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Judgment
N.V. Balasubramanaian, J.—The question of law referred to us in Tax Case No. 1263 of 1985 for the assessment year 1978-79 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. 1,31,03 u/s
57(iii) against the assessee''s income under the head ''Other sources'' ?
The common question of law referred to us in Tax Cases Nos. 766 and 1016 of 1986 for, the assessment years 1979-80 and 1980-81 is as
under :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in allowing the entire expenditure incurred by
the assessee u/s 57(iii) against the 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 Income Tax Officer, however, determined the
total income showing positive figure and the positive figure arose because of the disallowance of certain expenditure by the Income Tax Officer 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 Income Tax Officer 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 u/s 57(iii) of the Income Tax Act, 1961 (hereinafter to be referred to as ""the
Act""). In short the Income Tax Officer rejected the entire claim of expenditure.
Aggrieved by the order of the Income Tax Officer, the assessee went on appeal before the Commissioner of Income Tax (Appeals) and the
Commissioner (Appeals) went into the matter in detail and held that the business was not carried on by the assessee and, hence, the income could
not be brought under the head, ""Business"". The Commissioner (Appeals), 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 Commissioner
(Appeals), therefore, held that the expenditure should be allowed as a deduction under the provisions of section 57(iii) of the Act and allowed the
appeals preferred by the assessee.
The Revenue went on appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal upheld the orders of the Commissioner
(Appeals) holding that the entire expenses were deductible against the income assessable under the head ""Other sources"", and dismissed the
appeals 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 stabbed 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 Mills Ltd. v. 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 sui generis and, therefore, the
expenditure incurred are not deductible u/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 is deduction and this court distinguished the decision of the Supreme Court in Vijaya Laxmi Sugar Mills Ltd.''s case :
[1991]191ITR641(SC) . He further submitted that in the case decided by this court in Commissioner of Income Tax Vs. Dwarka Chit Funds Pvt.
Ltd., the Tribunal followed the assessee''s own case and when this court has approved the earlier order of the Appellate Tribunal, which followed
the assessee''s own case, it must be followed that the principles laid down in Commissioner of Income Tax Vs. Dwarka Chit Funds Pvt. Ltd.,
would apply to the facts of the case.
We have carefully considered the rival submissions of learned counsel for the parties. As already stated, the Appellate Assistant Commissioner
went into the nature of the expenditure in detail and found that the company was engaged in 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. In so far as the 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. In so far 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 safe custody of the materials. A separate office was also maintained It 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 the filing of suits for recovery of money. In so far 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 liquidation 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 are 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 of his duties by the official liquidator and the nature of
the expenditure clearly shows that the expenditure was incurred to protect and preserve the assets. The finding of the Appellate Tribunal in the
instant case is that the expenditure was incurred to maintain the infrastructure for earning or making I 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 Mills Ltd. v. CIT : [1991]191ITR641(SC) is distinguishable on the facts of the case.
In Vijaya Laxmi Sugar Mills Ltd.''s case : [1991]191ITR641(SC) , the Supreme Court held as under (page 646)
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 sui generis. 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
expenditures 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 u/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 Appellate 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 of 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 Commissioner of
Income Tax Vs. Dwarka Chit Funds Pvt. Ltd., 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 Mills Ltd. v. CIT
[1991]191ITR641(SC) held as under (page 124) :
According to the Supreme Court, the expenditure claimed u/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 of acquire the assets. Therefore, the Supreme Court held in that case that
the expenditure claimed u/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 any one
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 depend upon 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 view that 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 Appellate Tribunal, we hold that the
Tribunal was correct in holding that the entire expenditure incurred by the assessee is deductible under the provisions of section 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.