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Commissioner Of Income Tax Delhi-21 Vs. Om Prakash Khaitan
July, 30th 2015
                                            Date of Decision: 21st July, 2015

+                         ITA 416/2015

       COMMISSIONER OF INCOME TAX DELHI-21           ..... Appellant
                   Through: Ms. Suruchi Aggarwal, Senior Standing
                   counsel with Ms. Lakshmi Gurung, Advocate.


       OM PRAKASH KHAITAN                                     ..... Respondent



CM No. 12085/2015 (for condonation of delay in re-filing the appeal)

1. For the reasons stated in the application, the delay in re-filing the appeal

is condoned.

2. The application is disposed of.

ITA No. 416/2015

3. The challenge in this appeal under Section 260-A of the Income Tax Act,

1961 (,,Act) is to an order dated 30th May 2014 passed by the Income Tax

ITA No.416 of 2015                                                Page 1 of 6
Appellate Tribunal (,,ITAT) in ITA No. 360/Del/2013 for the Assessment

Year (,,AY) 2009-10.

4. The Assessee is proprietor of M/s. O.P. Khaitan and Company, a firm of

Solicitors and Advocates. The Assessee follows the cash system of

accounting since inception and this has been consistently accepted by the

Department since 1990. The Assessee receives 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 are kept in a separate ledger account in the name of the client where

all the expenses are debited from time to time. At the end of the year, credit

balances in the accounts, where the matters were complicated or settled, are

transferred to the Profit & Loss Account. Where the cases are pending, the

credit balances are carried forward to the next year as sundry creditors.

5. For the year under consideration, the Assessing Officer (,,AO) made an

addition of Rs.10,78,01,478 representing balances outstanding on 31 st

October 2011 out of the total credit balance of Rs.20,79,97,695 as on 31 st

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. Income had to be taxed in the year in which it was

ITA No.416 of 2015                                                Page 2 of 6
received. Since the above amount had not been returned or shown as

professional fee, it had to be taxed during the current AY. Further, as

regards the amount earned from the investments made by the Assessee in

mutual funds and shares, the AO concluded that there was a "direct and

proximate nexus between the exempted income and the expenditures

directly or indirectly involved in earning the said income" and therefore by

invoking Section 14 A of the Act read with Rule 8D of the Income Tax

Rules (,,Rules) he worked out a disallowance of Rs. 8, 92,738.

6. The Assessees appeal was allowed by the Commissioner of Income Tax

(Appeals) [CIT (A)] and the above addition of Rs.10,78,01,478 was deleted.

As regards the disallowance under Section 14 A of the Act read with Rule

8D of the Rules, the CIT (A) restricted it to Rs. 94,721 on the ground that

no direct or indirect expenses were incurred for earning the exempt income.

7. In the consequent appeal by the Department, the ITAT noticed inter alia

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 had been brought

on record to persuade the ITAT to differ from the view taken by the ITAT

in the Assessees own case for those years. The ITAT also followed its

ITA No.416 of 2015                                               Page 3 of 6
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."

8. Learned counsel for the Department has not questioned the above

exposition of the law. 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

ITA No.416 of 2015                                             Page 4 of 6
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.

9. As regards the second issue concerning the disallowance under Section

14A of the Act, the ITAT noticed the decision of its co-ordinate Bench in

Justice Sam P. Bharucha v. Addl, Commissioner of Income Tax, Mumbai 25 381 (Mum)and observed that in the present case, the AO had

not recorded any finding that any expenditure incurred by the Assessee was

attributable for earning the exempt income. In order to disallow the

expenditure there must be a nexus between the expenditure incurred and the

income not forming part of the total income. Consequently, the

disallowance under Section 14A of the Act was rightly deleted by the CIT

(A) and affirmed by the ITAT.

ITA No.416 of 2015                                                 Page 5 of 6
10. The Court finds that no substantial question of law arises for

determination by the Court from the impugned order of the ITAT.

11. The appeal is dismissed.

                                                   S. MURALIDHAR, J

                                                   VIBHU BAKHRU, J
JULY 21, 2015/dn

ITA No.416 of 2015                                           Page 6 of 6
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