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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 ..... 1,122 made by the Income Tax Officer, Ward 37(3), New Delhi by invoking the provisions of the section 14A of the Income Tax Act, 1961, as the aforesaid provision had no application on the facts of the instant case, since the expenditure incurred and debited in the Income & Expenditure A/c has absolutely no relationship with the exempted income. The observations made in the order are highly theoretical and conjectural. 3. It is thus prayed that the addition of Rs. 35,02,689 and the disallowance made of Rs. 71,122 under section 14A of the Income Tax Act, 1961 by the Income Tax Officer, Ward 37(3), New Delhi and sustained by the Commissioner of Income Tax (Appeals)- XXVIII may kindly be deleted. 3. The brief facts qua the first issue raised by the assessee are that the assessee is a partnership firm engaged in the profession of legal services, (i.e. it is a law firm). During the course of assessment proceedings, the Assessing Officer, on a perusal of the balance sheet, noted that under the head "current liabilities", a sum of Rs. 42,91,289/- is appearing and out the said current liabilities, sum of Rs. 5 lakhs and for Rs. 2,88,680/-, the Assessing Officer accepted assessee's repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign clients by electronic mail, which is followed by a hard copy sent by postal mail and in some of the instances by mistake clients have make double payments, i.e., once on receiving the invoice by the electronic mail and again on receiving the hard copy of the postal mail. Immediately on coming to know that the client has made double payment by mistake, it makes a request to the client for remitting the amount through wire transfer which has wrongly paid the extra amount. However, some of the clients instructed that the fees wrongly paid need not to be remitted but should be retained for adjustment against fees for future services. Under all the categories, assessee submitted that it is the money belongs to the clients and it is held by the assessee-firm in fiduciary capacity, which cannot be appropriated by the firm as its income as income is not realised unless services are performed for the clients. In support of such accounting practice, reliance was placed on various decisions, which have been incorporated at pages 4 & 5 of the appellate order. 5. The ld. CIT (A), incorporated various details of bills and invoices submitted by the assessee with regard to all the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h system of accounting these amounts are to be treated as the appellant's income. The addition made by the Assessing Officer is therefore sustained." 6. Before us, the ld. Sr. counsel for the assessee, Shri C.S. Aggarwal, after explaining the entire facts, submitted that under all the three categories of payment received in advance from the clients, money has kept in the fiduciary capacity to meet out the expenditures and obligations on behalf of its clients, like making payment of fees to the Senior Advocates engaged for the purpose of such clients or to meet out the litigation expenses, etc. In none of the three categories, money belonged to the assessee and the same is retained as trust money. Therefore, the same cannot be reckoned as income of the assessee even under cash system of accounting. In support, he relied upon the following decisions/judgments:- (i) K.K. Khullar vs. DCIT [2008] 304 ITR 295 (Delhi) (ii) Career Launcher (India) Ltd. Vs. ACIT [2011] 139 TTJ 48 (Delhi) (iii) CIT vs. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) (iv) Manilal Kher Ambalal & Co. vs. A.G. Lallu [1989] 176 ITR 253 (Bombay) (v) CIT vs. Tanubhai D. Desai [1972] 385 ITR 339 (Bombay) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, and Parts B, C and D for expenses for arbitration and fees of local counsel etc. 1.10 The Commissioner (Appeals) has also stated that "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 partner/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". (Underlining added). These observations are baseless. As stated above, the amount raised on clients for services rendered by lawyers of the appellant firm is included in the professional receipts of the appellant firm, and only amounts received in advance which could not be adjusted during the financial year 2009-10 (because the outside lawyers did not render services during the financial year or expenses in connection with arbitration and court proceedings were not incurred during the financial year) are shown as "Current Liabilities". 1.11 The Commissioner (Appeals) has stated that no separate evidence in respect of advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n adjusted in the subsequent year. Thus, he submitted that the addition cannot be sustained. 9. On the other hand, the ld. Sr. D.R. strongly relied upon the order of the ld. CIT(A) and submitted that under the cash system of accounting, assessee should have accounted for all the receipts and whatever payment has been made for meeting out the expenses to other professionals, the same should be debited as expenditure. Thus, the entire receipts in the case of the assessee has to be treated as income and any outgoing related for earning of income should be allowed as expenditure and, therefore, the Assessing Officer and the ld. CIT(A) have rightly confirmed the addition. 10. We have heard the rival submissions and perused the relevant finding given in the impugned order as well as the material referred to before us. The assessee is a law firm, which is rendering services mostly to its foreign clients. The system of accounting adopted by the assessee is that, bills and invoices are raised for advance payment of fees or expenditure from its clients; firstly, which are in the category of making payment of fees to Senior Advocates who are engaged to represent the matters before the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking payment for Senior Advocates engaged to represent the matters of the clients or for incurring of expenditure on behalf of the clients during the course of litigation proceedings or arbitration proceedings. The Revenue's case is simply that whatever has been received from the clients has to be recognized as income and whatever has been paid is to be treated as expenditure and this has been justified on the ground that under the cash system of accounting, this procedure should be followed. 11. We are unable to appreciate such a contention of the Revenue because under the Income Tax Act, what is chargeable to tax is 'income' that is received, accrued or deemed to receive or accrue in India in the previous year relevant to the year for which assessment is made. In short, income tax is levy of income and, therefore, one has to see whether the receipts has resulted into income or not. If any amount or receipt is received by the assessee for discharging of any obligation on or on behalf of the principal, or money has been entrusted by the principal, then it partakes the character of somebody else's money, i.e. principal's money, here in this case client's money. If money has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be taxed in the year in which it was received. The Tribunal held that, firstly, in the earlier year similar addition made by the Assessing Officer had been deleted and; secondly the issue of lawyers accepting money from the clients on account to defray the expenses and appropriating fees as income only upon completion of a case cannot be faulted with and the characterization of receipt can take place only at the time of appropriation, i.e., in the case of fees only when the services was offered or when the assessee decides on the quantum of fees, is the correct way of recognizing the income. The entire advance received cannot be treated as income. This finding of the Tribunal got upheld by the Hon'ble High Court, wherein the Hon'ble High Court concluded that for lawyers and law firms, characterization of receipt can take place only at the time of appropriation, i.e., in case of fees only when the services were rendered or as and when assessee decides on the quantum of fees and not before that. Even the other judgments, which has been relied upon by the ld. counsel for the assessee are also to the similar effect. Thus, we hold that the amounts, which are appearing und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the judgments of the Hon'ble Delhi High Court in the cases of CIT vs. Taikisha Engineering India Ltd. reported in [2015] 370 ITR 338 (Delhi); and CIT vs. I.P. Support Services India (P.) Ltd. Reported in [2015] 378 ITR 240 (Delhi). 15. On the other hand, the ld. Sr. D.R. strongly relied upon the order of the ld. CIT(A) and submitted that the Assessing Officer did reject assessee's explanation on the ground that it is not found satisfactory. This itself goes to show that the Assessing Officer was satisfied that assessee's claim is not correct and, therefore, he is justified in proceeding to make disallowance under rule 8D. 16. We have heard the rival submissions and also perused the relevant find given in the impugned order. The assessee before the Assessing Officer had categorically submitted that the looking to the nature of expenditure debited in the profit & loss account as well as pointed from other details like bank statements and balance sheet that no expenditure whatsoever has been incurred for earning of income by way of dividends which very paltry sum. It was further submitted that the income in respect of units of mutual funds and gross amount of income has been o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of Rs. 33,57,275/- without appreciating the fact that the assessee has not invested the amount arising from long term capital gain in its own name and hence, the assessee is not eligible for deduction under section 54EC. 18. At the outset, the ld. counsel for the assessee submitted that the tax effect on the disputed amount is only Rs. 6,91,599/- because here the issue is, whether long term capital gain of Rs. 33,57,275/- derived by the assessee is liable for exemption under section 54EC or not. Even if the exemption is not allowed, then capital gain chargeable to tax is @ 20% plus cess and if tax is calculated on such capital gain, then it works out to IRs.6,91,599/- which is much less than the revised limit of Rs. 10 lakhs as per CBDT Circular No.21/2015 dated 10/12/2015. 19. The ld. D.R. too admitted that the tax effect is much below the prescribed monetary limit of Rs. 10 lakhs, therefore, the appeal of the Revenue is not maintainable. Accordingly, we hold that the Revenue's appeal is not maintainable and is dismissed in limine on the ground that the monetary limit for filing of appeal is much below the monetary limit of Rs. 10 lakhs. 20. In the result, appeal ..... 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