Madras High Court
Commissioner Of Income Tax vs Administrator General Of Madras (For ... on 18 January, 1996
Equivalent citations: (1997)139CTR(MAD)261
JUDGMENT
THANIKKACHALAM, J. :
At the instance of the Department, the Tribunal referred the following question for the opinion of this Court under s. 256(1) of the IT Act, 1961 :
"Whether, on the facts and in the circumstances of the case the sum of Rs. 26,538 was assessable as accrued interest and the sum of Rs. 23,850 was allowable as expenses against interest income ?"
2. One Mrs. Ida L. Chambers died on 13th Aug., 1968 leaving an estate covered by her will, dt. 29th Oct., 1949 with a codicil, dt. 3rd Jan., 1950. After the death of Mrs. Ida L. Chambers, the estate was taken over by the Administrator General of Madras under an order made by this Court. The Administrator General of Madras applied to this Court for permission to take possession of the estate and the Court ordered to take possession on 28th Aug., 1968. On 28th April, 1969, the Administrator had made an application to prove the will. Probate was granted on 26th March, 1970. The Administrator filed a return, showing nil income and claiming that the entire income of the estate of late Mrs. Ida L. Chambers was held for the purpose of certain charities and as such was exempted. The ITO found that the income arose between the period 14th Aug., 1968 and 31st March, 1969, whereas, the letters of administration were obtained only on 5th May, 1970. Under the will, the disbursements of charities and other legacies could take place only after taking charge of the assets and completely disposing them of. Since this process was still going on even on the date of the assessment, the entire income of the estate was assessable in the hands of the Administrator General.
3. The said late Mrs. Ida L. Chambers had advanced amounts to one A. Nagappa Chettiar. At the time of her death the total outstanding consisting of the amounts advanced to A. Nagappa Chettiar and also to M/s Chrome Leather Company Ltd. stood at about Rs. 11 lakhs. The Administrator General filed a Suit, C. S. No. 61 of 1969 against Shri A. Nagappa Chettiar. The plaint refers to a Promissory note in favour of late Mrs. Ida L. Chambers, promising to pay a sum of Rs. 5,94,000 with interest thereon. On the date of the plaint, the sum due to the plaintiff was Rs. 7,29,719. The suit was filed to recover the above sum of Rs. 7,29,719 with subsequent interest at 6 per cent per annum and also the cost. Likewise, a suit, C. S. No. 60 of 1969 was filed to recover a sum of Rs. 5,25,000 from M/s Chrome Leather Company. Both the suits were settled out of Court. The assessee incurred a sum of Rs. 28,082 by way of Court fee and expenses in respect of the abovesaid two suits. As already stated, the assessee had filed a nil return. The ITO, however, assessed him on interest receipts of Rs. 47,539 and Rs. 18,915 on the basis of receipt from M/s Chrome Leather Company and Rs. 26,538 on the basis of accrual. The claim for expenses of Rs. 23,850 on account of stamp duties and Rs. 2,384 being other expenses were disallowed by the ITO.
4. The assessee claimed before the Tribunal that the interest income was assessable and assessed on a receipt basis and so expenses incurred for realising the income are allowable. In the case of A. Nagappa Chettiar, the interest was calculated on the basis of accrual. The Tribunal found that out of the overall amount due to the assessee by way of capital and interest of Rs. 11 lakhs on account of the compromise made out of Court, the assessee not only did not receive the interest but even had to forego a part of the capital. As far as the year under consideration, the position was that though the assessee had lost his capital in respect of these amounts, he had been assessed on interest of Rs. 45,453 on the one had and not allowed the expenses incurred by way of stamp charges etc., on the other. According to the accountant Member, there being a loss even in the capital, interest could not be collected. Therefore, he held that the sum of Rs. 26,538 should not have been added as accrued interest. In the alternative the amount recovered even going towards the capital had been recovered only after spending the amount by way of Court fee and other expenses. Even if accrual could be justified, the accrued amount had to be subsequently collected on the basis of accrual only by spending amounts, even during the year of account such collection could be done only after the expenditure of amount for litigation. Therefore, the Accountant Member held that on an accrual basis, the interest ought not to have been taxed at all but the interest having been treated as partly accrued, the amounts actually spent on releasing it should be allowed as expenditure. He, therefore, deleted the addition of Rs. 26,538 being accrued interest and allowed an expenditure of Rs. 26,244.
5. On the contrary, the Judicial Member held that the assessee could not be said to have not only received interest but also lost a part of the capital. He held that it could not be said that the expenditure has not been incurred for earning the interest portion of the outstandings. According to the Judicial Member, part of the expenditure attributable to the interest realised only could be allowed.
6. The matter went to a Third Member, in view of the difference of opinion between the Judicial Member and the Accountant Member. The Third Member supported the Accountant Members view and also held that the sum of Rs. 26,538 was not to be included in the total income. With regard to the expenditure, it was held that the sum of Rs. 23,850 having gone out of the coffers by way of cash dealing in the accounting year should be allowed as expenditure.
7. The first item of dispute arising in this reference relates to interest accrued to the extent of Rs. 26,538. Insofar as the amount due from A. Nagappa Chettiar is concerned, C. S. No. 61 of 1969 was filed. The said suit was said to have been compromised outside the Court. According to the assessee, in the compromise, the assessee had to forego not only interest but also a part of the capital, i.e. the principal amount. Therefore, it was contended that as a matter of fact, there being a loss even in capital, interest cannot be collected and uncollectable interest cannot be said to accrue to the lender merely for the reason that the money advanced has been collected. Therefore, according to the assessee, a sum of Rs. 26,538 should not have been added as accrued interest. In the alternative, it was stated that the amount recovered even towards the capital has been recovered only after spending amounts even during the year of account and such collection could be done only after the expenditure of amounts for litigation. Therefore, according to the assessee on an accrual basis the interest ought not to have been taxed at all. That was the view expressed by the Accountant Member.
8. On the other hand, the Judicial Member was of the view that the balance of the interest of Rs. 26,538 accruing on the death of the assessee for the period from 14th Aug., 1968 to 31st March, 1969 has to be assessed in the hands of the assessee for the assessment year under consideration. According to the Judicial Member, the assessee was following mercantile system of accounting and the Administrator General, representing the estate of the deceased is not entitled to change the said method of accounting into that of cash system. The Judicial Member also pointed out that the assessee has not produced the compromise decree, so as to enable the Tribunal to appraise whether the assessee had not only foregone the interest, but also a part of the capital, as alleged. In this view of the matter, the Judicial Member held that the interest accrued is liable to be taxed in the hands of the Administrator General, who is a representative assessee on accrual basis.
9. The Third Member, following a decision of the Supreme Court in the case of Executors of The Estate of J. K. Dubashi vs. CIT (1951) 19 ITR 182 (SC) held that the Administrator General is a new assessee under s. 168 of the Act and that he is bound by the Rules that are applicable to him with regard to the maintenance of various cash books. Taking into account the fact that under the Rules framed under the Administrator Generals Act, 1913, which were followed in the 1963 Act also, the third member held that the Administrator General has got to maintain the account on receipt basis and he cannot follow the mercantile system of accounting, which was followed by the deceased. Since the assessee had not received interest of Rs. 26,538 actually during the year in question, he came to the conclusion that the said amount of Rs. 26,538 cannot be assessed in the hands of the assessee. In view of the Administrator Generals Act, 1913, which was followed by 1963 Act also, the Administrator General can follow only one method of accounting, viz., accounting showing the receipt basis. If that is so in the accounting year relating to the assessment year, the interest amount of Rs. 26,538 did not reach the hands of the assessee. Therefore, it cannot be taxed in the hands of the assessee for the relevant assessment year. In that view of the matter, there is a statutory prohibition, prohibiting the Administrator General from following any other method of accounting other than the accounting method, on the receipt basis. Inasmuch as the interest income has not reached the hands of the assessee during the assessment year, it is not taxable in the assessment year under consideration. Accordingly, we answer the first part of the question referred to us in the negative and against the Department.
10. The second part of the question referred to us is relating to deduction of Rs. 23,850 as expenditure for earning the income. Before the ITO a claim was made for deduction of expenses of Rs. 23,850 incurred on account of stamp duties for filing the suit against Sri Nagappa Chettiar. However, the ITO disallowed the same. On appeal, the CIT held that the income of the assessee is assessable under the head other sources and only such deduction as provided for in s. 57 of the Act can be allowed. According to him, the expenditure claimed must have been incurred for the purpose of earning the income. He further held that the expenditure incurred by the assessee for recovering the interest due from Nagappa Chettiar has obviously been laid out for the purpose of recovering a specified sum of money and that therefore, it cannot be said to have been expended for the purpose of earning it. When the matter came up before the Tribunal, on appeal, the Accountant Member held that the expenses of Rs. 23850 should be allowed as a deduction. According to the Accountant Member, the interest having been treated as partly accrued, the amount actually spent on realising it should be allowed as expenditure. It was pointed out by the Accountant Member that the amount recovered even going towards the capital has been recovered only after spending the amounts even during the year of accounting, such collection should be done only after the expenditure of amounts for reduction. According to the Accountant Member, the expenses incurred have to be allowed. According to the Judicial Member, the expenditure has not been incurred for earning the interest portion. He was, therefore, of the opinion that a part of the expenditure is attributable to the interest of Rs. 1,60,719 (sic) referred to above. The Judicial Member also has held that the ITO should reconsider this particular claim and allow only that portion of expenditure, which is relatable to the earning of the interest income. The Third Member held that only such expenditure as relatable to the interest alone would be admissible and not that relating to the capital because of the assessment was made under s. 57(iii) of the Act. Therefore, he ultimately held that whatever expenses incurred applicable to the realisation of interest, if they have been incurred during the year on the basis of cash system should be allowed. The Third Member further pointed out that before him, the Departments representative did not dispute the figure of Rs. 23,850 as having gone to the coffer by way of cash during the accounting year relevant to the assessment year in question. So, he held that on the basis of cash system of accounting the same has got to be allowed. There was no controversy on the principle that the said sum has been incurred for earning or making the income.
11. Learned standing counsel for the Department submitted that inasmuch as the interest income was not realised even according to the assessee, the expenditure incurred is not attributable for earning the interest income. Therefore, under the provisions of s. 57(iii) of the Act, the assessee is not entitled to claim any deduction. Learned standing counsel for the Department further submitted that there is no nexus between earning of interest income and the expenditure involved in the present case. Learned counsel further submitted that the expenditure was incurred only to realise the capital and therefore, it has got absolutely no connection in the matter either making or earning the interest, so as to enable the assessee to make a claim for deduction under s. 57(iii) of the Act.
12. However, learned counsel appearing for the assessee submitted that the expenditure was incurred for filing the suit. If the suit was not filed, the principal amount itself could not be recovered. Therefore, in order to preserve the estate and collect the principal amount and the interest, the expenditure incurred is allowable under s. 57(iii) of the Act.
13. The Supreme Court in Vijaya Laxmi Sugar Mills Ltd. vs. CIT (1991) 191 ITR 641 (SC), while considering the provisions of s. 57(iii) of the Act held that the expenditure incurred were to facilitate the earning or for preserving the estate, which is allowable as deduction under s. 57(iii) of the Act. Under s. 57(iii) of the Act, the expenditure incurred should have been for the purpose of making or earning such income.
14. The Supreme Court in CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) held that the plain natural construction of the language of s. 57(iii) of the Act, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. The Allahabad High Court in the decision reported in CIT vs. Rampur Timber & Turnery Co. Ltd. (1981) 129 ITR 58 (All) has held that the expenditure incurred for retaining the status of the company, viz., miscellaneous expenses, salary, legal expenses, travelling expenses and the like would be expenditure incurred wholly and exclusively for the purpose of making or earning income.
15. According to the facts arising in this case, the expenditure was incurred by way of stamp duty in order to file the suit to recover the amount with interest from the debtor. If the amount was not realised, it would become time-barred. Therefore, in order to preserve the estate and to collect the amount due to the estate, the suit was filed and the expenditure was incurred. Therefore, it cannot be said that such an expenditure would not fall under s. 57(iii) of the Act as wholly and exclusively incurred for making and earning the income. In that view of the matter, we are in agreement with the Tribunals view that the expenditure of Rs. 23,850 is allowable as deduction under s. 57(iii) of the Act.
16. Accordingly, we answer the second part of the question referred to us in the affirmative and against the Department. There will be no orders as to costs.