1991 (8) TMI 1 - SC - Income Tax

Winding up of company - sale proceeds of assets were deposited in a bank by liquidator - Whether the assessee is entitled to deduction of the whole or any part of the expenses incurred by the liquidator in the computation of the assessee s total income

Summary

Issues:
- Deduction of expenses incurred by the liquidator in the computation of the assessee's total income.
- Allowability of expenses incurred by the liquidator for earning interest income from fixed deposits.
- Classification of interest income as business income taxable under section 28 or under section 56 of the Income-tax Act, 1961.
- Interpretation of section 57(iii) for deduction of expenses laid out or expended wholly and exclusively for earning income.

Analysis:

The judgment involves a private limited company in liquidation that earned interest income from fixed deposits and claimed deduction of expenses incurred by the liquidator in the computation of total income. The Income-tax Officer assessed the entire interest income as taxable under section 56 of the Income-tax Act, 1961, under the head "Income from other sources," denying any deduction for the expenses claimed by the company.

In the assessment years 1966-67 and 1967-68, the company earned interest income from fixed deposits, while the liquidator incurred various expenses. The High Court referred a question regarding the deduction of these expenses under section 256(2) of the Act. The company contended that the interest income should be considered as business income taxable under section 28, allowing for deduction of related expenses. However, the court found that the liquidator's activities were part of the winding-up process and not business activities of the company before liquidation.

The court cited the decision in Vijay Laxmi Sugar Mills Ltd. v. CIT and Morvi Mercantile Bank Ltd. v. CIT, emphasizing that the interest income from fixed deposits falls under section 56, not section 28. The expenses incurred by the liquidator were deemed unrelated to the interest income and not deductible under section 57(iii) of the Act, which requires a nexus between the expenditure and the earning of income.

The court concluded that the expenses claimed by the liquidator were not incurred for the purpose of earning the interest income and were not deductible. Therefore, the High Court's decision to deny the deduction of expenses and tax the interest income under the head "Income from other sources" was upheld. The appeals were dismissed with costs, affirming the decision in favor of the Revenue.