Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held amount received by an advocate/solicitor from client for some work being done by the solicitor as his agent can not be taxed as income under cash basis of accounting.

Case Details:
I.T.A Nos. 2137/Kol/2010 & 612/Kol/2011 AY : 2005-06 2007-08
ACIT (Appellant) vs Pawan Kumar Jhunjhunwala (Respondent)
Date of Order: 06-11-2015

Brief Facts of the Case:

The assessee was an individual and engaged in the legal profession under the name and style of ‘Jhunjhunwala& Co’ following regularly cash system of accounting. The total income comprised mainly of professional income, short term capital loss, long term capital gain and interest income from other sources.

The assessee had 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 had 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 from clients was made for those two asst years. However for the assessment year in question, the assessee was questioned as to why the same should not be taxed as income in the year of receipt in line with the cash system of accounting regularly followed by the assessee. The assessee replied that the advance payments are received from clients on account of court fees, counsel fees , stamp duty, registration charges, typing charges, photocopying charges, travelling expenses etc. which are adjusted against the bill amount and the bills are generally raised after conclusion of the matters. The AO not being satisfied with this reply added the advances 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.

The ITAT observed that a 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 position is not altered by the fact that the solicitor retains a lien upon the balance of the money for his costs. ITAT further observed that 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 no change in the facts and circumstances of the case.

Important Excerpts from ITAT Judgment
We find that the impugned issue is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Ratan Lal Gagar in ITAT NO. 80 of 2014 G.A.No. 1933 of 2014 vide order dated 12.9.2014 which dealt with the very same issue, wherein the questions raised before the court and the decision rendered thereon are as under:-

Questions :

i) Whether on the facts and in the circumstances of the case, the learned Tribunal has erred in law in deleting the addition of entire amount of Rs.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 Rs.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 balance sheet, thereby they are deferring the tax liabilities and enjoying the said advances without paying tax?”

Page 2& 3 of the order: -

“It is submitted by Mr. J.P Khaitan that the issue involved is covered by the judgment in CIT, West Bengal-I –vs. Sandersons & Morgans: 75 ITR 433 (Cal). In support of his submission, he has referred to a paragraph of the said judgment, which specifically deals with issue in the following manner:

“On the other hand, he submitted, when money was made over 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 money received by a solicitor. 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 position is not altered by the fact that the solicitor retains a lien upon the balance of the money for his costs. The result of solicitor having a lien on the balance of the money is no more than a person having 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 client.”

Md. Nizamuddin, learned advocate appearing on behalf of the appellant/ revenue does not dispute that the issue has been dealt with in the case cited.

We find that as the issue is covered by the judgment of the jurisdictional court, In our view, no substantial question of law arises. Hence, the application and the appeal are dismissed. “

We also find that the impugned issue is also squarely covered by the recent decision of the Hon’ble Delhi High Court rendered in the case of CIT vs Om Prakash Khaitan reported in (2015) 93 CCH 0147 (Del HC) vide order dated 21.7.2015

Similar views were taken by the Hon’ble Bombay High Court and the Gujarat 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.

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

Download Full Judgment Click Here >>