1986 (3) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 8,000 can be considered incidental to the assessee's business and allowable as a deduction out of interest income earned upon deposits.
2. Whether a question of law arises from the order of the Income-tax Appellate Tribunal.

Detailed Analysis:

Issue 1: Allowability of Expenditure as Deduction

The assessee, a private limited company, declared a loss of Rs. 560 for the assessment year 1978-79. The company's primary objective was to acquire land for dairy and farming, but it did not engage in these activities. Instead, it deposited its surplus funds with M/s. Ashoka Minerals, Beawar, earning interest income. The Income-tax Officer (ITO) assessed this interest as income from other sources, not as business income, and allowed only 10% of the interest income as deductible expenditure, amounting to Rs. 1,008.

The assessee appealed to the Commissioner of Income-tax (Appeals), arguing that all expenses should be allowed. The appellate court upheld the ITO's decision, noting that the invested amount did not require significant expenditure to earn the interest. The assessee then appealed to the Income-tax Appellate Tribunal, which allowed Rs. 8,000 as deductible expenditure against the claimed Rs. 10,640. The Tribunal justified this by referring to the company's memorandum of association, which included lending money as an object, and past allowances of similar expenditures.

Issue 2: Question of Law Arising from Tribunal's Order

The Commissioner of Income-tax filed an application under section 256(1) of the Income-tax Act, asserting that a question of law arose regarding the Tribunal's decision to allow Rs. 8,000 as deductible expenditure. The Tribunal dismissed this application, stating that its findings were purely factual and no question of law arose.

The Commissioner then moved under section 256(2) to the High Court, arguing that the Tribunal's order was erroneous and lacked proper justification for the enhanced expenditure. The High Court examined whether a question of law indeed arose from the Tribunal's order. It noted that the primary argument before the ITO and the appellate court was the quantum of allowable expenditure, not whether the expenditure was allowable at all.

The High Court emphasized that the Tribunal's decision was based on facts, specifically the quantum of expenditure, and did not involve a legal question. The Revenue did not object to the principle that some expenditure was allowable, nor did it appeal against this principle. The High Court concluded that no question of law arose from the Tribunal's order, as the Tribunal had only addressed the quantum of allowable expenditure, not the legal basis for its allowability.

Conclusion:

The High Court dismissed the reference application under section 256(2), holding that no question of law arose from the Tribunal's order. The Tribunal's findings were purely factual, concerning the quantum of allowable expenditure, and did not warrant a legal review. The High Court highlighted that its role in such applications is advisory and not appellate, reinforcing that the Tribunal's factual determinations are final and not subject to interference unless a clear legal question is involved.