Commissioner of Income Tax vs Ganga Properties Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the Income Tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1972-73 :

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Section 52(2) of the Income Tax Act, 1961, had no application and could not be invoked?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in holding that the approval of the Inspecting Assistant Commissioner in this case was not given in accordance with law?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Rs. 18,675 was incurred by the assessee wholly and exclusively to earn its income and as such the Tribunal was right in holding that this amount was a deductible expenditure?"

The first question is now concluded by the decision of the Supreme Court in the case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, . Following the said decision we answer the first question in the affirmative and in favour of the assessee. In view of our answer to the first question, the second question does not call for any answer. We, therefore, decline to answer the second question.

The only question that remains to be considered is the third question. The facts relating to the third question are that the Income Tax Officer disallowed certain expenses claimed by the assessee while computing the income from other sources. Total expenses claimed by the assessee amounted to Rs. 22,384. Out of the above, the Income Tax Officer allowed Rs. 3,145 (a portion of salary) under the head "Property" and another sum of Rs. 490 (being interest) under other sources and disallowed the balance of Rs. 18,675 as expenses not spent wholly and exclusively for the purpose of earning the interest income of Rs. 76,075 assessed under " other sources ". The disallowed expenses are as under :

Rs.

Office Rent 900

Salary 15,015

Contribution to provident fund 511

Rates and taxes 200

Audit fee 300

Printing and stationery 436

Charges general 861

Filing fees 50

Staff welfare 402

18,675

On appeal, the Appellate Assistant Commissioner allowed a further expense of Rs. 6,855 without specifying as to which of the above disallowances be deleted. In any case, after the order of the Appellate Assistant Commissioner, a sum of Rs. 11,820 still stood disallowed.

Before the Tribunal, it was contended that all the above expenses had to be incurred by the assessee either on statutory necessity or on commercial expediency. The assessee relied on the various orders passed by the Tribunal from time to time where similar expenses incurred by the assessee had been allowed as deduction under "other sources". The Tribunal was of the view that the assessee being a company had to appoint a secretary and an accountant and also observe all the requirements under the company law and labour law. An office has to be maintained. None of the expenses claimed by the assessee, according to the Tribunal, can be said to be for any purpose other than those wholly and exclusively required for its activities to earn income. The Tribunal, therefore, allowed the expenditure.

At the hearing, it was contended by learned counsel appearing for the petitioner that a similar case came before the Allahabad High Court in the case of Commissioner of Income Tax Vs. Rampur Timber and Tannery Co. Ltd., . There the assessee claimed certain expenses which were disallowed. The expenditure incurred there was for retaining the status of the company, namely, miscellaneous expenses, salary, legal expenses, travelling expenses, etc. The Allahabad High Court held that such expenses are allowable for the purpose of keeping the business of the assessee-company alive and for retaining the status of the assessee-company.

In our view, a limited company, even if it does not carry on business but it derives income from "other sources" has to maintain its establishment for complying with statutory obligations so long it is in operation and its name is not struck off the register or unless the company is dissolved which means cessation of all corporate activities of the company for all practical purposes. So long as it is in operation, it has to maintain its status as a company and it has to discharge certain legal obligations and, for that purpose, it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is pre-eminently a reasonable conclusion. We have considered a similar case in Income Tax Reference No. 360 of 1979 ( Commissioner of Income Tax Vs. New Savan Sugar and Gur Refining Co. Ltd., ), where the judgment was delivered on April 18, 1989.

For the reasons aforesaid, we are of the view that the Tribunal was justified in allowing the expenditure. The third question is, therefore, answered in the affirmative and in favour of the assessee.

Bhagabati Prasad Banerjee, J.

I agree.