Client money in an advocate's hands remains fiduciary funds until valid fee appropriation; year-end balance accretion was not fully taxable.

An advocate's receipts from clients held in a fiduciary capacity as client money are not professional income when received, because they retain their trust character until validly appropriated towards fees with client consent, under the governing professional accounting rules, or on settlement or completion of the matter. The ordinary rule that the character of a receipt is fixed at the time of receipt was applied, and the department could not displace a long-accepted accounting method merely at its discretion where it was not shown to be contrary to law. On that basis, the year-end accretion in clients' credit balances could not be taxed as the full professional receipt, and only the admitted untransferred fees were includible.

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Issues: Whether the amounts received by an advocate from clients and credited to clients' accounts constituted taxable professional income in the year of receipt, and whether the department could substitute the assessee's long-accepted accounting system by treating the year-end accretion in clients' credit balances as income.

Analysis: The relationship between an advocate and client was held to be fiduciary, governed as one of principal and agent. Money received from clients on account of expenses retained the character of clients' money and trust money until authorised adjustment towards fees on settlement of the matter or with the client's consent. The Court relied on the professional accounting rules applicable to advocates, which required separate accounting of client monies, prohibited diversion of expenses towards fees without consent, and permitted appropriation of settled fees only on termination of proceedings. On that basis, the receipts were not treated as trading receipts and the ordinary principle that the quality of a receipt is fixed at the time of receipt applied. The Court further held that although res judicata and estoppel do not apply to income-tax assessments, a method of accounting consistently followed and not shown to be contrary to law could not be displaced at the officer's discretion under the proviso to section 145(1) of the Income-tax Act, 1961. The material on record did not show any obligation to treat the initial client receipts as fees or any basis for taxing the full accretion in clients' balances as professional income.

Conclusion: The addition based on the entire year-to-year accretion in clients' credit balances was not sustainable, and only the admitted amount of Rs. 43,770 representing untransferred fees was liable to be included in income.

Ratio Decidendi: Money received by an advocate from a client in a fiduciary capacity as clients' money is not taxable as professional income until it is validly appropriated towards fees in accordance with the client's consent, the governing rules, or the completion and settlement of the work.

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