TMI Blog1990 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... est amounting to Rs. 25,904. This income was taxed by the Income-tax Officer under the head "Income from other sources". As against this income, he allowed expenses only to the extent of Rs. 933. The assessee-company had claimed expenses amounting to Rs. 2,00,649 for the purpose of advertisement, legal expenses, etc., in connection with proxy war which was waged by the assessee-company as against another group of shareholders of the National Rayon Corporation Ltd., viz., the Kapadia group. The assessee-company was holding 10,334 fully paid up equity shares of the face value of Rs. 100 each in National Rayon Corporation. In view of this substantial investment of the assessee-company in the National Rayon Corporation Ltd., it had been acting as the managing agents of the National Rayon Corporation Ltd. for many years. It seems that, on the termination of the managing agency of the assessee-company, the Kapadia group wanted to obtain control of the National Rayon Corporation while the assessee-company was interested in continuing its right to manage the said company through its directors. The assessee-company claimed these expenses as deductible business expenses. This claim was dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adia Group against its continuing its managing rights in the National Rayon Corporation Ltd. through its representatives?" The first question is whether the assessee-company carried on any business during the previous year. The Income-tax Officer as well as the Appellate Assistant Commissioner and the Tribunal have held that the assessee-company did not carry on any business during the relevant previous year. Mr. Jetly, learned counsel for the Department, has, therefore, urged that this is a finding of fact which cannot be disturbed in reference. It is, however, submitted by Mr. Dastur, learned counsel for the assessee, that, on the basis of facts as found, we should hold that the assessee-company did carry on business during the previous year. In this connection, it is necessary to note that, up to December 31, 1969, the assessee-company carried on business as the managing agents of National Rayon Corporation Ltd. In this connection, it also held a substantial block of shares in the National Rayon Corporation Ltd. This business, however, came to an end on December 31, 1969. For the calendar year 1970, therefore, the assessee-company did not carry on any business as managing agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 1 (SC), the assessee-company was an electricity supply undertaking. Its only business was supply of electricity. At the end of 1942 or the beginning of 1943, the Punjab Government acquired the electric supply undertaking. On September 5, 1946, the company delivered the undertaking and all its assets to the Government and received a part of the compensation money. The company invested the monies received from the Government as well as the considerable assets it had, but which did not appertain to the electricity supply undertaking, in Government or other securities and shares. The sole income of the company after September 5, 1946, was the income from those investments. The company also continued to hold deposits made by consumers of electricity which had to be returned to them with interest. It also retained its staff and establishment for certain purposes. In its assessment to income-tax for the years 1948-49 and 1949-50, the company claimed deduction of various amounts under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was whether the company was carrying on any business in the accounting years to be entitled to these deductions. The Supreme Court held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period, the assessee-company was merely realising its dues and earned interest on the outstandings from the purchasers of the machinery which had been sold out. The Delhi High Court held that the assessee-company cannot be said to carry on any business. There was no evidence to show that the company carried on any other business. Simply because, in realising its assets, it had earned interest on the outstandings or made some profits in selling some assets and spares, it cannot be said to carry on business. Similarly, the Allahabad High Court in the case of Inderchand Hari Ram v. CIT [1953] 23 ITR 437, also held that, in order that an expenditure can be deducted as business expenditure, it must be for the purpose of business which was in existence in the accounting year. If the business had ceased to exist, such expenditure cannot be deducted. In that case, the assessee-firm was the managing agent of a sugar mill and was also its sole selling agent. By reason of the Sugar Control Order and a notification issued thereunder, the assessee could not work as selling agents of the mill from April 30, 1942. During the period October, 1944, to September, 1945, the assessee did not do any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred for earning dividend income on the ground that there was no material to show that, in order to earn dividends, the company had paid any sum by way of commission or remuneration to any person. The Tribunal, however, appears to have lost sight of the provisions of section 57(iii) in this connection. Under section 57(iii), a deduction can also be allowed in respect of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. The words "such income" refer to the income covered by section 57. Section 57 clearly provides that deductions under section 57 pertain to income from other sources. Therefore, any other expenditure which may have been incurred wholly and exclusively for the purpose of earning dividends is deductible from the income so earned for the purpose of computation of income-tax. The assessee-company has claimed expenditure for the purpose of maintaining its establishment in order that it may realise income from its various assets and investments including dividends from shares. The Appellate Assistant Commissioner has allowed expenditure at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders must be considered as expenses necessary to protect the company's investment in the shares of National Rayon Corporation Ltd. In the first place, since the investment by itself does not entail carrying on of any business, the expenses to protect the investment would not become business expenses. It has been argued that, in order to protect the value of the shares held by the assessee-company in National Rayon Corporation Ltd., the company was required to ensure that the management of National Rayon Corporation Ltd. was a friendly management which would safeguard the investment made by the assessee-company. The proxy war which was fought was to prevent the management of National Rayon Corporation falling into unfriendly hands thereby jeopardising the assessee-company's investment. This argument has to be appreciated in the context of the company's earning of dividend income in the relevant previous year, because, during the relevant previous year, the company's only business, assuming for the sake of argument that it can be considered as business, was to earn income from this investment. It would be difficult to hold that such expenses were necessary for the purpose of earni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for going into this submission. Even if we assume that the expenses for 1970 were similar to the expenses for 1969, these cannot be considered as expenses incurred in connection with the company's "business", looking to the nature of the company's activities during 1970. Under section 28 of the Income-tax Act, 1961, the income chargeable to income-tax under the heading "Profits and gains of business or profession" includes the profits and gains of any business which was carried on by the assessee at any time during the previous year. Under section 29, the income referred to in section 28 is to be computed in accordance with the provisions contained in sections 30 to 43A. Section 37 deals with deductions, inter alia, of any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. Such deduction, therefore, has to be in respect of expenditure for business which was carried on by the assessee at any time during the previous year. Such is not the case here. Hence, in our view, the Tribunal was right in holding that the expenditure in connection with the proxy war could not be deducted as business expenditure, since the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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