Brief of the case:
The Hon’ble Delhi High Court in the case of CIT vs. Om Prakash Khaitan held that In the absence of change in system of accounting consistently followed by the assessee and accepted by the department, the department cannot take different stand for the subsequent years. Such change in stand if allowed would create confusing situation as far as assessee is concerned
Facts of the case:
- The assessee proprietor of the solicitors firm has been preparing his firm’s account account as per the cash system of the accounting. The advances received from the clients are recorded as in a separate ledger in the name of the client and all the expenses incurred in relation to the provision of service to clients are charged to the same account.
- At the end of the year, credit balances in the accounts are transferred to the P&L A/c in respect of the clients whose cases got settled. In case of clients whose cases are pending, the credit balances are carried forward as Sundry Creditors.
- The AO made an addition of Rs. 10,78,01,478/- representing the credit balances outstanding in the clients accounting relating to unsettled cases. The CIT (A) and ITAT decide the matter in the favour of assessee. Department preferred an appeal before the Hon’ble High Court.
Contention of the Revenue:
- The learned counsel for the Revenue argued the advances pending in the clients’ account in respect of pending cases are invested by the assessee in the mutual funds in his name, therefore, to the extent of income accruing from the fund should be taxed as assessee’s income even if the same not being received in cash.
- Thus, the addition made by the AO is partly justified as the above argument is a new material not covered by the ITAT in its previous decision in respect of the same assessee.
Contention of the Assessee:
- The assessee contended that the identical case has been decided by the ITAT in his favour in the earlier years and the same cannot be decided otherwise because the assessee is following the accounting practice consistently which have also being accepted by the department for the earlier years.
- Thus, in the absence of any change in the facts or accounting practice the department cannot take stand contrary to what it has been accepting year by year.
Held by ITAT:
- The ITAT noticed that the addition for the AY under consideration was similar to the ones made by the AO for earlier AYs (2001-02 and 2003-04) and which had been deleted by the CIT (A) and ITAT. The revenue has not brought anything new to persuade ITAT to differ from the view taken by the ITAT in the assessee’s own case for those years.
- The principles of consistency requires that unless facts or law have/has undergone a change, the view taken earlier under similar circumstances needs must be followed. Thus, the ITAT allowed the assessee’s appeal following its own decision in respect of earlier AYs.
Decision of the Hon’ble High Court:
- The department fought the case only on the ground that advances received from the clients 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 the same practice were also followed in respect of previous years also which has been accepted by the department and such accruals from the mutual funds were not taxed.
- There is no change of system of accounting followed by the assessee. If the department is allowed to take a different stand in the AY in question it would create an anomalous situation as far as the assessee is concerned.. The manner of functioning of the lawyers and law firms, make it possible to recognize the fees as income only when the matter is over or as when the lawyer has decided the quantum in advance. Thus, the advance cannot be treated as income even if the system of accounting is cash basis.
- Appeal was decided in the favour of the assessee.