Palani Sri Murugan Textiles Ltd. (by Official Liquidator) vs Assistant Commissioner of Income Tax

R. Jayasimha Babu, J.—The Revenue contends that there is no nexus between the receipt of interest and dividend by the official liquidator,

and the expenditure which the official liquidator incurred towards maintaining his office, payment of salary to staff, legal charges, Government

commission, etc.

This contention is without any merit. When the official liquidator, is appointed by the company court, after a winding up order is made, the

custody of the company''s assets passes to the court and the official liquidator functions under the supervision of the company judge. The official

liquidator is an officer of the Central Government who has to carry out the duties assigned to him under the Companies Act and by the company

court in respect of the affairs of the company in liquidation. While performing such duties in relation to the company in liquidation, the official

liquidator has necessarily to incur expenditure on payment of salary to the employees, establishment costs, legal expenses, etc., payment of

Government commission, etc. Any interest that he may earn from deposits made by the company or any dividend that he may receive from

investments in shares that may have been made by the company prior to its liquidation, is income, which is received during the period when the

winding up proceedings are in progress. The duration of the winding up proceedings is uncertain, being dependant upon several factors and, until

the proceedings are complete, the expenditure on establishment by way of salary to employees, legal and other costs have necessarily to be

incurred by the official liquidator.

All these expenses are certainly expenses without which the winding up proceedings cannot be efficiently continued and the expenses so

incurred cannot be said to be expenses which have no nexus at all with the income by way of interest or dividend received by the official liquidator.

Unlike a running business, in the case of winding up proceedings in court, the expenditure incurred by the official liquidator is expenditure which is

essential, being the expenditure authorised and required by law and incurred under the supervision of the court. The receipt of the income by way

of interest and dividends is made possible by reason of the pendency of the winding up proceedings, deposits and investments being the amounts

which are to be part of the amounts to be distributed among the creditors and, to the extent of any surplus among the contributories, for which

expense has to be incurred, in continuing the winding up proceedings. The expense, so incurred, therefore, is an expense which is required to be

given deduction to, for the purpose of determining the net taxable income of the company in liquidation.

The Tribunal was clearly in error in holding otherwise.

The questions as to whether the appellant is entitled to claim the audit fees, common establishment charges, Government commission, legal

charges, taxes paid, salary account, etc., totalling to Rs. 90,582 for the assessment year 1990-91 and Rs. 1,24,098 for the assessment year 1991-

92, as expenditure, is answered in favour of the assessee and against the Revenue. The assessee is entitled to costs in the sum of Rs. 1,500.