2016 (7) TMI 400 - HC - Income Tax

Addition on account of cessation of liability - Advance receipts from client - system of accounting - the deposits received by the assessee were treated by him as his liability - Held that - There is no iota of doubt that the deposits were treated by the assessee as a capital receipt and the deposits were adjusted in the subsequent years against the expenditure incurred for or on behalf of the client from whom the deposit was received. Such expenditure also included the fees of the assessee himself. It is at that stage that the money was earned by him. Before that, he was holding the money as an agent or as a fiduciary of his client. There was no cessation of trading liability within the meaning of section 10(2A) (erstwhile), and the amount of such wages could not be added to income. Thus, even though the remedy of some of the clients may have become barred by limitation, even then the barred debt did not become income of the assessee and could not be taxed under the Income-tax Act. See KOHINOOR MILLS CO. LTD. Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY I. 1962 (10) TMI 58 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Challenge to the judgment and order passed by the Income Tax Appellate Tribunal.
2. Justification of quashing the order dated 29th October, 2010.
3. Consideration of the proposition of law laid down by the Supreme Court.
4. Reliance on specific decisions by the Tribunal and High Court.

Analysis:

1. The appeal challenges a judgment and order passed by the Income Tax Appellate Tribunal, where the assessing officer was directed to reassess the income of the assessee. The main contention revolves around the Tribunal quashing the order dated 29th October, 2010, and the legality of the mixed system of accounting used by the assessee.

2. The first issue questions the justification of quashing the order dated 29th October, 2010, by the Commissioner, emphasizing the prohibition of the mixed system of accounting since 01.04.1997. The argument is centered on whether the Tribunal was correct in ignoring the legal requirement for maintaining either cash or mercantile system of accounting under Section 145 of the Income Tax Act, 1961.

3. The second issue pertains to the consideration of the proposition of law established by the Honorable Supreme Court in a specific case. The Tribunal's decision is scrutinized for not aligning with the legal principles laid down by the Supreme Court regarding the taxability of income received or deemed to be received in the previous year.

4. The final issue focuses on the reliance placed by the Tribunal on specific decisions, particularly the case of R.N. Jhunjhunwala, and the subsequent challenge of the High Court's order before the Supreme Court. The argument questions the sustainability of the Tribunal's decision based on the absence of comprehensive consideration by the Tribunal and High Court regarding the assessibility of certain aspects.

In the detailed analysis, the Court delves into the interpretation of Section 145 of the Income Tax Act, emphasizing the choice available to the assessee in computing income under different systems of accounting. The judgment also highlights the nature of receipts received by the assessee and the subsequent treatment of such deposits, establishing them as capital receipts rather than revenue receipts.

Moreover, the Court references a previous judgment to support the argument that funds received by the assessee, acting as a solicitor, were held in a fiduciary capacity and were not to be considered as the assessee's income. The legal position is further strengthened by citing relevant cases where the character of the funds received and the subsequent treatment play a crucial role in determining taxability.

Ultimately, the Court dismisses the appeal, concluding that the Tribunal's decision was in accordance with legal principles and the questions of law raised by the revenue lack merit. The parties are directed to bear their own costs, emphasizing the thorough analysis conducted to arrive at the final decision.