Whether when assessee receives arrears of his professional fees after getting elevated as HC Judge, such receipt cannot be taxed for the lack of legislative provision - YES: ITAT

THE issues before the Bench are Whether when the assessee receives arrears of his professional fees after getting elevated as a HC Judge, such receipt cannot be taxed for the lack of legislative provision and Whether assessee is entitled to allowance for expenses incurred to recover the outstanding and book-keeping costs. And the verdict partly goes in favour of the assessee.

Facts of the case

The assessee is a lawyer by profession, before his elevation as a Judge of the Delhi High Court. During the year under consideration, he derived income from salary, profession and income from other sources, maintaining his books of account on cash basis. He claimed an amount of Rs

67,10,362/- representing receipt of arrears of his professional fees for professional services rendered in earlier years before his elevation as Judge of the High Court, as exempt from tax. As an abundant caution, though the assessee deposited advance tax in respect thereof. The AO was of the view that by claiming the exemption, the assessee had neither offered the amount of Rs 67,10,362/- for taxation in the year in which the professional activity was carried out by him, nor in the year of receipt, nor in any other year, and so, allowing the claim of exemption would result in the receipt never being taxed. The AO stated that however, such receipts were chargeable to tax u/s 176 (4). The CIT (A) deleted the addition made by the AO.

On Appeal before the Tribunal the DR submitted that CIT (A) had overlooked the fact that in ‘Nalinikant Ambalal Mody’ the SC had decided the appeal in favour of the assessee as per the I.T Act of 1922, which did not contain any specific provision for the taxation of such receipts, whereas in the Act of 1961, there did exist such a specific provision in the shape of Section 176(4), whereunder, such receipts were specifically taxable. The AR submitted that the CIT (A) had allowed the claim of the assessee by passing a speaking elaborate well-reasoned order on the issue at hand, which order required no interference.

Having heard the parties, the Tribunal held that,

++ even in spite of introduction of Section 176 (4), the receipts in question cannot be treated as the assessee’s income falling under the head “Profits and Gains of Business, Profession or Vocation”, even though they were, being the fruits of the assessee’s professional activities, the profits and gains of a profession, under the very same head of “Profits and Gains of Business, Profession or Vocation.” It is due to the absence of any legislative provision that these receipts cannot be treated as business income falling under the head “Profits and Gains of Business, Profession or Vocation” carried on by the assessee during the relevant year. They cannot be included in the total income of the assessee, even though the amount was received by the assessee before the discontinuance of his profession due to his elevation as High Court Judge;

++ on the issue of the CIT (A) deleting the disallowance of Rs 75,523/- made by the AO on account of expenses claimed by the assessee, since the gross receipts are not liable to tax, the expenditure incurred for recovery of outstanding fees and for maintaining books of account cannot be disallowed and no such disallowance was called for;

++ on the issue of the assessee sought credit of TDS of Rs 53,351/-, which was inadvertently omitted from being claimed in the return of income, it is seen that undisputedly, it was an inadvertent error which led to the omission of the claim of TDS in the return of income. We find that the omission was on account of an inadvertent error. However, this aspect of the matter is directed to be verified at the hands of the AO, to see if the matter is remitted. The AO, on verification of the claim, may allow the credit as per law