Taxability of Advance fees received by lawyer / law firm
Question ;When should the Advance Fees received by the law firms be taxed ?
Answer : Categorisation of a receipt can take place only at the time of appropriation i.e Fees can be taxed only when the matter is over or as when the Assessee decides on the quantum of fees.
CIT Vs. Om Prakash Khaitan, I.T.A. No. 416/2015, Date of Order: 21.07.2015, High Court of Delhi
The issue was whether the Assessee was consistently following a certain system of accounting which had been accepted by the Department. There is no change of system of accounting followed by the Assessee. Allowing the Department to adopt a different stance in the AY in question would create an anomalous situation as far as the Assessee is concerned. The issue of lawyers accepting monies from clients on account to defray the expenses and appropriating fees as income only upon completion of a case has been examined in the past and a consistent view has been taken by the ITAT. This has been adverted to in the impugned order of the ITAT.
The principles on the basis of which those decisions were taken are unexceptionable. Given the manner and functioning of the lawyers and law firms, it is correct that the categorisation of a receipt can take place only at the time of appropriation i.e. in case of fees only when the matter is over or as when the Assessee decides on the quantum of fees. This will not be the entire advance received as at the time it is received it does not bear any particular characterisation for the purposes of treating it as income.