TMI Blog2014 (6) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be incurred before the matter gets finally concluded - The characterization of the receipt can take place only at the time of appropriation i.e., in case of fees only when the matter is over and the assessee decides upon the quantum of fees - it would be inappropriate to treat the entire advance as fees in the year of its receipt when it does not bear any particular characteristic – Decided against Revenue. Restriction of disallowance u/s 14A of the act – Nexus between expenses were incurred for earning the exempt income – Held that:- CIT(A) rightly restricted the disallowance from Rs. 8,92,738/- to Rs. 94,721, thereby granting a relief of Rs. 7,98,017/- to the assessee – Following Justice Sam P. Bharucha Versus Additional Commissioner of Income-tax-11(3), Mumbai [2012 (12) TMI 409 - ITAT MUMBAI] - when it is possible to determine the actual expenditure in relation to the exempt income, or when no expenditure had been incurred in relation to exempt income, the principle of apportionment embedded in Section 14A of the Act has no application, that to disallow the expenditure u/s 14A of the Act, there must be a live nexus between the expenditure incurred and the income not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was shown at Rs. 20,76,97,695/- as sundry creditors which was very unusual. 5. In the facts and circumstances of the case the ld. CIT (A) grossly erred in deleting the addition made by the AO on account of Sundry Creditors not appreciating the facts that the principle of res-judicata is not applicable to the income tax proceedings as held by various courts. 6. In the facts and circumstances of the case the ld. CIT (A) erred in restricting the disallowance u/s 14A to Rs. 94,721/- as against Rs. 8,92,738/- made by the AO wrongly stating that no direct or indirect expenses were incurred for earning the exempt income. 2. Ground Nos.1 to 5 pertains to one single issue, i.e., the department s challenging against the action of the ld. CIT (A) in deleting the addition made on account of sundry creditors. 3. As per the record, the assessee is proprietor of M/s O.P. Khaitan Co., a firm of Solicitors and Advocates. During the year under consideration returned income from profession as Advocates and Solicitors, capital gains, house property and income from other sources. The AO made addition of Rs. 10,78,01,478/- out of credit balances in the clients account of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clients and as per the system of accounting followed by the assessee himself, this amount had to be taxed in AY 2009-10 itself; there being no system of deferring it to the subsequent years under the cash system of accounting. 7. The ld. Counsel for the assessee, on the other hand, has placed strong reliance on the impugned order. Besides, reliance has also been placed on composite Tribunal order dated 23.05.08, in the assessee s own case for 2001-02 and 2003-04 (copy at APB B-45 to B-47). 8. We have heard both the parties and have perused the material on record. Undisputedly, the assessee has been consistently following the cash system of accounting for the firm of Solicitors and Advocates. The firm received advances from its clients against various legal matters for meeting out of pocket payments towards expenses of various kinds. Such advance receipts were kept in a separate ledger account in the name of the clients. All the expenses were debited therein from time to time. At the year end, credit balances in the accounts where the matters stood completed or settled, were transferred to the Profit Loss Account. Where the matter was pending, the credit balances were carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e form of court fees, photo copying expenses, counsel s fees etc. At times, it may so happen that the entire advances may be consumed for expenses. In that event, it would be improper to attach the characteristic of an income to the advance receipt. If part of the advances is consumed for expenses and if a portion is adjusted as fees, then it is only that portion which is characterized as fees, can be taken as income. The characterization of the receipt can take place only at the time of appropriation i.e., in case of fees only when the matter is over and the assessee decides upon the quantum of fees. Therefore, it would be inappropriate to treat the entire advance as fees in the year of its receipt when it does not bear any particular characteristic. This cannot be termed as a mixed system of accounting as has been held by the CIT (A). It has to be borne in mind that when a lawyer receives money from his clients, he does not do so as a trading receipt but he receives the money in his capacity as an agent and that also in a fiduciary capacity. It does not have any profit making quality about it when received. It remains money received by a lawyer as client s money for being emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. A notional expenditure cannot be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with an aim to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.3 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. The details of the expenditure, makes it clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. The Assessing Officer has not given any finding of fact that any of the expenditure that is incurred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the disallowance, the ld. CIT (A) relied on Justice Sam P. Bharucha (supra). 17. In the case of Justice Sam P. Bharucha (supra), it was held, inter alia, that when it is possible to determine the actual expenditure in relation to the exempt income, or when no expenditure had been incurred in relation to exempt income, the principle of apportionment embedded in Section 14A of the Act has no application; that to disallow the expenditure u/s 14A of the Act, there must be a live nexus between the expenditure incurred and the income not forming part of total income; that a notional expenditure cannot be apportioned for the purpose of earning exempt income unless there is an actual relation in earning income not forming part of total income. In that case, as in the present one, the AO had not given any finding that any of the expenditure incurred and claimed by the assessee was attributable to earning of the exempt income. It was held that in the absence of any such instance of expenditure, finding of the AO, or any material that the assessee had in fact incurred any such expenditure having relation to the earning of the exempt income, the provisions of Section 14A of the Act c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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