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TMI Blog2017 (11) TMI 710X X X X Extracts X X X X X X X X Extracts X X X X ..... e of such ‘satisfaction’ no disallowance can be made under section 14A. The Hon'ble High Court concluded that; firstly, where there was a failure by Assessing Officer to comply with mandatory requirement of section 14A(2) read with rule 8D(1)(a) to record his satisfaction as required thereunder, then question of applying rule 8D(2)(iii) does not arise; and secondly, where Assessing Officer had failed to establish any direct nexus between investments made by assessee and interest expenditure incurred, then it not correct to remand the matter concerning deletion of disallowance of interest under clause (ii) of rule 8D(2) to Assessing Officer for fresh determination. - I.T.A. No.5336 AND 5846/DEL/2014 - - - Dated:- 8-11-2017 - SHRI. AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Shri C.S. Aggarwal, Sr. Advocate For The Respondent : Shri S. K. Mishra, D.R. ORDER PER AMIT SHUKLA, J.M.: The aforesaid cross-appeals have been filed by the assessee as well as by the Revenue against the impugned order dated 22/8/2014, passed by the ld. CIT (Appeals)-XXVIII, New Delhi for the quantum of assessment passed under section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that year and any expenditure actually incurred or paid in a particular year has to be treated as expenditure of that year. The assessee-firm is showing the professional fees received in the previous year in the profit loss account for the year and it pays the professional charges after deducting TDS to the Senior Advocates which was received by it in the previous year and therefore, this is clear violation of the principles of cash system of accounting. Accordingly, he added the entire amount of ₹ 35,02,609/- appearing under the head current liabilities to the income of the assessee for this year. 4. Before the ld. CIT(A), assessee submitted that the current liabilities under this head consist of three categories of payments received from the clients; * firstly, amount received in advance from the clients for payment of fees to Senior Advocates, who are engaged to appear on behalf of the clients before Hon'ble High Courts and Supreme Court, as Senior Advocates generally demand fees in advance and, therefore, it request clients to remit advance fees payable to the Senior Advocates in advance and accordingly bills are sent to the clients clearly indicating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as advance and directions have been issued to the client to not deduct TDS. The appellant is taking all advances outstanding on the last day of the Financial Year as current liability and in essence is not treating any amount received in advance as its income even where the amount has been received against bill raised by it for its own partners/employees. Even where bill has been raised for efforts put in by Lira Goswami and Mohna M Lai, the appellant has treated the same as advance amount. Thus the appellant has not maintained the account as per cash system of accounting. The evidence filed by it as per Sr. No. 12 above does not relate to the year in question. 2. In respect of advance received for expenses: No separate evidence in respect of this category has been filed by the appellant, however this has been dealt with in one above and the appellant has treated specific amount spent against specific expenses as advance. 3. In respect of double payment: The appellant has filed copy of account of, DEG Deutsche Investitions; Genworth Financial Inc.; Global English Corporation; NBC Universal; and Mars Inc as evidence of double payments. The appellant has not filed any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el and Jr. Counsel, but the same has also been treated as advance and directions have been issued to the client to not deduct TDS . The Commissioner (Appeals) has overlooked the fact that the Note at the end of the Bill clarifies that This is advance money which shall be used by us to make payments from time to time. (Underlining added). While making payment to the Ld' Arbitrators we shall be deducting TDS. You are requested not to deduct TDS on this payment . It is clear from this Note that the entire amount raised under the Bill was by way of advance, and no part thereof was towards fees for services rendered. 1.8 With regard to Bill No. 238/2009 referred to (on page 7 of the appellate order) at Serial No. 8, the Commissioner (Appeals) has stated that it is towards fees of Lira Goswami (Partner of the firm), expenses towards miscellaneous charges for hotel and Taxi and Local Counsel fees . The Commissioner (Appeals) has overlooked the fact that the Bill has four parts, A, B, C and D. Only Part A relates to legal fees payable to the appellant firm, and the other three parts (B, C and D) relate to miscellaneous expenses for arbitration; local Counsel fees and expenses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEG Deutsche Investitions; Genworth Financial Inc.; Global English Corporation; NBC Universal; and Mars Inc. During the five hearings in the course of assessment proceedings, the Assessing Officer had called for information on a number of points specified by him, but the Assessing Officer never asked the appellant to provide evidence to show that clients had made double payment. During the course of the hearing, the Commissioner (Appeals) also did not ask the appellant to provide any evidence in this regard. The Commissioner (Appeals) is, therefore, not justified in making this observation. As stated in paragraph 1.4 above, on coming to know that a client has made a double payment, the partner who raised the Bill phones the concerned person in the client's office for providing details for returning this amount by wire transfer, but, during the talk on phone, the clients advised that the double payment received may be adjusted against future expenses and services, and the amount has been subsequently so adjusted. To sum up, therefore, the adverse observations made by the Commissioner (Appeals) are not justified. 8. Thus, it was submitted by Shri C.S. Agarwal that even unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and in support, scrutiny assessment for assessment year 2009-10 has also been filed before us, wherein similar system of recognizing the income and the accounting practice of the assessee has been accepted. Under all the three categories of payments, which has been discussed hereinabove, it is seen that money received by the assessee was the money of the clients received in the fiduciary capacity. It is a kind of trust money of the client, for which assessee has to discharge certain obligations while representing the case of its clients before various Courts and other legal and arbitration proceedings. From perusal of various Memo of fees raised to the clients, we find that the amount which has been raised to the clients are on account of advance payment for filing of proposed petitions, fees for Senior Advocates for various hearings, including fees for junior counsel, Court fees, miscellaneous expenses, etc. In the said memo of fees itself, there is a categorical note below that this is advance money which shall be used by the assessee firm to make payments from time to time, like while making payment to the arbitrators and Senior Advocates for which TDS would be deducted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in advance for discharging obligations on behalf of clients like making payments for engaging of Senior Advocates, who generally charge advance fees for representing any legal or arbitration proceedings before any Court or likewise, certain expenditures which are to be incurred on behalf of the clients for such legal proceedings, especially when clients are foreign based and day-to-day requirement of meeting the expenditures cannot be easily available from clients, then as a matter of practice, Solicitors/Law firms demand advance money for discharging such obligation and the balance money is either refunded or adjusted against the fess which is ostensibly is income chargeable to tax. Such a system in the case of Solicitors has been well accepted and settled by the Hon'ble Calcutta High Court in the case of CIT vs. Sandersons and Morgans [1970] 75 ITR 433. This judgment has been followed by various Courts and Hon'ble Delhi High Court in the case of CIT vs. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi), has accepted such a practice. In the case before the Hon ble Delhi High Court, assessee was a proprietor of the firm of Solicitors and Advocates and was following cash sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are that the assessee has earned dividend income of ₹ 38,057/- and income from mutual funds of ₹ 8,59,847/-, which were claimed as exempt from tax under section 10(34) and 10(35). 13. During the course of the assessment proceedings, assessee was required to give details of expenditure incurred in relation to the exempt income as to why expenses should not be added back in terms of provisions of section 14A. In response assessee submitted that from the perusal of the profit loss account and balance sheet as well as bank statements, it can be seen that no expenditure whatsoever has been incurred for for the purpose of earning of exempt income. Further, so far as income in respect of unit of mutual funds were concerned, the same has been offered for taxation, therefore, qua this amount, rule 8D cannot be applied. The Assessing Officer however observed that assessee s reply is not found satisfactory and held that disallowance has to be made under section 14A in accordance to rule 8D and accordingly, worked out the disallowance under section rule 8D(2)(iii) at ₹ 71,122/-. This disallowance has been confirmed by the ld. CIT(A) also. 14. Before us, Shri C.S. Agar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r there is an exempt income, expenditure has to be disallowed. It is required to be seen, whether expenditure has been incurred by the assessee in relation to the earning of exempt income or not and this can be examined having regard to the accounts of the assessee and the nature of expenditure debited. Here in this case, the Assessing Officer has failed to satisfy himself about the correctness of the assessee s claim and, therefore, in view of the principle laid down by the Hon'ble Delhi High Court in the case of H.T. Media Ltd. Vs. Pr. CIT reported in 85 taxmann.com 113 (Delhi), the Assessing Officer cannot proceed to make disallowance under section 14A. The Hon'ble Jurisdictional High Court has once again reiterated that it is mandatory and incumbent upon the Assessing Officer to record such satisfaction and in the absence of such satisfaction no disallowance can be made under section 14A. The Hon'ble High Court concluded that; firstly, where there was a failure by Assessing Officer to comply with mandatory requirement of section 14A(2) read with rule 8D(1)(a) to record his satisfaction as required thereunder, then question of applying rule 8D(2)(iii) does not aris ..... X X X X Extracts X X X X X X X X Extracts X X X X
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