ADVANCES – NOT ASSESSABLE AS INCOME

[Mr. M. GOVINDARAJAN]

Section 4 and 5 of the Income Tax Act, 1961 (‘Act’ for short) deals with the scope of income and its charge to income tax.  The Act takes into account two points of time on which the liability to tax is attracted, namely-

• Accrual of income; or
• Receipt of income.

It is accrual of income or receipt of income that can become the subject matter of tax and it is the income which has to be recorded as per the system of accounting followed by the assessee.  Further the assessee may either follow the cash system or mercantile system.  A receipt can be treated as income only if such income can be considered as recognized.

In this article the issue to be discussed is whether the advances received is considered as income for the purpose of tax with reference to decided case laws.

In ‘K.K. Khullar V. Deputy Commissioner of Income Tax’ – 2008 (1) TMI 447 - ITAT DELHI-I the assessee received certain amount for services to be performed over a period of time.  The amount relatable to the services rendered in the year under consideration was shown as income, the reason being that the assessee became entitled to receive that amount from the client in respect of the services rendered.   In other words, the High Court held that debt to the extent of the amount pertaining to services rendered only got vested 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 favor of the assessee.   Therefore this amount did not become the income.   The High Court was of the view that the Commissioner (Appeals) erred in finding that the assessee was following the hybrid system of accounting on the ground that the whole of the amount received from the clients was not declared as income in the year of the receipt of the amount.

In ‘R.S. Suriya V. Deputy Commissioner of Income Tax’ – 2010 (1) TMI 969 - ITAT CHENNAI  the Commissioner (Appeals) has confirmed the advance professional fee of ₹ 55 lakhs as income for the impugned assessment year 2006 – 07 relying on his own decision for the assessment years 2004 – 05 and 2005 – 06.  The Tribunal found that it is clear from the assessment order itself that the amounts received by the assessee from M/s Photon Factory and M/s Studio Green were not against any particular films.  The assessee contended that the income could not be recognized till the artist had acted in the film, for which the advances were received.  Story line was not fixed, neither was the name, not even the co-artists were known.   Just because the 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.    The Tribunal had held in the assessee’s own case for the earlier years that it would not be proper and appropriate to treat professional advance received as income, unless and until proposed assignments had materialized.  The Tribunal held that the amount of ₹ 55 lakhs received by the assessee as advance could not have been treated as his income for the impugned assessment year.   Such addition stands deleted.

In ‘R.S. Suriya V. Assistant Commissioner of Income Tax’ – 2015 (11) TMI 339 - ITAT CHENNAI the appellant is a cine artist.  There was a search in the premises of the appellant on 19.01.2010.   The appellant filed returns for the assessment years 2004-05 to 2006-07 in response to the notice under Section 153A.  The assessments were completed and the Assessing Officer brought to tax advances received from various producers as income of the assessee.   The appellant contended that these amounts received by the appellants are only advances and since the films were not commenced these advances cannot be treated as income of the appellant and it should be taxed in the year in which film shooting/production commenced as income of the assessee.  The Commissioner (Appeals) upheld the additions treating the said amount as income of the appellant for the reason that the appellant is following cash system of accounting and therefore they have to be considered as income of the assessee.

Before the Tribunal, in appeal, the appellant submitted the following:

• The advances brought to tax in the hands of the assessee were already assessed while completing the assessments for all the three assessment years;
• There was no incriminating material found during the course of search suggesting that the appellant had suppressed income;
• All the advances were in fact, assessed while completing the assessments;
• In appeal for the above assessments the Tribunal held that the amounts received are only advances and cannot be assessed in the assessment years;
• The advances brought to tax by the Assessing Officer in the search assessments are the same amounts, where the Tribunal deleted in the proceedings completed under Section 143(3) of the Act;
• All these additions are to be deleted following the decisions of the Tribunal in R.S. Suriya V. Deputy Commissioner of Income Tax’ – 2010 (1) TMI 969 - ITAT CHENNAI

The Revenue supported the orders of the lower authorities and relied on the decision of the Tribunal in ‘D. Meena V. Deputy Commissioner of Income Tax’ in I.T.A. Nos. 1624 and 1625/Mds/2000,  19.07.2005 and the decision of High Court, Madras in ‘Lakshminaraya Films V. Commissioner of Income tax’ – 1999 (11) TMI 32 - MADRAS High Court in support of the submission that advances have to be treated as income of the assessee.

The Tribunal found that similar advances were brought to tax while completing assessments under Section 143 (3) for all these three assignment years by the Assessing Officer and when the matter was carried on appeal the Tribunal deleted the additions for these assessment years.  The order of the Tribunal was produced before the Commissioner (Appeals).  The Tribunal held that the Commissioner (Appeals) failed to follow these orders stating that the appellant has not produced the written agreements and therefore it was of the view that unless written agreements are produced the orders cannot be followed and he tried to distinguish the orders passed by the Tribunal.  The Tribunal also found that the co-ordinate bench specifically stated that no written agreement between the assessee and the producers of films were entered into.   Therefore in the absence of written agreement the Commissioner (Appeals) should not have tried to distinguish the orders of the Tribunal and refused to follow the same.

The Tribunal also found that the advances were received by the appellant for taking up the assignment of acting in the films in future.   There is no written agreement between the appellant and the producers of the films.  The appellant has shown these advances as liability in the balance sheets and in view of the peculiar fact that in the subsequent years these advances were returned by these advances were returned 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.  In ‘Lakshminarayana Films’ (supra) relied by Commissioner (Appeals) the amounts were to be received by the assessee as per the written agreement on completion of certain formalities in future.  Therefore this amount to be income of the assessee in the year in which the said amounts were received on completion of the conditions as per the agreement and cannot be said as accrued at the time of execution of the agreement.   This case is not applicable to the present case since there is now written agreement as well as there are no dates on which the amounts to be paid on fulfillment of certain conditions.

The Tribunal held that the amounts received by the appellant from various producers towards advances cannot be assessed as income of the assessee.  The Tribunal set aside the order of the Commissioner (Appeals) and delete the additions in respect of the advances treated as income of the assessee.