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TMI Blog1990 (12) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rs. 5,59,631 in the immediately preceding year. The ITO, however, noted that the numerous clients' account, about 3,000 in number, showed credit balances of Rs. 31,70,966 whereas the debit balances in the accounts of the partner's of the assessee firm amounted to Rs. 22,72,285. He, therefore, by his letter dated 12-2-1985, required the assessee firm to explain the true state of affairs in the light of the cash system of accounting, said to have been adopted by it. 4. By its letter dated 2-3-1985, the assessee explained that the amounts received from the clients are credited to their respective accounts known as " clients A/cs ", and as and when expenditure is incurred in connection with the work of the client, entrusted to the assessee, his account is debited with such amount. On completion of the work or finalisation of the case, entrusted by the client, a Bill charging fees for the services rendered is prepared and sent to the concerned client requesting him to come to the assessee for settlement of his account. It is after such settlement that fees are charged and then " Fees' A/c " is credited and client's A/c is debited with the amount of the fees charged. This practice or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional fees, to the total income of the assessee. Further, he charged interest under section 215 of the IT Act, 1961 ('the Act') also. The assessee appealed to the CIT(A). 7. Reiterating its same stand, as mentioned above, before the CIT(A) the assessee pointed out that a work or case of a client might take decades for completion or finalisation and, therefore, it was not possible to apportion the advance, initially received from the client, between anticipated expenditure and chargeable professional fees. Fees shall have to be necessarily adjusted, contended the assessee, at the end of completion and finalisation of the work or case after settlement of account with the client, as work done or service rendered would determine the extent of fees chargeable and charged. By his letter dated 28-10-1985 the ITO again reiterated his position. 8. In order to appreciate the respective stand of the parties the CIT(A) required the ITO to examine the bills issued by the assessee during F.Y. 1981-82, particularly the bills which were still outstanding. The ITO was further asked to examine the details of the outstanding bills which were not adjusted against the credit balance of the same cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts. In working out the balances in that way, the CIT(A) found the net credit balance in A.Y. 1982-83 at Rs. 25,92,522 in place of Rs. 31,70,956 and in A.Y. 1981-82 at Rs. 21,24,737 instead of Rs. 24,38,593 as had been adopted by the ITO. The resultant difference of Rs.4,67,785 (Rs. 25,92,522 - Rs. 21,24,737) and not of Rs. 7,32,362 (Rs. 31,70,956 - Rs. 24,38,593) as had been adopted by the ITO, was considered to be the accretion to the credit balance of clients account for the year under consideration. But accretion amount of Rs. 4,67,785 had to be reduced to Rs. 1,86,169 as the CIT(A) found that an amount of Rs. 2,61,615 stood in the name of Shri J.M. Thakore, Advocate General on account of fees payable to him, and Rs. 10,000 each as Arbitration deposits in the names of Ashoka Engineering Co. and Anup Ashoka Engineering Co. and thus these amounts had nothing to do with assessee's receipts on account of its fees. The learned CIT(A) thus reduced the addition to Rs. 1,86,169 from Rs. 7,32,363. Further, he confirmed the charge of interest under section 215 of the Act on the reduced income of the assessee. 12. In its appeal the assessee has disputed the addition sustained of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, Mr. Thakore further submitted that all moneys are received by the assessee from its clients towards expenses and are credited to the concerned " Clients' A/c ". As and when expenses are incurred in connection with the work or case of a client his account is duly debited. The credit balance, if any, in Clients' A/c is held by the assessee in trust as " Clients' Money ". On completion of the work or finalisation of the case a bill is issued to the client showing all the receipts from him, expenditure incurred for and on his behalf and the fees proposed to be charged for the work done and services rendered and the client is required to help settlement of his account. When the account is settled a receipt in proforma at page 51 is issued showing adjustment of fee against the credit balance in his account. His account is then debited with the fees charged and if there remain any credit balance in clients' account the same is returned or refunded. Explaining the huge credit balances in various 'Clients A/c' Mr. Thakore submitted that more often than not a work or case entrusted by a client to the assessee takes decades for completion thus delaying final settlement of accounts. Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings under the Act, revenue is not barred from bringing the real income of the assessee to tax. 17. Mr. Shah also challenged the reliance of the assessee on the Bombay and Calcutta cases. He submitted that those cases dealt with the moneys received by the solicitors from their clients and the position of a solicitor materially differ from that of an Advocate or Lawyer and, therefore, the ratio in Bombay and Calcutta High Court decisions was not applicable to the instant case. Mr. Shah thus urged for the restoration of the order of the ITO. 18. Before we proceed to examine the merits in the submissions made on behalf of the parties, we would like to remove the confusion over the position of an Advocate vis-a-vis a Solicitor. The Indian High Courts Act, 1861 (commonly known as the Charter Act) passed by the British Parliament enabled the Crown to erect and establish High Courts in India by Letters Patent and these Letters Patent authorised and empowered the High Courts to make rules for enrolment of Advocates and Attorneys (commonly known as Solicitors). Under these rules a suitor on the original side of the High Courts of Bombay and Calcutta had to approach an Advocate thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overned under an agreement entered into by the client with him. Such relationship between them would ordinarily be that of a principal and agent wherein the Advocate has agreed to act, appear and plead for and on behalf of his client in latter's cause before a Court or Tribunal. He has to act, appear or plead in such cause as an agent of his client, the terms and conditions of the agency having been determined by the agreement evidenced by a Vakalatnama and/or regulated by rules framed by the Bar Council of India and/or State Bar Council. 21. Ordinarily a lawyer should fix his fees at the time when he is engaged by his client. He should not leave the determination of the fees till the conclusion of the litigation or dependent upon how the litigation fares. But howsoever improper it might be on the part of the lawyer in not determining his fees at the time of his engagement, the moneys received by him from his client at the initial stage or at subsequent stages during the course of his engagement would have the character of " clients money " in his hands until those or a part of them had been adjusted towards fees. This takes us to consider the meaning and character of the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase were accepted by the Bombay High Court in Tanubai D. Desai's case wherein it was further held that : " . . . If the solicitor unauthorisedly converts the income from the clients money, the taxation must proceed on the basis that the income did not in fact belong to him and the income is not liable to be taken into computation in his personal assessment. " Such observations stood fully supported by the decision of the House of Lords in Brown v. IRC [1965] 57 ITR 729 where it had been held that if a person in fiduciary position receives any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he is authorised to do so. The Bombay High Court reiterated the above principles again in the case of Manilal Kher Ambalal Co. 25. The principles laid down by the British Indian Courts, as mentioned above, in the context of receipts by the solicitors from their clients seem to have been well recognised by the Bar Council of India while making rules regarding duties of the Advocates to their clients. In rules 25 to 31 of Chapter II, in Part VI of the Bar Council of India Rules, framed under sections 16(3) and 49(1) of the Advocates Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any order of the court ". 27. It may be noted that Rule 25 obliges the Advocate to keep accounts of clients money and such account should show the amount received from the client or on his behalf, the expenses incurred for him and the debits made on account of fees with respective dates and all other necessary particulars. Rule 26 forbids an advocate from diverting any portion of the expenses towards his fees. It is rule 28 which permits the Advocate to appropriate towards the settled fees due to him any sum remaining unexpended out of the amount paid or sent to him for expenses, or any amount that has come into his hands in that proceedings. It is to be done after the termination of the proceedings. No time limit for such adjustment has been laid down in the rules. Rule 29 provides that where the fees has been left unsettled, the Advocate shall be entitled to deduct, out of any moneys of the client remaining in his hands, at the termination of the proceedings for which he had been engaged, the fees payable under the rules of the Court in force for the time being, or by then settled and the balance, if any, shall be refunded to the client. It needs to be pointed out here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We agree with Mr. Shah that the doctrines of res judicata and estoppel do not apply to the assessment proceedings under the Act for the obvious reason that each assessment is separate from the independent of the other. But it the same time a system of accounting which had not only found favour with the department for long and is also not found bad in the light of the Judge-made law and the rules framed by the Bar Council of India cannot be allowed to be overlooked by the ITO and to be substituted by him with his own at his sweet will be applying the proviso to section 145(1) of the Act. The ITO did not bring on record any material showing that as per terms and conditions of its agreement with its clients or under any provision of law or relevant rules the assessee was obliged to have appropriated a part of its initial receipts from the clients towards its fees. There is no evidence on record that the assessee had ever settled its fees with any of its clients at the time of its engagement by the client. He even did not try to bring such evidence on record through the examination of any of the clients or partners of the assessee. On the other hand, the assessee had positively proved ..... X X X X Extracts X X X X X X X X Extracts X X X X
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