1993 (9) TMI 25 - HC - Income Tax

A Firm, Additions To Income, Cash System, Income From Undisclosed Sources, Income Tax Act, Question Of Law

Summary

Issues:
1. Interpretation of the cash system of accounting followed by a firm of advocates.
2. Determination of whether the method of accounting adopted by the firm was consistent with the Income-tax Act.
3. Whether the net accretion to the credit of clients' accounts should be considered as the income of the firm.
4. Whether the relationship between an advocate and a client establishes the advocate as a trustee for clients' money.
5. Whether the Tribunal's decision to not refer the questions proposed by the Revenue to the High Court was correct.

Analysis:

1. The firm of advocates followed the cash system of accounting, where they received money from clients for expenses and credited it to clients' accounts. The Income-tax Officer contended that the firm was enjoying the money without showing it as income, leading to tax implications. The Commissioner of Income-tax (Appeals) in one case held that the method was accepted for many years and ordered the addition to be deleted. The Tribunal in another case found that the firm acted as a trustee for clients' money, and the method was consistent with Bar Council rules and the advocate-client relationship.

2. The Revenue argued that the firm used the accounting method to reduce income, but the Tribunal disagreed, stating it was a fiduciary relationship. The High Court noted that the method was accepted for years and cited a similar case involving solicitors where the method was approved. The Court agreed with the Tribunal's view that the method did not aim to reduce income and that the relationship between an advocate and client is fiduciary, holding clients' money like a trustee.

3. The Revenue sought to refer questions to the High Court regarding the deletion of additions to the firm's income based on the accounting method. The High Court found that the method was not aimed at reducing income, bills were prepared in a timely manner, and there was no evidence of manipulation. The Court upheld the Tribunal's decision to not refer the questions, stating the method was accepted and consistent with the advocate-client fiduciary relationship.

4. The Tribunal's decision in each case was upheld, and the Revenue's applications were dismissed. The High Court found that the firm's accounting method was in line with accepted practices for advocates and did not aim to reduce income. The Court emphasized the fiduciary nature of the advocate-client relationship and the lack of evidence showing manipulation or reduction of income through the accounting method.