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

The appellant is a private limited company in Liquidation. The winding up order was made by the High Court on 8th November, 1949 land the Liquidator was directed to submit reports every three months respecting the progress of the winding up proceedings and realisation of the assets. In the course of winding up the Liquidator sold certain assets and deposited the money in fixed deposits with certain banks. During the previous year relevant to the assessment year 1966-67 the appellant earned by way of interest from fixed deposits a sum of Rs.32, 237.60. The Liquidator had in the relevant previous year incurred the following expenditure totalling Rs. 12, 379.45:Salaries Rs. 1, 2 15.00Legal fees Rs. 9, 725.00Liquidation expenses Rs. 538.85T.A. &D.A. Rs. 751.51Postage Rs. 95.34Stationery Rs. 53.75Total:-- Rs. 12, 379.45The assessee-company claimed a deduction of the above said sum of Rs. 12, 379.45 from the interest income of Rs.32, 237.60. The Income Tax Officer did not allow any part of the expenditure claimed by the assessee company and assessed the entire amount of Rs.32, 237.60 as taxable under section 56 of the Income Tax Act, 1961 (hereinafter referred to as the Act), under the head INCOME FROM OTHER SOURCES". This assessment order was confirmed by the Appellate Assistant Commissioner and the Tribunal on an appeal.

Court's reasoning:
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.