2006 (8) TMI 518 - AT - Income Tax

Chargeability to tax - Interest income - receipt of incomes - maintained a separate bank account - professional fees received from the clients in his capacity as a solicitor for the purpose of discharging obligations of the clients - Expenditure in respect of use of motor car, telephone, printing and stationery - Nature of expenditure - HELD THAT - It is true that when the assessee did not disclose the interest income in the original returns of income filed by him, he wrongly claimed deduction for TDS. As per the provisions of section 199 of the Act, credit for TDS shall be allowed for the assessment year for which the relevant income is brought to the charge of the tax. When the income itself, was not shown by the assessee, in the original return of income, the claim for TDS was patently wrong. However, that should not be a reason for bringing to the charge of tax such income, which is not chargeable to tax at all in the hands of the assessee as per the provisions of law. The Assessing Officer is within his right to deny credit for the TDS but he cannot bring to the charge of tax the income, which is not assessable in the hands of the assessee. Thus, we hold that the relevant interest income is not chargeable in the hands of the assessee and we direct the Assessing Officer to exclude such income from the assessee s total income for all the assessment years under appeal. The Assessing Officer is also directed to withdraw the credit in respect of TDS allowed to the assessee for all the assessment years. Expenditure in respect of use of motor car, telephone, printing and stationery - Nature of expenditure - HELD THAT - No material was produced before us to controvert the finding of the ld CIT(A) or to show that no part of the expenditure is in the nature of personal expenditure of the assessee. The ld CIT(A) has sustained disallowance merely at 10 per cent. of the telephone expenses, motor car and depreciation on motor car. In the facts of the case, this cannot be said to be unreasonable or excessive. The disallowance of printing and stationery expenses have been deleted by the ld CIT(A) except for the assessment year 1995-96. We fail to understand as to why such disallowance should be sustained for the assessment year 1995-96 when for all the assessment years there is a consistency finding by the ld CIT(A) that this expenditure was entirely for professional purpose. Therefore, for the assessment year 1995-96, we modify the order of the ld CIT(A) to the extent that the disallowance from out of the printing and stationery expenses is directed to be deleted. With regard to the disallowances from out of other expenses as mentioned, orders of the ld CIT(A) are upheld. In the result, the appeals of the assessee are partly allowed.

Issues Involved:
1. Validity of proceedings initiated under section 147.
2. Taxability of interest income accrued on clients' accounts.
3. Refund of self-assessment tax paid on revised return filed in response to notice under section 148.
4. Disallowance of expenses such as motor car expenses, depreciation, printing and stationery expenses, and telephone expenses.

Detailed Analysis:

1. Validity of Proceedings Initiated under Section 147:
The grounds challenging the validity of the proceedings under section 147 were not contested by the assessee's counsel. Therefore, the orders of the Commissioner of Income-tax (Appeals) confirming the validity of these proceedings for all assessment years under appeal stand confirmed.

2. Taxability of Interest Income Accrued on Clients' Accounts:
The substantial issue pertains to the taxability of interest income accrued on clients' accounts, which the assessee claimed did not belong to him. The assessee, an advocate and solicitor, maintained a separate bank account for clients' deposits. Interest accrued on these deposits was not declared in the original returns but was offered for tax conditionally in revised returns filed under protest. The Commissioner of Income-tax (Appeals) acknowledged that the interest income did not belong to the assessee but upheld the assessment on the basis that the income was voluntarily disclosed.

The Tribunal held that the interest income accrued on the clients' accounts is not chargeable to tax in the hands of the assessee, referencing the Bombay High Court's decision in Tanubai D. Desai [1972] 84 ITR 713, which established that interest income held in a fiduciary capacity by a solicitor is not taxable in their hands. The Tribunal directed the Assessing Officer to exclude such income from the assessee's total income and withdraw the credit for TDS allowed.

3. Refund of Self-Assessment Tax Paid on Revised Return Filed in Response to Notice under Section 148:
The assessee argued that the self-assessment tax paid on the revised return should be refunded since the interest income did not belong to him. The Commissioner of Income-tax (Appeals) denied the refund, citing proviso (b) to section 240, which states that tax chargeable on the total income returned cannot be refunded even if the assessment is annulled. However, the Tribunal clarified that this proviso applies only when the assessment is annulled, not when it is reduced or confirmed. Since the assessments were not annulled, the Tribunal held that the assessee is entitled to dispute the inclusion of such interest income in his total income.

4. Disallowance of Expenses:
The Assessing Officer disallowed 20% of motor car expenses, depreciation on motor car, telephone expenses, and printing and stationery expenses for personal use. The Commissioner of Income-tax (Appeals) reduced the disallowance to 10% for motor car and telephone expenses and deleted the disallowance for printing and stationery expenses except for the assessment year 1995-96.

The Tribunal upheld the disallowances, noting that the Assessing Officer is within his jurisdiction under section 147 to disallow expenses not wholly and exclusively incurred for the assessee's profession. However, the Tribunal directed the deletion of the disallowance for printing and stationery expenses for the assessment year 1995-96, aligning it with the findings for other assessment years.

Conclusion:
The appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the taxability of interest income and directing the exclusion of such income from the total income. The Tribunal also upheld the disallowances of certain expenses but provided relief for the printing and stationery expenses for the assessment year 1995-96.

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