Income - Compensation and interest on clients income
November, 16th 2007
Govind Mahato vs Assistant/DCIT Citation 108 ITD 506
Income - Compensation and interest on clients income The assessee was a practicing advocate mainly practicing in land acquisition matters. His clients were awarded compensation on account of compulsory acquisition of their lands. As per interim directions of the court he deposited these amounts in bank account. The compensation amount or interest earned thereon was not his income. The said amount could not be assessed in his hands.
Govind Mahato vs Assistant/DCIT
IT Appeal Nos. 445 to 457/P of 2002 Assessment Years 1986-87, 1989-90 to 1993-94 and 1995-96
N.L. Dash, Judicial Member and M.V. Nayar, Accountant Member
10 August 2006
A.K. Rastogi, Rakesh Kumar, A.K. Agarwal and A.K. Mishra for the Appellant K.K. Jhunjhunwala for the Respondent
1. These thirteen appeals are by the two assessees against the same orders of the ld. CIT(A), Ranchi dated 18-9-2002 and 19-9-2002 for ITA Nos. 445-450/P/2002 and dated 30-9-2002, 19-9-2002 and 17-9-2002 respectively for ITA Nos. 451-457/P/2002 for the assessment years 1986-87, 1989-90 to 1993-94 and 1995-96.
2. In these cases both the assessees are advocates practising mainly in land acquisition matter. The department has assessed the assessees' professional income in some of the years by adopting certain percentage of additional/enhanced compensation. In some of the years, the department has treated the entire additional/enhanced compensation as income of the assessees after giving benefit of outgoing viz. payment to awardees, expenditure incurred on litigation. Further, interest on the additional/enhanced compensation has been assessed as income of the assessees. The addition made by the Assessing Officer by adopting certain percentage of additional/enhanced compensation as professional income of the assessees has been enhanced by Ld. CIT (Appeals) and the Ld. CIT (Appeals) has affirmed taxation of additional/enhanced compensation, disallowance of expenditure and taxation of interest in the hands of the assessees. A year-wise chart showing income estimated by the Assessing Officer and upheld by Ld. CIT (Appeals) in both the cases is summarized hereunder :-
Professional Income estimated by Assessing Officer @ 10 per cent of additional/ enhanced compensation in both the cases
Additional/enhanced compensation and interest accrued on SB/FD assessed @ 50 per cent each in case of appellants by Assessing Officer and CIT(A)
Remarks (Disputed before I.T.A.T.)
Disallowance of expense @ 50 per cent each in case of appellants by Assessing Officer and C.I.T. (Appeals)
Remarks (disputed before I.T.A.T.)
CIT (Appeals) affirmed addition of Rs. 7,85,643 @ 50 per cent in both the cases.
CIT (Appeals) affirmed addition of Rs 1,47,320 @ 50 per cent in both the cases.
Rs. 7,05,445 (G.Mahto) 52,045 (B.N. Dey)
CIT (Appeals) affirmed addition of Rs. 2,60,222.50 @ 50 per cent in both the cases.
CIT(Appeals) affirmed disallow- ance of Rs. 11,92,393 @ 50 per cent in both the cases.
1995-96 (Only in the case of B.N. Dey)
Assessing Officer - Rs. 2,25,368 CIT(A) - Rs.2,25,368 only interest and no addl. compensation.
CIT (Appeals) affirmed addition of Rs. 2,25,368 in case of B.N. Dey.
3. The assessee's have contested initiation of proceeding under section 147/148 in assessment years 1986-87 and 1992-93 in both the cases. The Ld. CIT (Appeals) has affirmed the initiation of proceeding under section 147/148. The Ld. Counsel for the appellant has not pressed the ground relating to initiation of proceedings under section 147/148 in both the cases in both the years. A written submission (page-A to I) and Paper Book containing of 283 pages was filed on 7-8-2006 and gist of case laws have been submitted on 8-8-2006. The assessee's counsel has argued the case on merits and has submitted that the taxation of additional/enhanced compensation, interest earned thereon (Fixed Deposit/Saving Bank Account) and disallowance of expenditure by the Assessing Officer and the Ld. CIT (Appeals) is wholly unjustified as the same is contrary to the provisions of Act. According to ld. A.R., the additional/enhanced compensation has been awarded by designated Court to the land owners in lieu of acquisition of their land by Government/Semi-Government/PSUs and therefore, the same cannot be the income of the appellants who are the advocates appointed by the land owners to defend them in land acquisition proceedings. The expenditure incurred in carrying on the litigation is also not the expenditure of the assessees. The deposit in Bank Account and fixed deposit are out of the funds of additional/enhanced compensation, and the interest income on such deposit is the income of land owners (awardees) and therefore, the same cannot be taxed in the hands of appellants. According to Ld. Counsel, the issue of assessment of additional/enhanced compensation and interest thereon has been decided way back by order of Calcutta Bench (Camp: Jamshedpur) in the case of Tribhuvan Mahato, Advocate v. Dy. CIT, Ranchi vide order dated 19-11-2001 (Pages-72 to 76 of Paper Book) wherein the Tribunal has held that the additional/enhanced compensation and interest accrued thereon cannot be the income of the advocate concerned. The Tribunal in the said case has also noticed the allegation put forth by revenue that there has been a scandal in the land acquisition cases. The advocates dealing with those cases misappropriated Government funds. The money representing the enhanced amount of compensation were deposited in various banks in the names of those advocates and it was also alleged that the advocates deposited huge amount of money in their individual names as well as in the names of their family members. Same allegation has been levelled against the present assessees in the order of assessment and the appellate order. The Ld. Counsel submitted that the amounts are being deposited in their names either in bank account or fixed deposit as per order of the designated Court or the Hon'ble High Court as the case may be and it remained till the litigation is finalized. Our attention was drawn to the following observation given by the Hon'ble Patna High Court, Ranchi Bench in this regard, in the case of CIT v. B.N. Dey [CWJC No. 1105 to 1108 of 1995 (R)] (copy placed at pages-8 to 23) :-
"A large area of land was acquired by the Government of Bihar for the benefit of public sector undertakings or the Government of India or for its own use under the Land Acquisition Act. The amount of compensation as determined by the Collector under that Act was paid to the land owners. The land owners objected to the quantum of compensation which gave rise to proceedings under section 18 of the Land Acquisition Act for enhancement of compensation. The subordinate Judge-cum-Land Acquisition Judge, Hazaribagh awarded higher compensation. The State of Bihar preferred appeals before Ranchi Bench of this Court. Pursuant to interim order passed by this Court the enhanced amount of compensation was deposited in different bank against bank guarantees in the accounts of the advocates who had represented the land owners."
4. The Ld. A/R submitted that the additional/enhanced compensation has always been taxed by the department in the hands of owner of the land as per section 45(5) read with section 155(16) and the same cannot be held as income of the appellants who are advocates and are rendering professional services. It was submitted that the additional/enhanced compensation, interest accrued thereon has always been subject-matter taxation in the hands of land owner and dispute arises regarding year of taxability of such enhanced amount and interest earned thereon and not in the hands in which it is to be assessed. Our attention was drawn to the decision of CIT v. Hindustan Housing and Land Development Trust Ltd.  161 ITR 5241(SC), in this regard. The charging sections 4 and 5 do not support the stand of the revenue insofar as taxation of additional/enhanced compensation, interest accrued thereon and disallowance of expense in the hands of the appellants. The Ld. A/R has submitted that the charge is attracted at the point when the income is earned and taxability does not depend upon the destination or manner of utilization of income. Further, it was submitted that section 5 defines the scope of the total income and sub-clause (b) provides that income which accrues or arises to the assessee can be brought to tax in the hands of the assessee. According to the Ld. A/R, in the present case, the admitted fact on record is that income has been earned by the land owners by way of decree of additional/enhanced compensation in lieu of acquisition of their land. Since the award was disputed by the Government, the awarded sum was allowed to be withdrawn with condition/stipulation contained in the Court's order. The interest was earned on the deposit of award money and the expenditure was incurred in process of litigation. Since the income did not belong to the appellants, all incidental receipt/expenditure cannot be held to be belonging to the appellants. The Ld. A/R has placed reliance on the following judicial decisions which according to him were relied upon by the Tribunal in their order dated 19-11-2001 in the case of Tribhuvan Mahto (supra), CIT v. Tanubai D. Desai  84 ITR 713 (Bom.), Manilal Kher Ambalal and Co. v. A.G. Lulla, ITO  176 ITR 2531. Yet another decision of Calcutta High Court in the case of CIT v. Sandarson and Morgans  75 ITR 433 was referred to and on the strength of these decisions and the order of ITAT, Kolkata Bench (Camp-Jamshedpur), the Ld. A/R prayed that the addition on account of additional/enhanced compensation, interest and disallowance of expense sustained by the Ld. CIT (Appeals) may kindly be ordered to be deleted. The Ld. A/R submitted that the CIT (Appeals) has arbitrarily added Rs. 25,00,000 (one half each) in assessment year 1992-93 in the case of both the appellants on account of fee received from Sri Ram Dular Gupta [Page-9 of order of CIT (Appeals) in the case of B.N. Dey]. It was submitted that the amount paid by him represents decretal amount of award granted by the designated Court in few cases which were jointly conducted with Mr. Dular Gupta, Advocate. He submitted that the sum was not paid as professional fee and therefore it cannot form part of professional income of the appellants. The nature of this receipt is similar to that of additional/enhanced compensation. Our attention was drawn to the reply of Mr. Gupta filed in course of his assessment proceeding before the Assessing Officer (placed at pages-107 to 109 of Paper Book) wherein Sri Gupta has intimated that Rs. 25,00,000 has been paid to Mr. B.N. Dey and Govind Junglee and Tribhuvan Mahto for keeping the same in Fixed Deposits with condition of refund on adverse decision by higher Court. The A/R submitted that in view of claim of Mr. R.D. Gupta, Advocate Rs. 25,00,000 paid by him cannot assume the character of professional income so as to warrant its addition in the hands of both the appellants. According to Ld. A/R, CIT (Appeals) was therefore not justified in resorting to enhancement and making addition of Rs. 25,00,000 (one half each) that too without giving any notice as required under section 251(2).
5. The Ld. AR has filed paper book containing 283 pages, the details of which are as under :-
Description of the Documents
Report of Dy. Commissioner, Hazaribagh dated 19-10-1995
Order of Hon'ble Judge, Land Acquisition dated 24-9-1993 on the issue of transfer of additional/enhanced compensation to the account of advocate concerned
Letter of Under Secretary, Govt. of Bihar addressed to Dy. Commissioner, Hazaribagh enclosing opinion of Additional Advocate General No. II.
Copy of order of the Hon'ble Patna High Court, Ranchi Bench in CWJC Nos. 1105 to 1108 of 1995 (R) dated 3-5-1996.
Report of valuation cell dated 16-11-1998 valuing house of Smt. Rani Dey, w/o B.N. Dey at Rs. 7,29,000 against allegation of Rs. 20,00,000 by DDI in his report dated 25-11-1993.
Copy of order of the Hon'ble Patna High Court, Ranchi Bench in Cr. WJC No. 180 of 1997 (R) dated 20-4-1998.
Copy of judgment of Apex Court reported in 161 ITR Page-524 in the case of CIT v. Hindustan Housing and Land Development Trust Ltd.
Copy of judgment of Delhi High Court reported in 194 ITR, Page-32 in the case of L.R. Gupta v. Union of India and Others.
Copy of judgment of Rajasthan High Court reported in 166 ITR, Page-377 in the case of CIT v. S. Sajit Singh and Sons.
Order of Hon'ble Tribunal, Kolkata Bench (Camp-Jamshedpur) presided over by Hon'ble Vice-President in the case of Tribhuvan Mahto, Advocate dated 19-11-2001.
Copy of judgment of Bombay High Court reported in 84 ITR, Page-713 in the case of CIT v. Tanubai D. Desai.
Copy of judgment of Bombay High Court reported in 176 ITR, Page-253 in the case of Manilal Kher Ambalal and Co. v. A.G. Lulla.
Copy of judgment of Calcutta High Court reported in 75 ITR, Page-433 in the case of CIT v. Sandarsons and Morgans.
Copy of CIT (Appeals) order dated 29-11-1996 in the case of B.N. Dey for assessment year 1991-92 to 1993-94.
Copy (sample) of agreement between the advocates and the client at the time of acceptance of briefcase.
Petition filed before Assessing Officer by Ram Dular Gupta, Advocate on 30-8-1994 (in relation to Rs. 25,00,000 assessment year 1992-93).
Brief Note on facts of each assessment year in the case of B.N. Dey along with evidences :
(a) Assessment year 1986-87 - Brief note, Bank Account, demonstrating additional award of 15.71 lakhs, payment to awardee Rs. 3,00,000 and Rs. 2,00,000, receipts from awardee, banks certificate of F.D. Rs. 9,30,000 and written submission before CIT (Appeals).
(b) Assessment year 1989-90 - Brief note, Bank Account showing debits on account of payment to awardee, receipts from awardee, copy of awards by which it is proved that Rs. 1,85,410 was received in assessment year 1990-91 and not in this year and written submission before CIT (Appeals).
(c) Assessment year 1990-91 - Brief note, letter to bank asking for bank statement (deposit of 1,85,410), three letters written by L.A. Judge to bank (award of Rs. 5,20,445), receipt from awardees and written submissionbefore C.I.T. (Appeals).
(d) Assessment year 1991-92 - Brief note, details of payment to awardee, details of expense of Rs. 22.09 lakhs, certificate of bank in respect of F.D. of Rs. 26 plus 2 lakhs, details of amount paid to associate advocate Rs. 5.11 lakhs and copy of written submission filed before CIT (Appeals).
(e) Assessment year 1992-93 - Brief note, details of payment to awardee, details of expense of Rs. 22.51 lakhs, details of amount paid to advocates Rs. 7.41 lakhs and to Pairvikars Rs. 61,000, certificate of bank regarding F.D. of Rs. 3.43 crores and Rs. 23.25 crores under bank guarantee, Certificate of F.D. of Rs. 9 lakhs, Rs. 2 lakhs, Rs. 4 lakhs, Rs. 4 lakhs and written submission before CIT (Appeals).
(f) Assessment year 1993-94 - Brief note, details of payment to awardee Rs. 26.85 lakhs, details of expense of Rs. 14.41 lakhs, details of payment to advocates Rs. 5.67 lakhs, bank guarantee in respect of award of Rs. 1.12 crores in favour of Tribhuvan Mahto and its renewal, certificate of bank regarding release of Rs. 1.12 crores in favour of Tribhuvan Mahto against bank guarantee and also stating that no amount (Rs. 1.22 crores) has been received or deposited for and on behalf of B.N. Dey and Govind Mahto from Sub-Judge, Hazaribagh, letter by bank to Assessing Officer, Hazaribagh regarding deposit of Rs. 1.12 crores by Tribhuvan Mahto and written submission filed before CIT (Appeals)
(g) Assessment year 1995-96 - Brief note, certificate from bank dated 29-1-2004 confirming the fact of payment of interest to the villagers (land owners/awardee's) from the bank accounts of B.N. Dey.
Brief Note on facts of each Assessment Year in the case- of Govind Mahto (evidence are common and therefore not enclosed) :
(h) Assessment year 1986-87 - Brief note and written submission before CIT (Appeals).
(i) Assessment year 1989-90 - Brief note.
(j) Assessment year 1990-91 - Brief note.
(k) *Assessment year 1991-92 - Brief note and written submission before CIT (Appeals).
(l) *Assessment year 1992-93 - Brief note and written submission before CIT (Appeals).
(m) Assessment year 1993-94 - Brief note and written submission before CIT (Appeals).
*Common in both the cases and therefore not enclosed (already enclosed with 18(f).
Certified that the documents at Sl. 2 to 8, 11 to 13, 15 to 17, 18 and 19 are part of record of authorities below and that at Sl. No. 1, 9 and 10, 14 are submission and copy of judgment of Hon'ble Courts.
6. On the other hand, the Ld. Standing Counsel of the Department, Sri K.K. Jhunjhunwala supported the action of the CIT (Appeals). He submitted that the Assessing Officer as well as Ld. CIT (Appeals) have passed well reasoned order for making/sustaining the additions. According to the Ld. Standing Counsel, the money has been kept in the Bank Account/Fixed Deposit standing in the name of the advocates concerned and therefore, the Assessing Officer and Ld. CIT (Appeals) was perfectly justified in treating the additional/enhanced compensation and interest accrued thereon as income of the appellants. He submitted that the Ld. CIT (Appeals) has allowed necessary deductions as and when payment has been made to the awardees and also where the amounts have been released under Bank Guarantee to the satisfaction of Joint Registrar, High Court. Similarly, CIT (Appeals) has allowed only 50 per cent of the expenditure under the head 'Court Fee' and other expense. According to Ld. Standing Counsel, the order of CIT (Appeals) in the case of B.N. Dey passed on 17-9-2002 for assessment years 1991-92 to 1993-94 is quite exhaustive and the Ld. CIT (Appeals) after weighing all the pros and cons have come to a finding that the additional/enhanced compensation, interest earned thereon is the income of the appellants and has also affirmed disallowance of inadmissible expense. According to Ld. Standing Counsel, the order of CIT (Appeals) is to be upheld in toto. On addition of Rs. 25,00,000 in assessment year 1992-93 by way of fees from R.D. Gupta, Advocate, the Ld. D/R submitted that the CIT (Appeals) has assigned proper reason and therefore, the addition made @ 50 per cent each in the hands of appellants are to be sustained.
7. Countering the arguments of Ld. Standing Counsel, the A/R of the appellant stated that there was no submission before CIT (Appeals) on charging section and scope of total income contained in sections 4 and 5 and therefore the CIT (Appeals) had no occasion to examine the case in the light of these two sections. Further, the CIT (Appeals) has not considered the decision of Calcutta Bench of ITAT (Camp-Jamshedpur) in the case of Tribhuvan Mahto (supra) in right perspective. According to Ld. A/R, deposit in Bank Accounts/Fixed Deposits are secondary and are appropriation/utilization of income as per Court's directive in the hands of appellants. The taxes are to be imposed on earning of income from a particular source. In the present case, the source is the land which are owned by land owners (and not by the appellants) to whom income in form of additional/enhanced compensation has been awarded by the designated Court and therefore the CIT (Appeals) was not justified in confirming the addition on account of a additional/enhanced compensation, interest earned thereon and disallowance of expenditure.
8. We have considered the rival submissions and have gone through the orders of Assessing Officer, CIT (Appeals) and the decision of Hon'ble Calcutta Bench of ITAT (Jamshedpur Camp) and we find that the facts and circumstances of the case in hand are identical to the facts in hand before the Hon'ble Calcutta Bench of ITAT (Jamshedpur Camp) which was presided over by the Vice-President (K.Z.) and the Co-ordinate Bench in the said judgment has held as under :-
"We have to accept the contention of the assessee that the amount in question has been deposited with the Bank in the name of the assessee as a custodian. It is not the assessee's amount and it is a settled principle that if the amount of the client is kept in the custody of the advocate in his professional capacity, the amount cannot be said to be the money or income of the assessee and to this proposition of law, reference can be made to the decision of CIT v. Tarun Bhai D. Desai 198 (wrong citation correct is 84) ITR page 713 and Mani Lal Ambalal and Co. v. A.G. Lulla 176 ITR, Page-253".
9. We also find that the land owners have not alienated or assigned their rights in favour of the appellants either in respect of the land on which additional/enhanced compensation has been awarded or in respect of the additional/enhanced compensation deposited in bank account/F.D. standing in the name of the appellants as per Court's order. It is settled that income can be taxed in the hands of transferee only if the transferor alienates or assigns the source of his income. None of the condition precedent for such inclusion is present in the case in hand before us. The income accruing or arising to an assessee is to be taxed in the hands of such assessee and not in the hands of other person. The Income-tax Act postulates clubbing provisions which has not been applied by the department in the present case. It is not the case of Revenue that the land owners are benamidars of the appellant advocates. It is also not the case of the Revenue that the land in question belonged to the appellants or have been held by them in some benami name. The Assessing Officer as well as CIT (Appeals) has completely failed to understand the canons of taxation and the provisions of Land Acquisition Act. Instead of taxing the land owners to whom additional/enhanced compensation has been awarded, assessment has been made in the hands of the advocates concerned who are rendering professional services only in the process of litigation. In the matrix of admitted facts on record which have not been disputed by the department in absence of any alienation or assignment, the additional/enhanced compensation, interest accrued thereon and expenditure incurred in process of litigation cannot be subject-matter of addition/disallowance in the hands of appellants. The order of the Calcutta Bench of ITAT (Jamshedpur Camp) (supra) applies with full force in the case of the appellants. It has been held in Union of India v. Paras Laminates  186 ITR 722 (SC) that a Bench of co-ordinate jurisdiction should not disregard the decision of another co-ordinate Bench. This ratio has recently been approved by Hon'ble Delhi High Court in the case of Thirani Chemicals Ltd. v. Dy. CIT  153 Taxman 45. Respectfully following the order of Hon'ble Calcutta Bench of ITAT (Jamshedpur Camp) we hold that the additions sustained by the CIT (Appeals) (indicated in the chart above) in respect of additional/enhanced compensation, interest accrued thereon and disallowance of expense are fit to be deleted. However, it is open to the department to initiate appropriate proceeding in the case of land owners for bringing to tax the amount of additional/enhanced compensation, interest accrued thereon and allowance or otherwise of expenditure incurred in process of litigation by them. As far as addition of Rs. 25,00,000 (50 per cent each) by CIT (Appeals) we find that Mr. Gupta has never claimed that professional fee was paid to the appellants and therefore, the addition of Rs. 25,00,000 is also ordered to be deleted.
10. On an overall consideration of the factual aspect it was observed that the department has proceeded in a wrong line particularly when the advocates are the authorized representatives of the assessees and not the legal heirs. In such circumstances the revenue should have issued notices in the name of the assessees through the advocates or should have collected the details from the advocates and proceeded against the assessees through the ARs. Instead of doing so the department has proceeded against the advocates who are neither the owner of the land nor lawful recipient of the compensation award. They are simply acting as custodian as per the orders of the Land Acquisition Compensation Authority or the Hon'ble Court as the case may be. Whatever may be their internal arrangement in between the original owners of land and the advocates and the present assessees, the department has nothing to do with that if at all the allegation of the revenue have been assumed to be true regarding the mis-appropriation of the award by the advocates from the original owners i.e., matter confined to the advocates and their clients. The state is not supposed to rub the rubber. With this considered view along with factual metrix and the order of the coordinating Bench as discussed above, we could not persuade ourselves to agree with the revenue for the levy of tax in these cases as the concerned advocates by treating them as the assessees for the purpose of the compensation amount. Hence, the appeals of both the assessees are allowed in full as indicated above. The Assessing Officer is directed to modify the order accordingly and give consequential relief on other issues like interest etc. which are consequential.
11. In the result, all the above thirteen appeals of both the assessees stands allowed.