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ACIT, Cir-54, Kolkata Versus Sri Pawan Kumar Jhunjhunwala and Vica-Versa

2015 (12) TMI 40 - ITAT KOLKATA

Taxability of advance received from clients in the year of receipt even though the assignments were completed in the subsequent year - Held that:- We find that the assessee being an individual engaged in the legal profession had to receive certain advances from clients for taking care of certain expenses to be incurred for and on behalf of the client and the same is reflected in the balance sheet as a liability. The said liability takes the character of income on completion of the matters / assi .....

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an a person having a charge on somebody else’s money. When a solicitor receives money from his client, he does not do so as a trading receipt but he receives the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The solicitor remains liable to account by this money to his client and hence it does not become the income of the assessee. Thus we have no hesitation in deleting the addition made towards advance received from clients by the Learned AO in various .....

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come and expenditure account and whether any deduction was claimed by the assessee in that regard . It is also not clear that whether the payments made to these counsels have been reimbursed to the asseseee by his clients. We hold that if there is no profit element in this activity and is mere reimbursement of expenses, then no disallowance u/s 40(a)(ia) could operate. However, there is no clarity on the same from the orders of the lower authorities. Hence we deem it fit and appropriate, in the .....

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penses, Car Maintenance, Motor Car depreciation, Car expenses representing Road tax, insurance on car and interest on loan for car - Held that:- CITA had disallowed only 5% towards personal element of expenditures involved hereinabove in the earlier years and hence his action of increasing the disallowance to 10% is without any basis. We also find that against the orders passed by the Learned CITA on this issue for the Asst Years 2003-04 & 2004-05, the revenue had not challenged this issue befor .....

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AO had not considered the claim of the assessee at all and he has straight away embarked upon computing disallowance under Rule 8D. Without recording his satisfaction in terms of Rule 8D(1), he cannot directly proceed to implement Rule 8D(2) and accordingly we hold that the action of the Learned AO in making disallowance u/s 14A of the Act in the facts and circumstances of the case is not in accordance with law. - Decided in favour of assessee.

Restriction of addition u/s 94(7) of th .....

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rther pleaded that in several cases, the assessee received dividend not on the shares sold but on the shares continued to be retained by him. It was also further pleaded that disallowance u/s 94(7) , if any, could be restricted only to the extent of dividend received. We hold that the Learned CITA had rightly restricted the disallowance u/s 94(7) of the Act to the extent of dividend received in accordance with the provisions of the Act and by duly appreciating the true intention behind introduct .....

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the assessee and the revenue arise out of the following appellate orders for the Asst Years 2005-06 ; 2006-07 & 2007-08 and order of the Administrative Commissioner of Income Tax u/s 263 for the Asst Year 2006-07 against the orders of assessment framed u/s 143(3) of the Income Tax Act 1961 (hereinafter referred to as the Act ). 2. All these appeals are taken up together for the sake of convenience as the issues involved in all the years are identical in nature. The various issues raised in .....

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y of professional income, short term capital loss, long term capital gain and interest income from other sources. The entire books of accounts viz cash book, ledger, bills / vouchers, etc were produced by the assessee before the Learned AO and the same were examined on test check basis by the Learned AO. These facts on record are undisputed and indisputable. 3.1. During the course of assessment proceedings, the Learned AO found that the assessee had shown certain sums as Advance from Clients in .....

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bill amount and the bills are generally raised after conclusion of the matters. The Learned AO not being satisfied with this reply sought to bring to tax the advance received from clients as income in the hands of the assessee in the year of receipt in line with cash system of accounting followed by the assessee. On first appeal, the assessee reiterated the submissions stated before the Learned AO and the Learned AO having stated that the advances received from clients cannot take the character .....

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been consistently following cash system of accounting and treating the advance received from clients as a liability in the balance sheet and the same are taken to income as and when the relevant matters are concluded. This practice has been followed by the assessee right from Asst Year 1985-86 onwards. During the course of scrutiny assessment proceedings for the Asst Years 2003-04 & 2004-05, this stand of the assessee has been accepted by the revenue and no addition towards advance received .....

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o be incurred for and on behalf of the client and the same is reflected in the balance sheet as a liability. The said liability takes the character of income on completion of the matters / assignment taken up by the assessee. We hold that the solicitor is the agent of the client. The client makes over the money to the solicitor for some work being done by the solicitor as his agent. The money must be employed to that purpose and must not be treated as money received for any other purpose. This p .....

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o his client and hence it does not become the income of the assessee. 3.4. We find that the assessee has been consistently following this accounting practice for over two decades and no addition has been made by the Learned AO in the immediately preceding assessment years i.e Asst Years 2003-04 & 2004-05 on this issue. Though principle of res judicata do not apply to income tax proceedings and each assessment year is separate, the principle of consistency cannot be given a go by if there is .....

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ustomers for providing usership rights along with other facilities and amenities for the period of 99 years. The assessee company had 100% of the consideration on account of time share agreements from its customers. It, however, treated only 45% of the receipts so received as assessable in the relevant year and sought to defer the balance 55% of such receipts. The 55% receipts was sought to be spread over the duration of the said time share agreements on the ground that with reference to the sai .....

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ssee had merely adopted a subterfuge to avoid payment of tax on 55% of the receipts. The basis facts in the said case were that the assessee never disputed the income character of the entire receipt. What it sought was that 55% of such income should be excluded from tax on the ground that it had to incur expenditure in several future years for obligations arising therefrom. It was claiming a set off of an estimated future expenditure for which it had incurred liability for earning 55% of such in .....

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p the revenue. 3.5.1 But in the instant case, the assessee received certain amounts as advances from time to time to meet the expenses on behalf of their clients and the amount already spent is debited in their accounts and balance amounts have been carried forward to the next year and this accounting practice is a continuous process over the years. For the time being, the assessee was a custodian of that amount. Hence we hold that the decision of the Chennai Tribunal relied upon by the Learned .....

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ces of the case, the learned Tribunal has erred in law in deleting the addition of entire amount of ₹ 1,25,62,006/- received by the assessee from his clients and following cash system of accounting ? ii) Whether on the facts and in the circumstances of the case, the learned Tribunal has erred in deleting the addition of entire amount of ₹ 1,25,62,006/- received by the assessee from his clients, by disregarding that the law firms following cash system putting aside all the advances in .....

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ver to the solicitor, in the instant case, the solicitor received the money as trading receipt. That character he submitted, was impressed upon the money throughout and the balance of that money, even though refundable to the client, when transferred to the profit and loss account would be profit out of trading receipt and consequently assessable to income tax. In our opinion, this argument should not be accepted. The argument proceeds on an entire misconception of the character of client s mone .....

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a charge on somebody else s money. We are of the opinion that when a solicitor receives money from his client, he does not do so as a trading receipt but receives money of the principal in his capacity as an agent and that also in a fiduciary capacity. The money so received does not have any profit making quality about it when received. It remains money received by solicitor as client s money for being employed in the client s cause. The solicitor remains liable to account by this money to his c .....

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Prakash Khaitan reported in (2015) 93 CCH 0147 (Del HC) vide order dated 21.7.2015 , wherein it was held that :- 7. In the consequent appeal by the Department, the ITAT noticed inter alia that the addition for the AY under consideration was similar to the ones made by the AO for AYs 2001-02 and 2003-04 and which had been deleted by the CIT(A) and concurred with by the ITAT. Nothing had been brought on record to persuade the ITAT to differ from the Nothing had been brought on record to persuade t .....

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under similar circumstances needs must be followed . 8.…… ….. ….. …… The issue of lawyers accepting monies from clients on account to defray the expenses and appropriating fees as income only upon completion of a case has been examined in the past and a consistent view has been taken by the ITAT. This has been adverted to in the impugned order of the ITAT. The principles on the basis of which those decisions were taken are unexceptional. Given the manne .....

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High Court in the cases of Manilal Kher vs A G Lulla Seventh ITO & Others reported in (1989) 176 ITR 253 (Bom) and CIT vs D C Gandhi reported in (1994) 210 ITR 929 (Guj) respectively. The operative portion therein is not reproduced herein for the sake of brevity. 3.9. Respectfully following the aforesaid judicial precedents on the impugned issue, we have no hesitation in deleting the addition made towards advance received from clients by the Learned AO in various assessment years. According .....

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, we find that the Learned CIT had stated that in the earlier asst year i.e Asst Year 2005-06, the CITA had treated 10% of advances received from clients as income of the assessee and against which both the assessee as well as the department had preferred an appeal before ITAT. He states that in view of the various decisions on this issue and department s ultimate stand on this issue and the individual facts of the case, the AO is directed to re-examine this issue and take a decision after grant .....

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Act. We also hold that the Learned CIT himself had stated that several decisions have been rendered already on the impugned issue and hence it can safely be concluded that the Learned AO had only taken one of the possible views in the matter and hence placing reliance on the decision of the Hon ble Apex Court in the case of Malabar Industries vs CIT reported in 243 ITR 83 (SC), we hold that the order passed by the Learned AO is not erroneous and prejudicial to the interest of the revenue and acc .....

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n the course of his profession. The Learned AO found during the course of assessment proceedings that the following payments were made to the following persons :- Shri.J.P.Khaitan 24,114 Shri.S.Roychoudhury 38,250 Shri.Samir Roy Choudhury 37,408 Shri.Tapas Kr.Banerjee 35,700 - 1,35,472 4.1. The assessee stated that payments were made to Sri Tapas Kr. Banerjee for acting as an Arbitrator appointed by the Hon ble Calcutta High Court and payments to Sri S Roychoudhury and Sri Samir Roy Choudhury as .....

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on which tax is not deductible at source and on the balance sum of ₹ 13,600/- , TDS compliance have been duly made by the assessee and hence no disallowance u/s 40(a)(ia) could be invoked. The Learned AO did not agree with the contentions of the assessee and proceeded to make disallowance u/s 40(a)(ia) of the Act on the aforesaid sum for non-deduction of tax at source which was upheld by the Learned CITA . Aggrieved, the assessee is in appeal before us on the following ground:- 3. For tha .....

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ax at source on such payments and that the assessee had deducted and deposited income tax at source on the balance amount of ₹ 13,600/-. 4.2. The Learned AR reiterated the facts stated by him before the lower authorities and produced evidences to the fact that the concerned persons i.e Shri.Samir Roy Choudhury / S.Roy Choudhury( both parties are one and the same) and Shri. Tapas Kr. Banerjee were appointed as Arbitrator and Receiver respectively under the orders of Hon ble Calcutta High Co .....

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arned DR vehemently supported the orders of the lower authorities. 4.3. We have heard the rival submissions and perused the materials available on record. We find that the assessee had paid a sum of ₹ 37,738.25 and not ₹ 37,408 (as mentioned in the assessment order) to Shri.Samir Roy Choudhury towards deficit registration charges by way of draft in favour of Additional Registrar of Assurances I Kolkata being the share of client of the assessee as directed by the Hon ble Calcutta High .....

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er), the same are liable for deduction of tax at source in terms of section 194J of the Act. But it is not clear from the records, whether the said sums were debited by the assessee in his income and expenditure account and whether any deduction was claimed by the assessee in that regard . It is also not clear that whether the payments made to these counsels have been reimbursed to the asseseee by his clients. We hold that if there is no profit element in this activity and is mere reimbursement .....

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en reimbursed to the assesee by his clients without any profit element. Accordingly, the ground no. 3 raised by the assessee in ITA No. 2000 / Kol /2010 for Asst Year 2005-06 is allowed for statistical purposes. ISSUE III - Disallowance of Licence Fees - ₹ 40,500/- 5. During the course of hearing before us, the Learned Senior Counsel for the assessee informed the Bench that he is not pressing this ground and the same is considered as a Statement from the Bar. Hence the ground no. 4 of the .....

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in respect of aforesaid expenditure on account of personal usage of the same. On first appeal, the Learned CITA restricted the disallowance to 10% of the said expenditure as attributable to personal element. Aggrieved, the assessee is in appeal before us for the various assessment years by raising various grounds. 6.1. The Learned AR argued that in the immediately preceding assessment years i.e Asst Years 2003-04 & 2004-05, the Learned CITA restricted the disallowance to 5% towards personal .....

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CITA on this issue for the Asst Years 2003-04 & 2004-05, the revenue had not challenged this issue before tribunal. In any case, it is only an estimated disallowance. Accordingly, we direct the Learned AO to restrict the disallowance at 5% towards personal element. Hence the Ground Nos. 4-7 in ITA No. 2000/ Kol /2010 for Asst Year 2005-06 ; Ground Nos. 3-5 in ITA No. 2001/Kol/2010 for Asst Year 2006-07 and Ground Nos. 4-6 in ITA No. 536/Kol/2011 for Asst Year 2007-08 of the assessee appeals .....

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essee was in receipt of certain exempt income in the form of income u/s 10(38) on long term transfer of shares through recognized stock exchanges after suffering securities transaction tax (STT) ; income u/s 10(38) on long term gains upon sale of mutual funds after suffering STT ; tax free dividends on shares and units ; tax free interest on central government bonds upon conversion of UTI 64 ; interest on tax free bonds of public sector companies ; interest on public provident fund and interest .....

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gard to long term gains on sale/transfer of shares under section 10(38), the assessee incurred substantial expenses as and by way of brokerage and other expenses and the Assessee has shown the net realization, after accounting for brokerage, securities Transaction Tax, Service tax, stamp duty etc., as long term gains on sale/transfer of shares under section 10(38). Thus, income disclosed contains an element of expenses in the form of brokerage and tax thereon, stamp duty and securities Transacti .....

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ing this income save and except STT. • With regard to the tax free dividends on shares and Units, it is stated that most of the shares and Units, held by the assessee, are in demat form and the Assessee has given instructions to the Depository for crediting dividends to the account of assessee electronically. In most of the cases, the dividends were credited to the account of the Assessee. Moreover, the Assessee being a Gold Card holder of Citi Bank NA, the Assessee has made arrangement wit .....

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t the professional income were incurred by the Assessee for earning the income from profession and no part of such expenses are attributable to tax free income earned by the Assessee. • The plea of the Assessing Officer that the expenses relating to handling and management of such investment portfolios are hidden in the expenses debited to Profit & Loss account for earning income is a mere conjecture and without any basis. The assessee is a corporate lawyer and with his own experience a .....

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le with retrospective effect from 1.4.1962 onwards and vehemently supported the orders of the lower authorities. 8.2. We have heard the rival submissions and perused the materials available on record in this regard. We find that the Learned AO had directly applied the provisions of Rule 8D(2)(iii) of the IT Rules, without complying with the requirements stipulated in Rule 8D(1). For the sake of convenience, the provisions of Rule 8D(1) are reproduced herein below:- Rule 8D : [Method for determin .....

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re in relation to such income in accordance with the provisions of sub-rule (2). 8.3. From the above, it is evident that the Learned AO had to first record his satisfaction that the claim made by the assessee that no expenditure has been incurred for earning exempt income or the expenditure incurred by assessee is not found to be correct. We find that the Learned AO had not considered the claim of the assessee at all and he has straight away embarked upon computing disallowance under Rule 8D. Wi .....

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The Court: The subject matter of challenge in this appeal is a judgment and order 14th May, 2013 by which the learned Tribunal dismissed the appeal preferred by the Revenue. Aggrieved by the order of the Tribunal, the revenue has come up in appeal. The Assessing Officer applied the Thumb Rule prescribed in Rule 8D of the Income Tax Rules in exercise of power under section 14A of the Income Tax Act without first recording that he was not satisfied with the correctness of the claim of the expendit .....

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e approached the Tribunal. The Tribunal has dismissed the appeal holding as follows: While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of .....

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he Ground Nos. 1-2 in ITA No. 2001/Kol/2010 for Asst Year 2006-07 and Ground Nos. 7-8 in ITA No. 536/Kol/2011 for Asst Year 2007- 08 of the assessee appeals stand allowed. ISSUE VII - Restriction of addition u/s 94(7) of the Act on sale of shares 9. The brief facts of this issue is that during the course of assessment proceedings, the Learned AO noted that the assessee claimed short term capital loss of ₹ 1,99,330/- and that the said loss on sale of securities was adjusted against short te .....

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of three months prior to the record date; [(b) such person sells or transfers- (i) such securities within a period of three months after such date; or (ii) such unit within a period of nine months after such date;] (c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received o .....

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