Feedback   New User   Login      
Tax Management India. Com TMI - Tax Management India. Com
Home Acts / Rules Notifications Circulars Tariff/ ITC HSN Forms Case Laws Manuals Short Notes Articles News Highlights
Extracts
Home List
← Previous Next →

Associated Law Advisers Versus ITO Ward 37 (3) , New Delhi

2017 (11) TMI 710 - ITAT DELHI

Income recognition - Addition in respect of “Current Liabilities” in computation of taxable profits - Held that:- The amounts, which are appearing under the head “current liabilities”, cannot be taxed as income in this year, as the advance money cannot partake the character of an income, because the assessee was entrusted with the money for discharging of various legal obligations on behalf of its clients and held the money in fiduciary capacity and the money was recognised as client’s money in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

it is mandatory and incumbent upon the Assessing Officer to record such satisfaction and in the absence of such ‘satisfaction’ no disallowance can be made under section 14A. The Hon'ble High Court concluded that; firstly, where there was a failure by Assessing Officer to comply with mandatory requirement of section 14A(2) read with rule 8D(1)(a) to record his satisfaction as required thereunder, then question of applying rule 8D(2)(iii) does not arise; and secondly, where Assessing Officer had f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

R. ORDER PER AMIT SHUKLA, J.M.: The aforesaid cross-appeals have been filed by the assessee as well as by the Revenue against the impugned order dated 22/8/2014, passed by the ld. CIT (Appeals)-XXVIII, New Delhi for the quantum of assessment passed under section 143(3) for the assessment year 2010-11. 2. We will first take up the assessee s appeal wherein the following grounds have been raised:- 1. That the Commissioner of Income Tax (Appeals) -XXVIII has erred both on facts and in law in sustai .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the facts of the instant case, since the expenditure incurred and debited in the Income & Expenditure A/c has absolutely no relationship with the exempted income. The observations made in the order are highly theoretical and conjectural. 3. It is thus prayed that the addition of ₹ 35,02,689 and the disallowance made of ₹ 71,122 under section 14A of the Income Tax Act, 1961 by the Income Tax Officer, Ward 37(3), New Delhi and sustained by the Commissioner of Income Tax (Appeals)- .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g Officer accepted assessee s reply; but for balance sums aggregating to ₹ 35,02,609/-, AO sought assessee s clarification to which assessee submitted that these payments are in the nature of advance payment received from the clients for making payment of fees to Senior Advocates to appear on behalf of the clients before Hon'ble High Court and Supreme Court and for incurring of expenditure on behalf of the clients. However, the Assessing Officer rejected assessee s contention on the gr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

it in the previous year and therefore, this is clear violation of the principles of cash system of accounting. Accordingly, he added the entire amount of ₹ 35,02,609/- appearing under the head current liabilities to the income of the assessee for this year. 4. Before the ld. CIT(A), assessee submitted that the current liabilities under this head consist of three categories of payments received from the clients; * firstly, amount received in advance from the clients for payment of fees to S .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lf of the clients towards fees payable to the Registrar of Companies and other authorities, for purchase of stamp papers, preparation of paper book, hotel and other expenses of the Sr. counsel engaged to handle the cases outside Delhi and, therefore, it requests the clients to remit in advance the estimated expenditure to be incurred for specified purposes; and * lastly, the assessee-firm sends a Memorandum of Fees (invoice) to its foreign clients by electronic mail, which is followed by a hard .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

remitted but should be retained for adjustment against fees for future services. Under all the categories, assessee submitted that it is the money belongs to the clients and it is held by the assessee-firm in fiduciary capacity, which cannot be appropriated by the firm as its income as income is not realised unless services are performed for the clients. In support of such accounting practice, reliance was placed on various decisions, which have been incorporated at pages 4 & 5 of the appel .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

yment to its own partners in a similar manner. Thus in respect of Sr. No.5 bill has been raised for fees for filing of petition and in respect of hearing by the Sr. Counsel and Jr. Counsel, but the same has also been treated as advance and directions have been issued to the client to not deduct TDS. The appellant is taking all advances outstanding on the last day of the Financial Year as current liability and in essence is not treating any amount received in advance as its income even where the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

filed by the appellant, however this has been dealt with in one above and the appellant has treated specific amount spent against specific expenses as advance. 3. In respect of double payment: The appellant has filed copy of account of, DEG Deutsche Investitions; Genworth Financial Inc.; Global English Corporation; NBC Universal; and Mars Inc as evidence of double payments. The appellant has not filed any correspondence with the above party showing the amount received were on account of payment .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a later date. As per cash system of accounting these amounts are to be treated as the appellant s income. The addition made by the Assessing Officer is therefore sustained. 6. Before us, the ld. Sr. counsel for the assessee, Shri C.S. Aggarwal, after explaining the entire facts, submitted that under all the three categories of payment received in advance from the clients, money has kept in the fiduciary capacity to meet out the expenditures and obligations on behalf of its clients, like making .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

39 TTJ 48 (Delhi) (iii) CIT vs. Om Prakash Khaitan [2015] 376 ITR 390 (Delhi) (iv) Manilal Kher Ambalal & Co. vs. A.G. Lallu [1989] 176 ITR 253 (Bombay) (v) CIT vs. Tanubhai D. Desai [1972] 385 ITR 339 (Bombay) (vi) CIT vs. Bijoy Kumar Jain [2016] 385 ITR 339 (Cal.) 7. So far as the discrepancies pointed out by the ld. CIT(A) in his impugned order, following rebuttal had been submitted by the ld. counsel for the assessee before us in the form of written submission which clarifies the factual .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

l clarifies that "This is advance money which shall be used by us to make payments from time to time. (Underlining added). While making payment to the Ld' Arbitrators we shall be deducting TDS. You are requested not to deduct TDS on this payment". It is clear from this Note that the entire amount raised under the Bill was by way of advance, and no part thereof was towards fees for services rendered. 1.8 With regard to Bill No. 238/2009 referred to (on page 7 of the appellate order) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cal Counsel. Therefore, out of the total Bill amounting to USD 3,524 only USD 700 relates to the fees payable to the appellant firm which has been included in the professional receipts of the firm. 1.9 With regard Bills Nos. 266/2009, 018/2010 and 304/2009 referred to at Serial Nos. 3,4 and 5 of the appellate order, the Commissioner (Appeals) has observed that the appellant "has treated advance payment to Sr. Advocates and for payment to its own partners in a similar manner". The Commi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eceived against bill raised by it for its own partner/employees. Even where bill has been raised for efforts put in by Lira Goswami and Mohna M Lai, the appellant has treated the same as advance amount". (Underlining added). These observations are baseless. As stated above, the amount raised on clients for services rendered by lawyers of the appellant firm is included in the professional receipts of the appellant firm, and only amounts received in advance which could not be adjusted during .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dvance". (Underlining added). These observations are also baseless. The amount spent on expenses is adjusted against the advance received from the client and goes to reduce the amount of the advance received from the client. 1.12 The Commissioner (Appeals) has observed on pages 8 and 9 of the appellate order that the appellant has not filed any correspondence to show that double payment had been made by DEG Deutsche Investitions; Genworth Financial Inc.; Global English Corporation; NBC Univ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ervation. As stated in paragraph 1.4 above, on coming to know that a client has made a double payment, the partner who raised the Bill phones the concerned person in the client's office for providing details for returning this amount by wire transfer, but, during the talk on phone, the clients advised that the double payment received may be adjusted against future expenses and services, and the amount has been subsequently so adjusted. To sum up, therefore, the adverse observations made by t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t liabilities ) are in the nature of advance and only when accounts are finalized, assessee credit it to the profit & loss account. In support, he also filed photocopies of the bills and invoices and also dates of receipt of amount and how the same has been adjusted in the subsequent year. Thus, he submitted that the addition cannot be sustained. 9. On the other hand, the ld. Sr. D.R. strongly relied upon the order of the ld. CIT(A) and submitted that under the cash system of accounting, ass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

finding given in the impugned order as well as the material referred to before us. The assessee is a law firm, which is rendering services mostly to its foreign clients. The system of accounting adopted by the assessee is that, bills and invoices are raised for advance payment of fees or expenditure from its clients; firstly, which are in the category of making payment of fees to Senior Advocates who are engaged to represent the matters before the Hon'ble High Court and Supreme Court on beh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ment and in support, scrutiny assessment for assessment year 2009-10 has also been filed before us, wherein similar system of recognizing the income and the accounting practice of the assessee has been accepted. Under all the three categories of payments, which has been discussed hereinabove, it is seen that money received by the assessee was the money of the clients received in the fiduciary capacity. It is a kind of trust money of the client, for which assessee has to discharge certain obligat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

this is advance money which shall be used by the assessee firm to make payments from time to time, like while making payment to the arbitrators and Senior Advocates for which TDS would be deducted by the assessee and specific request was made by the client not to deduct TDS on such payment. Even in the memo fees for seeking advance money for incurring expenditure also, it is seen that various heads of proposed expenditure are mentioned like photocopy; courier charges; local counsel fees; charges .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g the course of litigation proceedings or arbitration proceedings. The Revenue s case is simply that whatever has been received from the clients has to be recognized as income and whatever has been paid is to be treated as expenditure and this has been justified on the ground that under the cash system of accounting, this procedure should be followed. 11. We are unable to appreciate such a contention of the Revenue because under the Income Tax Act, what is chargeable to tax is income that is rec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ere in this case client s money. If money has been received in the fiduciary capacity for discharging the obligation on or on behalf of the principal/client, then such money received for discharging of obligation cannot be reckoned as income. Under the Income Tax Act every receipt cannot be an income as it has to fall in the category of income first, chargeable to tax and under a relevant head. Money received as trust or in a fiduciary category cannot be ipso facto be recognised as income belong .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of meeting the expenditures cannot be easily available from clients, then as a matter of practice, Solicitors/Law firms demand advance money for discharging such obligation and the balance money is either refunded or adjusted against the fess which is ostensibly is income chargeable to tax. Such a system in the case of Solicitors has been well accepted and settled by the Hon'ble Calcutta High Court in the case of CIT vs. Sandersons and Morgans [1970] 75 ITR 433. This judgment has been follow .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

were debited from time to time and at the end of the year, credit balance in the account where matters are unsettled, the same were carry forwarded to the next year as sundry creditors and matters, which are settled in this year were transferred to the profit & loss account. In that case also, the Assessing Officer held that since assessee adopted cash system of accounting, taxation of the income cannot be differed to the subsequent year and income is to be taxed in the year in which it was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uantum of fees, is the correct way of recognizing the income. The entire advance received cannot be treated as income. This finding of the Tribunal got upheld by the Hon'ble High Court, wherein the Hon'ble High Court concluded that for lawyers and law firms, characterization of receipt can take place only at the time of appropriation, i.e., in case of fees only when the services were rendered or as and when assessee decides on the quantum of fees and not before that. Even the other judgm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y in its accounts. Accordingly, the addition of ₹ 35,02,609/- is deleted. 12. So far as the second issue of disallowance under section 14A of ₹ 71,122/- is concerned, the brief facts are that the assessee has earned dividend income of ₹ 38,057/- and income from mutual funds of ₹ 8,59,847/-, which were claimed as exempt from tax under section 10(34) and 10(35). 13. During the course of the assessment proceedings, assessee was required to give details of expenditure incurre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

amount, rule 8D cannot be applied. The Assessing Officer however observed that assessee s reply is not found satisfactory and held that disallowance has to be made under section 14A in accordance to rule 8D and accordingly, worked out the disallowance under section rule 8D(2)(iii) at ₹ 71,122/-. This disallowance has been confirmed by the ld. CIT(A) also. 14. Before us, Shri C.S. Agarwal submitted that when assessee had submitted before the Assessing Officer that none of the expenditure de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ke disallowance under rule 8D, which cannot be upheld. In support, he relied upon the judgments of the Hon'ble Delhi High Court in the cases of CIT vs. Taikisha Engineering India Ltd. reported in [2015] 370 ITR 338 (Delhi); and CIT vs. I.P. Support Services India (P.) Ltd. Reported in [2015] 378 ITR 240 (Delhi). 15. On the other hand, the ld. Sr. D.R. strongly relied upon the order of the ld. CIT(A) and submitted that the Assessing Officer did reject assessee s explanation on the ground that .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

other details like bank statements and balance sheet that no expenditure whatsoever has been incurred for earning of income by way of dividends which very paltry sum. It was further submitted that the income in respect of units of mutual funds and gross amount of income has been offered for taxation. After such a claim, under the provisions of sub section (2) & (3) of section 14, it was incumbent upon the Assessing Officer having regard to the accounts of the assessee and the nature of expe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is can be examined having regard to the accounts of the assessee and the nature of expenditure debited. Here in this case, the Assessing Officer has failed to satisfy himself about the correctness of the assessee s claim and, therefore, in view of the principle laid down by the Hon'ble Delhi High Court in the case of H.T. Media Ltd. Vs. Pr. CIT reported in 85 taxmann.com 113 (Delhi), the Assessing Officer cannot proceed to make disallowance under section 14A. The Hon'ble Jurisdictional H .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and secondly, where Assessing Officer had failed to establish any direct nexus between investments made by assessee and interest expenditure incurred, then it not correct to remand the matter concerning deletion of disallowance of interest under clause (ii) of rule 8D(2) to Assessing Officer for fresh determination. Accordingly, on the facts of the present case disallowance of ₹ 71,122/- made by the Assessing Officer is directed to be deleted. Accordingly, the appeal of the assessee is all .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Forum
what is new what is new
  ↓     bird's eye view     ↓  


|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version