Madras High Court
Commissioner Of Income Tax vs Dwarka Chit Funds Pvt. Ltd. on 13 February, 1995
Equivalent citations: [1995]216ITR115(MAD)
Author: T. Jayarama Chouta
Bench: T. Jayarama Chouta
JUDGMENT Thanikkachalam, J.
1. At the instance of the Department, the Tribunal has referred the following question of law under s. 256(1) of the IT Act, 1961, for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire expenses incurred by the official liquidator of the assessee-company in the course of liquidation proceedings was allowable as deduction under s. 57(iii) on the ground that they were incurred wholly, necessarily and exclusively for the purpose of earning interest and other miscellaneous income in the asst. yrs. 1978-79 to 1983-84?"
2 The official liquidator, representing Dwarka Chit Funds Pvt. Ltd., Madras, is the assessee. The assessment years are from 1978-79 to 1983-84. The assessee follows the financial year as the previous year. The assessee is a company carrying on chit fund business. The said company was wound up by the High Court by its order dt 25th June, 1976. The High Court appointed the official liquidator as the liquidator for the company, which underwent liquidation. While completing the assessment for the abovesaid six years, pursuant to the order passed by the CIT under s. 263 of the IT Act, the ITO disallowed expenses claimed by the official liquidator against the interest receipt and other miscellaneous receipts as not allowable. The amounts so disallowed by the ITO are as under :
Asst. yr. Amount disallowed
Rs.
1978-79 4,296
1979-80 7,173
1980-81 5,923
1981-82 32,200
1982-83 64,711
1983-84 44,011
3. The CIT(A), after examining the expenditure claimed by the official liquidator, held that these expenses were incurred by the official liquidator not only wholly and exclusively for the purpose of earning the income, but also necessarily for the purpose of earning the income. The CIT(A) was of the view that the entire expenditure claimed by the official liquidator was eligible under s. 57(iii) of the Act as the official liquidator has incurred them in accordance with the Companies (Court) Rules, 1959, framed under the Companies Act, 1956, and also maintained accounts which were subjected to audit by the examiner of local fund accounts and were also approved by the High Court. The CIT(A) further relied on the decision of Tribunal, Madras Bench 'A' in the case of ITO vs. Gannon Dunkerley & Co. (Madras) Ltd. (in liquidation).
4. The Department filed a second appeal before the Tribunal for all these six years. The Tribunal confirmed the decision of the CIT(A) following the decision of the Bombay High Court in CIT vs. H. H. Maharani Shri Vijaykuverba Saheb of Morvi (1975) 100 ITR 67 (Bom).
5. Learned standing counsel for the Revenue submitted as under :
These expenses were not incurred or expended wholly and exclusively for the purpose of making or earning the income under the head "Other sources" as specified in s. 57(iii) of the IT Act. The income shown by the official liquidator represents interest receipts and miscellaneous interest and that for earning these receipts the expenses claimed by the official liquidator under the various heads cannot be held to have been laid out or expended wholly and exclusively for the purpose of making or earning those interest receipts or miscellaneous receipts. The interest was earned from the bank by depositing the amounts into the bank by the official liquidator and nothing more was required to be done by the official liquidator for the purpose of earning this interest income. In order to support this contention, learned standing counsel for the Department placed reliance on the following decisions : South Arcot Electricity Distribution Co. Ltd. vs. CIT , United Provinces Electric Supply Co. Ltd. vs. CIT , In re Wandoor Jupiter Chits Pvt. Ltd. (in liquidation) (1992) 195 ITR 244 (Ker) and CIT vs. Rajendra Prasad Moody .
On the other hand learned counsel appearing for the respondent submitted as under :
The Tribunal was right in allowing the expenses claimed by the official liquidator as admissible under s. 57(iii) of Act. In order to realise the assets and to pay the creditors of the company, the official liquidator has to necessarily collect the funds from the various customers and the debtors of the company and deposit the same as per the directions of the High Court and then distribute the same among the creditors. It is in the process, the official liquidator has earned this interest income from the deposits made by him out of the collection made from the debtors of the company. All the expenses have to be incurred to maintain the infrastructure for the earning or making the interest income. Without incurring these items of expenditure, it would be impossible for any one to earn this income by way of interest receipts or miscellaneous receipts. The accounts maintained by the official liquidator are periodically audited by the statutory auditors. All these expenses are incurred as per the directions given by the Company Court. It was, therefore, pleaded that the Tribunal was correct in allowing these expenses under s. 57(iii) of the Act.
6. For the asst. yr. 1978-79, the assessee claimed expenditure amounting to Rs. 25,552.87. The ITO was of the view that expenses like filing fees, legal fees, establishment charges, etc., can be allowed as deductions. On the other hand, the ITO pointed out that it cannot be said that expenses like audit fees, Government commission and miscellaneous expenses are eligible. Accordingly, the ITO disallowed a sum of Rs. 4,295.61. In the asst. yr. 1979-80, the assessee claimed an expenditure of Rs. 42,778.78. The ITO disallowed Rs. 7,177.28 being audit fees, Government commission and miscellaneous expenses. For the asst. yr. 1980-81, the assessee claimed an expenditure of Rs. 31,930.08. The ITO disallowed a sum of Rs. 5,923.15 being the audit fees, Government commission and miscellaneous expenses. For the asst. yr. 1981-82 the assessee claimed Rs. 33,200 against the interest receipt of Rs. 32,090 resulting in a loss of Rs. 1,110. The ITO allowed an expenditure of Rs. 1,000 and disallowed the balance expenditure claimed. For the asst. yr. 1982-83, an expenditure of Rs. 3,000 was allowed by the ITO, while the assessee claimed an expenditure of Rs. 67,711. For the asst. yr. 1983-84, the assessee claimed an expenditure at Rs. 41,041 and the ITO estimated the expenditure of Rs. 4,000 and allowed the same and the balance was disallowed. Thus, the ITO disallowed a portion of expenditure claimed by the assessee since, according to the ITO, it was not incurred wholly and exclusively for the purpose of making or earning such income.
7. In South Arcot Electricity Distribution Co. Ltd. vs. CIT (supra), this Court while considering the provisions of ss. 10(2)(xv) and 12(2) of the Indian IT Act, 1922 and s. 57(iii) held as under :
"The assessee was assessed in this case under the head 'Income from other sources'. The income assessed was the interest income. The expenditure allowed under s. 12(2) is one incurred solely for the purpose of making or earning the interest income. The meaning given for the word 'purpose' in Webster's New International Dictionary is that which one sets before himself as object to be obtained; the end or aim to be kept in view in any plan, measure, exertion or operation, design, intention. We have already pointed out that the assessee was not carrying on any business during the relevant assessment years. The 'source' which is taxed is also not the business income, whether it is money-lending business or any other business. It was not an expenditure incurred solely for the purpose of earning the interest income. In other words, the expenses incurred are so remote that they have no connection for earning of the interest."
It was further held that :
"We have already seen that so far as the interest receivable from fixed deposit and the compensation no effort is necessary and expenditure incurred could not be also considerable."
The Supreme Court in CIT vs. Rajendra Prasad Moody (supra) while considering the provisions of ss. 37(1) and 57(iii) of the IT Act, 1961, held as under :
"What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. Sec. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. vs. CIT , where interpreting the corresponding provision in s. 12(2) of the Indian IT Act, 1922, which was ipsissima verba in the same terms as s. 57(iii)...."
In Nakoda Bus Services (P.) Ltd. vs. CIT , the Punjab & Haryana High Court, While considering the provisions of s. 57(iii) of the Act, 1961, held as under :
"The view taken by the Tribunal, in the context of the circumstances herein, is clearly too narrow to be countenanced. The totality of the circumstances of the assessee have to be seen to determine the matter in question. It would be pertinent in the context to advert to the judgment of the High Court of the Allahabad in CIT vs. Rampur Timber & Turnery Co. Ltd. , where, in dealing with the provisions of s. 57(iii) of the Act with regard to the assessee-company that had discontinued its business, it was held that the expenditure incurred for retaining the status of the company, namely, 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. Seen in this light, the assessee here must indeed be held entitled to the deduction claimed. The reference is, consequently, hereby answered in the negative, in favour of the assessee and against the Revenue. There will, however, be no order as to costs."
So also, the Kerala High Court, while considering the provisions of s. 57 of the IT Act and s. 449 of the Companies Act, in the case of Wandoor Jupiter Chits P. Ltd., In Re (supra), held as under :
"The official liquidator attached to this Court becomes the liquidator of a company under s. 449 of the Companies Act when this Court orders winding up of that company. He is an officer subject to the control of this Court. His major income is the interest earned on investments made as provided under r. 293 of the Companies (Court) Rules. The liquidator will have to comply with various orders passed by this Court for the realising the debts due to the company by filing cases, engaging counsel and also by deputing staff for conducting enquiries. He has also to obtain legal assistance and appoint additional staff as provided under rr. 307 and 308 of the Companies (Court) Rules. He will have to incur expenses like cost of revenue stamp, cost of Court fee stamp, audit fee filing fee, Central Government commission, estate clerk's salary, advocate's fee, professional fee to chartered accountants, godown rent, printing charges, advertisement charges, travelling allowance, bank commission, witness batta, estate establishment expenses, remuneration paid to watchman and other miscellaneous expenses. The nature of these expenses is uniform in the administration of the winding up of all companies under his charge. All these expenses are met by the official liquidator as per the order of this Court.
Since the liquidator is incurring unnecessary expenditure for getting this fact admitted by the IT authorities, it has become necessary for this Court to give a declaration to the effect that these expenses are expenses in the winding up a administration of the company."
Reliance was also placed on a decision in the case of United Provinces Electric Supply Co. Ltd. vs. CIT (supra). According to the facts arising in that case the assessee-company which had gone into voluntary liquidation earned interest on the short-term deposits. It claimed deduction of an amount of Rs. 92,565. The ITO went through the details of the expenses and he was of the opinion that all the items of expenses could not be said to have been wholly and exclusively laid out for the purpose of earning the income. He allowed expenses aggregating to Rs. 36,987 and this was upheld by the Tribunal. On a reference to the High Court, it was held that what was the exact amount spent wholly and exclusively for earning the income was basically a question of fact. The amount of Rs. 36,987 was deduction under s. 57 in the asst. yr. 1976-77.
8. According to the facts arising in the present case, the assessee-company went into liquidation. The official liquidator was appointed as liquidator of the assessee-company. In the process of liquidation proceeding, he has earned interest income from the deposits made by him out of the collection made from the debtors of the company. All the expenses were stated to have been incurred to maintain the infrastructure for earning or making the interest income. It is not possible, according to the assessee, to earn the interest income or miscellaneous receipts without incurring the various items of expenditure claimed by the assessee. The ITO disallowed a portion of the expenditure claimed by the assessee since, according to him, some of the items of expenditure were not wholly and exclusively laid out for earning the income. The CIT(A) and the Tribunal found that the items of expenditure disallowed by the ITO are necessary for the earning the interest income. The expenditure was incurred by the official liquidator in accordance with the Companies (Court) Rules, 1959, framed under the Companies Act, 1956. He also maintained accounts which were subjected to audit by the examiner of local funds accounts and were also approved by the High Court.
9. According to the facts arising in the South Arcot Electricity Distribution Co. Ltd. vs. CIT (supra), the business of supplying electricity carried on by the assessee-company was taken over by the Government. During the periods relevant for the asst. yrs. 1959-60 to 1962-63, the income derived by the assessee-company consisted of interest from fixed deposits from banks, interest paid by the Government on the compensation amount payable by the Government for taking over the assets of the assessee-company and share transfer fees and the income was assessed under the head "Other sources". Hence, this Court held that no effort was made by assessee to earn the interest income, but, according to the facts arising in the present case, the official liquidator incurred the expenses for the earning the interest income after the approval of the Company Court, because without such direction, the official liquidator cannot act independently on his own accord. Therefore, the decision in South Arcot Electricity Distribution Co. Ltd. vs. CIT (supra) would not be applicable to the facts of the present case.
10. Lastly, the learned Departmental Representative relied on a decision of the Supreme Court in Vijay Laxmi Sugar Mills Ltd. vs. CIT , wherein while considering the provisions of s. 57(iii) of the IT Act, 1961, the Supreme Court held that "the next submission of learned counsel for the assessee was that, in the course of the effecting the winding up of the assessee-company, the liquidator has been incurring expenses such as salaries, legal fees, travelling expenses and other liquidation expenses and that these expenses are allowable as deduction from income earned by way of interest from fixed deposits in the relevant year. In computing the income chargeable under the head 'Income from other sources', s. 57(iii) provides that deduction is to be made in respect of expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. 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 the 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 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. The Tribunal was, therefore, right in holding that the expenses claimed are not related to the interest income and were not deductible expenditure under s. 57."
11. According to the Supreme Court, the expenditure claimed under s. 57(iii) of the Act was 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 any one much less the official liquidator, to earn this income by way of interest receipts or miscellaneous receipts. It was, therefore, held that these expenses were incurred by the official liquidator wholly, exclusively and necessarily for the purpose of earning or making the income as contemplated under s. 57(iii) of the Act. Therefore, the Tribunal came to the abovesaid conclusion on an appraisal of facts arising in this case. Therefore, there is no infirmity in the order passed by the Tribunal in allowing the expenditure claimed by the assessee under s. 57(iii) of the Act. In that view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.