TMI Blog1973 (4) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... y at various places in Madras State. The business was taken over by the Madras Electricity Board under the Madras Electricity Undertakings Acquisition Act, 1954, with effect from June 1, 1957. As from this date the assessee-company ceased its business of applying electricity and did not deprive any income from the business as such. The assesee's year of account is the calendar year. During the periods relevant to the assessment years 1959-60 to 1962-63, the income derived by the company consisted of interest from fixed deposits from bank, interest paid by the Government on the compensation amount payable by the Government for taking over the assets of the company, and share transfer fees. This income was assessed under the head "Income from other sources "'The income so assessee for the several years in question is as under: 1959-60 Rs. 34,245 1960-61 Rs. 15,120 1961-62 Rs. 40,517 1962-63 Rs. 10,878 Against this income the assessee claimed allowances for the expenses relating to establishment, salaries, rent, sitting fees and travelling expenses of directors, remuneration to the accredited representatives, etc. The expenses thus claimed by the assessee for the several yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and stated that, in view of the decision of the Supreme Court in Commissioner of Income-Tax v. Lahore Electric Supply Co. Ltd. he was not pressing the contention that the assessee was carrying on any business during the assessment years under reference and that the expenditure claimed by the assessee was laid out wholly and exclusively for the purpose of the assessee's business. The Tribunal, therefore, confirmed the finding of the Appellate Assistant Commissioner that daring the relevant period the assessee neither carried on any business nor intended to carry on any business and that the expenditure claimed by the assessee cannot be allowed under section 10(2)(xv) of the Act as laid out wholly and exclusively for the business of tae assessee-company. It was then contended before the Tribunal that the expenditure is allowable even under section 12(2) of the Act as having been incarred for the purpose of earning the income that was assessed in these years. The tribunal noted that the earnings consisted of the share transfer fees, interest on fixed deposits in the banks and interest on the compensation amount payable by the Government. The share transfer fee earned during the seve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the compensation payable would be Rs. 36.14,031.25 and this dispute went on for a considerable time. Further, the Government had made deductions amounting to Rs. 9,15,230.05 from the computed figure. The accredited representative questioned the validity of the said deductions. The matter had been in dispute. The company had to take competent technical and legal advice and fight the issue which involved heavy expenses. The compensation was in the nature of an income producing asset. To acquire that asset the company had to spend. If the company had succeeded in getting additional compensation, interest on the same would be payable from June 1, 1957, the date of acquisition, and, therefore, the expenses incurred should be deemed to have been "solely " or " wholly and exclusively " expended for the purpose of making or earning the income by way of interest though, in fact, additional compensation was not received and no interest was earned on that account. In this connection he referred to the dictionary meaning of the word " making " and stated that it would mean fabrication, production or conversion of a thing and include the material from which the thing is made. He contended fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m other sources". It provides that "any expenditure (not being in the nature of capital expenditure incurred solely for the purpose of making or earning, such income, profits or gains" shall be deducted in computing the income from other sources. The corresponding provision in the Income-tax Act, 1961, is section 57(iii), The only difference between these two sections is, instead of the word "solely" occurring in section 12(2), the words "wholly and exclusively" are used in section 57(iii). As observed by this court in Commissioner of Income-tax v. S. Devaraj though the scope of section 12(2) presents riot much of difficulty, its application to particular facts is a matter of nicety. Sometimes it baffles beyond imagination when it comes to the question of its application to a given set of facts. The applicability of this provision in respect of particular expenses incurred have come up for consideration in a number of cases. In Commissioner of Income-tax v. Bihar Spinning and Weaving Mills Ltd. the facts were these : The assessee, a public limited company, was at the relevant time in the second year of its existence. It had not yet commenced the business, but it was preparing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of office and establishment expenses un-connected with the earning of the income nor anything necessary for keeping the company alive. Indeed, if a company which is at the development stage and as yet doing no business has only an interest income chargeable under section 12 and claims the expenses necessary for keeping itself alive, it really claims personal expenses which are expressly forbidden under clause (a) of sub-section (2) of section 12 .... Considerations such as the necessity of keeping the company alive or such as the necessity of maintaining an establishment for the purposes of the prospective business, are wholly extraneous and cannot be utilised for enlarging the amount of the deduction nor can any allowance which is claimable only under section 10 be allowed or claimed before a business income assessable under the Act has emerged." This court had also considered this question in a number of cases. But it is useful to refer to one decision in Commissioner of Income-tax v. S. Devaraj. That was a case where the question for consideration was whether the expenses incurred by the assessee in establishing his status as an adopted son is an allowable expenditure from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary, as we indicated earlier, is satisfied by the expenditure in this case. We are unable to see any connection, direct or indirect, between the status of the assessee as an adopted son and the investments which produced the dividends. It is true that, unless his adoption is upheld, the assessee's title to the investments will fail. But the two things cannot be mixed up and the one cannot be taken for the other. Adoption is a matter of status, which is personal to the assessee. That necessarily does not bear upon the investments, though the status of the assessee as the adopted son once established may entitle him to the investments. But the question of status and the dispute relating to it does not spring from, or arise out of, or is not directly or indirectly connected with, the investments producing the dividends. In a sense, one may find a connection by adding certain links in the chain, but that is not the nexus contemplated by section 12(2). If the connection is remote, it will not satisfy the test of nexus required for the purpose of section 12(2)." In a later decision, the Supreme Court had also expressed a similar view in regard to the scope of sections 10(2)(xv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity as a person carrying on the business." The assessee was assessed in this case under the head "Income from other sources". The income assessed was the interest in income The expenditure allowed under section 12(2) is one incurred solely for the purposes of making or earning the in interest income The, meaning given for the word "purpose" in Webster's New International Dictionary is that which one sets before himself as object to be obtained ; the end or aim to be kept in view in any plan, measure, exertion or operation, design, intention. We have already pointed out that the assesseee was not carrying on any business during the relevant assessment years. The "source" 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 of the interest. The learned counsel for the assessee then questioned the estimate of the expenditure for the purposes of earning the income from other Sources at 10 per cent. of the income. His contention was that this allocati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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