TaxTMI 
TaxTMI 
2006 (8) TMI 518
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.... the appeals were fixed for hearing and heard 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) erre....
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....ng the interest income to the charge of tax, which is claimed as pertaining to the clients of the 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 ba....
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.... in response to notices issued under section 148. The learned Commissioner of Income-tax (Appeals) has dealt with this issue for 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 th....
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....ent years under appeal. 9. Not satisfied with the orders of the learned Commissioner of Income-tax (Appeals), the assessee has come up before the Tribunal. Shri S. E. Dastoor, learned counsel for the assessee pointed out that the learned Commissioner 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 2....
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....s. 5,67,912/- can be taxed. The assessee raised an additional ground before the Commissioner of Income-tax claiming that the amount was not taxable at all as the Income-tax Act did not apply to the State of Sikkim for the assessment year 1988-89. But this 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, ....
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....ssessing Officer to reopen a best judgment assessment under section 144 of the Act. It is thus clear that the Legislature has consciously and deliberately used the expression 'annulment of assessment' in section 251 of the Act. The question that arises for consideration is in which case the order should be set aside 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 ....
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....m or on behalf of his clients is that of a quasi trust and he holds such moneys in a fiduciary capacity. The solicitor can deal with such moneys only to the extent provided for under the relevant rules of the High Court. The High Court further observed that corpus i.e. the moneys credited in the clients' accounts, is held by a 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 Asse....
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....his is substantiated from the exposition of the word "annulment" as contained in the judgment of the hon'ble Bombay High Court in the case of Mrs. Ratanbai N. K. Dubhash [1998] 230 ITR 495 referred to above. We, therefore, hold that the grounds of appeal raised by the assessee regarding taxability of interest income must be admitted 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....
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....d by the assessee pertains to partial disallowance sustained by the learned Commissioner of Income-tax (Appeals) from out of disallowance made by the Assessing Officer in respect of motor car expenses, depreciation on motor car, telephone expenses and printing and stationery expenses. Briefly stated the facts are that the Assessing Officer disallowed 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 ....
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....ging from the provisions of law and the cases cited before us. Section 147 is applicable with effect from April 1, 1989, reads as under : Income escaping assessment. "147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, 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....
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....n'ble Punjab and Haryana High Court, in the case of Vipan Khanna [2002] 255 ITR 220 held that it is only such income which has escaped assessment which can be brought to the charge of tax in the reassessment framed under section 147. If during the course of reassessment proceedings, the Assessing Officer notices that any other income chargeable has also escaped assessment, he is within his power to bring to charge of tax such income. However, 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 [197....
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.... the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and identity. It is only in case of 'underassessment' based on clauses (a) to (d) of Explanation 1 to section 147, that the assessment of tax due has to be recomputed on the entire taxable income. The judgment in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC), therefore, cannot be read to imply as laying down that, in the 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....
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....wed to be converted as 'revisional' or 'review' proceedings at the instance of the assessee, thereby making the machinery unworkable. As a result of the aforesaid discussion, we find that, in proceedings under section 147 of the Act, the Income-tax Officer may bring to charge items of income, which had escaped assessment other than or in addition to that item or items, which have led to the issuance of the notice under section 148 and where reassessment is made under section 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 r....
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....he benefit of the Revenue and during the course of the reassessment proceedings, the assessee cannot claim any deduction or any benefit with regard to the matters which have already reached finality at the time of the original assessment. The assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision in disguise and seek relief in respect of items earlier rejected or claim relief in respect items not claimed in the original assessment proceedings. The Assessing 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 ....