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Issues involved: The judgment addresses the method of accounting followed by a firm of solicitors and advocates, specifically in relation to the treatment of clients' deposits and expenses incurred, as challenged by the Income-tax Officer for the assessment year 1985-86.
Details of the Judgment: Accounting Method and Compliance with Rules: The petitioners, a firm of solicitors and advocates, have been following a consistent accounting practice for over 35 years, treating clients' deposits as costs and maintaining a separate client's account as per the rules of the Bombay High Court. The Income-tax Officer raised objections to this method for the assessment year 1985-86, requesting detailed information on client deposits and expenses incurred. The Inspecting Assistant Commissioner directed the Income-tax Officer to obtain the information and adjust major expenses against clients' deposits to determine the correct income of the assessee, leading to the challenge in the present writ petition. Legal Provisions and Accounting Standards: The judgment refers to section 145 of the Income-tax Act, 1961, which allows income computation based on the method of accounting regularly employed by the assessee. The petitioners' accounting method, accepted for over 30 years, aligns with professional standards and has been deemed appropriate by the Income-tax Officer. The court highlights the fiduciary relationship between solicitors and clients, emphasizing the need for accurate accounting practices. Judicial Precedents and Accounting Principles: Citing case laws such as CIT v. Tanubai D. Desai and CIT v. Sandersons and Morgans, the judgment underscores that solicitors hold clients' money in a fiduciary capacity, and income is recognized only upon finalization of accounts. The court dismisses the notion that clients' deposits constitute income, emphasizing the fiduciary duty of solicitors to account for such funds accurately. Jurisdiction and Intervention: The court asserts that the Income-tax Officer lacks the authority to impose a different accounting method on the assessee, as section 145 governs income computation based on the assessee's regular accounting practices. The directions issued by the Inspecting Assistant Commissioner are deemed without jurisdiction and likely to cause undue hardship and harassment to the petitioners. Conclusion and Relief Granted: The petition is allowed, restraining the respondents from taking further steps based on the challenged directions. The court rules in favor of the petitioners, emphasizing the long-standing acceptance of their accounting method and the potential hardship posed by altering it. The respondents are directed to pay the costs of the petition. This judgment upholds the petitioners' accounting method, emphasizing compliance with professional standards and rejecting the imposition of a different method by tax authorities, thereby safeguarding the petitioners from unnecessary hardship and ensuring adherence to established accounting principles.
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