2002 (Shakti - The Power) Ramgopal Verma Rs. 13,62,500 30th April, 2002 to 31st Dec., 2002 2003-04 (Bhoot) New Century Films Rs. 61,42,000 2nd Jan. 2002 to 28th April, 2002 26th Nov., 2003 (Aanch) 7. The CIT(A) considered the assessee's argument that the assessee has to return the advances to the producer in the case, if the assessee failed to act for any reason, i.e., illness or other unforeseen circumstances. In this record, the assessee quoted an incident of refunding of an amount of Rs. 15 lakhs to Archana Entertain- ment as shooting never took place. The CIT(A) considered the assessee's explanation and held that the advances received from (i) Archana Entertainment (Rs. 15,00,000), (ii) Mehul Kumar (Rs. 11,00,000), (iii) Ram Gopal Verma (Rs. 13,62,500) and (iv) New Century Films (Rs. 61.42 lakhs) are not to be considered as income of the assessee for the reason the shootings of the films did not commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting and the policy in respect of income recognition. We have already discussed the facts relating to the grounds referred above, submissions of the assessee and the decisions of the CIT(A). Briefly, the CIT(A) decision includes that no income to be recognized out of advances, where the shooting of film has not begun during the year; proportionate income is to be recognized, where shooting was partly done; and the opening balance of Rs. 23 lakhs is the income of the year. In effect, the CIT(A) ignored the obligation of the assessee to refund the advance mentioned in the agreement with the producers. 10. Aggrieved with the above decision of the CIT(A), the assessee is in appeal before us. The ld. AR for the assessee argued that the CIT(A) failed to give decision on the invoking of the provision of section 145(1) and the rejections of the books of account of the assessee. He further has taken as through the contracts with the producers for the proposition that the assessee recognises taxable income only when the films are released. He also mentioned that the amounts have refunded in the case of failure of completing the films. The CIT(A) erred in rejecting the above facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercantile system of accounting regularly employed by the assessee. (2)The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income. (3)Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." Sub-sections (1) and (3) are relevant in assessee's case and they have the following ingredients: (a) the assessee is to regularly employ either cash or mercantile system of accounting and meaning and consequences of not regularly following the system of accounting; (b) Assessing Officer being not satisfied about the correctness or completeness of the accounts of the assessee and the very meaning of the correctness and completeness of the accounts; and (c) making of an assessment in the manner provided under section 144. 13. There is no dispute on the regularly employin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. In view of the above and in our opinion, the rejection the books of account under section 145 of the Income-tax Act, while accepting the books as correct and complete, is an invalid assumption of jurisdiction by the Assessing Officer. 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 Assessing Officer are deleted. Above views are fortified by the Madras Bench decisions in the cases of S. Kamalahasan (supra) and S. Priyadarshan (supra). Accordingly, the ground of the assessee in this regard is allowed. ITA No 8776/M/04 - Revenue's Appeal 17. The only ground in this appeal is against the decision of the CIT(A) in holding that the amount of Rs. 156.05 lakhs being advances considered by the Assessing Officer is not the income of the assessee. In this regard, the ld. DR reiterated the submissions already mentioned in the preceding paragraphs. However, he relied on the orders of the Assessing Officer. On the other hand, the ld. AR for the assessee repeated the above submissions in favour of the ..... 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