ACIT 11(3), MUMBAI V. MANSUKHLAL HIRALAL & CO., MUMBAI

ITA 1457/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84647 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 22-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI D. KARUNAKAR RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 1457 /MUM/2013 ASSESSMENT YEAR: 2007-08 ACIT 11(3) R.NO. 466, 4 TH FLOOR, AAYAKAR BHAVAN MUMBAI- 400 020 VS. MANSUKHLAL HIRALAL & CO 2 ND FLOOR, 8 TH SOORYA MAHAL, BURJORJI BHARUCHA MARG, FORT, MUMBAI 400020 PAN:AABFM 0666 R (APPELLANT) (RESPON DENT) ASSESSEE BY : SHRI ANUJ KISNADWALA REVENUE BY : SHRI AKHILENDRA YADAV DATE OF HEARING : 2 5 . 11 . 2014 DATE OF ORDER : 19 . 1 2 .2014 O R D E R PER AMIT SHUKLA, JM: THIS APPEAL PREFERRED BY THE REVENUE AGAINST ORDER DATED 29.10.2012, PASSED BY THE LD.CIT(A)-7, MUMBAI, FOR THE QUANTUM OF THE ASSESSMENT PASSED U/S 143(3) FOR THE A.Y. 2007-08 O N THE FOLLOWING GROUNDS:- ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AN I N LAW, WHETHER THE LD.CIT(A), MUMBAI WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.18,77,755/- U/S 40(A)(IA) MADE BY THE AO FOR NON DEDUCTION OF TDS OF PAYMENT OF INTEREST TO PARTIES. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AN IN LAW, WHETHER THE LD.CIT(A), MUMBAI WAS JUSTIFIED IN STATING THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX BECAUSE HE IS NOT A BAN K OR ANY OTHER SUCH PERSON TO DEDUCT THE TAX U/S 194A. ITA NO. 1457 /MUM/2013 MANSUKHLAL HIRALAL & CO ASSESSMENT YEAR: 2007-08 2 2. BRIEF FACTS OF THE CASE ARE THAT, ASSESSEE IS A PARTNERSHIP FIRM CARRYING ON THE PROFESSION OF SOLICITOR AND ADVOCAT ES. THE FIRM HAD RECEIVED ADVANCES FROM ITS CLIENTS WHICH HAVE BEEN DEPOSITED WITH THE BANKS IN FIXED DEPOSITS, ON WHICH INTEREST HAS BEEN EARNED. THE ASSESSING OFFICER NOTED THAT AS PER THE DETAILS FUR NISHED OF THE INTEREST RECEIVED AND INTEREST PAID, THE ASSESSSEE HAS NOT D EDUCTED TDS ON THE INTEREST PAID TO THE CLIENTS. THE ASSESSEES CONTEN TION WAS THAT NEITHER THE INTEREST INCOME NOR THE EXPENDITURE BELONGS TO THE ASSESSEE THEREFORE, IT WAS NOT LIABLE TO DEDUCT TDS. THE ASS ESSE HAD RECEIVED RS.35,12,212/- ON FIXED DEPOSIT BY WAY OF INTEREST AND FROM THAT IT HAS PAID INTEREST OF RS.18,99,595/- TO SOME OF ITS CLIE NTS. THE BALANCE NET INTEREST OF RS.16,12,617/- WAS CREDITED TO THE P/L ACCOUNT. THUS, AO HELD THAT ASSESSEE WAS ENTITLED TO SUCH AN INTEREST INCOME AND THEREFORE, HE WAS LIABLE TO DEDUCT TDS ON THE INTER EST PAYMENT. ACCORDINGLY HE INVOKED THE PROVISION OF U/S 40(A)(I A) FOR DISALLOWING THE INTEREST PAYMENT OF RS.18,77,755/-. 3. BEFORE THE LD.CIT(A), THE ASSESSEE SUBMITTED THA T OUT OF TOTAL AMOUNT OF INTEREST RECEIVED OF RS.35,12,212/-, THE ASSESSE HAS OFFERED TAX ON INTEREST AMOUNT OF RS.16,12,607/-. IT WAS FU RTHER SUBMITTED THAT ASSESSEE RENDERS PROFESSIONAL SERVICES TO VARIOUS C LIENTS AND DEPENDING UPON THE DISPUTES, SOME OF THE LITIGANTS MAKE DEPOS IT OF SMALLER AMOUNT WITH THE ASSESSEE. THE AMOUNT OF DEPOSITS WERE KEPT IN ESCROW ACCOUNT. IN CASES WHERE PAYMENTS OF INTEREST RECEI VED FOR AND ON BEHALF OF THE CLIENTS AND INTEREST HAVE BEEN PAID TO THE C LIENTS ON SUCH DEPOSITS THEY WERE CLAIMED AS EXPENDITURE AND WHENEVER SUCH PAYMENTS ARE NOT MADE THEY WERE OFFERED FOR TAXATION THOUGH ASSESSE WAS NOT REQUIRED TO DO SO AS THE AMOUNT OF DEPOSIT WAS HELD IN THE FIDU CIARY CAPACITY. THE ITA NO. 1457 /MUM/2013 MANSUKHLAL HIRALAL & CO ASSESSMENT YEAR: 2007-08 3 ASSESSE WAS NOT LIABLE TO DEDUCT TDS ON THE INTERES T PAID TO THE CLIENT U/S 194A. THEREFORE, NO DISALLOWANCE U/S 40(A)(IA) CAN BE MADE. FURTHER THE HONBLE BOMBAY HIGH COURT RULES ARE APPLICABLE IN THE CASE OF THE ASSESSEE WHICH ARTICULATES THE MANNER IN WHICH THE ASSESSE HAS TO MAINTAIN THE MONEY OF ITS CLIENTS ACCOUNT. AFTER CO NSIDERING THE ENTIRE SUBMISSIONS OF THE ASSESSE, THE LD.CIT(A) DELETED T HE ADDITION AFTER OBSERVING AND HOLDING AS UNDER:- I HAVE CONSIDERED THE AO'S ORDER AS WELL AS THE AP PELLANT AR'S SUBMISSION AS EXTRACTED ABOVE. I HAVE ALSO TAKEN NO TE OF THE DECISION CITED BY THE APPELLANT'S AR IN HIS SUBMISS ION IN 'SUPPORT OF HIS CONTENTION. THE ONLY ISSUE INVOLVED IN THIS APPEAL WAS NON DEDUCTION OF TAX ON PAYMENT OF INTEREST TO THE CLIE NTS BY THE SOLICITOR OF THE INTEREST WHICH THE APPELLANT'S FIR M KEPT IN ITS ACCOUNT ON THE INSTRUCTION OF THE HIGH COURT IN THE FIDUCIARY CAPACITY TO PERFORM THE DUTY ON TRUST AS ASSIGNED B Y THE HIGH COURT. EVEN, I ALSO FIND THAT UNDER THE ADVOCATE RU LES FORMULATED BY THE HIGH COURT, THIS NATURE OF WORK HAS BEEN ART ICULATED IN RULE NO. 10, 11,12, 13 & 15. HAVING TAKEN NOTE OF ALL THESE FACTS, I FIND THAT T HE APPELLANT WAS, NOWHERE LIABLE TO DEDUCT THE TAX WHILE MAKING SUCH PAYMENT OF INTEREST BECAUSE THE APPELLANT WAS NOT A BANK OR AN Y SUCH PERSON TO DEDUCTION THE TAX U/S. 194A UNDER CHAPTER XVIV(B ) OF THE ACT AS ENVISAGED FOR SUCH DISALLOWANCE U/S. 40(A)(IA) O F THE ACT. FURTHER TO THAT, THIS IS ALSO BROUGHT TO MY NOTICE BY THE APPELLANT'S AR THAT SUCH INTEREST WHICH WAS PAID BY THE SOLICITOR TO HIS DIFFERENT CLIENTS HAVING CONSEQUENTLY DISCLO SED SUCH INTEREST INCOME IN THEIR RETURN OF INCOME PAID THE TAXES THE REON. TO THIS EFFECT, THE APPELLANT'S AR HAS ALSO FILED PROOF FOR SUCH PAYMENT DURING THE APPELLATE PROCEEDINGS. TAKING NOTE OF AL L THESE FACTS AVAILABLE ON RECORD AND ALSO AFTER TAKING NOTE OF T HE DECISIONS RELIED UPON BY THE APPELLANT' AR, I AM OF THE CONSI DERED VIEW THAT THE AO WAS NOT JUSTIFIED IN HIS ACTION IN MAKING SU CH DISALLOWANCE. ACCORDINGLY, THE ADDITION MADE BY THE AO OF RS.18,77,755/- IS DELETED. THUS, APPELLANT'S THIS GROUND OF APPEAL IS ALLOWED. ITA NO. 1457 /MUM/2013 MANSUKHLAL HIRALAL & CO ASSESSMENT YEAR: 2007-08 4 4. BEFORE US, THE LD. DR STRONGLY RELIED UPON THE O RDER OF THE AO AND SUBMITTED THAT THE ASSESSEE WAS RECEIVING INTEREST AND PAYING THE INTEREST TO ITS CLIENT. WHEN THE BALANCE INTEREST H AS BEEN CREDITED TO THE P&L ACCOUNT, THEN ON THE INTEREST PAYMENT TO THE CL IENTS, THE ASSESSE WAS LIABLE TO DEDUCT TDS U/S 194A. THUS DISALLOWANC E U/S 40(A)(IA) WAS RIGHTLY MADE BY THE AO. 5. ON THE OTHER HAND LEARNED COUNSEL SUBMITTED THAT AS PER THE HONBLE BOMBAY HIGH COURT RULES 10, 11, 12 AND 13 T HE ASSESSE WAS REQUIRED TO KEEP AND MAINTAIN THE ACCOUNTS ON BEHAL F OF THE CLIENT AND HOW SUCH AN AMOUNT IS TO BE ACCOUNTED FOR. HE SUBMI TTED THAT THE ASSESSE HAS RECEIVED THE DEPOSITS FROM THE CLIENTS WHICH HAVE BEEN KEPT IN THE ESCROW ACCOUNT AND THE BANK WAS REQUESTED TO KEEP IT IN THE FORM OF FIXED DEPOSITS. THE INTEREST RECEIVED BY THE ASS ESSE WAS IN THE FIDUCIARY CAPACITY I.E., AS THE TRUST OF THE CLIEN T. THE ASSESSE WAS NOT LIABLE TO DEDUCT TDS WHILE MAKING SUCH PAYMENT TO T HE CLIENTS BECAUSE ASSESSE IS NOT A BANK OR ANY SUCH PERSON LIABLE TO DEDUCT TAX U/S 194A, THEREFORE, THE FINDING OF THE LD.CIT(A) SHOULD BE U PHELD. IN SUPPORT OF HIS CONTENTION HE ALSO RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TANUBAI D. DESAL REPORTED IN 84 ITR 713 . 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS. THE ASSESSE IS A FIRM OF SOLICITORS AND ADVOCATES. IT HAS KEPT THE MONEY OF ITS CLIENTS ON THE INSTRUCTION OF THE HIGH COURT IN FIDUCIARY CAPACITY TO PERFORM THE DUTY ON TRUST AS ASSIGNED BY THE HIGH COURT. UNDER THE RULES FORMULA TED BY THE HONBLE BOMBAY HIGH COURT, THE ASSESSE WAS REQUIRED TO MAIN TAIN SEPARATE BOOKS OF ACCOUNT FOR THE MONEY RECEIVED AND PAID BY ITS CLIENTS AND THE MONEY WHICH IS RECEIVED AND PAID ON ITS OWN ACCOUNT . THE MANNER IN ITA NO. 1457 /MUM/2013 MANSUKHLAL HIRALAL & CO ASSESSMENT YEAR: 2007-08 5 WHICH THE MONEYS ARE TO BE KEPT AND PAID TO THE CLI ENTS HAVE BEEN PROVIDED IN RULES 10 TO 13 OF THE BOMBAY HIGH COURT RULES. IF THE ASSESSE HAS PAID THE INTEREST TO ITS CLIENT ON THEI R MONEY, THEN DEFINITELY NO TDS IS LIABLE TO DEDUCTED U/S 194A, AS IT IS NOT THE INCOME OF THE ASSESSEE. THUS THE FINDING RECORDED BY THE LD.CIT(A ) AS ABOVE IS FACTUALLY AND LEGALLY CORRECT. IN THE CASE OF CIT VS. TANUBAI D. DESAI (SUPRA), ALSO ON SIMILAR NATURE OF TRANSACTIONS, THE HONBL E HIGH COURT ON SUCH TRANSACTIONS HAS OBSERVED AND HELD AS UNDER:- A MERE READING OF THESE RULES SHOWS THAT A SOLICIT OR OF THIS COURT IS OBLIGED TO KEEP A SEPARATE BANKING ACCOUNT IN RE SPECT OF ALL THE MONEYS RECEIVED BY HIM FROM OR ON BEHALF OF HIS CLI ENTS. HE CAN APPROPRIATE MONEYS OUT OF THE SAID ACCOUNT TO HIMSE LF PERSONALLY IN THE LIMITED CLASS OF CASES PROVIDED FOR BY THESE RULES. THESE MONEYS ARE TO BE SEGREGATED AND KEPT BY A SOLICITOR IN A SEPARATE BANK ACCOUNT HI THE TITLE OF WHICH THE WORD 'CLIENT ' MUST APPEAR AND HE CAN WITHDRAW AND APPROPRIATE IT TO HIMSELF O NLY IN SO FAR AS THE RULES PERMIT HIM TO DO SO. IN THIS CONNECTIO N IT MUST ALSO BE BORNE IN MIND THAT A SOLICITOR WHO IS A CREATURE OF THE RULES MADE BY THIS HIGH COURT IS SUBJECT TO THE INHERENT AND DISCIPLINARY JURISDICTION OF THIS COURT AND ANY BRE ACH COMMITTED BY HIM OF THESE RULES IS ' CAPABLE OF ENTAILING WHAT W OULD BE A DISASTROUS CONSEQUENCE TO HIM OF HIS NAME BEING ST RUCK OFF THE ROLL OF SOLICITORS MAINTAINED BY THIS COURT. THEREF ORE, NOT ONLY DO THESE RULES PROVIDE FOR THE SEGREGATION AND HOLDING IN A WATER- TIGHT COMPARTMENT OF THE AMOUNTS RECEIVED BY A SOLI CITOR FROM OR, ON BEHALF OF HIS CLIENTS, BUT THERE ALSO IS ENOUGH SANCTION PROVIDED BY THE RULES FOR ENFORCING THAT WHAT THESE RULES PROVIDE IS COMPLIED WITH.. IN VIEW OF THE PROVISIONS OF THE SAID RULES OF THIS HIGH COURT, THE POSITION OF A SOLICITOR VIS-A- VIS, THE MONEYS RECEIVED BY HIM FROM OR ON BEHALF OF HIS CLIENTS IS THAT OF A QUASI- TRUST AND HE HOLDS SUCH MONEYS IN A FIDUCIARY CAPAC ITY. THUS WE HOLD THAT THE DISALLOWANCE OF RS.18,77,755/ - MADE U/S 40(A)(IA) BY THE AO HAS RIGHTLY BEEN DELETED BY THE LD.CIT(A). ACCORDINGLY THE GROUND RAISED BY THE REVENUE IS DIS MISSED. ITA NO. 1457 /MUM/2013 MANSUKHLAL HIRALAL & CO ASSESSMENT YEAR: 2007-08 6 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF DECEMBER, 2014. SD/- SD/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 19.12.2014 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR B BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.