2016 (5) TMI 70 - AT - Income Tax

Income recognition - Advance received in the nature of imprest money held in the fiduciary capacity for his overseas client Ace Step Management Ltd., UAE - as alleged by revenue that within two days of receipt of the so called advance amount, the assessee disbursed more than ₹ 2 crores for making payments to his own firm, Hindu undivided family, wife, son and daughter and remaining amount was used for making payments towards preferential share amount of Dhanlaxmi Bank - Held that - Facts and circumstances are similar and synonymous to the facts and circumstances in the case of CIT v. Om Prakash Khaitan 2015 (7) TMI 785 - DELHI HIGH COURT and respectfully following the same, we hold that the amount of professional advances received by the assessee accepting money from its clients on account to meet expenses for and on behalf of its clients and appropriating fees as per bill received against the client, then, the amount of advance cannot be treated as income in the hands of the assessee. We may further point out that the assessee received the amount in question on April 9, 2008, pertaining to the financial year 2008-09 relevant to the assessment year 2009-10 and it was the first year of receipt and the assessee has shown the balance at the end of the financial year, i.e., ₹ 6,44,44,813 as sundry creditors, after adjusting the professional fees and amount paid towards reimbursement on behalf of the client, then this amount cannot be treated as income of the assessee for the assessment year 2009-10. Finally, respectfully following the proposition laid down by the hon ble jurisdictional High Court in the case of CIT v. Om Prakash Khaitan supra we hold that the present issue raised is clearly covered on all four corners in favour of the assessee and therefore, we dismiss the view taken by the Assessing Officer and upheld by the learned Commissioner of Income-tax (Appeals) wherein the entire amount of advance has been treated as income of the assessee for the assessment year 2009-10. Before we part with the adjudication of this issue, we may point out that we are in agreement with the contentions of the learned Departmental representative that income earned by the assessee himself, by his own firm, by his Hindu undivided family and by his wife, son and daughter, from investments of funds, so received by them out of advance amount in question, may be added to their respective taxable income. - Decided in favour of assessee. Disallowance u/s 14A - Held that - We are in agreement with the contention of the learned Departmental representative that the Assessing Officer, after recording satisfaction has invoked section 14A read with rule 8D and has computed disallowance under clause (iii) of sub-rule (2) in accordance with the relevant provisions of the Act. It is pertinent to note that the language used by the Legislature in section 14A as well as in rule 8D of the Rules mandates that the provisions of sub-section (2) of section 14A of the Act shall also apply in relation to a case where the assessee claims that no expenditure has been incurred by the assessee in relation to the income which does not form part of the total income under this Act. In the present case, undisputedly and admittedly, the assessee has not made any suo motu disallowance. Therefore, we may safely presume that the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act. Therefore, after recording satisfaction, the Assessing Officer rightly invoked the provisions of section 14A read with rule 8D(2)(iii) of the Rules and we hold that the disallowance made by the Assessing Officer and upheld by the learned Commissioner of Income-tax (Appeals) is based on proper invocation and application of the relevant provisions of the Act and Rules and thus, we uphold the same - Decided against assessee.

Summary

Issues Involved:
1. Addition of Rs. 6,44,44,813 as taxable income.
2. Disallowance under Section 14A read with Rule 8D(2)(iii) of the Income-tax Rules.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 6,44,44,813 as Taxable Income:

The primary issue revolves around whether the amount of Rs. 6,44,44,813 received by the assessee from Ace Step Management Ltd., UAE, should be considered taxable income. The assessee argued that this amount was an advance held in a fiduciary capacity for his overseas client and not taxable income. The Commissioner of Income-tax (Appeals) confirmed the addition, stating that the assessee received the amount as "advance as professional fees" and utilized it for personal purposes, indicating ownership over the funds.

The Tribunal reviewed various precedents, including the case of CIT v. Om Prakash Khaitan, where it was held that advances received by professionals should not be treated as income until appropriated as fees. The Tribunal also noted that the assessee followed the cash system of accounting, and the advance was recorded as sundry creditors, not income. Despite the Revenue's argument that the assessee used the funds for personal investments and disbursed them to family members, the Tribunal found that the character of the receipt as an advance was not altered by its subsequent use.

The Tribunal concluded that the amount received as an advance could not be treated as income for the assessment year 2009-10, following the principle of consistency and the legal precedents. Thus, the addition of Rs. 6,44,44,813 was deleted.

2. Disallowance under Section 14A read with Rule 8D(2)(iii):

The second issue pertains to the disallowance of Rs. 3,11,043 made by the Assessing Officer under Section 14A read with Rule 8D(2)(iii) of the Income-tax Rules. The assessee claimed that no expenditure was incurred to earn the exempt dividend income, and hence no disallowance should be made. However, the Assessing Officer, after recording satisfaction, invoked Section 14A and computed the disallowance.

The Tribunal examined the assessment order and found that the Assessing Officer had recorded satisfaction as required under Section 14A(2) before making the disallowance. The Tribunal upheld the disallowance, stating that the provisions of Section 14A and Rule 8D mandate disallowance of expenditure related to exempt income, and the Assessing Officer had correctly applied these provisions.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the addition of Rs. 6,44,44,813, holding that it was not taxable income but an advance held in a fiduciary capacity. However, the Tribunal upheld the disallowance of Rs. 3,11,043 under Section 14A read with Rule 8D(2)(iii), finding that the Assessing Officer had properly invoked the relevant provisions. The appeal was partly allowed and partly dismissed.