2015 (9) TMI 442 - AT - Income Tax

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 - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the advance received by the assessee for professional work should be assessed in the year of receipt or in the year of performing the contract.

Issue-wise Detailed Analysis:

1. Assessment Year of Advance Received for Professional Work:
The primary issue in this case is whether the advance received by the assessee, a music director, for professional work should be taxed in the year of receipt or in the year when the contract is performed. The assessee received advances from two entities: Rs. 9,50,000 from Sri Rajalakshmi (P) Ltd. and Rs. 3,00,000 from Film Workes, Boat Club.

The assessee argued, citing the case of R.S. Suriya, that advances should be taxed in the year the contract is performed, not in the year of receipt. The counsel for the assessee highlighted that the advance from Sri Rajalakshmi (P) Ltd. was refunded as no project materialized, while the advance from Film Workes was still outstanding.

2. Revenue's Position:
The Departmental Representative supported the Assessing Officer's decision to tax the advances in the year of receipt, relying on the case of D. Meena Vs. DCIT, where it was held that advances received for signing a film should be treated as income in the year of receipt.

3. Commissioner of Income Tax (Appeals) Decision:
The Commissioner of Income Tax (Appeals) partially sustained the addition made by the Assessing Officer. It held that the Rs. 3,00,000 received from Film Workes should be taxed in the year of receipt as it was for a specific project, aligning with the D. Meena case. However, the Rs. 9,50,000 from Sri Rajalakshmi (P) Ltd. was not taxable in the assessment year 2005-06 as it was a token advance for exploring the possibility of working on a project, similar to the R.S. Suriya case.

4. ITAT Chennai's Analysis and Decision:
The ITAT Chennai reviewed the facts and previous decisions, including the R.S. Suriya case, which established that advances received should be assessed in the year of performing the contract, not in the year of receipt. The Tribunal noted that in similar cases, such as R.S. Suriya and K.K. Khullar, advances were treated as liabilities in the balance sheet and not as income until the contract was performed or the project materialized.

The Tribunal emphasized that the substance of the matter is "income" and that receipt of an amount does not automatically constitute income unless it is recognized as such. The Tribunal found that the advances received by the assessee were for future projects and should not be taxed in the year of receipt.

Conclusion:
The ITAT Chennai concluded that the advances received by the assessee from Sri Rajalakshmi (P) Ltd. and Film Workes should not be assessed as income in the assessment year 2005-06 as they were intended for future projects. The Tribunal set aside the lower authorities' orders and deleted the additions made by the Assessing Officer. Consequently, both the appeal of the Revenue and the cross-objection of the assessee were dismissed.

Order Pronouncement:
The order was pronounced in the open court on 26th August 2015.