Law:

Section:

I.Section 145 of the Income-tax Act, 1961 - Method of accounting - System of accounting (Professional fees) - Assessment year 2009-10 - Petitioner-assessee was proprietor of firm of Solicitors and Advocates - Assessee received advances from its clients for various legal matters for meeting out of pocket payment towards expenses in travelling, preparation of cases, engaging lawyers, etc. - Such advances receipts were kept in a separate ledger account in name of client - Assessing Officer made an addition of Rs. 10.78 crores representing balances outstanding out of total credit balances of Rs. 20.79 crores - Whether categorization of a receipt could take place only at a time of appropriation and, in case of legal fees only when legal matters would be over or as when assessee would decide on quantum of fees - Held, yes - Whether entire advance receipt did not bear any particular characterization for purpose of treating it as income - Held, yes [Para 8] [In favour of assessee] II.Section 14A of the Income-tax Act, 1961, read with rule 8A of the Income-Tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Dividend) - Assessment year 2009-10 - Assessee was a proprietor of firm of solicitors and Advocates - It earned income from investment made in mutual funds and shares - Whether since Assessing Officer did not record any finding that any expenditure was incurred by assessee which was attributable for earning exempt income, disallowance under section 14A was to be deleted - Held, yes [Para 9] [In favour of assessee] FACTS-I â–  The petitioner-assessee was proprietor of firm of Solicitors and Advocates. The assessee followed the cash system of accounting since inception and that had been consistently accepted by the department. The assessee received advances from its clients for various legal matters for meeting out of pocket payment towards expenses in travelling, preparation cases, engaging lawyers etc. Such advances/receipts were kept in a separate ledger account in the name of client where all the expenses are debited from time to time. At the end of the year, credit balances in the account, where the matters were…

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