TaxTMI 
TaxTMI 
2016 (5) TMI 70
X X X X Extracts X X X X
X X X X Extracts X X X X
....continued to be accountable to the client for, and to the extent amounts received by the assessee, such receipt fall outside the ambit of taxable income in the hands of the assessee. 3. Without prejudice to the fact that even factual findings of the learned Commissioner of Income-tax (Appeals) in respect of end use of funds are incorrect and that the assessee continued to hold the funds in the fiduciary capacity, in any event the learned Commissioner of Income-tax (Appeals) erred in law in holding that the amount was taxable in the hands of the assessee because the assessee used the money received in fiduciary capacity for his personal purposes, but, in doing so, he overlooked the fact that, as is the settled legal position, it is the character of receipt in the hands of the recipient and not end use of the funds so received, that determines its taxability (e.g. even if salary receipt is kept intact in the bank account it will continue to be taxable and even if loan for business is used in daughter's marriage it will not have the character of income). 4. The learned Commissioner of Income-tax (Appeals) erred in law and on facts in appreciating of facts with re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and in being swayed by the considerations which are not germane to the context of the taxability of income. 8. The learned Commissioner of Income-tax (Appeals) erred in law and facts in confirming addition of Rs. 3,11,043 made by the Assess ing Officer by applying rule 8D read with section 14A holding that expenditure has been incurred in relation to income which does not form part of the total income without appreciating the fact that no expenditure has been incurred to earn the dividend income and also without appreciating the provisions of section 14A read with rule 8D of the Income-tax Rules, which is arbitrary, illegal, unjustified and against the provisions of law. 9. The impugned order passed by the learned Commissioner (Appeals) is illegal, bad in law and inappropriate to the facts of this case. The above grounds of appeal taken are without prejudice to each other. The appellant prays for liberty to raise, at the time of hearing or at any other point of time prior thereto, such further grounds of appeal arising from the facts of this case, as may enable the appellant to seek justice and to assist your honours in upholding the majesty of l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rial on record. It is observed that a similar issue had come up for consideration before Delhi 'C' Bench of the Income-tax Appellate Tribunal in the case of Jitender Sharma v. DCIT and after considering the judgment of the hon'ble Calcutta High Court in the case of CIT v. Sandersons and Morgans [1970] 75 ITR 433 (Cal), the hon'ble Bombay High Court in the case of CIT v. Tana Bhai D. Desai (supra) and the hon'ble Gujarat High Court in the case of CIT v. D. C. Gandhi Associates [1994] 210 ITR 929 (Guj), a similar addition made on account of advance received by an advocate from his client was deleted by the Tribunal vide its order dated February 3, 2006 rendered in I. T. A. No. 1765/Del/2002 for the following reasons : 'On due consideration of the matter, we delete the entire addition for the reasons that follow. It is true that the assessee is following cash system of accounting. Under this system, the assessee has to account for all the incomes received during the year irrespective of the fact whether they have accrued to the assessee or not. However, it is equally true that every receipt is not an income. A receipt to be accounted as an income must ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....M/ s. Anand and Anand, one of the assessees in the present cases, has also deleted the similar addition made in the assessment year 2001-02 vide its order dated August 25, 2006 in I. T. A. No. 3820/Del/2004, a copy of which is placed on record on behalf of the assessees. The common issue involved in the present cases thus is squarely covered in favour of the assessees and against the Revenue by the aforesaid two decisions of the Tribunal and respectfully following the same, we uphold the impugned orders of the learned Commissioner of Income- tax (Appeals) deleting the additions made by the Assessing Officer on account of advances received by the assessees from their client." 7. Learned senior counsel further drew our attention towards the order of the Income-tax Appellate Tribunal "A" Bench, Delhi dated January 11, 2008 in the case of ACIT v. Fox Mandal and Co. I. T. A. No. 3377/Delhi/ 2006 for the assessment year 2003-04 and submitted that the issue of advance from the client was resolved in favour of the assessee in para 3 at pages 280 to 283 of the paper book wherein it was held that the advance received in a fiduciary capacity will become income of the professional assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... retainership fee against this amount which was debited to the client's advance account as per ledger account of the client in the assessee's firm available at pages 2 to 4 of the assessee's paper book wherein similar account of professional bills and other expenses incurred for and on behalf of the client has been debited at the time of raising professional fees, bill or debit vouchers. The learned authorised representative further submitted that the confirmation letter dated May 2, 2008 and amount mentioned therein is clearly entered in the ledger account of the assessee at page 2 of the assessee's paper book. 11. Per contra, the learned Departmental representative submitted that the assessee received remittance from abroad from his client on April 9, 2008 which was INR 6,86,10,521 and up to the assessment year 2009-10, only Rs. 1.5 crores amount was adjusted against the professional fees and other expenses and till date more than Rs. 5 crores advances lying with the assessee after lapse of 6-7 years period. The learned Departmental representative further submitted that as per details noted by the learned Commissioner of Income-tax (Appeals) in para 5.4, the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e-tax (Appeals) adjudicated the issue against the assessee with the following findings/observations and conclusion : "5.4 It is not disputed that the appellant is following cash system of accounting and there is no change in the method of accounting. As per the cash system of accounting all the income is recognised the moment cash is received and not as it is earned. The appellant has relied upon the decision of the hon'ble Gujarat High Court in the case of CIT v. D. C. Gandhi Associates [1994] 210 ITR 929 (Guj) wherein it has been held that every advance receipt by the assessee does not bear the character of a professional fees. It is merely in advance out of which expenses may have to be incurred before the matter is finally concluded. To verify the facts of the present case in light of the above decision, the appellant was asked to produce the foreign inward remissions certificate from the bank to show the declared purpose for which the proceeds have been received from abroad. As per the FIRC issued by the Canara Bank on May 1, 2008 the funds of US dollar 17,19,993 have been remitted by Ace Steps Management Ltd., as 'advance as professional fees' a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the appellant he was asked to submit the amount till the current period, i.e., 2013-14. The facts reflected that the appellant had hardly appropriated the amount towards income as professional fees or for meeting expenses. In fact till December 3, 2011 the appellant had adjusted only Rs. 50 lakhs towards his professional fees. This clearly reflects that the amount received by the appellant belonged to him and has not been given to him as a receipt to be retained for future use. The appellant has during the proceedings also filed a confirma tion from the client claiming therein that it is an advance to be used as per instruction. The confirmation and the purpose stated therein is clearly an after thought filed to avoid taxability in the hands of the appellant. The FIRC issued at the time of remittance shows the declared purpose at that instance. As already discussed above the manner of utilisation of the amount shows the ownership rights of the appellant. Further, the amount received by him is clearly disproportionate to the amount reflected by him and adjusted by him towards expenses and income. It is not out of context to mention that M/s. Comment (Mauritius) Ltd., is ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e above submissions, we may point out that the learned Departmental representative has not disputed that the assessee has submitted copy of the ledger account and confirmation in pursuance to directions of the Bench during the hearing of the appeal on June 4, 2015. At the same time, we are of the view that while copy of the ledger account of the assessee was placed before the authorities below during the first appellate proceedings and assessment proceedings, then the same cannot be treated as additional evidence and confirmations of client regarding outstanding payment is not relevant for the assessment year 2009-10 and there is no dispute about the outstanding amount shown by the assessee in his ledger account. Therefore, we are of the considered view that there is no requirement of invoking provisions of rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 for admission and consideration of additional evidence and thus, the prayer of the assessee, is dismissed. 16. Now we proceed to consider the dicta laid down by the hon'ble High Court of Delhi in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi). In this case, the assessee was a firm of solicitors a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... hon'ble High Court held that given the manner and functioning of lawyers and law firms, it was correct that the categorisation of reply can take place only at the time of appropriation, i.e., in case of fees only when the matter is over or as and when the assessee decided on the quantum of fees. The hon'ble High Court explicitly held that entire advance received by the lawyer and law firms at the time it was received, did not bear any particular characterisation for the purpose of treating the same as income of the recipient lawyer or tax firm or professional. 17. In the light of the decision in the order of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) by the hon'ble jurisdictional High Court, when we analyse the facts and circumstances of the present case, we are inclined to hold that the facts and circumstance of the present case are quite similar to the facts in the case of CIT v. Om Prakash Khaitan (supra) as in the present case the assessee is a professional and consistently following the case system of accounting. It is also pertinent to note that on the similar issue for the assessment year 2001-02, the Tribunal granted relief to the assessee vide ord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtinent to mention that the assessee transferred the amounts of professional fees to the profit and loss account and the credit balance in the advance account were carried forward to the next year as sundry creditors. In this situation, we are inclined to hold that on the basis of foregoing discussion, we have no hesitation to hold that the facts and circumstances are similar and synonymous to the facts and circumstances in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) and respectfully following the same, we hold that the amount of professional advances received by the assessee accepting money from its clients on account to meet expenses for and on behalf of its clients and appropriating fees as per bill received against the client, then, the amount of advance cannot be treated as income in the hands of the assessee. We may further point out that the assessee received the amount in question on April 9, 2008, pertaining to the financial year 2008-09 relevant to the assessment year 2009-10 and it was the first year of receipt and the assessee has shown the balance at the end of the financial year, i.e., Rs. 6,44,44,813 as sundry creditors, after adjusting the profe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Mumbai as discussed above, therefore he has reasons to arrive at the satisfaction of disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 and he made addition of Rs. 3,11,043 under rule 8D(2)(iii) of the Rules. Learned senior counsel pointed out that the relevant part of the assessment order as well as the impugned first appellate order, that the authorities below have not recorded any satisfaction as per sub-section (2) of section 14A of the Act for which no satisfaction for claim in respect of such expenditure in relation to the income which does not form part of the total income under this Act. The learned authorised representative submitted that in the absence of any such satisfaction, no disallowance under section 14A read with rule 8D(2)(iii) of the Rules can be made. 20. The learned Departmental representative replied that the law relied upon by the learned authorised representative in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) is not applicable to the present case as in that case, disallowance was made under section 14A of the Act only and in the present case, no disallowance has been made under section 14A where....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g observations and notings : "6.1 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee had shown dividend income of Rs. 18,02,899 which has been claimed as exempt. The Assessing Officer after recording the satisfaction has invoked section 14A read with rule 8D and has computed the disallowance under clause (iii) at Rs. 3,11,043. On careful examination of the matter, I find that any income, whether exempt or not, can only be earned after incurring some expenditure. In the case of the appellant, such expenditure cannot be segregated in the accounts of the assessee and is clubbed with overall administrative/financial and other expenses of the business as a whole. If any income is exempt from tax because it is not included in the total income by virtue of section 10 of the Income-tax Act, 1961, section 14A of the Act prohibits allowance of any expenditure incurred in relation thereto. Income from deployment of funds in shares earned by way of dividend is not included in total income by virtue of the provisions contained in section 10(34) of the Act, whether the shares are held as ....