2013 (9) TMI 482 - AT - Income Tax

Taxability of amount received after closure of business / profession - Discontinued business u/s 176 - addition on account of receipt of arrears of professional fees - Discontinuation from legal profession - CIT deleted disallowance - whether the CIT (A) has rightly allowed the claim of the assessee for exemption from tax, the receipt of arrears of his professional fees, such arrears having been received by the assessee after his elevation as High Court Judge - Held that - before his elevation as a Judge, assessee was carrying on legal profession as an advocate, arrears of professional receipts received after discontinuation of legal profession were not assessable in his hands after he has discontinued his legal profession. Even in spite of introduction of Section 176 (4) in the Act, the receipts in question cannot be treated as the assessee s income falling under the head Profits and Gains of Business, Profession or Vocation , even though they were, being the fruits of the assessee s professional activities, the profits and gains of a profession, under the very same head of Profits and Gains of Business, Profession or Vocation - It is due to the absence of any legislative provision that these receipts cannot be treated as business income falling under the head Profits and Gains of Business, Profession or Vocation carried on by the assessee during the relevant year. They cannot be included in the total income of the assessee, even though the amount was received by the assessee before the discontinuance of his profession due to his elevation as High Court Judge - Following decision of Commissioner of Income Tax v. Justice R.M. Datta 1989 (7) TMI 59 - CALCUTTA High Court and Nalinikant Ambalal Mody. Versus S. A. L. Narayan Row, Commissioner Of Income-Tax, Bombay City I. 1966 (5) TMI 13 - SUPREME Court - Decided against Revenue. Disallowance of expenses - Expenditure on printing and stationery, conveyance, telephone and accounting, etc. - Held that - since the gross receipts are not liable to tax, the expenditure incurred for recovery of outstanding fees and for maintaining books of account cannot be disallowed and no such disallowance was called for - Decided against Revenue.

Summary

Issues Involved:

1. Deletion of addition made by the AO on account of arrear of professional fees received after discontinuation of legal profession.
2. Deletion of disallowance made by the AO on account of expenses claimed by the assessee.
3. Admission of additional ground to allow credit of TDS omitted in the return of income.

Issue 1: Deletion of Addition of Arrears of Professional Fees

The Department's appeal challenged the CIT (A)'s decision to delete the addition of Rs. 67,86,669/- made by the Assessing Officer (AO) on account of arrears of professional fees received by the assessee after discontinuation of his legal profession. The AO argued that such receipts should be taxable under Section 176(4) of the Income Tax Act, 1961, which states that any sum received after the discontinuation of a profession shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt. The AO cited the Supreme Court decision in 'Nalinikant Ambalal Modi Vs. SAL Narayan Rao' which held that the fruits of professional activity are taxable irrespective of when they are received, but this was under the Income Tax Act, 1922, which lacked specific provisions for such receipts unlike the 1961 Act.

The CIT (A) deleted the addition, relying on judicial precedents such as 'CIT v. Justice R.M. Datta' and 'Justice Kuldip Singh v. ITO', which suggested that arrears of professional receipts received after discontinuation of legal profession were not assessable. The Tribunal upheld the CIT (A)'s decision, noting that Section 176(4) introduces a legal fiction to deem such receipts as income but does not specify under which head of income they should be taxed. Therefore, these receipts cannot be taxed under "Profits and Gains of Business, Profession or Vocation" or "Income from Other Sources" as the assessee did not carry on any profession during the relevant year.

Issue 2: Deletion of Disallowance of Expenses

The AO disallowed Rs. 75,523/- claimed by the assessee for expenses on printing and stationery, conveyance, telephone, and accounting, arguing that these expenses were not incidental to the assessee's profession. The CIT (A) deleted the disallowance, noting that the expenses were nominal and incurred for maintaining proper accounts and recovering outstanding fees. The Tribunal agreed with the CIT (A), stating that since the gross receipts were not liable to tax, the related expenses should not be disallowed.

Issue 3: Admission of Additional Ground for TDS Credit

The assessee sought credit for TDS of Rs. 53,351/- which was inadvertently omitted in the return of income. The CIT (A) allowed this credit, directing the AO to verify the claim and allow the credit as per law. The Department contended that TDS credit could only be given if claimed in the return of income, citing 'Goetze India Ltd. vs. CIT' which pertains to the powers of the ITAT, not the CIT (A). The Tribunal found that the omission was an inadvertent error and directed the AO to verify the claim and allow the credit as per law.

Conclusion

The appeal was partly allowed. The Tribunal upheld the CIT (A)'s deletion of the addition of arrears of professional fees and disallowance of expenses. However, it remitted the issue of TDS credit back to the AO for verification and appropriate action.