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Assistant Commissioner of Income Tax, Central Circle- II (5) Versus Mr. J. Harris Jayaraj

2015 (9) TMI 442 - ITAT CHENNAI

Accrual of income - Advance received by the assessee for his professional work - whether has to be assessed in the year of receipt or in the year of performing the contract? - Held that:- None of the advances received by the assessee are assessable as income of the assessee in the assessment year 2005-06 as it was received only as advance for performing projects in future. Advances received cannot be assessed in the year of receipt but has to be assessed in the year of performing contract - Deci .....

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only issue in both the appeal and cross objection is that whether the advance received by the assessee for his professional work has to be assessed in the year of receipt or in the year of performing the contract. 2. Counsel for the assessee submits that the issue in the appeal has been decided by the co-ordinate Bench in the case of R.S.Suriya in ITA Nos. 1944 to 1946/Mds/2014 dated 30th June, 2015, who is a film actor wherein it was held that advance received by the assessee for acting in fil .....

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000/- received from Film Workes, counsel submits that the amount is still outstanding as on date, therefore placing reliance on the order of the co-ordinate Bench in the case of R.S.Suriya (supra), counsel submits that advances received by the assessee are not taxable in the assessment year 2005-06. 3. Departmental Representative supports the order of Assessing Officer. 4. Heard both sides. Perused orders of lower authorities and the decision relied on. The Assessing Officer brought to tax a sum .....

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deleted the addition to the extent of ₹ 9,50,000/- in respect of advances received from Sri Rajalakshmi P.Ltd. observing as under:- 12. I have considered the facts and the submissions of the ld.A.R. and the ACIT. The issue is recognition of income in the case of a cine artiste who follows cash system of accounting. In the two decisions referred to by the A.O and the appellant (D.Meena and R.S.Suriya), the Hon ble ITAT, Chennai has with clarity enunciated the conditions under which the amou .....

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n of various factors and criteria and held that such advances received as token amounts for giving priority to the parties to negotiate future assignments without finalizing the terms and conditions cannot be treated as income on receipt basis. 13. From the two decisions of the Hon ble ITAT, it is clear that an amount received would be treated as income if it is for a project which is known at the time of the receipt of the amount and an amount received should be treated as an advance if the amo .....

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s squarely applicable. For the advances received from Mis Sri Rajalakshmi (P) Ltd it is the submission of the ld.A.R. that the advances were received only for exploration of possibility for working in a project and as no project materialised, the advances were subsequently refunded. The decision of the Hon ble ITAT, Chennai in the case of R.S.Suriya is therefore applicable to the fact of these advances. 15. Accordingly, I hold that advance of ₹ 3,00,000/ from M/s Film Works is assessable a .....

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advances received cannot be assessed in the year of receipt but has to be assessed in the year of performing contract. The co-ordinate Bench considered its earlier decisions while deciding the issue as under:- 5. Heard both sides. Perused orders of lower authorities and the decisions relied on. In this case, search was conducted in the premises of the assessee on 19.01.2010 and assessments were completed for the assessment years 2004-05 to 2006-07 on 30.12.2011 and while completing assessments, .....

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s for these assessment years in ITA Nos. 596 & 597/Mds/2009 dated 21.08.2009 for the assessment years 2004-05 & 2005-06 and by ITA No.1329/Mds/2009 dated 19.01.2010 for the assessment year 2006-07. We also find from the order of the Commissioner of Income Tax (Appeals) that though assessee produced these orders of the Tribunal, he failed to follow these orders stating that assessee has not produced the written agreements and therefore, he was of the view that unless written agreements ar .....

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ce of any written agreement the Commissioner of Income Tax (Appeals) should not have tried to distinguish the orders of the Tribunal and refused to follow the same. On going through the orders of the Tribunal, we find that the issue in appeal is already decided in the proceedings under section 143(3) of the Act. 6. The co-ordinate Bench in ITA Nos. 596 & 597/Mds/2009 dated 21.08.2009 while arriving at the conclusion that token advances received by the assessee cannot be assessed as income of .....

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d by the assessee as the proposed assignments were not materialized the advance token receipt cannot partake the character of income for the assessment year under consideration. The Commissioner of Income Tax (Appeals) has relied upon the Hon ble jurisdictional High Court in the case of Lakshminarayana Films Vs. CIT (supra), wherein the amounts were to be received by the assessee as per the written agreement and on completion of certain formalities in future. Therefore, the Hon ble High Court ha .....

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the amounts to be paid on fulfillment of certain conditions. 6. From the facts of the present case, we find that these token amounts were received by the assessee for giving preference to the parties for making himself available for future assignments, if finalized after deliberations and consideration of various factors and criteria. Which means that by receiving these advances as token amounts, the assessee is binding not to take up any other assignment prior to finalizing the proposed assignm .....

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e Tribunal has held in para 5 as under:- 5. After carefully considering the record available with the Tribunal and in the light of the arguments advanced on behalf of both the parties, we find that the assessee had shown the disputed amount of ₹ 25 lakhs in the list of sundry creditors in the balance sheet filed by him for the period ending 31st March, H97. As per the contention of the assessee only that part of the advance is treated as income for which he rendered service to the giver of .....

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assessee to constitute income to be chargeable to tax during the period. Thereby the addition of ₹ 25 lakns to the returned income of the assessee is unsustainable under law and it is to be set aside. 7. Similarly, in the case of K.K. Khullar Vs. Deputy Commissioner of Income Tax, the Delhi Benches of this Tribunal has held in paragraph 8 and 9 as under: 8. We have considered the facts of the case and rival submissions. We may refer to the charging section 4 of the Act to the effect that i .....

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nd 5 deal with the scope of income and its charge to income tax, section 1.45 is a procedural section regarding the method to be followed for recording of income in the books of account. It is no doubt true that for the assessment year 1997-1998 and onwards, the assessee can follow either the cash or the mercantile system of accounting and the hybrid system of accounting is prohibited. However, what is to be taxed is income and receipt of an amount is not be the basis for the levy of the tax. In .....

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per the system of accounting followed by the assessee in view of section 145 of the Act, because the substance of the matter is income . Therefore, there is an infirmity in the order of the learned Commission of Inome Tax (Appeals) in paragraph 4.7 where it was stated that the entire amount received whether arrears or advance is to be shown as income under the cash system of accounting. The correct position would be that the entire income received, whether arrear or advance of income has to be .....

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in the assessee. The rest of the amount was taken as liability to be adjusted in subsequent years as and when the service was rendered. It is but clear that the excess amount would have to be returned in case the service was not performed in subsequent year and therefore, in respect of such amount no debt came into existence in favour of the assessee. Therefore, this amount did not become the income. Accordingly, we are of the view that the learned Commissioner of Income Tax (Appeals) erred in f .....

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se as it was confirmed to the facts of that case. We may add that if a manifestly wrong decision has been taken by the Assessing Officer in one year or in a number of years/ it will not bind the Assessing Officer in tile assessment of a subsequent year because there cannot be any estoppel against the law. However, in this case, we find the earlier and subsequent assessment were made on correct appreciation of the principle of the cash system of accounting. Since the assessee succeeds on merits o .....

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on of any agreement but were received as a token amount for giving a priority to the parties to negotiate for future assignment without finalizing the terms and conditions. When the future assignments were not materialized and the amounts were returned, then the said advances cannot be treated as income of the assessee. Accordingly, we aside the orders of lower authorities, qua this issue and delete the addition in this respect. 7. Similarly, the co-ordinate Bench for the assessment year 2006-07 .....

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actory and M/s.Studio Green were not against any particular films. Assessee s contention that income could not be recognized till the artist had acted in the film, for which the advances were received, carries great strength. Storyline was not fixed, neither was the name, not even the co-artists were known. Just because assessee was following the cash system, it was not obliged to consider all sums received by it as income unless such receipt could be categorized as income. Whether it is cash sy .....

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ents had materialized. Though the Ld. DR put great efforts to submit that fact situation for the impugned assessment year could have been different from that of the earlier years, which was dealt with by the Tribunal in ITA No. 596 597/Mds/2009 as aforesaid. We find that Ld. CIT(A) had confirmed the order of the Assessing Officer for the impugned assessment year based on his own decision for the earlier years, which was later reversed by the Tribunal. As for the reliance placed by the Ld. Counse .....

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