2006 (6) TMI 80 - HC - Income Tax

Tax Ruling: Advance Lease Amount Taxable in Year of Receipt

The High Court held that the advance lease amount received by an assessee-firm for leasehold rights of a film should be taxed in the year of receipt, ... Accural of Income – lease - in accordance with the agreement between the assessee and the lessee, the amount of Rs. 4,00,000 became due on the execution of the agreement. There was no mechanism laid down in the agreement by which this amount could be recovered or could be held by way of deposit by the assessee - Tribunal is correct in law in holding that the lease amount received in advance by the assessee for leasing out the film for 5 years and to be adjusted towards the yearly lease amount for the next four years is taxable in the year of receipt, i.e, the previous year ending on March 31, 1986, when the assessee was maintaining the accounts on mercantile basis - Tribunal is correct in law in holding that the right of receiving the entire lease amount accrued to the assessee Issues:1. Taxability of lease amount received in advance.2. Accrual of right to receive entire lease amount.Issue 1: Taxability of lease amount received in advanceThe case involved an assessee-firm engaged in the distribution of feature films, which sold leasehold rights of a film to a financier. The consideration of Rs. 4,00,000 was to be paid immediately and adjusted over five years. The Income-tax Officer concluded that the assessee was following the cash system of accounting and spread the amount over five years to reduce tax liability. However, the Commissioner of Income-tax (Appeals) reversed this decision. The Tribunal, on appeal by the Department, reinstated the Income-tax Officer's order, stating that the advance received was not refundable and had to be taxed in the year of receipt. The Tribunal emphasized that inter se agreements for adjustment did not affect taxability. The High Court analyzed previous judgments, including CIT v. K.R.M.T.T. Thiagaraja Chetty and Co., to establish that income accrues when the right to receive it vests, regardless of actual payment or accounting method. The Court held that the amount received should be taxed in the year of receipt, rejecting the assessee's attempt to spread it over five years.Issue 2: Accrual of right to receive entire lease amountThe Court examined the agreement between the assessee and the lessee, noting that the entire consideration of Rs. 4,00,000 was due at the agreement's execution, with no provision for refund or deposit by the assessee. Referring to CIT v. Ashokbhai Chimanbhai, the Court emphasized that income accrues when the right to it vests, regardless of payment timing or agreement terms. The Court rejected the assessee's argument that the amount could be spread over five years, as the right to receive the full amount accrued at the agreement's inception. Citing ITO v. Murlidhar Bhagwan Das, the Court clarified that assessments must relate to the year under review, supporting the Tribunal's decision to tax the entire amount in the year of receipt. Ultimately, the Court ruled in favor of the Revenue, upholding the taxability of the entire lease amount received by the assessee in the year of the agreement.This judgment clarifies the tax treatment of advance lease amounts, emphasizing that income accrues when the right to receive it vests, irrespective of payment timing or accounting method. The Court rejected the assessee's attempt to spread the amount over multiple years, affirming that the entire consideration should be taxed in the year of receipt. The decision provides a comprehensive analysis of relevant legal precedents and highlights the importance of assessing income accrual based on the vesting of rights, ensuring consistent tax treatment in similar cases.