Interest on the bank deposits held on account of “client account” is assessable under the head “profits and gains of business or profession” and the same would, therefore, be part of the professional income for the purposes of computation of deduction under section 40(a)(ii) of the IT Act, 1961, on account of remuneration permissible to the partners of the firm.
ITAT, MUMBAI BENCHES ‘B’, MUMBAI
Bilawala & Co.
ITA NO. 2509 TO 2511/Mum/2008
July 7, 2009
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18. We have given our careful consideration to the rival contentions. In this case it is not disputed that the assessee is a firm of Solicitors & Advocates. It would be necessary to first examine as to whether The Bombay High Court (Original Side Rules are applicable in the case of the solicitors and then to consider the obligations of the Solicitor firm under the said Rules, if found applicable. For this purpose, it will be relevant to refer to the decision of the Hon'ble Bombay High Court in the case of Manilal Kher Ambalal and Co. (supra). In this case the Hon'ble High Court, while examining the method of accounting followed by the appellant firm, has stated as under: -
"The assessee, a firm of solicitors and advocates enrolled more than fifty years ago, maintained their accounts in accordance with the rules framed by the Bombay High Court. Under these rules, the assessee was required to keep separate accounts in respect of monies received from or on account of their clients., Withdrawals from the account were regulated. The accounts were finally adjusted after the work was completed and the income was shown in the year in which the work was so completed'.
It becomes abundantly clear from the above decision of the Hon'ble Bombay High Court that The Bombay High Court (Original Side) Rules are applicable in the case of a firm of Solicitors & Advocates. The present respondent is a firm of Solicitors and Advocates and therefore we do not have any doubt in our mind that The Bombay High Court (Original Side) Rules are applicable in the present case.
The relevant Rules, which may be helpful in deciding the issue on hand, are reproduced hereunder: -
"R.10. Advocate to keep accounts - Every advocate shall keep such books of accounts, as will be necessary, to show and distinguish in connection with his practice as an Advocate -
(a) Moneys received from or on account of and moneys paid to or on account of each of his clients and,
(b) The moneys received and the moneys paid on his own account".
"R.11. Obligation to pay money into a "client account" - Every Advocate who holds or receives money on account of a client (save money hereinafter expressly exempted from the application of this Rule) shall forthwith pay such money to a current of deposit account at bank to be kept in the name of the Advocate in the title of which the word “client” shall appear (hereinafter referred to as "client account”. An Advocate may keep one client account or as many such accounts as he thinks fit:
Provided that when an Advocate receives a cheque or draft presenting in part money belonging to the client and in part money due to the Advocate, he may, where practicable, split the cheque or draft and pay to the client account that part only which represents money belonging to the client. In any other case he shall pay the whole of such cheque or draft into the client account".
"R. 12. What moneys to be paid into a "client account" – No money shall be paid into a client account other than money held or received on account of a client;
(a) such money belonging to the Advocate as may be necessary for the purpose of opening or maintaining the account;
(b) money for replacement of any sum which may by mistake or accident have been drawn from the account in contravention of Rule 13 of these Rules;
(c) a cheque or draft received by the Advocate representing in part money belonging to the client and in part money due to the Advocate when such cheque or draft has not been split as provided by Rule 11 hereof.
"R.13. What moneys to be withdrawn from a "client account" - No money shall be drawn from a client account other than -
(a) money properly required for payment to or on behalf of a client or for or towards payment of a debt due to the Advocate from a client or money drawn on client's authority, or money in respect of which there is a liability of the client to the Advocate, provided that money so drawn shall not in any case exceed the total of the money so held for the time being for such client;
(b) such money belonging to the Advocate as may have been paid into the client account under Rule 12(b) or 12(d) of these rules;
(c) money which may by mistake or accident have been paid into such account in contravention of Rule 12 of these Rules".
Rule 14 being an exception to Rules 11,12 and 13 may also be relevant and the
same is reproduced hereunder: -
"R.14. Inapplicability of Rules 11,12 and 13 in certain cases -
Rules 11,12 and 13 shall not apply to money which -
(a) the client authorizes an Advocate in writing to withhold from a client account;
(b) an Advocate pays into a separate account opened or to be opened in the name of a client or some person named by that client or the duly authorised agent of the client;
(c) in the ordinary course of business upon receipt is paid on behalf of the client to a third party;
(d) is upon receipt paid to the client;
(e) is paid to an Advocate expressly on account of costs;
(f) the Bombay Bar Council of Maharashtra, upon an application made to them in writing by an Advocate, specifically authorises in writing to be withheld or withdrawn from a client account".
19. The Full Bench of the Hon'ble Rajasthan High Court in AIR 1958 Raj 77 (FB) has held that while dealing with the money of the client, an expenditure incurred by the Advocate for and on behalf of the client out of such moneys must be duly accounted for and that it is professional misconduct if he withholds such moneys or misappropriate them. The Hon'ble Madras High Court in AIR 1937 Mad 696 has held that misappropriation of clients money is misconduct. The Hon'ble Kerala High Court in AIR 1961 Ker 209 has held that it will be professional misconduct on the part of an Advocate when he retains the money in clients account even after the demand is made by the client.
20. A perusal of the Rules and the decisions quoted above reveal that the assessee is under an obligation to keep the money received from its clients as deposit in a separate bank account and withdrawal and appropriation from the said bank account is regulated. It therefore follows that the deposit in such an account cannot be said to be the surplus money available with the assessee deposited with a bank for earning of interest income. Such deposits, as is seen from the quoted Rules are made as mandated under the High Court Rules to be followed by Advocates as well as by a firm of Solicitors. Therefore, the interest flowing from such an account is bound to take the character of income from profession of Solicitors and Advocates. Therefore, in our view, the interest on such deposit cannot be assessed under the head "Income from other sources". Since the income from interest of such account falls within the specific head of "Profits and gains of business or profession", the said income is not assessable under the head "Income from other sources". We are therefore of the considered view that interest on the bank deposits held on account of "client account" is assessable under the head "Profits and gains of business or profession" and the same would therefore be part of the professional income for the purposes of computation of deduction under section 40(a)(ji) of the Act, on account of remuneration permissible to the partners of the firm. We may hasten to add that this will not be true in respect of the deposits made even by the firm of Solicitors or Advocates of the surplus money in the bank accounts to earn interest in any other account. We make it clear that our decision will apply only in respect of the deposits made under Rule 11 of The Bombay High Court (Original Side) Rules as a deposit on client account and not in respect of the other surplus money, if any, deposited in the bank accounts.
21. For the assessment year 2001-02, the C|T(A) has decided the issue in favour of the assessee. For the other assessment years the said decision has been followed. In the present case the Department has not disputed the claim of the assessee that the interest earned is on the bank deposits held on "clientaccount" under Rule 11 of The Bombay High Cc>urt (Original Side) Rules. That being so, the decision of the CIT(A) is bound to be upheld. Finding no merit in the appeals of the Revenue, we dismiss the same.