VIPIN MALIK,NEW DELHI vs. ACIT, NEW DELHI

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal by the assessee has been filed against the order of the CIT(A)-XXVIII, New Delhi dated 24.02.2014 passed in first appeal No. 175/2011-12 for AY 2009-10. 2. The grounds raised by the assessee read as under:

“1. The ld. CIT(A) erred in law and on facts of the present case in confirming the addition of Rs. 6,44,44,813/- in respect of the amount received by the assessee, as an advance in the nature of imprest money held in the fiduciary capacity for his overseas client Ace Step Management Ltd, UAE.

The above grounds of appeal taken are without prejudice to each other.

The appellant prays for the liberty to raise, at the time of hearing or at any other point of time prior thereto, such further grounds of appeal arising from the facts of this case, as may enable the appellant to seek justice and to assist your honors in upholding the majesty of law.”

Ground Nos. 1 to 7

attention towards assessee’s paper book pages 269 to 274 and especially took us through paras 5 and 6 of the order which read as under:

“5. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before Delhi ‘C’ Bench of ITAT in the case of Jitender Sharma Vs. DCIT and after considering the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. Sandersons & Morgans (supra), Hon'ble Bombay High Court in the case of CIT Vs. Tana Bhai D.Desai (supra) and Hon'ble Gujarat High Court in the case of D.C. Gandhi Associates - 210 ITR 929, a similar addition made on account of advance received by an Advocate from his client was deleted by the Tribunal vide its order dated 3.2.2006 rendered in 1TA No.l765/Del/2002 for the following reasons:-

“On due consideration of the matter, we delete the entire addition for the reasons that follow It is true that the assessee is following cash system of accounting Under this system, the assessee has to account for all the incomes received during the year irrespective of the fact whether they have accrued to the assessee or not. However, it is equally true that every receipt is not an income. A receipt to be accounted as an income must bare the character of an income and then only it can be treated as such in the year of receipt under the cash system of accounting. It was in this context, the Supreme Court in KCP Ltd d by the assessee does not bear the character of a professional fee. It is merely an advance out of which many expenses may have to be incurred before the matter gets finally concluded. These expenses may be in the form of court fees, photo copying expenses, counsel’s fees etc At times it may so happen that the entire advances may be consumed for expenses In that event, it would be improper to attach the characteristic of an income to the advance receipt If part of the advance is consumed for expenses and if a portion is adjusted as fees, then it is only that portion which is characterized as fees, can be taken as income. The characterization of the receipt can take place only at the time of appropriation i e. in case of fees only when the matter is over and the assessee decides upon the quantum of fees. Therefore, it would be inappropriate to treat the entire advance as fees in the year of its receipt when it does not bear any particular characteristic T his cannot be termed as a mixed system of accounting as has been held by the CIT(A) It has to be borne in mind that when a lawyer receives money from his clients, he does not do so as a trading receipt but he receives the money in his capacity as an agent and that also in a fiduciary capacity. It does not have any profit making quality about it when received It remains money received by a lawyer as “client’s money' for being employed in the client’s cause The lawyer remains liable to account for this money to his client This is the gist of the judgments relied upon by the learned counsel Therefore, in the light of the aforesaid discussion, we delete the addition of Rs 10,59.454/-"

will become income of the professional assessee only when the bill is raised for services rendered.

“5. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before Delhi ‘C’ Bench of ITAT in the case of Jitender Sharma Vs. DCIT and after considering the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Sandersons & Morgans (supra), Hon'ble Bombay High Court in the case of CIT Vs. Tanu Bhai D.Desai (supra) and Hon'ble Gujarat High Court in the case of D. C. Gandhi Associates

- 210 ITR 929, a similar addition made on account of advance received by an Advocate from his client was deleted by the Tribunal vide its order dated 3.2.2006 rendered in ITA No. 1765/Del/2002 for the following reasons:-

“On due consideration of the matter, we delete the entire addition for the reasons that follow It is true that the assessee is following cash system of accounting Under this system, the assessee has to account for all the incomes received during the year irrespective of the fact whether they have accrued to the assessee or not. However, it is equally true that every receipt is not an income. A receipt to be accounted as an income must bare the character of an income and then only it can be treated as such in the year of receipt under the cash system of accounting. It was in this context, the Supreme Court in KCP Ltd. (supra) held that if a receipt is a trading receipt, the fact that it is not so shown in the account books of assessee would not prevent the assessing authorities from treating it as a trading receipt. Thus, the emphasis of the Supreme Court was on the principle that the receipt must be a trading receipt In the instant case, the advance received by the assessee does not bear the character of a professional fee. It is 'merely an advance out of which many expenses may have to be inquired before the matter gets finally concluded. These expenses may be in the form of court fees, photo copying expenses, counsel’s fees etc At times, it may so happen that the entire advances may be consumed for expenses. In that event, it would be improper to attach the characteristic of an income to the advance receipt If part of the advance is consumed for expenses and if a portion is adjusted as fees, then it is only that portion which is characterised as fees can be taken as income. The characterisation of the receipt can taken place only at the time of appropriation i e in case of fees only when the matter is over and the assessee decides upon the quantum of fees. Therefore, it would be inappropriate to treat the entire advance as fees in the year of its receipt when it does not bear any particular characteristic This cannot be termed as a mixed system of accounting as has been held by the CIT(A) It has to be borne in mind that when a lawyer receives money from his clients, he does not do so as a trading receipt but he receives the money in his capacity as an agent and that also in a fiduciary capacity. It does not have any profit making quality about it when received It remains money received by a lawyer as “client’s money” for being employed in the client’s cause The lawyer remains liable to account for this money to his client This is the gist of the judgments relied upon by the learned counsel Therefore, in the light of the aforesaid discussion, we delete the addition of Rs 10,59.454/-.

Following the aforesaid decision in the case of Jitender Sharma, Delhi ‘G’ Bench of ITAT in the case M/s Anand & Anand, one of the assessees in the present cases, has again deleted the similar addition made in AY 2001-02 vide its order dated 25 8 2006 in IT A No .3820/Del/2004, a copy of which is placed on record on behalf of the assessees The common issue involved in the present cases thus is squarely covered in favour of the assessees and against the Revenue by the aforesaid twp decisions of the Tribunal and respectfully following the same, we uphold the impugned orders of the learned CIT(A) deleting the additions made by the AO on account of advances received In the assessees from their clients”.

circumstances, advance money cannot be treated as income of advocates or professional firm until and unless the bill is raised against the client for services rendered.

that as per the confirmation letter of the client, i.e Ace Step Management Ltd. Dated 2.5.2008, available at assessee’s paper book page 1, the client itself has confirmed that the assessee may debit the professional fees as invoiced of Rs. 37,73,578/- as retainership fee against this amount which was debited to the client’s advance account as per ledger account of the client in assessee’s firm available at pages 2 to 4 of the assessee’s paper book wherein similar account of professional bills and other expenses incurred for and on behalf of the client has been debited at the time of raising professional fees bill or debit vouchers. The ld. AR further submitted that the confirmation letter dated 2.5.2008 and amount mentioned therein is clearly entered in the ledger account of the assessee at page 2 of the assessee’s paper book.

after receipt has disbursed substantial amount of so called advance to assessee’s own firm, assessee’s HUF and assessee’s wife, daughter and son. The ld. DR further pointed that on 10.04.2008, the assessee made payment of Rs. 68,07,600/- to Dhanlaxmi Bank for right issue of shares and also made payment of Rs. 4,62,76,614/- in assessee’s own name and almost entire amount was disbursed within two days from the date of receipt which shows that the amount received from M/s Ace Management Ltd was not an advance but it was an income of the assessee. Therefore, the assessee used almost the entire advance as per his own wish and the amount of Rs. 2.11 crore was given to assessee’s own firm, HUF and wife, daughter and son and about Rs. 5.30 lakhs was invested in the right issue of shares as of Dhanlaxmi Bank in assessee’s own name. The ld. DR vehemently pointed out that the manner in which the assessee has utilised the amount received from the parties/client as is apparent from the mode of disbursement clearly shows that the amount has not been retained in his fiduciary capacity or for the purpose of meting out prospective expenses for and on behalf of the assessee. The ld. DR also drew our attention towards operative portion of para 5.4 of the impugned order and submitted that almost the entire amount had been appropriated for assessee’s own personal purpose. Thus, it clearly shows complete ownership right

of the assessee over the amount received from the client. Therefore, the authorities below were quite justified and correct in treating the same as assessee’s income for the period under consideration. The ld. DR pointed out that the assessee is holding 10% of shares in the Ace Steps Management Ltd. This makes it apparent that the assessee is not acting simply as an advocate for his client, but also as a close business link. Therefore, the receipt of money from the company to the assessee may have been received as compensation for services other than declared by the assessee.

“5.4 It is not disputed that the appellant is following cash system of accounting and there is no change in the method of accounting. As per the cash system of accounting all the income is recognized the moment cash is received and not as it is earned. The appellant has relied upon the decision of Hon'ble’ Gujarat High Court in the case of DC Gandhi Associates wherein it has been held that every advance receipt by the assessee does not bear the character of a professional fees. It is merely in advance out of which expenses may have to be incurred before the matter is finally concluded. To verify the facts of the present case in light of the above decision, the appellant was asked to produce the foreign inward remissions certificate from the bank to show the declared purpose for which the proceeds have been received from abroad. As per the FIRC issued by the Canara Bank on 01.05.2008 the Funds of US Dollar 17,19,993 have been remitted by Ace Steps Management Ltd., as “Advance as professional fees” against which the appellant had received a rupee equivalent of Rs.6,86,10,521/-. Thus the funds have been received as advance toward professional fees. Since the appellant is maintaining books of account on cash basis, the entire amount is taxable receipt basis and is therefore taxable for year in question. The appellant has also upon the decision of the Hon'ble ITAT in his own case for assessment year 2000- wherein the Hon'ble Court has held that though the assessee was following cash system of accounting, however, every receipt is not an income and to be accounted as income it must bear the character of an income and then only it can be treated as such in the year of receipt. The Hon'ble’ court has held that the advance may be given for incurring expenses and then it would be improper to attach the characteristic of an income to the advance receipt. When a lawyer received money from the client he does not do so as a trading receipt but received a money in a fiduciary capacity.

In the light of the above decision of the Hon'ble court when the case of the appellant is examined it is seen that not only the declared purpose of remission of the amount to the appellant is “Advance as professional fees” but substantial amount, as pointed out by the Assessing Officer has been utilized as under after transferring the amount to his other bank account :-

The manner in which the appellant has utilized the amount received from the party/client as is apparent from the above transactions clearly shows that the amount has not been retained by the appellant in his fiduciary capacity or for the purpose of meeting of prospective expenses. It has entirely been appropriated for his personal purposes, thus showing complete ownership right over the amount received from the client. To further verify the contention of the appellant he was asked to submit the amount till the current period i.e.2013-14.The facts reflected that the appellant had hardly appropriated the amount towards income as professional fees or for meeting expenses. In fact till 03.12.2011 the appellant had adjusted only Rs.50 to lacs towards his professional fees. This clearly reflects

that the amount received by the appellant belonged to him and has not been given to him as a receipt to be retained for future use. The appellant has during the proceedings also filed a confirmation from the client claiming therein that it is an advance to be used as per instruction. The confirmation and the purpose stated therein is clearly an after thought filed to avoid taxability in the hands of the appellant. The FIRC issued at the time of remittance shows the declared purpose at that instance. As already discussed above the manner of utilization of the amount shows the ownership rights of the appellant. Further, the amount received by him is clearly disproportionate to the amount reflected by him and adjusted by him towards expenses and income.

It is not out of context to mention that M/s. Comment (Mauritius) Ltd., is holding company of Ace Step Management Ltd. In 2009 M/s. Infomerics Valuation and Rating Pvt. Ltd., had moved an application to SEBI to be registered as a credit rating agency, in this company, Shri Vipin Malik has 71% Holding of shares M/s.HLM Consultants Pvt. Ltd has 11% holdings, and M/s. Ace Steps Management Ltd., has 10% holding of shares. M/s. Comment (Mauritius) Ltd., is a promoter for Infomerics Valuation and Rating Pvt. Ltd. this makes its apparent that the appellant is not acting simply as an advocate for his client but also has close business links with it. Thus the receipt of money from the company to the appellant may have been received as a compensation for services other than declared by the appellant.”

At this juncture, it would be appropriate to consider the application of the assessee u/r 29 of the IT(AT) Rules, 1963. The ld. Sr. Counsel pointed out that the assessee craves leave to place documents by way of additional evidence in pursuant to directions issued by the Bench during the hearing of appeal on 4.6.2015. The ld. AR submitted that the copy of ledger account showing utilization of amount upto 31.3.2013 and confirmation from client in respect of outstanding amount of Rs. 5.3 lakhs as on 31.3.2014 to 31.3.2015 may kindly be admitted as additional evidence of the assessee.

Jurisdictional High Court categorically held that the Revenue contended that the monies were kept invested by the assessee in mutual funds in the name of the assessee itself and therefore, the same had to be treated as income in its hands and these facts were not new to the A.Y 2009-10. It was also held that the issue was whether the assessee was consistently following certain system of accounting followed by the assessee, then the Revenue is allowed to adopt a different stance in the subsequent A.Y 2009-10, then it would create an anomalous situation as far as the assessee is concerned. It was also held that the issue of lawyer accepting money from his client and appropriating the fees as income only upon completion of a case has been examined in the past and consistent view has been taken by the Tribunal. The Hon'ble High Court held that given the manner and functioning of lawyers and law firms, it was correct that the categorization of reply can take place only at the time of appropriation i.e in case of fees only when the matter is over or as and when the assessee decided on the quantum of fees. The Hon'ble High Court explicitly held that entire advance received by the lawyer and law firms at the time it was received, did not bear any particular characterization for the purpose of treating the same as income of the recipient lawyer or tax firm or professional.

issue raised in Ground Nos. 1 to 7 of the assessee is clearly covered on all four corners in favour of the assessee and therefore, we dismiss the view taken by the AO and upheld by the ld. CIT(A) wherein the entire amount of advance has been treated as income of the assessee for A.Y 2009-10. Before we part with the adjudication of this issue, we may point out that we are in agreement with the contentions of the ld. DR that income earned by the assessee himself, by his own firm, by his HUF and by his wife, son and daughter, from investments of funds, so received by them out of advance amount in question, may be added to their respective taxable income. Finally, Ground Nos. 1 to 7 of the assessee are allowed.

whereas the AO has made disallowance in question u/r 8D(2)(iii) of the Rules. The case of the assessee is that he earned interest free dividend income of Rs. 18,02,899/- which has been claimed as exempt and the assessee has not made any suo motto disallowance. Therefore, the disallowance made by the AO by invoking Rule 8D(2)(iii) of the Rules cannot be held as unsustainable and not in accordance with the provisions of the Act.

expenditures and interest is involved in this process. There is direct and proximate nexus between the exempted income which the investments shall generate and the expenditures directly or indirectly involved in earning the said income. With these notings, the AO observed that hence, he is fully satisfied to invoke the provisions of section 14A r.w.r. 8D to workout disallowance of expenses. In the light of the operative part of the assessment order, as noted above, we decline to accept the contention of the ld. SR. counsel of the assessee that the AO has not recorded satisfaction as required to invoke section 14A of the Act, r.w.r 8D of the Rules.

“ 6 . 1 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee had shown dividend income of Rs. 18,02,899/- which has been claimed as exempt. The Assessing Officer after recording the satisfaction has invoked section 14A read with Rule 8D and has computed the disallowance under Clause (iii) at Rs.3,11,043/-.

On careful examination of the matter, I find that any income, whether exempt or not, can only be earned after incurring some expenditure. In the case of the appellant, such expenditure cannot be segregated in the accounts of the assessee and is clubbed with overall administrative/financial and other expenses of the business as a whole. If any income is exempt from tax because it is not included in the total income by virtue of section 10 of the Income-tax Act, 1961, section 14A of the Act prohibits allowance of any expenditure incurred in relation thereto. Income from deployment of funds in shares earned by way of dividend is not included in total income by virtue of the provisions contained in section 10(34) of the Act, whether the shares are held as stock-in-trade or as investment. As dividend income does not form part of total income under the Act, the provisions of section 14A are applicable. The allowance of expenditure in relation to dividend income is thus not admissible in computing the income of an assessee whether the shares are held as investment or they are held on trading account as stock- in-trade.

The provisions of section 14A, controls the computation of income under the provisions of the Act and has overriding effect over other provisions. Therefore, even if the expenditure is allowable under any other provision of the Act, disallowance is made because of the overriding effect of section 14A of the Act. The Legislature by using the expression "expenditure in relation to income which does not form part of the total income" in section 14A of the Act, in no way indicates that it does not encompass disallowance of expenditure incurred in relation to the income in the absence of actual receipt of income during the relevant previous year. On the contrary, the term "in relation to" is wide enough to include in its sweep expenditure both "for making or earning income" and "incurred wholly and exclusively for the purposes of business carried on by the assessee".

Considering the above, the impugned addition of Rs. 3,11,043/- made by the AO by applying rule 8D read with section 14A of the Act is confirmed. This ground of appeal is dismissed.”'