Excel for
Chartered Accountants

THE HIGH COURT OF DELHI

Case No.  ITA  416/2015
Parties: CIT...Appellant  vs Om Prakash Khaitan .....Respondent
Coram:  Hon’ble Dr. Justice S. Muralidhar;  Hon'ble Mr. Justice Vibhu Bakhru
Order Date: 21-07-215                     

Facts of the Case:
The Assessee was proprietor of a firm of Solicitors and Advocates. The Assessee followed the cash system of accounting since inception and this had been consistently accepted by the Department since 1990. The Assessee received advances from its clients for various legal matters for meeting out of pocket payments towards expenses in travelling, preparation of cases, engaging lawyers, etc. Such advance receipts were kept in a separate ledger account in the name of the client where all the expenses were debited from time to time. At the end of the year, credit balances in the accounts, where the matters were complicated or settled, were transferred to the Profit& Loss Account. Where the cases were pending, the credit balances were carried forward to the next year as sundry creditors.

However, the Assessing Officer made an addition of Rs.10,78,01,478 representing balances outstanding on 31st October 2011 out of the total credit balance of Rs.20,79,97,695 as on 31st March 2009. The AO held that since the Assessee adopted the cash system of accounting, the taxing of the income could not be deferred to the subsequent years. The AO held that Income had to be taxed in the year in which it was received. Since the above amount had not been returned or shown as professional fee, it had to be taxed during the current AY.

On appeal, the ITAT noticed 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 new had been brought on record to persuade ITAT to differ from the view taken by the ITAT in the Assessee‟s own case for those years. The ITAT also followed its earlier order dated 3rd February 2006 in ITA No.1765/Del/2002 (Jitender Sharma v. DCI)' and order dated 25th August 2006 in ITA No.3820/Del/2004 (M/s. Anand & Anand). The ITAT acknowledged that although res judicata was not applicable to income tax proceedings “the principle of consistency requires that unless facts or law have/has undergone a change, the view taken earlier under similar circumstances needs must be followed.

Judgment:
The High Court upheld the order of ITAT.

Excerpts from the Judgment:
The only ground urged before the Court is that the monies were kept invested by the Assessee in the mutual funds in the name of the Assessee and, therefore, had to be treated as income in his hands. However, as noted by the ITAT these facts were not new to the AY in question. The issue was whether the Assessee was consistently following a certain system of accounting which had been accepted by the Department. There is no change of system of accounting followed by the Assessee. Allowing the Department to adopt a different stance in the AY in question would create an anomalous situation as far as the Assessee is concerned. 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 unexceptionable. Given the manner and functioning of the lawyers and law firms, it is correct that the categorisation of a receipt can take place only at the time of appropriation i.e. in case of fees only when the matter is over or as when the Assessee decides on the quantum of fees. This will not be the entire advance received as at the time it is received it does not bear any particular characterisation for the purposes of treating it as income.

Download Full Judgment Click Here >>

Delhi High Court-In the Absence of Change in System of Accounting Consistently Followed by Assessee and Accepted, Income-Tax can not adopt different Stance | 22-07-2015 |