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TMI Blog1995 (2) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the previous year. The assessee is a company carrying on chit fund business. The said company was wound up by the High Court by its order dated June 25, 1976. The High Court appointed the official liquidator as the liquidator for the company, which underwent liquidation. While completing the assessment for the abovesaid six years, pursuant to the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, the Income-tax Officer disallowed expenses claimed by the official liquidator against the interest receipts and other miscellaneous receipts as not allowable. The amounts so disallowed by the Income-tax Officer are as under : Assessment year Amount disallowed Rs. 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 Commissioner of Income-tax (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 of Income-tax (Appeals) was of the view that the entire expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors of the company, the official liquidator has to necessarily collect the funds from the various customers and debtors of the company and deposit the same as per the directions of the High Court and then distribute the same among the creditors. It is in this process, 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 have to be incurred to maintain the infrastructure for earning or making the interest income. Without incurring these items of expenditure, it would be impossible, for any one to earn this income by way of interest receipts or miscellaneous receipts. The accounts maintained by the official liquidator are periodically audited by the statutory auditors. All these expenses are incurred ,as per the directions given by the company court. It was, therefore, pleaded that the Tribunal was correct in allowing these expenses under section 57(iii) of the Act. For the assessment year 1978-79, the assessee claimed expenditure amounting to Rs. 25,552.87. The Income-tax Officer was of the view that expenses like filing fees, legal fees, establishment charges, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce' which is taxed is also not the business income, whether it is money-lending business or any other business. It was not an expenditure incurred solely for the purpose of earning the interest income. In other words, the expenses incurred are so remote that they have no connection for earning of the interest. " It was further held that (at page 478) : " We have already seen that so far as the interest receivable from fixed deposit and the compensation no effort is necessary and the expenditure incurred could not be also considerable. " The Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 while considering the provisions of sections 37(1) and 57(iii) of the Income-tax Act, 1961, held as under (at page 522) : " What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under section 449 of the Companies Act when this court orders winding up of that company. He is an officer subject to the control of this court. His major income is the interest earned on investments made as provided under rule 293 of the Companies (Court) Rules. The liquidator will have to comply with various orders passed by this court for realising the debts due to the company by filing cases, engaging counsel and also by deputing staff for conducting enquiries. He has also to obtain legal assistance and appoint additional staff as provided under rules 307 and 308 of the Companies (Court) Rules. He will have to incur expenses like cost of revenue stamp, cost of court fee stamp, audit fee, filing fee, Central Government commission, estate clerk's salary, advocate's fee, professional fee to chartered accountants, godown rent, printing charges, advertisement charges, travelling allowance, bank commission, witness batta, estate establishment expenses, remuneration paid to watchman and other miscellaneous expenses. The nature of these expenses is uniform in the administration of the winding up of all companies under his charge. All these expenses are met by the official liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were subjected to audit by the examiner of local funds accounts and were also approved by the High Court. According to the facts arising in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 (Mad), the business of supplying electricity carried on by the assessee-company was taken over by the Government. During the periods, relevant for the assessment years 1959-60 to 1962-63, the income derived by the assessee-company consisted of interest from fixed deposits from banks, interest paid by the Government on the compensation amount payable by the Government for taking over the assets of the assessee-company and share transfer fees and the income was assessed under the head "Other sources". Hence, this court held that no effort was made by the assessee to earn the interest income, but, according to the facts arising in the present case, the official liquidator incurred the expenses for earning the interest income after the approval of the company court, because without such direction, the official liquidator cannot act independently on his own accord. Therefore, the decision in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 (Mad) wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure should have been incurred ' for the purpose of making or earning such income ' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. There could be no doubt that the expenditure incurred by the liquidator in this case can, by no stretch of imagination, be said to have been incurred with the object or for the purpose of earning the interest income. The Tribunal was, therefore, right in holding that the expenses claimed are not related to the interest income and were not deductible expenditure under section 57. " According to the Supreme Court, the expenditure claimed under section 57(iii) of the Act was not allowed because there is not even some sort of evidence to show that the expenses incurred by the liquidator were to facilitate the earning of or at least for preserving the estate. In the abovesaid decision, the Supreme Court held that if any expenditure were incurred like commission for collection or such similar expenditure, it may be considered as spent solely for the purpose of earning that income, the position may be different. The Supreme Court further pointed out that according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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