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2015 (12) TMI 40 - AT - Income TaxTaxability of advance received from clients in the year of receipt even though the assignments were completed in the subsequent year - Held that - We find that the assessee being an individual engaged in the legal profession had to receive certain advances from clients for taking care of certain expenses to be incurred for and on behalf of the client and the same is reflected in the balance sheet as a liability. The said liability takes the character of income on completion of the matters / assignment taken up by the assessee. We hold that the solicitor is the agent of the client. The client makes over the money to the solicitor for some work being done by the solicitor as his agent. The money must be employed to that purpose and must not be treated as money received for any other purpose. This position is not altered by the fact that the solicitor retains a lien upon the balance of the money for his costs. The result of solicitor having a lien on the balance of the money is no more than a person having a charge on somebody else s money. When a solicitor receives money from his client, he does not do so as a trading receipt but he receives the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The solicitor remains liable to account by this money to his client and hence it does not become the income of the assessee. Thus we have no hesitation in deleting the addition made towards advance received from clients by the Learned AO in various assessment years - Decided in favour of assessee Disallowance u/s 40(a)(ia) in respect of payments to Receiver etc. - Held that - In respect of remuneration component to the receiver Shri.Samir Roy Choudhury (assessee client s share is ₹ 38,250/-) and Shri. Tapas Kr. Banerjee (Special Officer), the same are liable for deduction of tax at source in terms of section 194J of the Act. But it is not clear from the records, whether the said sums were debited by the assessee in his income and expenditure account and whether any deduction was claimed by the assessee in that regard . It is also not clear that whether the payments made to these counsels have been reimbursed to the asseseee by his clients. We hold that if there is no profit element in this activity and is mere reimbursement of expenses, then no disallowance u/s 40(a)(ia) could operate. However, there is no clarity on the same from the orders of the lower authorities. Hence we deem it fit and appropriate, in the interest of justice and fair play, to set aside this issue in respect of amounts paid to Shri. Samir Roy Choudhury and Shri. Tapas Kr. Banerjee alone , to the file of the Learned AO to ascertain whether deduction has been claimed by the assessee in respect of payments made to them and whether the same has been reimbursed to the assesee by his clients without any profit element - Decided in favour of assessee for statistical purposes. Disallowance of Electricity Expenses, Telephone Expenses, Car Maintenance, Motor Car depreciation, Car expenses representing Road tax, insurance on car and interest on loan for car - Held that - CITA had disallowed only 5% towards personal element of expenditures involved hereinabove in the earlier years and hence his action of increasing the disallowance to 10% is without any basis. We also find that against the orders passed by the Learned CITA on this issue for the Asst Years 2003-04 & 2004-05, the revenue had not challenged this issue before tribunal. In any case, it is only an estimated disallowance. Accordingly, we direct the Learned AO to restrict the disallowance at 5% towards personal element. - Decided in favour of assessee in part. Disallowance u/s 14A read with Rule 8D - Held that - AO had to first record his satisfaction that the claim made by the assessee that no expenditure has been incurred for earning exempt income or the expenditure incurred by assessee is not found to be correct. We find that the Learned AO had not considered the claim of the assessee at all and he has straight away embarked upon computing disallowance under Rule 8D. Without recording his satisfaction in terms of Rule 8D(1), he cannot directly proceed to implement Rule 8D(2) and accordingly we hold that the action of the Learned AO in making disallowance u/s 14A of the Act in the facts and circumstances of the case is not in accordance with law. - Decided in favour of assessee. Restriction of addition u/s 94(7) of the Act on sale of shares - Held that - We find that the assessee had sold certain shares within a period of three months. Before us, the Learned AR pleaded that the loss of ₹ 1,54,690/- on the shares of Federal Bank Ltd took place owing to purchase of cum Bonus Shares and sale of Ex Bonus Shares. It was also pleaded that the Learned AO had not considered the fact whether the assesee had received dividend in respect of the subject mentioned share scripts during the relevant period. It was further pleaded that in several cases, the assessee received dividend not on the shares sold but on the shares continued to be retained by him. It was also further pleaded that disallowance u/s 94(7) , if any, could be restricted only to the extent of dividend received. We hold that the Learned CITA had rightly restricted the disallowance u/s 94(7) of the Act to the extent of dividend received in accordance with the provisions of the Act and by duly appreciating the true intention behind introduction of provisions of section 94(7) of the Act. Hence we find no infirmity in the order of the Learned CITA in this regard.- Decided against revenue.
Issues Involved:
1. Taxability of advance received from clients in the year of receipt. 2. Disallowance under Section 40(a)(ia) of the Income Tax Act in respect of payments to receivers, etc. 3. Disallowance of license fees. 4. Disallowance of electricity expenses, telephone expenses, car maintenance, motor car depreciation, car expenses representing road tax, insurance on car, and interest on loan for car. 5. Depreciation on leasehold property. 6. Disallowance under Section 14A read with Rule 8D. 7. Restriction of addition under Section 94(7) on sale of shares. Issue-wise Detailed Analysis: Issue I: Taxability of Advance Received from Clients The assessee, an individual engaged in the legal profession, follows a cash system of accounting. The AO sought to tax advances received from clients as income in the year of receipt, arguing that it aligns with the cash system. The assessee contended that these advances were for expenses like court fees and were adjusted against bills raised after the conclusion of matters. The Tribunal held that the solicitor acts as an agent for the client, and the money received does not constitute trading receipts but remains a liability until the services are rendered. The Tribunal emphasized the principle of consistency, noting that the assessee's accounting practice had been accepted in previous years. The Tribunal distinguished the case from the Sterling Holiday Resorts decision and relied on several judicial precedents, including the Hon'ble Jurisdictional High Court's decision in CIT vs. Ratan Lal Gagar, to conclude that the advances should not be taxed as income in the year of receipt. Issue II: Disallowance under Section 40(a)(ia) The AO disallowed payments made to various lawyers and receivers under Section 40(a)(ia) for non-deduction of tax at source. The Tribunal found that payments to Shri Samir Roy Choudhury and Shri Tapas Kr. Banerjee, appointed by the Calcutta High Court, were not liable for TDS as they were reimbursements. For payments to Shri J.P. Khaitan, the Tribunal noted that part of the payment was reimbursement of expenses and the remaining amount had TDS compliance. The Tribunal directed the AO to verify if the payments to receivers were reimbursed without any profit element and set aside the issue for further examination. Issue III: Disallowance of License Fees The assessee did not press this ground during the hearing, and the Tribunal dismissed it as not pressed. Issue IV: Disallowance of Personal Expenses The AO disallowed a percentage of expenses related to electricity, telephone, car maintenance, etc., attributing them to personal use. The CIT(A) restricted the disallowance to 10%. The Tribunal noted that in previous years, the disallowance was restricted to 5% and directed the AO to follow the same for the assessment years in question. Issue V: Depreciation on Leasehold Property The assessee did not press this ground during the hearing, and the Tribunal dismissed it as not pressed. Issue VI: Disallowance under Section 14A read with Rule 8D The AO applied Rule 8D(2)(iii) directly without recording satisfaction under Rule 8D(1). The Tribunal held that the AO must first record satisfaction that the assessee's claim of no expenditure or the expenditure incurred is incorrect before applying Rule 8D(2). The Tribunal relied on the Jurisdictional High Court's decision in CIT vs. Ashish Jhunjhunwala and deleted the disallowance made under Section 14A. Issue VII: Restriction of Addition under Section 94(7) The AO noted that the assessee claimed short-term capital loss on shares sold within three months. The Tribunal held that disallowance under Section 94(7) should be restricted to the extent of dividend received, as per the provisions of the Act. The Tribunal found no infirmity in the CIT(A)'s order restricting the disallowance accordingly. Outcome: - Assessee's appeals (2000/Kol/2010, 2001/Kol/2010, 536/Kol/2011): Partly allowed. - Assessee's appeal against Section 263 order (758/Kol/2011): Allowed. - Departmental appeals (2137/Kol/2010, 612/Kol/2011): Dismissed.
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