Arrears received by lawyer who stopped his practice on being elevated as judge not taxable as business income

Arrears of professional fee received by assessee after he had discontinued his legal profession of lawyer on being elevated as a judge of High Court couldn’t be taxed as business income despite insertion of section 176(4) in the Act

In the instant case the assessee was a practising lawyer before his elevation as a judge of the Delhi High Court. He received certain amount of arrears of his professional fees for professional services rendered in the earlier years before his elevation as a Judge of the High Court. The AO held that such receipts were chargeable to tax under section 176(4). On appeal, the CIT (A) deleted the addition made by the AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) As per provisions of section 176(4), in the case of cessation of a profession by a professional, the receipt of any sum after such cessation shall be deemed to be the income of the professional and would be taxed in the year of receipt as if, it had been received prior to the cessation of the profession;

2) Section 176(4) introduces a legal fiction, which should be limited only to the purpose for which it has been created. Section 176(4) merely treats the receipt as the income of the recipient. In the absence of any further fiction in the section, the character of such receipt cannot be determined and no further fiction can be introduced so as to determine the head of charge under which such receipt would fall;

3) Thus, the express language of section 176(4) does not render the receipt to be treated as profit and gains of business or profession (PGBP). Therefore, in spite of introduction of section 176(4) in the Act, the receipts in question couldn’t be treated as the assessee's income falling under the head "PGBP”, even though they were the fruits of the assessee's professional activities;

4) It was due to the absence of any legislative provision that these receipts couldn’t be treated as business income falling under the head "PGBP”. They couldn’t 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 the High Court Judge. Thus, the order of CIT (A) was to be confirmed. – ITO v. Justice Rajiv Shakdher (2013) 36 taxmann.com 585 (Delhi - Trib.)

Consideration received by an advocated in form of land to undertake patta and layout of properties is taxable as capital gains and not as professional receipts

Facts of the case:

A. The assessee, an practising advocate, entered into an agreement as per which he had to undertake the job of obtaining patta and design the layout of the properties and for the services rendered the owners agreed to transfer 3 plots of land to him;

B. In pursuance of the agreement, possession of the property was handed over to the assessee and General Power of Attorney was executed in his favour;

C. Sale agreement was executed in respect of three plots of land for a consideration of Rs. 1.5 crores out of which the assessee received a consideration of Rs. 90 lakh as ‘confirming party’.

D. The AO held that such receipt was to be assessed as income from professional services. On appeal, the CIT(A) reversed the order of AO and held that the receipt could only be taxed as capital gains. The Tribunal upheld the order of AO.

The High Court held as under:

1) The agreement entered between the assessee and the owners made no reference at all to the professional status of the assessee for taking his services. There was no mention about his being an Advocate and that his services were being taken only in that capacity;

2) The possession given of the entire 5 plots of land to the assessee was with the specific object of getting patta and layout of the property. The sale agreement made it very clear that the transfer of 3 plots of land to the assessee was intended by way of consideration for securing patta and layout and, as such, the original owners had entrusted the entire land to the assessee;

3) The assessee had rightly placed his reliance on section 2(47)(v) of the Income-tax Act, 1961, read with section 53A of the Transfer of Property Act, 1882, that the receipt would attract capital gains at his hands. There was nothing on record to show that the services to be rendered were taken in the capacity as a lawyer. Therefore, the Consideration received by an advocated in form of land to undertake patta and designing of layout of properties is taxable as capital gains and not as professional receipts – CIT V. J. MAHALINGAM (2013) 37 taxmann.com 38 (Madras)