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TMI Blog2024 (2) TMI 1114X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. We are of the opinion that 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 money so received does not have any profit-making quality about it when received. It remains money received by a solicitor as client's money for being employed in the client s cause. The solicitor remains liable to account by this money to his client. We are of the view that the monies received by assessee from clients were held by the assessee in a fiduciary capacity. The money received by the assessee was the money of the principal which was received by him as the agent in a fiduciary capacity for being employed for the work of the principal (clients) entrusted to him. It was not trading receipt. Therefore, the respondent/assessee was not under any legal obligation to show it as his receipts of money from the clients. Even factually, since the money received from clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se being taken, the Assessing Officer was quite justified in adding the same amount to the total income of the assessee. Facts : 3. Briefly stated facts of the present case are that the respondent/assessee is a very old solicitor firm. During the assessment year in question i.e., Assessment Year 2007-08, the respondent/assessee disclosed receipts from profession amounting to Rs.1,82,02,958/-. As per the TDS certificate the amount received was Rs.5,56,88,817/-. Therefore, the Assessing Officer sought explanation from the respondent/assessee for the difference of Rs.3,74,85,859/-. The assessee explained that it has been receiving advances from its clients, a portion of which was spent on behalf of the client for counsels fees, stamp paper, court-fees stamp, payment to rent controller, bank draft in lieu of stamp duty and registration fees etc. He also gave complete details of payments made head-wise. 4. The Assessing Officer recognized that the money was spent by the assessee on behalf of his clients and yet he added the aforesaid differential amount of Rs.3,74,85,859/- in the income of the assessee. 5. Aggrieved with the assessment order dated 24.12.2009 under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the clients as agent were not professional receipts of the assessee, therefore, there was no question to enter it in the books of account as professional receipts or receipts of the assessee or as part of the income of the assessee. He further submits that payments made by the solicitor firm on behalf of the clients as agent have neither been disputed nor doubted by the assessing officer. Therefore, in any case, the effect stands neutralised. He further submits that since the money received by the assessee from its clients were not trade receipts but were clients money, to be held in fiduciary capacity, there can be no justifiable reason to reflect it in the books of account as receipts. He drew our attention to the details of account head and particulars of each account head with respect to the aforesaid differential amount, which were noted by the CIT(A) in its order. He also drew our attention to own finding of the assessing officer that the assessee firm incurs expenditure on behalf of its clients and the expenses are reimbursed by the clients in pre/post expenditure basis and the resultant sum is shown as liabilities on advance from clients account in the bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fee . Further, the expenses like Travelling expenses, purchase of stamp papers, payments to rent controller, Registration fee, counsel fee etc. incurred on behalf of their clients, met out of the advances received by the appellant is as per the appellant, treated as out of pocket expenses . Further these out of picket expenses were kept out of profit loss account for the year. The AO took the view that the appellant, by not bringing these receipts and expenses into profit and loss account had under stated the Business profit to that extent. This view of the AO is clearly incorrect. If these receipts are taken to the P L A/c, then the corresponding expenses also are required to be taken to the P L A/c which will neutralise the effect. Further, the advances which are subjected to TDS can not be treated as income because the job is to be performed and bills are raised and income is recognized. Further it s not the AO s case that the expenses were not actually laid out or they were not laid out for the purpose of the Appellant s business. It is also not the AO s case that all amounts, including advances, received by the appellant should be treated as Income of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kins, J., (as he then was) in Khetter Kristo Mitter v. Kally Prosunno Ghose, (1898) ILR 25 Cal 887, in the following language:- These principles appear to me to be the clear result of the authorities in England; and founded, as they are, on justice, equity and good conscience, I see no reason why they should not apply in this country. 16. In Halsbury s Law of England (Simonds Edition), Volume 36, the relationship of a solicitor with his clients in respect of clients money has been described as under:- (Aritcle 85): The relationship between solicitor and client is a fiduciary one, but it does not follow that a solicitor is in all respects a trustee in relation to his client. Ordinarily the relationship between solicitor and client is that of agent and principal and therefore time will run against the client in respect of money left in his solicitor s hands; but special circumstances, as where money is paid by the client to his solicitor for a particular purpose, may constitute the solicitor a trustee of that money in relation to the client, so that time will not run against the client to preclude his recovery of money, not applied for the particular purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this is so in respect of the client's moneys received by the solicitor in the ordinary course of business. In the absence of special circumstances, therefore, the Limitation Act, 1939, Section 2 (q), which bars the action in six years, will run from the time of the receipt by the solicitor or last acknowledgment or part payment. * * * * Special circumstances are needed to raise the relation of trustee and cestuique trust between solicitor and client, as where the solicitor receives his client's money not for remittance, nor as banker merely, but for a particular purpose, and with the duty of holding it for the benefit of the client, and keeping it until it is called for. At p. 441 of the same book the following passage appears:- Every solicitor who holds or receives client's money including money proper to be paid in under Rule 4, is bound to keep and maintain separate bank account for clients' money and without delay to pay such money into his client account; and any solicitor may keep more than one client account. Clients' money is trust money in the wider sense demanded by the general law of trusts; and thus, for example, on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his costs. This appears from Section 171 of the Indian Contract Act. . . . . . . . . . A solicitor in this country fulfils the description of legal adviser and the advantages, if any, gained by him in his fiduciary character must be governed by the provisions of Section 88 of the Trusts Act. Although standing in a fiduciary capacity a solicitor, as agent of his principal, namely the client, has a lien on client money and over goods bailed to him for his costs. This appears from Section 171 of the Indian Contract Act. . . . 13. Mr. Pal argued that we should not be guided by Tattersall s case, (1939) 22 Tax Cas 517 ITR 316 (C.A.) because in that case there was no money initially paid, as was done in the instant case. He submitted that what was done in that case was to put a horse belonging to a client to auction. The proceeds of the sale was money belonging to the auctioneer's client, as much as the animal itself had belonged to the client. The auctioneer might have been entitled to some remuneration out of the money received but for all practical purposes the sale proceeds did not belong to the auctioneer but to the client. On the other hand, he submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposited the money in its own bank account; it may be that this money remained part of the general assets of the assessee for a long time; but this mixing up did not have the result of converting the money into the assessee's money or trading receipt or income. That being the position, we do not think that the Tribunal was wrong in not relying upon the Punjab case, (1953) 24 ITR 597: (AIR 1954 Punj 61) and being guided by Tattersall case, (1939) 22 Tax Cas 51: 7 ITR 316 (C.A.) in this matter. (Emphasis supplied) 18. The principle laid down in the above referred judgment of this Court in Sandersons Morgans (supra) has been referred/followed by Allahabad High Court in Bijli Cotton Mill (P) Ltd. vs. Commissioner of Income Tax, (1971) 81 ITR 400 (All) and by Delhi High Court in Commissioner of Income Tax vs. Motor General Finance Ltd. (1974) ITR 582 (Del.) 19. In Commissioner of Income Tax vs. Sundarm Iyengar Sons Ltd. (1996) 6 SCC 294 (paras 13, 17) Hon ble Supreme Court impliedly approved the principle laid down in Sandersons Morgans (supra) as under:- 13. In the case of CIT v. Sandersons and Morgans principle of Morley v. Tattersall was applied. In tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making quality about it when received.... The solicitor remains liable to account by this money to his client. and observed: We think these observations fully apply to the facts of the present case. It was then contended for the Revenue that since the solicitor did not stand in the position of a trustee to the client and since the Limitation Act applied, the remedy of the clients to recover some of the balances may have become barred by limitation. This contention was rejected, their Lordships observing: 'We do not think that this consideration in any way alters the legal position.... Thus even though the remedy of some of the clients may have become barred by limitation, even then the barred debt did not become the income of the assessee....' These observations apply with equal force here and make it clear that the transfer of some of the balances to the Profit and Loss Account by the assessee does not convert it into a trading receipt, even if such transfer is based on the ground of limitation. We may only add that, on this aspect of the case, it is true that their Lordships were not asked to consider Jay's case but their decision is binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Morgans (supra) has been followed by Allahabad High Court and Delhi High Court and has also been approved by Hon ble Supreme Court in the above quoted two judgments. Thus, the principle of laid down in Sandersons Morgans case (supra) is binding upon the appellant herein i.e., the Commissioner of Income Tax- XIX, Kolkata. 22. Thus 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. We are of the opinion that 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 money so received does not have any profit-making quality about it when received. It remains money received by a solicitor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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