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TMI Blog1973 (4) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 years are as under 1959-60 Rs. 54,224 1960-61 Rs. 62,375 1961-62 Rs. 37,390 1962-63 Rs. 36,713 The Income-tax Officer held that these expenses cannot be said to have been incurred entirely in the course of earning the items of the income accounted for. He estimated the expenses attributable to these items of income at 10 per cent. of the receipts and disallowed the balance of the claim. ln the appeal filed before the Appellate Assistant Commissioner the assessee raised three main contentions. Firstly, although the Government had taken over the assessee's business of supply of electricity, the company did not cease to carry on the business in the assessment year under appeal, that it intended to start a new business and, therefore, was maintaining an establishm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended 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 several years 1959-60 to 1962-63 were Rs. 66, Rs. 29, Rs. 18 and Rs. 62, respectively. The Tribunal, therefore, observed that in the circumstances it cannot be said that in order to earn this income the assessee-company had to maintain a large establishment and pay sitting fees and travelling allowance to the board of directors which are far in excess of the income earned by it. It also pointed out that it was one of the objects of the as company to earn income by way of share transfer fees and that the interest receipts, though large as compared with the share transfer fees, did not involve, in the nature of things, the necessity of incurring any heavy expenditure because the banks and the Government pay the interest even without any claim by the assessee-company. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusively " 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 further that the expenses incurred for preservation and protection of an asset would come under section 12(2) of the Indian Income-tax Act, 1922. The asset in this case is in the form of compensation. Commercial expediency demanded preservation of this asset and getting of excess compensation. Even if the expenses incurred are indirectly connected with the making or earning of the income it is enough to attract the provisions of section 12(2). He also contended that to earn the share transfer fee it was necessary for the board of directors to approve the transfer, that under the Companies Act it was necessary for the board of directors to meet at least once in every three months and that, therefore, the sitting fees and the travelling allowance of directors was a necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 do so. In the meantime it had certain investments from which it had derived interest income. This income was assessed as income from "Other sources". The assessee claimed a deduction of Rs. 21,654 on account of office and establishment expenses. But this was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner. But the Tribunal held that although the company might be it the development stage it was still entitled to some deduction on accountant of revenue expenditure because it was necessary to maintain an establishment in order to keep the company alive and the money spent on such establishment would be an expenditure of a revenue nature. The Tribunal further held that a certain amount, in its judgment, was the barest minimum necessary for keeping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed 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 the dividend income under section 12(2). This court considered the relevant scope of section 10(2)(xv) and section 12(2) and held that the words "wholly and exclusively for the purposes of such business, profession or vocation" in section 10(2)(xv) is wider than the words "solely for the purpose of making or earning such income " in section 12(2). This court also considered in this regard the third principle propounded in Eastern Investments Ltd. v. Commissioner of Income-tax and, after referring to the report of the Royal Commission on Taxation, Profits and Income and the decision of the Gujarat High Court in Commissioner of Income-tax v. Kasturbhai Lalbhai held : "......section 12(2) is narrower in scope than section 10(2)(xv), but the narrowness lies in this that whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) and 12(2). This is what the Supreme Court held in Commissioner of Income-tax v. Birla Cottan Spinnig & Weaving Mills Ltd. : " The expression 'for the purpose of the business' is essentially wider than the expression 'for the purpose of earning profits'. It covers not only the running of the business or its administration but also measures for the preservation of the business and production of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business. " It would be clear, therefore, that in order to bring the expenditure under section 12(2), the assessee will have to show the nexus between the character of the expenditure and the earning of the interest income. The learned counsel for the assessee contended that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 allocation should have been with reference to the total expenditure incurred and, not with reference to the actual income earned in that year and that 10 per cent. would not have been enough for earning the income returned On this question the Appellate Tribunal that the assessee had not placed any material to show that if was entitled to a larger allowance and considering the nature of the income the estimate of expenditure at 10 per cent of the income was reasonable, The assessee required this question also considering referred to the High Court, in his applications under section 66(1) of the Indian Income-tax Act 1922 and 256(1) of the of the income-tax Act, 1961, along with the question now referred. But the Tribunal refused to refer to this question of reasonableness of allocation. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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