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Judgment
Jagannatha Shetty, J.—These tax reference cases shall stand disposed of by the following order.
The Income Tax Appellate Tribunal, Bangalore Bench, had referred the following questions under s. 256(1) of the I.T. Act, 1961.
ITRC. No. 108 of 1980 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of expenses amounting to Rs. 3,990 ?"
ITRC. Nos. 179 and 180 of 1980 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenses towards audit fees, establishment charges, filing fees, maintenance of building, etc., is an allowable deduction, even though the expenses have no direct nexus in earning the income."
The common assessee, in these cases, is a private limited company. Its income during the relevant years was only by way of rents payable for stables let out for horse owners. For the assessment year 1975-76, the assessee had collected Rs. 20,000 as rent. The assessee claimed certain deductions under s. 57(iii). The ITO held that none of the expenses claimed was attributable to the earning of the said income and so he disallowed the entire claim for deduction.
Upon appeal, the AAC allowed the claim of the assessee except the legal fees written off amounting to Rs. 1,500. The Department challenged order of the AAC before the Tribunal. The Tribunal held that the expenses on maintenance of buildings, garden, tractor maintenance and rates and taxes should be allowed, since they had direct nexus to the income. Accordingly, those expenses claimed by the assessee were allowed. The Tribunal, however, agreed with the AAC for disallowing the said legal fees written off. Out of the office establishment expenses amounting to Rs. 6,479 claimed by the assessee, the Tribunal allowed only a sum of Rs. 4,000 as being reasonable and having a clear nexus with the earning of the income.
At the instance of the assessee, the Tribunal in ITRC. No. 108 of 1980 referred the question as to the disallowance expenses amounting to Rs. 3,990 pertaining to the assessment year 1975-76.
ITRC Nos. 179 and 180 of 1980 pertain to the assessment years 1976-77 and 1977-78. The question referred in these cases was at the instance of the Revenue. The assessee has claimed deductions under s. 57(iii) towards office establishment, filing fees, audit fees, maintenance of buildings, gardens, rates and taxes, telephone charges, etc. The ITO declined to give any relief and brought to tax the entire receipt under the head "Other sources". The assessee appealed to the AAC. The AAC following his order for the earlier assessment year held that the assessee would be entitled to all expenses except legal expenses amounting to Rs. 2,500 and preliminary expenses amounting to Rs. 4,154 for the assessment year 1976-77. Likewise for the year 1977-78, the AAC allowed the other expenses claimed except the legal fees to the extent of Rs. 750.
The Department being aggrieved by the order of the AAC preferred appeals to the Tribunal. The assessee complaining of the disallowance of legal expenses also appealed to the Tribunal. The Tribunal allowed the assessee''s appeal and remitted the case back to the AAC for fresh disposal to consider the details of the expenses on record, while dismissing the appeals preferred by the Department.
The reasons given by the Tribunal for allowing or disallowing certain expenses under s. 57(iii) for the three assessment years appear to be inconsistent. For the assessment year 1975-76, the Tribunal has stated that the assessee is not entitled to legal fees, bank charges, miscellaneous expenses and filing fees. So far as office establishment is concerned, it has allowed part of the amount claimed. It has allowed Rs. 4,000 as against Rs. 6,479.46, on the ground that Rs. 4,000 alone may be said to be having a clear nexus to the earning of income. In other words, the entire order of the Tribunal proceeded on the basis that what could be allowed under s. 57(iii) are only such of those expenses which have direct nexus for the purpose of earning the income. But while dealing with the case pertaining to the years 1976-77 and 1977-78, the Tribunal followed the decision of the Bombay High Court in COMMISSIONER OF Income Tax, BOMBAY CITY I Vs. H. H. MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI AND OTHERS., The Tribunal held that the expenses claimed by the assessee must be allowed although it has no direct nexus and it is sufficient if the deductions claimed have only indirect nexus for the earning of the income. There also the Tribunal appears to have committed an error in allowing the full office establishment charges. The Tribunal has allowed Rs. 4,000 as against Rs. 6,479 for the year 1975-76. For the years 1976-77 and 1977-78, the AAC allowed the entire claim of the assessee for the office establishment. It was a little over Rs. 9,000 for the year 1976-77. For the year 1977-78, one does not know the real expenses claimed by the assessee under that head and yet the Tribunal did not interfere with the order of the AAC.
The primary question for consideration is whether the expenses claimed by the assessee fall under s. 57(iii) of the I.T. Act. Section 57(iii) provides :
"57. The income chargeable under the head ''Income from other sources'' shall be computed after making deductions, namely :-.......
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."
The above clause no doubt states that expenses laid out or expended wholly and exclusively for the purpose of making or earning the income are liable to be deducted. But the courts have held that the expenses which have a direct or indirect connection for earning the income are also entitled to be deducted under s. 57(iii).
The Tribunal has not considered every item claimed by the assessee under s. 57(iii). In a case like this, there must be a closer scrutiny of each and every item claimed by the assessee for the purpose of deduction. It is necessary to examine whether there has been a connection or a nexus between the expenditure incurred and the income earned, and whether any other expense is necessary for maintaining the source of income. It is only such expenditure that could be allowed under s. 57(iii) and no other.
In COMMISSIONER OF Income Tax, BOMBAY CITY I Vs. H. H. MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI AND OTHERS., , the Bombay High Court while examining the scope of s. 12(2) of the Indian I.T. Act, 1922, observed that there should be a connection between the expenditure and the earning of the income and that connection need not be direct. The connection may be indirect, but there must be a nexus between the expenses incurred and the income earned.
In Traco Cable Company Ltd. Vs. Commissioner of Income Tax, the Kerala High Court, while examining the scope of s. 57(iii), observed at page 506 :
"Office and establishment expenses unconnected with the earning of the company or keeping the company alive are not permissible deductions under s. 57 of the Act : vide the decision of the Calcutta High Court in Commr. of Income Tax, West Bengal, Calcutta Vs. Bihar Spinning and Weaving Mills Ltd., Calcutta,
In Commr. of Income Tax, West Bengal, Calcutta Vs. Bihar Spinning and Weaving Mills Ltd., Calcutta, the Calcutta High Court observed at p. 115 :
"Consideration such as the necessity of keeping the company alive or such as the necessity of maintaining an establishment for the purpose of the prospective business, are wholly extraneous and cannot be utilised for enlarging the amount of the deduction nor can any allowance which is claimable only u/s 10 be allowed or claimed before a business income assessable under the Act has emerged."
It is clear from these principles that if there is a nexus between the expenditure incurred and the income earned, the assessee would be entitled to deduct such expenditure under s. 57(iii). The assessee is also entitled to deduct such expenditure incurred for maintaining the source of income. But he is not entitled to claim deduction in regard to expenses required for the purpose of keeping the corporate nature of the assessee or keeping the company alive. In view of the infirmity in the order of the Tribunal, the question referred to us cannot be answered. The matter must go back for fresh disposal in the light of the light of the observations made.
In the result, I.T.R.C. Nos. 108, 179 and 180 of 1980 stand disposed of.