COMMISSIONER OF INCOME TAX vs GANNON DUNKARLAY and CO. (P) LTD.

M. V. BALASUBRAM4M, J.

The question of law referred to us in TC No. 1263 of 1985 for the asst. yr. 197879 is as under:

Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the entire expenditure of Rs. 1,31,031 under

s. 57(iii) against the assessee''s income under the head ''Other sources''?

The common question of law referred to us in TC Nos. 766 & 1016 of 1986 for the asst. yrs. 1979-80 and 1980-81 is as under :

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the entire expenditure incurred by the

assessee under s. 57(iii) against assessee''s income under the head ''Other sources''?

The assessee is a private limited company in liquidation represented by the official liquidator. The assessee during the said assessment years filed

returns of income admitting nil income, as there was excess of expenditure over the income. The ITO, however, determined the total income

showing Positive figure and the positive figures arose because of the disallowance of certain expenditure by the ITO in the said assessment

proceedings towards establishment charges, rent, rates, taxes, travelling, etc. on the ground that they were not admissible as deduction against the

interest receipt on fixed deposits. The ITO also held that the said expenditure could not be said to have been incurred in earning interest income so

as to be eligible for deduction under s. 57(iii) of the IT Act, 1961 (hereinafter to be referred to as ''the Act''). In short, ITO rejected the entire

claim of expenditure.

Aggrieved by the order of the ITO, the assessee went on appeal before the CIT(A) and the CIT(A) went into the matter in detail and held that

business was not carried on by the assessee and hence, the income could not be brought under the head, ''business''. The CIT(A), however, found

that the activities carried on by the official liquidator were composite activities and the earning of interest income was a part of the activity of the

official liquidator and, therefore, there was a connection between the incurring of the expenditure and earning of the income by way of interest from

deposits with the banks. The CIT(A) therefore, held that the expenditure should '' be allowed as a deduction under the provisions of s. 57(iii) of

the Act and allowed the appeals preferred by the assessee.

The Revenue went on appeal before the Tribunal. The Tribunal upheld the orders of the CIT(A) holding that the entire expenses were

deductible against the income assessable under the head, ''Other sources'' and dismissed the appeal preferred by the Revenue.

Mr. C.V. Rajan, learned counsel for the Revenue submitted that the Tribunal was not correct in holding that the expenditure incurred by the,

assessee towards establishment charges, rent, etc. should be allowed against the interest income assessable under the head, ''Other sources'', as it

cannot be stated that the expenditure was incurred by the assessee for earning the interest income. He strongly placed reliance on a decision of the

Supreme Court in the case of Vijaya Laxmi Sugar Mws Ltd. vs. CIT : [1991]191ITR641(SC) and submitted that the expenses sought to be

deducted cannot be said to have been related to the earning of interest income and the interest income accrued suigeneris and therefore, the

expenditure incurred are not deductible under s. 57(iii) of the Act.

Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the expenditure was incurred wholly and exclusively

and necessarily for the purpose of earning interest income and the expenditure was an allowable deduction. He submitted that this Court in the case

of Commissioner of Income Tax Vs. Dwarka Chit Funds Pvt. Ltd., has taken a view that the expenditure incurred by the official liquidator would

be allowable as deduction and this Court distinguished the decision of the Supreme Court in Vijaya Laxmi Sugar Mills Ltd. case, Cited supra. He

further submitted that in the case decided- by this Court in Dwarka Chit Funds (P) Ltd. case, the Tribunal followed the assessee''s own case and

when this Court has approved the earlier order of the Tribunal which followed the assessee''s own case, it must be followed that the principles laid

down in Dwarka Chit Funds (P) Ltd. case, Cited supra, would apply to the facts of the case.

We have carefully considered the rival submissions of the learned counsel for the parties. As already stated, the AAC went into the nature of the

expenditure in detail and found that the company was engaged in the construction business at various places in southern States involving huge and

substantial investment and engaged the services of the staff commensurate with the volume of work and incurred expenditure towards staff salary.

Insofar as staff members are concerned, they were paid on consolidated basis, but the watchman was paid on daily basis. It is seen that the

watchman has necessarily to be employed for the protection and safety of the premises and the properties of the company and the staff were

engaged in administering the affairs of the company. Insofar as the payment of rent is concerned, the company had machineries, equipments: and

materials lying at various work sites and all the materials were collected and centralised in a yard at Pollachi and the rent was paid for safecustody

of the materials. A separate office was also maintained at Chennai for which rent was also paid. There were statutory dues that were to be paid by

the assessee- company. It was found that there were certain legal expenses such as payment of advocate fees and certain expenditure incurred in

connection with filing of suits for recovery of money. Insofar as other expenses are concerned, he found that there were certain other expenses

incurred in the performance of the statutory duties cast upon him. The official liquidator has to perform the statutory duties and report to the Court

the amount of expenditure incurred and during the course of administering the affairs of the company under liquidation, the official liquidator has to

incur certain expenditure in accordance with the Companies (Court) Rules, 1959 and he is obliged to maintain accounts which is subject to audit

by the examiner of local funds accounts and the expenses are also subject to the approval of this Court. Therefore, we are of the view, the

expenditure was incurred in the performance a of his duties by the official liquiator and the nature of the expenditure clearly shows that the

expenditure was incurred to protect and preserve the assets. The finding of the Tribunal in the instant case is that the expenditure was incurred to

maintain the infrastructure for earning or making interest income and without incurring expenditure, it would not have been possible to earn income

by way of interest.

The decision of the Supreme Court in Vijaya Laxmi Sugar AMS vs., CIT (supra) is distinguishable on the facts of the case. In Vijaya Laxmi

Sugar Mills Ltd. case (supra), the Supreme Court held as under:

The question for consideration, therefore, is whether the expenses of the type incurred by the liquidator in this case can be said to have been

incurred solely for the purpose of earning the interest income. It is true that the connection between the expenditure and the earning of income need

not be direct and it may be indirect. But, since the expenditure must have been incurred for the purpose of earning that income, there should be

some nexus between the expenditure and the earning of the income. There is not even some sort of evidence to show that the expenses incurred by

the liquidator were to facilitate the earning of or at least for protecting the income. The interest accrues suigeneris. The interest is payable by the

bank whether it is claimed or not and whether there is any establishment or not. Normally, there was no necessity for spending anything separately

for earning the interest. However, we may hasten to add that, if any expenditure was incurred like commission for collection or such similar

expenditure which may be considered as spent solely for the purpose of earning that income, the position may be different. But that was not so in

this case. It could not also be said that the expenditure incurred was to preserve or acquire the asset. Nor could it be said that the expenses were

incurred for the purpose of maintenance of the source. The requirement under s. 57(iii) that the expenditure should have been incurred ''for the

purpose of making or earning such income'' shows that the object of spending or the end or aim or the intention of such spending was for earning

the interest income. There could be no doubt that the expenditure incurred by the liquidator in this case can, by no stretch of imagination, be said to

have been incurred with the object or for the purpose of earning the interest income.

But, on the facts of the case, it is found that the expenses were incurred to preserve the assets and to maintain the source which yielded the

income. The facts found by the Tribunal clearly show that the official liquidator has incurred expenditure for the purpose of protecting the source of

income. In addition thereto, the earning of interest income by the official liquidator cannot be construed in isolation or apart from other activities of

the official liquidator. The official liquidator performed his statutory duties and during the course of his performance of duties, he incurred certain

expenditure and earned the interest income. Therefore, we are of the view that there is a connection or nexus between the expenditure incurred

and the interest income earned by the official liquidator. We are of the view that the decision of this Court in CIT vs. Dwarka Chit Funds (P) Ltd.

(supra) would apply to the facts of the case and this Court after noticing the decision of the Kerala High Court in In Re: Wandoor Jupiter Chits P.

Ltd. (In Liquidation), the decision of the Calcutta High Court in United Provinces Electric Supply Co. Ltd. (In liquidation) Vs. Commissioner of

Income Tax, , and the decision of the Supreme Court in Vijaya Laxmi Sugar AEls Ltd. vs. CIT (supra) held as under:

According to the Supreme Court, the expenditure claimed under s. 57(iii) of the Act was not allowed because there is not even some sort of

evidence to show that the expenses incurred by the liquidator were to facilitate the earning of or at least for preserving the estate. In the abovesaid

decision, the Supreme Court held that if any expenditure were incurred'' like commission for collection or such similar expenditure, it may be

considered as spent solely for the purpose of earning that income, the position may be different. The Supreme Court further pointed out that

according to the facts arising in that case, the expenditure incurred was not to preserve or acquire the assets. Therefore, the Supreme Court held in

that case that the expenditure claimed under s. 57(iii) is not a permissible deduction. The decision in each case depends upon its own facts. But,

according to the facts arising in the present case, the Tribunal, which is the final fact finding authority, pointed out that all the expenses have to be

incurred to maintain the infrastructure for earning or making the interest income. Without incurring these items of various expenditure, it would be

impossible for anyone much less the official liquidator to earn this income by way of interest receipts or miscellaneous receipts.

Following the said decision, we hold that the decision in each case would depletion the facts of its own case and according to the facts of the

present

case, the Tribunal recorded a clear finding that the expenses were incurred by the official liquidator to maintain the infrastructure for the earning of

the interest income and without incurring the expenditure, it would not have been possible for the official liquidator to earn the interest income. We

are of the finding of the Tribunal clearly shows that there is a nexus between the expenditure and the interest income earned and that finding

regarding the nexus, in our opinion, is a finding of fact. In view of the finding of the Tribunal, we hold that the Tribunal was correct in holding that

the entire expenditure incurred by the assessee is deductible under the provisions of S 57(iii) of the Act.

In fine, we answer the questions of law referred to us in the various tax cases in the affirmative and against the Revenue. However, there will be

no order as to costs, in the circumstances of the case.