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2016 (5) TMI 70 - ITAT DELHI

2016 (5) TMI 70 - ITAT DELHI - [2016] 45 ITR (Trib) 589 - Income recognition - Advance received in the nature of imprest money held in the fiduciary capacity for his overseas client Ace Step Management Ltd., UAE - as alleged by revenue that within two days of receipt of the so called advance amount, the assessee disbursed more than ₹ 2 crores for making payments to his own firm, Hindu undivided family, wife, son and daughter and remaining amount was used for making payments towards prefere .....

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f 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., ₹ 6,44,44,813 as sundry creditors, after adjusting the professional fees and amount paid towards reimbursement on behalf of the client, .....

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of advance has been treated as income of the assessee for the assessment year 2009-10. Before we part with the adjudication of this issue, we may point out that we are in agreement with the contentions of the learned Departmental representative that income earned by the assessee himself, by his own firm, by his Hindu undivided family and by his wife, son and daughter, from investments of funds, so received by them out of advance amount in question, may be added to their respective taxable income .....

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andates that the provisions of sub-section (2) of section 14A of the Act shall also apply in relation to a case where the assessee claims that no expenditure has been incurred by the assessee in relation to the income which does not form part of the total income under this Act. In the present case, undisputedly and admittedly, the assessee has not made any suo motu disallowance. Therefore, we may safely presume that the assessee claims that no expenditure has been incurred by him in relation to .....

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No. 2384/Delhi/2014 - Dated:- 18-12-2015 - Chandra Mohan Garg (Judicial Member) And L. P. Sahu (Accountant Member) For the Petitioner : Ajay Vohra, Rohit Garg, Deepesh Jain For the Respondent : R. C. Danday ORDER Chandra Mohan Garg (Judicial Member) 1. This appeal by the assessee has been filed against the order of the Commissioner of Income-tax (Appeals)-XXVIII, New Delhi dated February 24, 2014 passed in first appeal No. 175/2011-12 for the assessment year 2009-10. 2. The grounds raised by th .....

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ent 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 .....

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ot have the character of income). 4. The learned Commissioner of Income-tax (Appeals) erred in law and on facts in appreciating of facts with respect to the nature of receipt of ₹ 6,44,44,813 from the assessee's client Ace Step Management Ltd., UAE inasmuch as the learned Commissioner of Income-tax (Appeals) erred in not holding that the money continued to belong to the client and that the assessee continued to be accountable in respect of the disbursements from the funds so received b .....

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nt and subsequent years duly confirmed by the client. All this happened much before any query to the effect was raised by the Assessing Officer. Therefore, the action of the Commissioner of Income-tax (Appeals) in confirming the addition is arbitrary, unjustified based upon mere surmises and conjectures, illegal, against the facts and bad in law. 6. The learned Commissioner of Income-tax (Appeals) erred in not appreciating that in view of the hon'ble Supreme Court in the case of Dr. K. Georg .....

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bt that the Income-tax Act imposes a general liability to tax upon all income, but it does not provide that whatever is received by a person must be regarded as income liable to tax, unless it is demonstrated that the receipt of the income nature at the point of time of receipt.) 7. The learned Commissioner of Income-tax (Appeals) erred in ignoring the ratio of the judicial precedents, including from this hon'ble Tribunal, cited before him, in ignoring the unambiguous facts of the case and c .....

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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 .....

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the notice under section 143(2) of the Act. The Assessing Officer noted that the assessee is following the cash system of accounting as per Column 11(A) of the tax audit report and there was no change in the method of accounting during the relevant period from the assessment year 2008-09. The Assessing Officer assessed the income of the assessee by making two disallowances, viz., First disallowance being addition pertaining to money received by the assessee from Ace Management Ltd., UAE. 4. The .....

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fully perused the relevant material placed on record, inter alia, assessment order, impugned order of the learned Commissioner of Income-tax (Appeals), the assessee's paper book spread over 288 pages and other relevant material placed before us. 6. The learned authorised representative took us through pages 269, 271, 273, 275 of the assessee's paper book and submitted that as per the order of the Income-tax Appellate Tribunal "E" Bench, in the case of ACIT v. Vipin Malik for th .....

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s under : "5. We have heard the arguments of both sides and also perused the relevant material 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. Des .....

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counting. 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 bare the character of an income and then only it can be treated as such in the year of receipt under the cash system of accounting. It was in this context, the Supreme Court in KCP Ltd. (supra) held that if a recei .....

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ncluded. These expenses may be in the 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 advance is consumed for expenses and if a portion is adjusted as fees, then it is only that portion which is characterised as fees, can be taken as income. The characterisation of the receipt can .....

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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 employed in the client's cause. The lawyer remains liable to account for this money to his client. This is the gist of the judgments relied upon by learned counsel. Therefore, in the light of the aforesaid discussion, we .....

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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, D .....

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at on the similar issue and in the similar facts and circumstances of the case, the hon'ble High Court of Gujarat in the case of CIT v. D. C. Gandhi Associates [1994] 210 ITR 929 (Guj) held that while the professional assessee-firm of advocates followed the cash system of accounting and it used to receive advance from the clients which was credited to the client's account and when expenses were incurred on behalf of the assessee, sums so spent were debited to the client's account. Le .....

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of Delhi in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) and submitted that as per the principles of consistency, while in the earlier years the firm of solicitors or professionals accepting money from clients on account of different expenses and appropriating fees only upon completion of case, then the receipts/Revenue accepting the advances are not an income of the solicitor firm in the past years, then in case when no new facts existing to take a different view, then the .....

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sentative submitted that as per the confirmation letter of the client, i.e., Ace Step Management Ltd. dated May 2, 2008, available at the assessee's paper book page 1, the client itself has confirmed that the assessee may debit the professional fees as invoice of ₹ 37,73,578 as 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 boo .....

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ssessee 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 ₹ 1.5 crores amount was adjusted against the professional fees and other expenses and till date more than ₹ 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 assessee .....

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o days from the date of receipt which shows that the amount received from M/s. Ace Management Ltd. was not an advance but it was an income of the assessee. Therefore, the assessee used almost the entire advance as per his own wish and the amount of ₹ 2.11 crores was given to the assessee's own firm, Hindu undivided family and wife, daughter and son and about ₹ 5.30 lakhs was invested in the right issue of shares as of Dhanlaxmi Bank in the assessee's own name. The learned Dep .....

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most the entire amount had been appropriated for the assessee's own personal purpose. Thus, it clearly shows complete ownership right of the assessee over the amount received from the client. Therefore, the authorities below were quite justified and correct in treating the same as the assessee's income for the period under consideration. The learned Departmental representative pointed out that the assessee is holding 10 per cent. of shares in the Ace Steps Management Ltd. This makes it a .....

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tions 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 .....

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have been remitted by Ace Steps Management Ltd., as 'advance as professional fees' against which the appellant had received a rupee equivalent of ₹ 6,86,10,521. Thus the funds have been received as advance toward professional fees. Since the appellant is maintaining books of account on cash basis, the entire amount is taxable receipt basis and is therefore taxable for year in question. The appellant has also upon the decision of the hon'ble Income-tax Appellate Tribunal in his .....

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When a lawyer received money from the client he does not do so as a trading receipt but received a money in a fiduciary capacity. In the light of the above decision of the hon'ble court when the case of the appellant is examined it is seen that not only the declared purpose of remission of the amount to the appellant is 'advance as professional fees' but substantial amount, as pointed out by the Assessing Officer has been utilised as under after transferring the amount to his other .....

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ty/client as is apparent from the above trans actions clearly shows that the amount has not been retained by the appellant in his fiduciary capacity or for the purpose of meeting of prospective expenses. It has entirely been appropriated for his personal purposes, thus showing complete ownership right over the amount received from the client. To further verify the contention of the appellant he was asked to submit the amount till the current period, i.e., 2013-14. The facts reflected that the ap .....

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d 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 .....

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fomerics Valuation and Rating Pvt. Ltd. this makes its apparent that the appellant is not acting simply as an advocate for his client but also has close business links with it. Thus the receipt of money from the company to the appellant may have been received as a compensation for services other than declared by the appellant." 13. At this juncture, it would be appropriate to consider the application of the assessee under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. Learned s .....

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assessee. 14. The learned Departmental representative submitted that the confirmed copy of the ledger account has already been placed on record by the assessee in the assessee's paper book from pages 2 to 4. The learned Departmental representative also pointed out that the present case is related to the assessment year 2009-10 and subsequent confirmation letter dated March 31, 2014 and March 31, 2015 has no bearing on the case of the assessment year 2009-10 and there is no dispute about thi .....

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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 an .....

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icta 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 and advocates which followed the cash system of accounting since its inception and this system was consistently accepted by the Department. During the course of professional activities, the assessee-firm received advance from its clients for various legal matters for meeting out of pocket payments for expenses in travelling .....

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addition for the assessment year 2009-10 was similar one made by the Assessing Officer for the assessment years 2001-02 and 2003-04 which had been deleted by the learned Commissioner of Income-tax (Appeals) and the deletion was further concurred by the Tribunal. Their Lordships noted that nothing had been brought on record to persuade the Tribunal to differ from the view taken by the Tribunal in the assessee's own case for those years. The Tribunal also followed the earlier order on the basi .....

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the assessment year 2009-10. It was also held that the issue was whether the assessee was consistently following certain system of accounting followed by the assessee, then the Revenue is allowed to adopt a different stance in the subsequent assessment year 2009-10, then it would create an anomalous situation as far as the assessee is concerned. It was also held that the issue of lawyer accepting money from his client and appropriating the fees as income only upon completion of a case has been .....

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eived, 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 Pra .....

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which was debited during the various financial years. The remaining amount, i.e. ₹ 5.13 crores are still lying with the assessee. The conclusion of the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) is revolving around this allegation that within two days of receipt of the so called advance amount, the assessee disbursed more than ₹ 2 crores for making payments to his own firm, Hindu undivided family, wife, son and daughter and remaining amount was used .....

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only working as professional, his functioning was more than that. As we have already noted that in the case of CIT v. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi), the assessee-firm invested the advance money in the mutual funds in his own name and in the present case also the assessee used and invested advance money received from its clients within a few days of receipt. However, the hon'ble High Court held that on the basis of the principle of consistency, unless the facts or law underwen .....

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e including bills received about professional bills charged by the assessee from the clients. These facts had not been controverted or demolished by the authorities below. It is also pertinent 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 .....

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me 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., ₹ 6,44,44,813 as sundry creditors, after adjusting the professional fees and amount paid towards reimbursement on behalf of the client, then this amount cannot be treated .....

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wherein the entire amount of advance has been treated as income of the assessee for the assessment year 2009-10. Before we part with the adjudication of this issue, we may point out that we are in agreement with the contentions of the learned Departmental representative that income earned by the assessee himself, by his own firm, by his Hindu undivided family and by his wife, son and daughter, from investments of funds, so received by them out of advance amount in question, may be added to their .....

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had not recorded any finding that the expenditure incurred by the assessee was attributable for earning exempt income and in order to disallow the expenditure, there must be a nexus between the expenditure incurred and the income not forming part of the taxable income. Therefore, disallowance under section 14A of the Act was rightly deleted by the learned Commissioner of Income-tax (Appeals) and affirmed by the Income-tax Appellate Tribunal. 19. Learned counsel for the assessee, elaborating the .....

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43 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 .....

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sing Officer has made disallowance in question under rule 8D(2)(iii) of the Rules. The case of the assessee is that he earned interest-free dividend income of ₹ 18,02,899 which has been claimed as exempt and the assessee has not made any suo motu disallowance. Therefore, the disallowance made by the Assessing Officer by invoking rule 8D(2)(iii) of the Rules cannot be held as unsustainable and not in accordance with the provisions of the Act. 21. On a careful consideration of the issue, fro .....

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arrive at the satisfaction for disallowance under section 14A read with section 8D of the Rules that other expenses relatable to earning of exempt income by the assessee. In the subsequent para, the Assessing Officer further noted that since the assessee has invested its money on such investment of shares which is capable to generate income which does not or shall not form part of the total income of the assessee and indirect cost in the form of administrative expenditures and interest is invol .....

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arned senior counsel of the assessee that the Assessing Officer has not recorded satisfaction as required to invoke section 14A of the Act, read with rule 8D of the Rules. 22. Further, from the relevant operative part of the impugned order of the learned Commissioner of Income-tax (Appeals), we note that the disallowance made by the Assessing Officer has been upheld with the following observations and notings : "6.1 I have carefully considered the assessment order and submissions thereof. T .....

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ure 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 p .....

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ion of income under the provisions of the Act and has overriding effect over other provisions. Therefore, even if the expenditure is allowable under any other provision of the Act, disallowance is made because of the over riding effect of section 14A of the Act. The Legislature by using the expression 'expenditure in relation to income which does not form part of the total income' in section 14A of the Act, in no way indicates that it does not encompass disallowance of expenditure incurr .....

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