Brief of the Case
In the Case of ACIT vs Sri Pawan Kumar Jhunjhunwala, ITAT Kolkata held that 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 solicitor remains liable to account by this money to his client and hence it does not become the income of the assessee.
Fact 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 comprises mainly of professional income, short term capital loss, long term capital gain and interest income from other sources. During the course of assessment proceedings, the Learned AO found that the assessee had shown certain sums as ‘Advance from Clients’ in the liability side of the balance sheet and 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 an appeal disallowance was sought to restricted to 10% of advance as income in view of the the fact that the assessee could not furnish the complete details substantiating that no income actually arising in the previous year was postponed to the next year. Aggrieved by this decision, both the assessee as well as the revenue filed the appeal before Hon’ble Tribunal for various asst years.
Contention of Department
The Learned DR vehemently supported the orders of the Learned AO.
Contention of Assessee
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. Advance payments received are adjusted against the bill amount and the bills are generally raised after conclusion of the matters. 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 from clients was made for those two asst years.
Held by the Tribunal
Tribunal found 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 no change in the facts and circumstances of the case. Reliance in this regard is also placed on the decision of the Hon’ble Apex Court in the case of Radha Soami Satsang Vs. CIT reported in 193 ITR 321 (SC).
Further, the Decision of co-ordinate bench of Chennai Tribunal, relied upon by the Ld. A.O, in the case of Sterling Holiday Resorts (I) Ltd vs ACIT reported in (2008) 111 ITD 116 (Chennai) was not applicable since 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. Since the assessee was not able to show any obligation for any expenditure to be incurred, the Tribunal rejected its claim for such estimated expenditure and held that it could not defer the income which it had admittedly received to suit its convenience. 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. The tribunal further found that the impugned issue was 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 wherein the issue involved was covered by the judgement in CIT, West Bengal-I –vs. Sandersons & Morgans: 75 ITR 433 (Cal) which specifically deals with issue in the following manner:
“…………….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.”
The Tribunal also found the issue to be covered by the decision of Hon’ble Delhi High Court in the case of CIT vs Om Prakash Khaitan reported in (2015) 93 CCH 0147 (Del HC). 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, the tribunal deleted the addition made towards advance received from clients by the Learned AO in various assessment years.