1986-VIL-79-ITAT-

Equivalent Citation: ITD 020, 439, TTJ 027, 604,

Income Tax Appellate Tribunal MADRAS

Date: 19.09.1986

INCOME-TAX OFFICER.

Vs

DWARAKA CHIT FUNDS PRIVATE LIMITED.

BENCH

Member(s)  : D. S. MEENAKSHISUNDARAM., DR. S. NARAYANAN.

JUDGMENT

Per Shri D. S. Meenakshisundaram, Judicial Member --- In these six appeals the revenue objects to the orders of the Commissioner (Appeals) allowing the expenditure claimed by the Official Liquidator of Dwaraka Chit Funds (P.) Ltd.

2. These appeals arise out of the income-tax assessments made on the Official Liquidator in the case of Dwaraka Chit Funds (P.) Ltd. The assessment years are from 1978-79 to 1983-84. The assessee follows the financial year as the previous year. Dwaraka Chit Funds (P.) Ltd. was a company carrying on chit fund business. The Hon'ble Madras High Court ordered this company to be wound up by its order dated 25-6-1976. The High Court appointed the Official Liquidator as the liquidator for the company, which went into liquidation. While completing the assessments for these six years pursuant to the orders passed by the Commissioner under section 263 of the Income-tax Act, 1961 ('the Act') the ITO disallowed expenses claimed by the Official Liquidator against the interest receipts and other miscellaneous receipts as not allowable. The amounts so disallowed by the ITO were the following :

Assessment year Amount disallowed

1978-79 4,296

1979-80 7,173

1980-81 5,923

1981-82 32,200

1982-83 64,711

1983-84 44,041

The details of the expenses disallowed by the ITO are fully set out in the common order passed by the Commissioner (Appeals) on 24-4-1985. The Commissioner (Appeals) 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 Commissioner (Appeals) was of the view that the entire expenditure claimed by the Official Liquidator was allowable under section 57(iii) of the Act as the Official Liquidator had 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 Commissioner (Appeals) further relied on the decision of the Tribunal, Madras Bench 'A' in the case of ITO v. Gannon Dunkerley & Co. (Madras) (P.) Ltd. [IT Appeal Nos. 1108 and 1109 (Mad.) of 1984 dated 28-2-1985] for the assessment years 1979-80 and 1980-81 in support of his action. This is being objected to by the revenue in these appeals.

3. At the time of hearing of the appeals, Shri S. Renganathan, the learned departmental representative relied on a decision of the Tribunal, Madras Bench 'C' in the case of Pilot Pen Co. (India) (P.) Ltd. [IT Appeal Nos. 573 and 574 (Mad) of 1983, dated 5-11-1983] and submitted that in view of this decision of the Tribunal, the Commissioner (Appeals) was not justified in allowing the expenditure claimed by the Official Liquidator in the present case. He further relied on the following decisions---Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC), K. Mahesh v. CIT [1968] 70 ITR 240 (Mad.) and South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 (Mad.).

He argued that in the light of these decisions it would be clear that the assessee was not entitled to any of the deductions claimed by him in the present case.

4. On behalf of the Official Liquidator, Shri R. Vijayaraghavan the learned counsel relied on the order of the Tribunal in the case of Gannon Dunkerley & Co. (Madras) (P.) Ltd. referred to by the Commissioner (Appeals) in his order. He also placed before us the earlier order of the Tribunal in the case of Gannon Dunkerley & Co. (P.) Ltd. for the assessment year 1978-79 [IT Appeal No. 1132 (Mad.) of 1983, dated 26-11-1983] referred to and followed by the Tribunal, Madras Bench 'C' for the latter years 1979-80 and 1980-81 and submitted that in the light of this decision of the Tribunal, the Commissioner (Appeals) was right in allowing the expenses claimed by the Official Liquidator as admissible under section 57(iii). Shri R. Vijayaraghavan further relied on the decision of the Bombay High Court in the case of CIT v. H. H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 and contended that this decision fully supported the case of the Official Liquidator for claiming allowance of the expenditure under the various heads.

5. We have carefully considered the submissions urged on both sides in the light of the materials placed before us. We have already stated that the details of the expenses claimed by the Official Liquidator are fully set out in the order of the Commissioner (Appeals) and, therefore, they need not be reproduced here. We way further mention that there is no dispute about the fact that these expenses were incurred by the Official Liquidator in accordance with the Companies (Court) Rules framed under the Companies Act and that the Official Liquidator had maintained the accounts which were audited by the examiner of local fund accounts and which were approved by the High Court. Thus, there can be no dispute about the genuineness of the expenditure claimed by the Official Liquidator.

6. The argument on behalf of the revenue is that these expenses were not laid out or expended wholly and exclusively for the purpose of making or earning the income under the head 'Income from other sources' as specified in section 57(iii). It is the argument of Shri S. Renganathan that the income shown by the Official Liquidator represented interest receipts and miscellaneous receipts and that for earning these receipts the expenses claimed by the Official Liquidator under the various heads could not 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 learned departmental representative pointed out that interest receipts were earned from 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. Though these arguments of the learned departmental representative are quite attractive they cannot stand a moment's scrutiny. All the items of expenses would have been allowed as admissible deductions if the assessee-company had carried on its chit fund business. Unfortunately, the assessee-company had gone into liquidation under orders of the High Court. In order to realise the assets and pay the creditors of the company, the Official Liquidator has necessarily to collect the funds from the various customers and debtors of the company and deposit the same as per the orders and directions of the High Court and then distribute the same among the creditors. It is in the process of these liquidation proceedings the Official Liquidator has earned this interest income from the deposits made by him out of the collections made from the debtors of the company. All the expenses had 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 anyone, much less for the Official Liquidator, to earn this income by way of interest receipts or miscellaneous receipts. It is in the context of these facts and circumstances that the Commissioner (Appeals) rightly held that these expenses were incurred by the Official Liquidator wholly, exclusively and necessarily for the purpose of earning or making the income as described in section 57(iii). We entirely agree with the reasoning of the Commissioner (Appeals) to allow these expenses in all the years.

7. We are supported in our view by the decision of the Bombay High Court in the case of H. H. Maharani Shri Vijaykuverba Saheb of Morvi. In this case, their Lordships of the Bombay High Court held that the deduction which is permissible under section 12(2) of the Indian Income-tax Act, 1922, corresponding to section 57(iii) of the Income-tax Act, is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax, and for determining whether an expenditure is deductible, the nature of the expenditure has to be examined. Their Lordships further held that the purpose for which the expenditure is incurred must be to earn the income, that the intention between the expenditure and the earning of the income need not be direct and that, however, indirect the connection may be, there must be a connection or nexus between the expenditure incurred and the income earned. Their Lordships relied on an earlier decision of the Bombay High Court in Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543. In the said case the assessees who were the trustees had to borrow a sum of Rs. 8,25,300 from the Bank of India Ltd. for paying the estate duty of Prince M. in whose favour a trust was created by a trust deed dated 6-10-1955. The trust property comprised of shares and securities and the income of the trust was by way of dividends from shares and interest on securities. The trustees had to pay the interest to the bank on the amount of Rs. 8,25,300 borrowed by them for paying the estate duty of the author of the trust M to the bank in the three assessment years 1959-60 to 1961-62 till the whole amount was repaid in 1962. The trustees claimed the amounts paid as interest as deduction against their income under the head 'Dividends and interest on securities'. The ITO rejected the claim, but it was allowed by the Tribunal. While affirming the order of the Tribunal, their Lordships of the Bombay High Court held that if an assessee had no option except to incur an expenditure in order to make the earning of the income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by the reason of the exercise of that option would come within the ambit of section 12(2). The decisions of the Tribunal in the case of Gannon Dunkerley & Co. (P.) Ltd. relied on by the learned counsel also support the case of the assessee. The other decision in the case of Pilot Pen Co. (India) (P.) Ltd. relied on by the learned departmental representative turned on their peculiar facts as the income received by the Official Liquidator was in respect of property income and the expenditure claimed was in respect of such property income and hence inapplicable to the facts of the present case. The three decisions relied on by the learned departmental representative are not applicable to the facts of the present case as they do not relate to a case of a company which is in liquidation and that the income is earned in the course of liquidation proceedings by the Official Liquidator and expenses are claimed by him against such income. The Special Bench decision of the Tribunal in ITO v. Smt. Vijayalaxmi N. Mafatlal [1985] SOT 581 (Bom.) is in favour of the assessee. We, therefore, respectfully follow the decision of the Bombay High Court in H. H. Maharani Shri Vijaykuverba Saheb of Morvi's case and the decisions of the Tribunal in the case of Gannon Dunkerley & Co. Ltd. and the Special Bench decision referred to above and confirm the orders of the Commissioner (Appeals) in all these years.

8. In the result, the appeals are dismissed.

 

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