2014 (2) TMI 80 - HC - Income Tax

Unexplained credit - Held that - The assessee received advance money for distribution of rights - The assessee was consistently following mercantile system of accounting, wherein advances received for distribution are treated as liabilities in the balance sheet in the year of receipt and those advances are offered as income in the year of distribution of film rights - The film was not released in the previous year, therefore, the assessee could not give rights to Shri.O.G. Krishnam Raju during the previous year and no income arose to the assessee during the previous year - This film was released in the succeeding previous year and the exhibition rights were given in favour of Shri. O.G. Krishnam Raju - Decided against Revenue.

Summary

Issues:
1. Whether the Tribunal was right in deleting the addition of Rs.50,00,000/- when the assessee failed to prove the identity, credit worthiness, and genuineness of the transaction?

Analysis:
1. The respondent/assessee filed a return of income for the assessment year 2006-07, admitting a total income of Rs.1,78,132. During the assessment proceedings, the Assessing Officer found cash and credit entries in the cash book. The Assessing Officer added Rs.50,00,000 as unexplained credit under Section 68 of the Income Tax Act, as the assessee could not establish the identity of the creditor source. This led to a demand of Rs.29,72,765. The Commissioner of Income Tax (Appeals) allowed the appeal against this order, stating that the assessee consistently followed the mercantile system of accounting, treating advances received for distribution as liabilities in the balance sheet in the year of receipt, and offering them as income in the year of distribution.

2. The first Appellate Authority noted that the assessee, engaged in film production and distribution, received Rs.50,00,000 from M/s. Venkateswara Pictures during the financial year 2005-06. The amount was treated as advances and accounted under the liability head in the balance sheet since the film distribution had not commenced during the relevant year. The Assessing Officer requested confirmation of the source, and the assessee provided a confirmation letter from M/s. Venkateswara Pictures, stating that the sum received had been offered as income in the subsequent year. The Tribunal, upholding the first Appellate Authority's decision, emphasized that the amount was kept as advance due to the film not being released in the previous year, leading to no income for the assessee during that period.

3. The Tribunal further supported the assessee's position by acknowledging their consistent adherence to the mercantile system of accounting. This system treated advances for distribution as liabilities in the year of receipt and income in the year of distribution. As the film was released in the subsequent year, with exhibition rights granted to M/s. Venkateswara Pictures, the confirmation letter provided by the creditor was deemed credible. Consequently, the Tribunal found no reason to doubt the confirmation letter or the assessee's accounting practices, leading to the dismissal of the Revenue's appeal as no legal question merited consideration in the case.