1. The basic point of law falling for our determination in this reference under section 66(1) of the Indian Income-tax Act, 1922, is whether interest earned by a practicing solicitor on moneys held by him in the client's account are includible in the computation of total income in his personal assessment. The reference concerns four assessment years 1956-57 to 1959-60, the relevant accounting periods being the calendar years 1955 to 1958, respectively.
2. The assessee is a practicing solicitor of this court. In the course of carrying on his profession the assessee used to receive moneys from or on behalf of his clients. The moneys so received were deposited by him in a separate current account with the then Imperial Bank of India up to 13th August, 1954. On 13th August, 1954, the assessee withdrew from that account a sum of Rs. 3,25,000 and placed it in a fixed deposit with the Chartered Bank. The assessee, thereafter, renewed from time to time the said deposit together with interest earned thereon, but whenever necessary he withdrew from the said current account small amounts, not exceeding three figures, to make up the amount of the fixed deposit to the nearest higher multiple of Rs. 1,000. During the four accounting years relevant to the four assessment years the assessee in that manner earned interest on the fixed deposits in the amounts of Rs. 11,472, Rs. 15,790, Rs. 23,032 and 25,328, respectively. The assessee, however, never adjusted the interest so earned by apportioning it to the different clients whose moneys were held in the said current account. The assessee did not show the interest so earned in any of the returns of his personal income filed by him for the said four years. The assessment was completed on the basis of the returns, but, thereafter, necessary proceedings were taken under section 34 to reopen the assessments for the purpose of including the amounts of the said interest in the relative assessments of the said four years on the ground that such interest had escaped assessment.
3. The Income-tax Officer and the Appellate Assistant Commissioner held that the said amounts were includible in the personal assessment of the assessee. The Tribunal, however, held to the contrary. The Tribunal, after examining the position in law, held that the said amounts held in the assessee's clients' account, including the amount of the fixed deposits, were held by the assessee in a fiduciary capacity, that the said amounts of interest earned by the assessee were also held by him in a fiduciary capacity and that even though the assessee had not apportioned the interest so earned between his various clients whose moneys were so held by him, it made no difference to the fiduciary capacity in which the assessee held the said amounts and also the said interest and that therefore the said amounts of interest were not includible in the personal assessment of the assessee.
4. Under the circumstances, at the instance of the revenue, the following question of law has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the interest accruing on the fixed deposits with the Chartered Bank was income liable to be assessed as the assessee's income for the respective assessment years, 1956-57, 1957-58, 1958-59 and 1959-60 ?'
5. The system of solicitors or Attorneys-at-law owes its existence in India to the existence of a similar system in England. The rights and obligations of a solicitor in India are practically similar to those of a solicitor in England. The profession of solicitors is created and controlled in so far as the High Court is concerned by the rules applicable to this High Court on its original side. So far as they are relevant to this decision of the question before us, rules 25 to 28 are relevant and they read :
'25. Every Attorney shall keep such books and accounts as may be necessary to show and distinguish in connection with his practice as an Attorney (a) moneys received from or on account of and the moneys paid to or on account of each of his clients and (b) the moneys received and the moneys paid on his own account.
26. Every Attorney who holds or receives moneys on account of a client (save money hereinafter expressly exempted from the application of this rule) shall forthwith pay such money into a current or deposit account at a bank to be kept in the name of the Attorney in the title of which the word 'client' shall appear (hereinafter referred to as 'a client' account). Any attorney may keep one client account or as many such accounts as he thinks fit.
27. No money shall be paid into a client account other than :
(a) money held or received on account of a client;
(b) such money belonging to the Attorney as may be necessary for the purpose of opening or maintaining the accounts;
(c) money for replacement of any sum which may by mistake or accident have been drawn from the account in contravention of rule 28 of these rules;
(d) a cheque or draft received by the Attorney representing in part money belonging to the client and in part money due to the Attorney, when such cheque or draft has not been split as provided by rule 26 hereof.
28. 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 Attorney from a client or money drawn on the client's authority or money in respect of which there is a liability of the client to the Attorney provided that the 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 Attorney as may have been paid into account under rule 27(b) or 27(d) of these rules;
(c) money which may by mistake or accident have been paid into such account in contravention of rule 27 of these rules.'
6. A mere reading of these rules shows that a solicitor of this court is obliged to keep a separate banking account in respect of all the moneys received by him from or on behalf of his clients. He can appropriate moneys out of the said account to himself personally only in the limited class of cases provided for by these rules. These moneys are to be segregated and kept by a solicitor in a separate bank account in the title of which the word 'client' must appear and he can withdraw and appropriate it to himself only in so far as the rules permit him to do so. In this connection it must also be borne in mind that a solicitor who is a creature of the rules made by this High Court is subject to the inherent and disciplinary jurisdiction of this court and any breach committed by him of these rules is capable of entailing what would be a disastrous consequence to him of his name being struck off the roll of solicitors maintained by this court. Therefore not only do these rules provide for the segregation and holding in a water-tight compartment of the amounts received by a solicitor from or on behalf of his clients, but there also is enough sanction provided by the rules for enforcing that what these rules provide is complied with.
7. In this connection the provisions of sections 94 and 95 of the Indian Trusts Act are material. These two sections read :
'94. In any case not coming within the scope of any of the preceding sections, where there is no trust, but the person having possession of property has not the whole beneficial interest therein, he must hold the property has not the whole beneficial interest therein, he must hold the property for the benefit of the persons having such interest, or the residue thereof (as the case may be), to the extent necessary to satisfy their just demands.
95. The person holding property in accordance with any of the preceding sections of this chapter must, so far as may be, perform the same duties, and is subject, so far as may be, to the same liabilities and disabilities, as if he were a trustee of the property for the person for whose benefit he holds it :.......'
8. In view of the provisions of the said rules of this High Court, the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients is that of a quasi-trust and he holds such moneys in a fiduciary capacity. The case of a solicitor falls, in our opinion, within the provisions of section 94 of the Indian Trusts Act because he has not the whole beneficial interest in such moneys. He must, therefore, hold such moneys for the benefit of the persons having such beneficial interest, such persons being his clients whose moneys are deposited in the client's account. A solicitor has, therefore, in view of the provisions of the said section 95, to perform the same duties and is subject to the same liabilities and disabilities as if he were a trustee in respect of the said moneys, his clients to whom the said moneys belong being the beneficiaries. The provisions of section 51 of the Indian Trusts Act would apply and a solicitor being a trustee of such a quasi-trust cannot use or deal with the trust property for his own profit or for any other purpose unconnected with the trust. He can deal with them only to the extent provided for under the said rules of this High Court. The corpus, i.e., the moneys credited in the client's account, is held by a solicitor in his fiduciary capacity and the income or interest derived from such corpus is equally held by him subject to such fiduciary relationship existing between the solicitor and his clients.
9. Mr. Hajarnavis, the learned counsel appearing for the revenue, contended that under the scheme of the Income-tax Act no distinction is made, unlike as made in England, between a legal owner and an equitable owner; that the Income-tax Act recognises only one ownership, namely, legal ownership; and that the income earned by the legal owner has to be brought to tax in the personal assessment of the legal owner whatever the relationship may otherwise be as between him as the legal owner. He relied in support of his contention on two judgments, one being that of the House of Lords in A. W. Williams v. W. M. G. Singer and the other being a judgment of the Privy Council in Currimbhoy Ibrahim Trust v. Commissioner of Income-tax. In the English case the only question was whether in the circumstances of that case the income receivable by a trustee could at all be brought to tax, but the question was not whether such income could be taxed including it in the personal income of the trustee. The question was whether such income was taxable. If it was held that it was taxable, the court was not concerned with the further question whether it should be brought to tax in the hands of the trustee separately as a trustee or by including it in the total income in his personal assessment. In the said Privy Council case the trustees were a body corporate created under a special statute. The assessment in that case had been made on the income of the properties of the trust in a separate return of income filed by the trustees as trustees, the only income shown in the return being the income derived from the trust properties. In that case the trustees being a body incorporated under a special Act and being a juridical person independent of the individuals composing that body, there could not be and there was not in fact any question of including the income of the trust in the personal income of the trustees individually or any of them. The Privy Council was therefore not concerned with the question whether income of the trust properties was or was not includible in the personal income of any trustee or trustees. As a matter of fact, the position canvassed for before us by the revenue would lead to impossible, if not absurd, results. If there are more trustees than one of a particular trust and the income derived from the trust properties is to be included in the assessment of the personal income of the trustees, the question would arise : In the personal income of which trustee or trustees is such income of the trust properties to be included The trustees, if they are totally unconnected inter se, would each file a separate return. In which of the returns is the income of the trust properties to be shown, if at all Or, is it to be divided between the trustees, and if it is to be divided, in what proportions Is it conceivably possible that the position would be different if there be a single trustee or there be more than one It has been stated, borrowing the words put by Charles Dickens in the mouth of one of the characters created by him, that law is an ass. We refuse to believe that the law, if at all it is an ass, is such an ass as revenue would want it to be believed. This argument is clearly negatived by the provisions of section 40 of the Indian Income-tax Act itself. It contemplates a separate return and a separate assessment to be made in respect of the income received by certain guardians, trustees and agents more particularly mentioned in that section. We are not concerned in this case with the actual provisions of that section 40. But its provisions certainly indicate that the legislature did not contemplate that the income derived by certain persons, not in their individual or personal capacity, but as guardians or trustees or agents, is to be assessed separately and not to be thrown into the personal assessment of such guardians, trustees or agents.
10. In support of his contention that in India there is but one title, being the legal title which the law recognises and that the person in whom it vests is the only person liable under the Income-tax Act, Mr. Hazarnavis also relied upon the judgment of the Privy Council in Chhatra Kumari Devi v. Mohan Bikram Shah. The Privy Council does not in that case clearly lay down that Indian law does not recognise in all ceases a legal owner and an equitable owner and that it recognises only the former. But the consideration whether the law recognises only a legal owner is, to our minds, off the mark when considering the present question before us as to whether the income received by a trustee from the trust properties must be included in his personal assessment. The case before the Privy Council was not at all concerned with the Income-tax Act as it did not at all relate to a question about the assessment of income-tax.
11. Our attention was drawn to a decision of the House of Lords in Brown v. Inland Revenue Commissioners. In that case a solicitor in the United Kingdom in the course of his practice received large sums of money on his client's behalf deposited with his firm. These sums were placed by him in a banking account called 'clients' current account'. As the account built up to a sum exceeding Pounds 5,000 that sum was placed on deposit receipt in the firm's name and the solicitor retained the interest therefrom and used it for his own benefit. When a considerable sum standing to the credit of any client was not likely to be required for some time, it was not put on deposit, earmarked as belonging to that client to whom the accrued interest was credited, and no question arise in that case in regard to such cases. The firm also lent clients' moneys at its disposal to other clients, these loans bearing interest. Interest was paid at a lower rate to clients who deposited money with the firm which retained the difference between the higher and lower rates of interest. The solicitor was assessed to income-tax on the deposit interest and on the difference between the interest charged and the interest allowed to clients on their accounts with the firm. The relevant principle laid down by the House of Lords in its judgment in that case is that if a person in a fiduciary position receives any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he is authorised to do so. Applying that principle the House of Lords held that on the facts of the case the solicitor was not authorised to keep the interest either by custom or by implied agreement, although, as a matter of fact, a similar practice had long been followed by a number of solicitors in the United Kingdom. As seen earlier, the relevant rules of this High Court do not permit a solicitor to treat the moneys received by him from or on account of his clients as his personal moneys and such moneys are held by him in a fiduciary capacity. Even the income received from such moneys must equally be held by the solicitor in a fiduciary capacity. What the solicitor actually does with the income, i.e., whether he appropriates it to himself or not, is, in our opinion, a matter of no consequence. If he appropriates it to himself, it would simply amount to a breach of his fiduciary relationship and whatever may be the consequences in law would follow. But his unauthorised act of converting any part of the corpus or even the income derived therefrom which is not in accordance with the provisions of the rules of this High Court would not convert those amounts held by him in a fiduciary capacity into moneys held by him beneficially for himself. In the said case before the House of Lords the solicitor had in fact converted the interest earned in that case to his own use, but none-the-less the House of Lords, on the basis that the moneys, and, therefore, the interest also was held by the solicitor in a fiduciary capacity, held that the taxation must proceed on the basis that the income did not in fact belong to him and was not liable to be taken into computation in his personal assessment. A similar view has been taken by a Division Bench of the Calcutta High Court in Commissioner of Income-tax v. Sandersons & Morgans.
12. In our opinion, therefore, the conclusion reached by the Tribunal is correct in law and we, therefore, answer the question in the negative. Revenue to pay the costs of the assessee.
13. Question answered in the negative.