1977 (11) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Whether the income derived by the assessee-company was assessable as business income.
2. If the income is assessable as income from "other sources," whether the expenses claimed by the company were deductible as expenses wholly and exclusively laid out or expended for purposes of earning its income.

Detailed Analysis:

Issue 1: Assessability of Income as Business Income
The primary issue was whether the income derived by the assessee-company was assessable as business income. The assessee, a public limited company, was involved in an agreement with the Secretary of State for India for the construction of railways. The Income Tax Officer (ITO) initially assessed the income under "other sources," considering the assessee as merely a financier. However, the Tribunal concluded that the assessee was carrying on business in association with the Secretary of State, thus deeming the income as business income. The Tribunal's decision was based on the continuous nature of the company's activities related to the construction and financing of the railway. This conclusion was supported by a similar case, IRC v. South Behar Railway Co. Ltd. [1925] 12 TC 657, where the House of Lords held that a company engaged in financing and receiving income from a railway project was carrying on business. The High Court agreed with the Tribunal, affirming that the assessee's activities constituted a business.

Issue 2: Deductibility of Expenses if Income is from "Other Sources"
Given the affirmative answer to the first issue, the second issue became unnecessary to address. However, the Tribunal had previously accepted the alternative contention that even if the income was assessed under "other sources," the expenses incurred were necessary for earning the income and should be deductible under Section 57 of the I.T. Act. These expenses included commissions, auditors' fees, directors' fees, and other administrative costs. The Tribunal found that these expenses were laid out wholly and exclusively for the purpose of making or earning the income.

Conclusion:
- Question 1: The income derived by the assessee-company was assessable as business income.
- Question 2: Unnecessary to answer, given the affirmative answer to Question 1.

The High Court ruled in favor of the assessee, affirming the Tribunal's decision and awarding costs of the reference to the assessee.