Case: Vijaya Laxmi Sugar Mills Ltd Vs. Commissioner Of Income Tax, Kanpur

its Liquidation was engaged in the manufacture of sugar. The records do not disclose that the Liquidator was carrying on the business of manufacture of sugar or any trading activity for the purpose of facilitating the winding up. The statement of facts on record show that the Liquidator realised certain amount by way of sale of the assets of the company in Liquidation and it is those sale proceeds that was invested in fixed deposit which earned the interest. The Liquidator in merely realising the assets of the company could not be considered as carry on any business of the company. The activity of realising the assets and banking them in fixed deposit was in the course of winding up and it was not in furtherance of any business activity carried on by the company before its winding up.There may be cases where the Liquidator may be said to carry on the companys business in so far as is necessary for the winding up or facilitate the winding up or realise the assets of the company in such a way as to involve the carrying on trade. But in this case there is no evidence in this regard. In fact the winding up order was made as early as in 1950 and nothing of the winding up activity is in evidence. The only accepted fact is that the interest income was derived from fixed deposits purchased out of the proceeds of sale of assets during winding up. The assessee, therefore, could not be said to have carried o n any business to bring the interest income within the meaning of section 28 of the Act and that therefore the interest income was liable to be assessed only under the head "Income From Other Sources". Very near to the facts of this case is t he decision reported in Morvi Mercantile Bank Ltd. (In Liquidation) v. Commissioner of Income Tax, Gujarat, 1976 (104) ITR 568 Guj. In that case the assessee a banking company was compulsorily wound up and its licence was suspended by the Reserve Bank. The Official Liquidator realised the assets and invested the money in short term deposit pending distribution. It was contended on behalf of the company in Liquidation that the income realised by the Liquidator was business income and that the Income Tax Officer was not right in treating it as "Income From Other Sources". Rejecting this contention the Gujarat High Court held: "That the assets of which the liquidator was seized and which he tried to realise for purposes of winding up were of capital nature and they cannot be said to be business assets; nor can it be said that merely because he was investing the realisations, assuming that that was permissible either under the memorandum or under the statute, the activities which he was carrying on as a liquidator were those of a businessman. In the circumstances, therefore, we cannot uphold the contention of Mr. Patel that the liquidator was making for merecantile necessity the investment of realisations as a business for beneficial winding up of the company. The Tribunal has found as a fact that the main business of the assessee-company having gone as a result of the winding-up order, there did not remain any other activity which can be legitimately said to be a business activity and whatever the liquidator did was merely as a liquidator for purposes of liquidation of the company".This is indeed the view to be taken even in this case also. The Tribunal was, therefore, right in holding that the interest income in the instant case is not governed by section 28 but fails to be considered under section 56. The next submission of the learned counsel for the assesee was that in the course of 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 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", section 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 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 an evidence to show that the expenses incurred by the Liquidator was to facilitate the earning or at leas t for protecting of 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 expenditures 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 section 57(iii) that the expenditure should have been incurred "for the purpose of making or earning such income" show that the object of spending or the end or aim or the intention of such spending was for earning the interest income.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]If this contention of his is right the expenditure incurred by the Liquidator shall also be considered as for the purpose of earning the above mentioned income or at least could be said as wholly and exclusively laid out or expended for the purposes of that business and deductable from the total income earned by the company during the relevant previous year. We are wholly at a loss to understand how this argument is possible on the facts and circumstances of this case. As already stated the company had been directed to be wound up and a Liquidator was appointed by the High Court as early as in 1950. The company before its Liquidation was engaged in the manufacture of sugar. The records do not disclose that the Liquidator was carrying on the business of manufacture of sugar or any trading activity for the purpose of facilitating the winding up. The statement of facts on record show that the Liquidator realised certain amount by way of sale of the assets of the company in Liquidation and it is those sale proceeds that was invested in fixed deposit which earned the interest. The Liquidator in merely realising the assets of the company could not be considered as carry on any business of the company. The activity of realising the assets and banking them in fixed deposit was in the course of winding up and it was not in furtherance of any business activity carried on by the company before its winding up.There may be cases where the Liquidator may be said to carry on the companys business in so far as is necessary for the winding up or facilitate the winding up or realise the assets of the company in such a way as to involve the carrying on trade. But in this case there is no evidence in this regard. In fact the winding up order was made as early as in 1950 and nothing of the winding up activity is in evidence. The only accepted fact is that the interest income was derived from fixed deposits purchased out of the proceeds of sale of assets during winding up. The assessee, therefore, could not be said to have carried o n any business to bring the interest income within the meaning of section 28 of the Act and that therefore the interest income was liable to be assessed only under the head "Income From Otheris true that the connection between the expenditure and the earning of 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 an evidence to show that the expenses incurred by the Liquidator was to facilitate the earning or at leas t for protecting of 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 expenditures 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 section 57(iii) that the expenditure should have been incurred "for the purpose of making or earning such income" show that the object of spending or the end or aim or the intention of such spending was for earning the interest income.