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HIGH COURT OF CALCUTTA
B. N. BANERJEE, K. L. RAY
COMMISSIONER OF INCOME-TAX, WEST BENGAL-1 - Appellant
Versus
SANDERSONS AND MORGANS - Respondent
Income-Tax Reference 69 Of 1964
Decided On : APRIL 24, 1968
SOLICITOR-CLIENT RELATIONSHIP - FIDUCIARY DUTY - CLIENT'S MONEY - INCOME TAX - TRADING RECEIPTS - UNCLAIMED BALANCES - SOLICITOR'S LIEN - LIMITATION ACT - INCOME-TAX ACT, 1922, SECTION 88 - SOLICITORS' ACCOUNT RULES, 1945 - INDIAN TRUSTS ACT, 1882, SECTION 171 - INDIAN CONTRACT ACT, SECTION 171 - PUNJAB DISTILLING INDUSTRIES LTD. V. COMMISSIONER OF INCOME-TAX, SIMLA - KOHINOOR MILLS CO. , LTD. V. COMMISSIONER OF INCOME-TAX, BOMBAY CITY - MORDLEY (INSPECTOR OF TAXES) V. TATTERSALL - LOESCHER V. DEAN - TYABJI DAYABHAI AND CO. V. JETHADEVSI AND CO. - DAMODAR DAS V. MORGAN AND CO. - KHETTER KRISTO MITTER V. KALLY PROSUNNO GHOSE - CORDERY'S 'LAW RELATING TO SOLICITORS' - HALSBURY'S LAW OF ENGLAND (SIMONDS EDITION), VOLUME 36 - INDIAN INCOME-TAX ACT, 1922, SECTION 66 (1).
Fact of the Case:
The assessee, a firm of solicitors, credited a sum of Rs. 4078, representing the aggregate of unclaimed balances in 83 personal ledger accounts of clients, to its profit and loss account. The Income-tax Officer added back the amount to the assessee's total assessable income, treating it as professional income. The assessee appealed, contending that the relationship between solicitors and clients was that of a trustee and a beneficiary and that the Limitation Act did not apply to the recovery of amounts deposited by clients.
Finding of the Court:
The Tribunal held that the unclaimed balances were liabilities of the assessee firm when first received and that no subsequent operations could turn them into professional receipts. The Tribunal also observed that the mere fact that the unclaimed balances had been credited to the assessee's profit and loss account would not change the character of the amount, which were "evidently the clients' money".
Issues: Whether the unclaimed balances in the clients' accounts, which were credited to the assessee's profit and loss account, were revenue receipts and thus liable to tax under the Indian Income-tax Act, 1922.
Ratio Decidendi: The court held that the unclaimed balances were not trading receipts but were clients' money, held in a fiduciary capacity by the assessee. The court relied on the decision in Morley (Inspector of Taxes) v. Tattersall, (1939) 22 Tax Cas 51=7 ITR 316 (C. A.), which held that moneys which were not, when received, income could never latter become income. The court distinguished the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax, Simla, which held that additional amounts taken by the assessee from wholesalers as a condition for the sale of liquor were trading receipts, on the ground that in that case the additional amounts were part of the consideration for the sale of the liquor, while in the instant case the unclaimed balances were clients' money.
Final Decision: The court answered the question referred to it in the negative and in favor of the assessee.
( 1 ) THIS reference, under Section 66 (1) of the Indian Income-tax Act, 1922 raises an interesting question about solicitor-client relationship.
( 2 ) THE institution of Solicitors is an English institution, which has been imported to or copied by this country. In dealing with the position of Solicitors in India, Marten, C. J. , observed in Tyabji Dayabhai and Co. v. Jetha Devsi and Co. , AIR 1927 Bom 542:--"in the first place it must be clearly understood that the rights and duties of attorney are in no way part of the indigenous law or practice in India. Their profession originates from, England; it grew up under the English Common Law and it is clear that it was the Common Law which governed their rights and duties in the King's Courts established by the Supreme Court Charter of 1823 to which Courts our present High Court is the successor. "this Court quoted with approval the above observation in Damodar Das v. Morgan and Co. , AIR 1934 Cal 341 and Panckridge, J. , observed:"mutatis mutandis those words appear to me to apply to the Calcutta High Court. I take the learned Chief Justice's words as amounting to a statement that the rights of an attorney in India are the same as the rights of a solicitor in England, except in so far as the latter have been diminished or increased by statute. "there are good reasons why the English Common Law principles should be applied in relation to Indian Solicitors, Those principles are based on justice, equity and good conscience and, in the absence of statutory provisions in this country, should govern the relationship between solicitors and clients. This view, was expressed by Jenkins, J. , (as he then was) in Khetter Kristo Mitter v. Kally Prosunno Ghpse, (1898) ILR 25 Cal 887, in the following language:--"these principles appear to me to be the clear result of the authorities in England; and founded, as they are, on justice, equity and good conscience, I see no reason why they should not apply in this country. "
( 3 ) NOW, the relationship in which a solicitor stands with his client, under the English Common Law, particularly in respect of client's money, has been described in Halsbury's Law of England (Simonds Edition), Volume 36 in the following language;-- (Article 85): "the relationship between solicitor and client is a fiduciary one, but it does not follow that a solicitor is in all respects a trustee in relation to his client, Ordinarily the relationship between solicitor and client is that of agent and principal and therefore time will run against the client in respect of money left in his solicitor's hands; but special circumstances, as where money is paid by the client to his solicitor for a particular purpose, may constitute the solicitor a trustee of that money in relation to the client, so that time will not run against the client to preclude his recovery of money, not applied for the particular purpose. "***** (Article 131): "the obligations of a solicitor towards his client may be viewed from two aspects, namely, that of equity, and that of the Common Law. In equity the relationship of solicitor and client is recognised as a fiduciary relationship and carries with it obligations on the solicitor's part to act with strict fairness and openness towards his client; for failure to fulfil this obligation a solicitor will be liable to make compensation in respect of any resulting loss to his client, though the circumstances are not such as would sustain an action for deceit at common law. By the common law a solicitor's retainer imposes on him an obligation to be skilful and careful; for failure to fulfil this obligation he may be made liable in contract for negligence, whether he is acting for reward or gratuitously, and whether he has or has not a practising certificate in force at the time. *****a solicitor, like any other individual, is liable for his wrongful, acts, and, if the circumstances justify the charge, may be made liable to his client in tort as, f
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