TaxTMI 
TaxTMI 
2006 (8) TMI 518
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....rd by us afresh. 3. The grounds of appeal raised by the assessee are similar for all the assessment years and it would suffice to reproduce these grounds from I. T. A. No. 4247/M/03 for the assessment year 2001-02 as under : "1. Under the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in not deleting the sum of Rs. 12,74,733/- being interest on clients' account accrued and credited to respective clients' accounts does not belongs to the appellant. In spite of the facts, the learned Commissioner of Income-tax (Appeals) has given a categorical finding that interest accrued on clients' accounts does not belong to the appellant. The return of income was filed under protest and with conditions. 2. The learned Commissioner of Income-tax (Appeals) has not annulled the assessment but has given partial relief. The appellant is entitled to refund on the taxes paid under self-assessment for the return filed in response to notice under section 148 of the Income-tax Act, 1961. 3. Under the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in holding no refund of self assessment paid on revised return o....
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.... assessee. It would be appropriate to set out the facts in brief leading to this controversy. The assessee is an advocate and also a solicitor. During the previous years relevant to the assessment years under appeal, the assessee was in receipt of the following incomes : (a) professional fees received for the services rendered to the clients ; (b) professional fees received for the services to be rendered to the clients ; and (c) amounts received from the clients in his capacity as a solicitor for the purpose of discharging obligations of the clients. 6. While there is no dispute regarding the taxability of the incomes at Sl. Nos. 1 and 2 above, the assessee claimed that the amounts received from the clients in his capacity as a solicitor were only in the nature of deposits held by the assessee on behalf of the clients and to be utilized only for discharging the obligations of the clients. The assessee maintained a separate bank account in respect of such deposits. On these deposits, which are kept in a separate bank account, interest was credited by the bank on accrual basis. However, such interest was not declared by the assessee in the original returns of income filed by ....
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....the assessment year 2001-02 for which a speaking order has been passed by him. He rejected the grounds raised by the assessee in this behalf and the relevant part of his order may reproduced below for the assessment year 2001-02 : "4.1 Before me, the argument as discussed in earlier paragraphs, about maintaining separate bank account for money received on behalf of clients, were repeated and it was contended that : * The interest accrued and credited in such bank account was not declared in the return of income as it rightly fully belonged to the clients to whom the appellant had to render an account. * The appellant held funds as trustee in a fiduciary capacity. * Neither such receipts nor income arising therefrom belonged to the appellant as per the High Court Rules. The appellant relied on following decisions : Tanubai D. Desai [1972] 84 ITR 713 (Bom) Manilal Kher Ambalal and Co. [1989] 176 ITR 253 (Bom) * The interest on clients' account referred to above was declared in the return of income in response to notice under section 148 under duress and with the condition that no penalty proceedings/prosecution under the Income-tax Act, 1961, shall be initiated. * The....
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....r of Income-tax (Appeals) rejected the grounds of appeal raised before him on this issue for two reasons viz., (a) the assessee himself disclosed the income voluntarily in the returns of income filed in response to notices issued under section 148 and also paid self-assessment tax on such income and credit for TDS relevant to this income was also allowed by the Assessing Officer and (b) as per proviso (b) to section 240, the tax chargeable on the total income returned by the assessee cannot be refunded. 10. Learned counsel for the assessee contended that the learned Commissioner of Income-tax (Appeals) has erred on both the issues. It is submitted that the interest incomes were offered by the assessee in response to notices issued under section 148 to buy peace of mind and to avoid litigation on the condition that penalty proceedings under section 271(1)(c) will not be initiated and the interest chargeable under sections 234B and 234C shall be waived. However, the Assessing Officer initiated penalty proceedings and also levied interest. It is true that subsequently, the penalty proceedings under section 271(1)(c) were dropped by the Assessing Officer but substantial interest has b....
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....s ground was rejected on the basis that the assessee could not be permitted to raise this issue at the stage of hearing of revision petition. The assessee filed writ petition before the hon'ble Bombay High Court and the High Court held as under (headnote): "Held, (i) that merely because the assessee offered the prize money won in the lottery of the Sikkim Government, to tax under the Income-tax Act, 1961, that would not take away her right to contend that the prize money was not chargeable and assessable to tax under the Income-tax Act, in the revisional jurisdiction. (ii) That the prize money won by the assessee from the lottery of the Government of Sikkim could have been charged to tax only in accordance with the then existing income-tax laws in the State of Sikkim and could not be charged to tax under the Income-tax Act, 1961." 11. Drawing support from the aforesaid judgment of the hon'ble Bombay High Court, learned counsel for the assessee forcefully contended that the assessee is free to raise the issue regarding taxability of interest income even though, the assessee disclosed such income in the return. 12. Coming to observations of the learned Commissioner of Income-ta....
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....e and in which case 'annulled' and what is the difference between 'setting aside the assessment' and 'annulment of the assessment'. In our opinion, there is a material distinction between setting aside an assessment and annulment of an assessment. In a case where the order of assessment is set aside, it is open to the Assessing Officer to make a fresh assessment in accordance with law. In the case of annulment, the order becomes non est." 14. Learned counsel contended that it is clear that in the present case assessments have not been annulled and therefore, the reliance placed by learned Commissioner of Income-tax (Appeals) on proviso (b) of section 240 is incorrect. 15. Coming to the merits of chargeability to tax of the relevant interest income, learned counsel for the assessee submitted that the issue is squarely covered in the assessee's favour by the decision of the hon'ble Bombay High Court in the case of Tanubai D. Desai [1972] 84 ITR 713. In that case also the assessee was a practicing solicitor of the hon'ble Bombay High Court and in the course of carrying on his profession, the assessee used to receive moneys from or on behalf of his clients and the same were deposited....
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....solicitor in his fiduciary capacity and the income or interest derived from such corpus is equally held by him in his fiduciary capacity. At page 719, the High Court observed that even if solicitor appropriates the income to himself, it would simply amount to breach of his fiduciary relationship and whatever may be consequences in law would follow. But this unauthorized act of converting any part of the corpus or income derived therefrom would not convert those amounts into moneys held by him beneficial for himself. The High Court upheld the conclusion reached by the Tribunal as correct in law and held that the income cannot be taxed in the hands of the solicitor. Learned counsel contended that this decision of the hon'ble Bombay High Court is fully applicable to the facts of the assessee's case. It is submitted that at the most the credit allowed by the Assessing Officer for TDS can be withdrawn. 17. The learned Departmental representative forcefully supported the orders of the Revenue authorities and reiterated that the amount voluntarily shown by the assessee in his returns of income cannot and should be excluded from the total income of the assessee. 18. We have given a caref....
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....d and decided on the merits. 19. Coming to the merits, there is no dispute about the factual position. The moneys have been received by the assessee in his capacity as a solicitor by way of deposits and to be utilized for meeting obligations of the clients. These moneys were put in a separate bank account and the interest accruing on this bank account was also apportioned by the assessee to various clients. All these amounts were shown in the accounts of the assessee as liability payable to the clients. The hon'ble Bombay High Court decision in the case of Tanubai D. Desai [1972] 84 ITR 713 is fully applicable to the facts of the assessee's case. In that case, the assessee had even appropriated the interest income for his own benefit. Nevertheless, the High Court held that the income cannot be brought to the tax in the hands of the solicitor. Any other action can be taken against the assessee for unauthorisedly converting the clients money for his own benefit but such income cannot be brought to the charge of tax. The case of the assessee is on a better footing. The assessee has maintained separate account and has also apportioned the interest income to the respective accounts of ....
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....owed 20 per cent. from out of the above expenses for personal use of the assessee. The learned Commissioner of Income-tax (Appeals) restricted the disallowance to 10 per cent. in respect of motor car expenses, depreciation on motor car and telephone expenses. The disallowance from out of printing and stationery expenses was deleted by the learned Commissioner of Income-tax (Appeals) for all the assessment years under appeal except for the assessment year 1995-96, where he has upheld the disallowance to the extent of 10 per cent. 23. Learned counsel for the assessee did not seriously contend regarding the merits of the disallowance sustained by the learned Commissioner of Income-tax (Appeals), but he forcefully contended that in an assessment made by the Assessing Officer under section 147 of the Act, he cannot make such disallowances in respect of matters which have reached finality in the original assessment and which are not in the nature of any escapement of income within the meaning of section 147. Learned counsel for the assessee pointed out that the original assessment was made under section 143(1) and thereafter no notice under section 143(2) was issued. Notices for the rel....
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...., assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Explanation 1.-Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence ....
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....the Assessing Officer cannot make any roving or fishing enquiries and he cannot proceed in a fashion as if entire proceedings are open before him. In that case, in response to the notice issue under section 148, the assessee filed the returns of income for the relevant assessment years declaring same income as had been shown in the original returns. The Assessing Officer, thereafter, issued notices under sections 143(3) and 142(1) requiring the assessee to produce the books of account and to furnish information specified in the letter issued by the Assessing Officer. Making of such enquiries was not approved by the hon'ble High Court. 27. This issue arose before the hon'ble Supreme Court in the case of V. Jaganmohan Rao v. CIT and CEPT [1970] 75 ITR 373 and the ratio of this case may be reproduced from the headnotes : "Once proceedings under section 34 are validly initiated the jurisdiction of the Income-tax Officer is not restricted to the portion of the income that escapes assessment. Section 34 in terms says that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containi....
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.... reassessment proceedings validly initiated, the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim recomputation of the income or redoing of an assessment and be allowed a claim, which he either failed to make or which was otherwise rejected at the time of original assessment, which has since acquired finality. Of course, in the reassessment proceedings, it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC), as laying down that reassessment wipes out the original assessment and that reassessment is not only confined to 'escaped assessment' or 'underassessment' but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters, which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phra....
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....on 147 in respect of income, which has escaped tax, the Income-tax Officer's jurisdiction is confined to only such income, which has escaped tax or has been underassessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions, which have been decided in the original assessment proceedings. It is only the underassessment, which is set aside and not the entire assessment when reassessment proceedings are initiated. The Income-tax Officer cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters, which are not the subject-matter of proceedings under section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under section 152(2). The words 'such income' in section 147 clearly refer to the income, which is chargeable to tax but has 'escaped assessment' and the Income-tax Officer's jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering ge....
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....essing Officer can bring to the charge of tax any income which has escaped assessment and which comes to his notice during the course of reassessment proceedings, but he cannot make roving and general enquiries as if the entire assessment was open before him. 30. Let us now examine the facts of the assessee's case, in the light of the legal position enunciated above. The returns of income originally filed by the assessee were accepted under section 143(1). The assessee is an advocate and a solicitor and claimed expenditure in respect of use of motor car, telephone, printing and stationery. These expenses stood allowed as the returns were accepted under section 143(1). The relevant assessments were reopened for the purpose of bringing to the charge of tax, the relevant interest income. During the course of the reassessment proceedings, the Assessing Officer noticed that the assessee had claimed the entire expenditure under section 37(1) and no part of the expenditure was disallowed by the assessee for personal use. He, therefore, asked the assessee to furnish the details. However, the assessee neither furnished any details nor any satisfactory explanation. In these circumstances, t....