2006 (8) TMI 283 - AT - Income Tax

Summary

Issues Involved:
1. Taxation of additional/enhanced compensation as professional income.
2. Taxation of interest on additional/enhanced compensation.
3. Disallowance of expenditure incurred on litigation.
4. Initiation of proceedings under section 147/148.
5. Addition of Rs. 25,00,000 as professional fee.

Detailed Analysis:

1. Taxation of Additional/Enhanced Compensation as Professional Income:
The department assessed the professional income of the assessees, who are advocates, by adopting a certain percentage of additional/enhanced compensation in various years. The CIT (Appeals) affirmed this addition. However, the Tribunal held that the additional/enhanced compensation awarded to landowners for land acquisition cannot be considered the income of the advocates who represented them. The Tribunal referenced the Calcutta Bench decision in Tribhuvan Mahato v. Dy. CIT, which established that such compensation and interest accrued thereon are not the income of the advocates but of the landowners. The Tribunal reiterated that the advocates acted as custodians, and the income belongs to the landowners.

2. Taxation of Interest on Additional/Enhanced Compensation:
The department also assessed the interest on additional/enhanced compensation as the income of the assessees. The Tribunal held that the interest earned on deposits made from additional/enhanced compensation funds belongs to the landowners, not the advocates. The interest income should be taxed in the hands of the landowners, as the advocates merely held the funds in trust as per court orders.

3. Disallowance of Expenditure Incurred on Litigation:
The CIT (Appeals) sustained the disallowance of 50% of the expenditure incurred on litigation. The Tribunal found that the expenditure related to the litigation process was not the expenditure of the advocates but of the landowners. Therefore, such disallowance in the hands of the advocates was unjustified. The Tribunal ordered the deletion of the disallowance.

4. Initiation of Proceedings Under Section 147/148:
The assessees contested the initiation of proceedings under section 147/148 for the assessment years 1986-87 and 1992-93. The CIT (Appeals) affirmed the initiation, but the assessees did not press this ground further. The Tribunal did not address this issue in detail as it was not pursued by the assessees.

5. Addition of Rs. 25,00,000 as Professional Fee:
The CIT (Appeals) added Rs. 25,00,000 (split equally between the two assessees) as professional fees received from another advocate, Mr. R.D. Gupta. The Tribunal found that this amount represented a decretal amount of award and not professional fees. Mr. Gupta had stated that the amount was paid to keep it in fixed deposits with a condition of refund upon an adverse court decision. Hence, the Tribunal ordered the deletion of this addition as well.

Conclusion:
The Tribunal concluded that the additional/enhanced compensation, interest accrued thereon, and related expenditures could not be taxed in the hands of the advocates. The income belonged to the landowners, and the advocates were merely custodians as per court directives. The Tribunal allowed the appeals of the assessees in full, directing the Assessing Officer to modify the orders accordingly and provide consequential relief.