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TMI Blog2016 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee, as an advance in the nature of imprest money held in the fiduciary capacity for his overseas client Ace Step Management Ltd., UAE. 2. The learned Commissioner of Income-tax (Appeals) erred in not appreciating that as the assessee continued to be accountable to the client for, and to the extent amounts received by the assessee, such receipt fall outside the ambit of taxable income in the hands of the assessee. 3. Without prejudice to the fact that even factual findings of the learned Commissioner of Income-tax (Appeals) in respect of end use of funds are incorrect and that the assessee continued to hold the funds in the fiduciary capacity, in any event the learned Commissioner of Income-tax (Appeals) erred in law in holding that the amount was taxable in the hands of the assessee because the assessee used the money received in fiduciary capacity for his personal purposes, but, in doing so, he overlooked the fact that, as is the settled legal position, it is the character of receipt in the hands of the recipient and not end use of the funds so received, that determines its taxability (e.g. even if salary receipt is kept intact in the bank account it will con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Commissioner of Income-tax (Appeals) erred in ignoring the ratio of the judicial precedents, including from this hon'ble Tribunal, cited before him, in ignoring the unambiguous facts of the case and clear legal position, and in being swayed by the considerations which are not germane to the context of the taxability of income. 8. The learned Commissioner of Income-tax (Appeals) erred in law and facts in confirming addition of ₹ 3,11,043 made by the Assess ing Officer by applying rule 8D read with section 14A holding that expenditure has been incurred in relation to income which does not form part of the total income without appreciating the fact that no expenditure has been incurred to earn the dividend income and also without appreciating the provisions of section 14A read with rule 8D of the Income-tax Rules, which is arbitrary, illegal, unjustified and against the provisions of law. 9. The impugned order passed by the learned Commissioner (Appeals) is illegal, bad in law and inappropriate to the facts of this case. The above grounds of appeal taken are without prejudice to each other. The appellant prays for liberty to raise, at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards the assessee's paper book pages 269 to 274 and especially took us through paras 5 and 6 of the order which read as under : 5. We have heard the arguments of both sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before Delhi 'C' Bench of the Income-tax Appellate Tribunal in the case of Jitender Sharma v. DCIT and after considering the judgment of the hon'ble Calcutta High Court in the case of CIT v. Sandersons and Morgans [1970] 75 ITR 433 (Cal), the hon'ble Bombay High Court in the case of CIT v. Tana Bhai D. Desai (supra) and the hon'ble Gujarat High Court in the case of CIT v. D. C. Gandhi Associates [1994] 210 ITR 929 (Guj), a similar addition made on account of advance received by an advocate from his client was deleted by the Tribunal vide its order dated February 3, 2006 rendered in I. T. A. No. 1765/Del/2002 for the following reasons : 'On due consideration of the matter, we delete the entire addition for the reasons that follow. It is true that the assessee is following cash system of accounting. Under this system, the assessee has to account for all the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the aforesaid discussion, we delete the addition of ₹ 10,59,454.' 6. Following the aforesaid decision in the case of Jitender Sharma Delhi G Bench of the Income-tax Appellate Tribunal in the case of M/ s. Anand and Anand, one of the assessees in the present cases, has also deleted the similar addition made in the assessment year 2001-02 vide its order dated August 25, 2006 in I. T. A. No. 3820/Del/2004, a copy of which is placed on record on behalf of the assessees. The common issue involved in the present cases thus is squarely covered in favour of the assessees and against the Revenue by the aforesaid two decisions of the Tribunal and respectfully following the same, we uphold the impugned orders of the learned Commissioner of Income- tax (Appeals) deleting the additions made by the Assessing Officer on account of advances received by the assessees from their client. 7. Learned senior counsel further drew our attention towards the order of the Income-tax Appellate Tribunal A Bench, Delhi dated January 11, 2008 in the case of ACIT v. Fox Mandal and Co. I. T. A. No. 3377/Delhi/ 2006 for the assessment year 2003-04 and submitted that the issue of advance from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, i.e., Ace Step Management Ltd. dated May 2, 2008, available at the assessee's paper book page 1, the client itself has confirmed that the assessee may debit the professional fees as invoice of ₹ 37,73,578 as retainership fee against this amount which was debited to the client's advance account as per ledger account of the client in the assessee's firm available at pages 2 to 4 of the assessee's paper book wherein similar account of professional bills and other expenses incurred for and on behalf of the client has been debited at the time of raising professional fees, bill or debit vouchers. The learned authorised representative further submitted that the confirmation letter dated May 2, 2008 and amount mentioned therein is clearly entered in the ledger account of the assessee at page 2 of the assessee's paper book. 11. Per contra, the learned Departmental representative submitted that the assessee received remittance from abroad from his client on April 9, 2008 which was INR 6,86,10,521 and up to the assessment year 2009-10, only ₹ 1.5 crores amount was adjusted against the professional fees and other expenses and till date more than ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee may have been received as compensation for services other than declared by the assessee. 12. On careful consideration of the above rival submissions of both sides at the very outset we note that the learned Commissioner of Income-tax (Appeals) adjudicated the issue against the assessee with the following findings/observations and conclusion : 5.4 It is not disputed that the appellant is following cash system of accounting and there is no change in the method of accounting. As per the cash system of accounting all the income is recognised the moment cash is received and not as it is earned. The appellant has relied upon the decision of the hon'ble Gujarat High Court in the case of CIT v. D. C. Gandhi Associates [1994] 210 ITR 929 (Guj) wherein it has been held that every advance receipt by the assessee does not bear the character of a professional fees. It is merely in advance out of which expenses may have to be incurred before the matter is finally concluded. To verify the facts of the present case in light of the above decision, the appellant was asked to produce the foreign inward remissions certificate from the bank to show the declared purpose fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dhan Laxmi Bank for right issue of shares (in self name) 4,62,76,614 The manner in which the appellant has utilised the amount received from the party/client as is apparent from the above trans actions clearly shows that the amount has not been retained by the appellant in his fiduciary capacity or for the purpose of meeting of prospective expenses. It has entirely been appropriated for his personal purposes, thus showing complete ownership right over the amount received from the client. To further verify the contention of the appellant he was asked to submit the amount till the current period, i.e., 2013-14. The facts reflected that the appellant had hardly appropriated the amount towards income as professional fees or for meeting expenses. In fact till December 3, 2011 the appellant had adjusted only ₹ 50 lakhs towards his professional fees. This clearly reflects that the amount received by the appellant belonged to him and has not been given to him as a receipt to be retained for future use. The appellant has during the proceedings also filed a confirma tion from the client claiming therein that it is an advance to be used as per instr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 has no bearing on the case of the assessment year 2009-10 and there is no dispute about this fact that the assessee is showing outstanding amount of ₹ 5,31,08,903. Therefore, copy of the ledger account which was placed before the Assessing Officer during the assessment proceedings cannot be treated as additional evidence and confirmation letters are not relevant to the assessment year 2009-10. Therefore, there is no necessity again to admit the copy of the ledger account as additional evidence of the assessee at this stage. 15. On careful consideration of the above submissions, we may point out that the learned Departmental representative has not disputed that the assessee has submitted copy of the ledger account and confirmation in pursuance to directions of the Bench during the hearing of the appeal on June 4, 2015. At the same time, we are of the view that while copy of the ledger account of the assessee was placed before the authorities below during the first appellate proceedings and assessment proceedings, then the same cannot be treated as additional evidence and confirmations of client regarding outstanding payment is not relevant for the assessment year 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2009-10. It was also held that the issue was whether the assessee was consistently following certain system of accounting followed by the assessee, then the Revenue is allowed to adopt a different stance in the subsequent assessment year 2009-10, then it would create an anomalous situation as far as the assessee is concerned. It was also held that the issue of lawyer accepting money from his client and appropriating the fees as income only upon completion of a case has been examined in the past and consistent view has been taken by the Tribunal. The hon'ble High Court held that given the manner and functioning of lawyers and law firms, it was correct that the categorisation of reply can take place only at the time of appropriation, i.e., in case of fees only when the matter is over or as and when the assessee decided on the quantum of fees. The hon'ble High Court explicitly held that entire advance received by the lawyer and law firms at the time it was received, did not bear any particular characterisation for the purpose of treating the same as income of the recipient lawyer or tax firm or professional. 17. In the light of the decision in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se also, the assessee is following the cash system of accounting and since its inception and the system was consistently accepted by the Department. The assessee-firm received advance from its client, i.e., M/s. Ace Step Management Ltd. for various legal matters and such advance receipts were kept in separate ledger account in the name of client where all the expenses were deposited from time to time including bills received about professional bills charged by the assessee from the clients. These facts had not been controverted or demolished by the authorities below. It is also pertinent to mention that the assessee transferred the amounts of professional fees to the profit and loss account and the credit balance in the advance account were carried forward to the next year as sundry creditors. In this situation, we are inclined to hold that on the basis of foregoing discussion, we have no hesitation to hold that the facts and circumstances are similar and synonymous to the facts and circumstances in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) and respectfully following the same, we hold that the amount of professional advances received by the assessee accepting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred and the income not forming part of the taxable income. Therefore, disallowance under section 14A of the Act was rightly deleted by the learned Commissioner of Income-tax (Appeals) and affirmed by the Income-tax Appellate Tribunal. 19. Learned counsel for the assessee, elaborating the facts and circumstances of the present case, drew our attention to the operative part of para 8 of the assessment order and submitted that the Assessing Officer simply noted that since no disallowance had been done by the assessee, going by the decision of the hon'ble High Court of Mumbai as discussed above, therefore he has reasons to arrive at the satisfaction of disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 and he made addition of ₹ 3,11,043 under rule 8D(2)(iii) of the Rules. Learned senior counsel pointed out that the relevant part of the assessment order as well as the impugned first appellate order, that the authorities below have not recorded any satisfaction as per sub-section (2) of section 14A of the Act for which no satisfaction for claim in respect of such expenditure in relation to the income which does not form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to invoke the provisions of section 14A read with rule 8D to workout disallowance of expenses. In the light of the operative part of the assessment order, as noted above, we decline to accept the contention of learned senior counsel of the assessee that the Assessing Officer has not recorded satisfaction as required to invoke section 14A of the Act, read with rule 8D of the Rules. 22. Further, from the relevant operative part of the impugned order of the learned Commissioner of Income-tax (Appeals), we note that the disallowance made by the Assessing Officer has been upheld with the following observations and notings : 6.1 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee had shown dividend income of ₹ 18,02,899 which has been claimed as exempt. The Assessing Officer after recording the satisfaction has invoked section 14A read with rule 8D and has computed the disallowance under clause (iii) at ₹ 3,11,043. On careful examination of the matter, I find that any income, whether exempt or not, can only be earned after incurring some expenditure. In the case of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. Accordingly, ground No. 8 of the assessee is dismissed. 24. In the result, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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