Supreme Court of India
VIJAYA LAXMI SUGAR MILLS LTD.versusCOMMISSIONER OF INCOME TAX, KANPUR
- Citation
- 1991 INSC 171
- Decided
- 6 August 1991
- Disposal
- Dismissed
- Bench
- K JAGANNATHA SHETTY
Holding
The liquidator’s activities do not amount to carrying on the company’s business, so the interest income is taxable under section 56 as income from other sources and the liquidator’s expenses are not deductible under section 57(iii).
Summary
The appellant, a company in liquidation, sold its assets and invested the proceeds in fixed deposits, earning interest income. The liquidator incurred various expenses (salaries, legal fees, etc.) which the company sought to deduct from the interest under section 57(iii) of the Income Tax Act. The Assessing Officer taxed the entire interest under section 56 as "income from other sources" and disallowed the deductions, a decision upheld by the Tribunal. The Supreme Court examined whether the liquidator’s activities amounted to carrying on the company’s business, thereby bringing the interest within section 28, and whether the expenses were incurred for the purpose of earning that income. It held that the liquidator was merely realizing assets, not conducting the company’s business, so the interest is taxable under section 56 and the expenses are not deductible. Consequently, the appeal was dismissed.
Issues considered
- Whether the sale of assets and investment of proceeds in fixed deposits by a liquidator constitutes carrying on the business of the company, making the interest income taxable under section 28 rather than section 56 of the Income Tax Act.
- Whether the expenses incurred by the liquidator (salaries, legal fees, etc.) are deductible under section 57(iii) of the Income Tax Act as being incurred for the purpose of earning the interest income.
Legislation cited
- Companies Act, 1956
- Income Tax Act, 1961s. 28, s. 56, s. 57(iii)
Subjects
liquidationinterest incomebusiness incomeincome from other sourcessection 57 deductionCompanies ActIncome Tax Act
Judgment
VIJAYA LAXMI SUGAR MILLS LTD. A
v.
COMMISSIONER OF INCOME TAX, KANPUR
AUGUST 6, 1991
[K. JAGANNATHA SHETIY, V. RAMASWAMI AND B
YOGESHWAR DAYAL JJ.)
Companies Act, 1956: Company in liquidation-Liquidator-
Rea/isation of assets-Whether carrying on a business of the Company.
income Tax Act, 1961: Ss. 28, 56, 57(iii)-Company in liquida- C
tion-Sale of assets-investment of sale proceeds in fixed deposits-
Whether a business of the company: inrerest income-Whether to be
assessed under s. 28: expenditures incurred by liquidator-Deduction
of-Whether admissible under s. 57(iii): interest accrues sui generis.
The appellant-company was ordered to be wound up in 1949. In D
the course of its winding up the liquidator sold certain assets of the
company and invested the sale proceeds thereof in fixed deposits with
certain banks. The liquidator incurred certain expenditures on salaries,
y legal fees, travelling expenses, postage and stationery. The assessee-
company claimed a ·deduction of the said expenses from the interest
income. The I.T.O. did not allow it, and assessed the entire interest E
income as taxable u/s 56 of the Income Tax Act, 1961 under the head
"Income from other sources". The assessment orders were confirmed
by .the Appellate Assistant Commissioner and by the Income Tax Appel-
late Tribunal in appeal.
On a reference by the Tribunal the High Court held that the F
income from fixed deposit was income from other sources; and it disal-
lowed deduction of the expenditure u/s. 57(iii) on the ground that the
expenses claimed were not related to the earning of the interest
income. Aggrieved the assessee-company preferred appeal by special
leave to this Court.
G
On the questions whether: (1) in effecting the sale and realisation
of the assets of the Company in liquidation and investing the same in
fixed deposits the liquidator was engaged in the business of the company
and the interest income was a business income taxable n/s 28 of the Act
and not under s. 56 under the head "Income from other sources", and
(2) the expenses incurred by the liquidator were incurred solely for the H
383
384 SUPREME COURT REPORTS [1991] 3 S.C.R.
A purpose of earning the interest income so as to claim deduction u/s.
57(iii).
Dismissing the appE,al, this Court,
HELD: I. The Liquidator in merely realising the assets of the
B Company could not be considered as carrying on any business of the
Company. [387G]
2. In the instant case, the company before its liquidation was
engaged in the manufacture of sugar. The records did not disclose that
the liquidator was carryiE1g on the business of manufacture of sugar or
any trading activity for the purpose of facilitating the winding up. The
c only accepted fact was th"t the interest income was derived from fixed
deposits purchased out of the proceeds of sale of assets during winding
up. The assessee, could not be said to have carried on any business to
bring the interest income within the meaning of s. 28 of the Act and,
therefore, the interest income was liable to be assessed only under the
D head "Income from other sources". The Tribunal was, therefore, right
in holding that the interest income in the instant caSe was not governed
bys. 28 but fell to be consid.ered under s. 56. [387F; 388B-C; 389A-B]
Vijay Laxmi Sugar Mills Ltd. v. Commissioner of Income Tax,
Delhi Central, [1972] 86 I. T.R. 402 All., affirmed.
E
Morvi Mercantile Bank Ltd. v. Commissioner of Income Tax,
Gujarat., [1976] 104 I. T.R. 568 Guj., approved.
3.1 In computing the income chargeable under the bead "Income
from other sources", requirement under s. 57(iii) of the Act is that the
F expenditure should have been incurred "for the purpose of making or
earning such income" and the deduction is to be made in respect of
expenditure laid out or expended wholly and exclusively for the purpose
of making or earning such income. [389C-D & G]
3.2 It is true that the connection between the expenditure and the
G earning of income need not be direct and it may be indirect. But since
the expenditure must have been incurred for purpose of earning that
income, there should be some nexus between the expenditure and the
earning of the income. [389D-E]
3.3 The interest accrues sui generis. The interest is payable by the
H bank whether it is claimed or not and whether there is any establish-
ment or not. [389E-F]
SUGAR MILL v. C.l.T. [RAMASWAMI, J.] 385
3.4 In the instant case there could be no doubt that the expendi-
A
dure incurred by the liquidator can by no stretch be said to have been
incurred with the object or for the purpose of earning the interest
income. It could not be said that the expenditure incurred was to pre-
serve or acquire the asset. Nor could it be said that the expenses were
incurred, for the purpose of maintenance of the source. The Tribunal
was, therefore, right in holding that the expenses cia•med were not B
related to the interest income and was not a deductable expenditure
unders. 57. [390A-B; 389G]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1103
& 1104 of I979.
From the Judgment and Order dated 20.3.1978 of the Allahabad
High Court in l.T.R. Nos. 428/72 and 542 of 1973. c
Ashok Grover for the Appellant.
J. Ram Murthy, S. Rajappa and Ms. A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by D
V. RAMASWAMI, J. The appellant is a private limited
company in Liquidation. The winding up order was made by the High
Court on 8th November, 1949 ·and the Liquidator was directed to
submit reports every three months respecting the progress of the
winding up proceedings and realisation of the assets. In the course of E
winding up the Liqwdator.sold certain assets and deposited the money
in fixed deposits with certain banks. During the previous year relevant
to the assessment year 1966-67 the appellant earned by way of interest
from fixed deposits a sum of Rs.32,237.60. The Liquidator had in the
relevant previous year incurred the following expenditure totalling
Rs.12,379.45: F
Salaries Rs. 1,215.00
Legal fees Rs. 9,725.00
Liquidation expenses Rs. 538.85
J, T.A.& D.A. Rs. 751.51 G
Postage Rs. 95.34
Stationery Rs. 53.75
Total:- Rs.12,379.45
H
386 SUPREME COURT REPORTS I 1991] 3 S.C.R.
The assessee-company claimed a deduction of the above said sum of
A
Rs.12,379.45 from the interest income of Rs.32,237.60. The Income
Tax Officer did not allow any part of the expenditure claimed by the
assessee company and assessed the entire amount of Rs.32,237.60 as
taxable under section 56 of the Income Tax Act, 1961 (hereinafter
referred to as the 'Act'), under the head 'INCOME FROM OTHER
B SOURCES". This assessment order was confirmed by the Appellate
Assistant Commissioner and the Tribunal on an appeal.
In the assessment year 1967-68 also the assessee earned certain
amounts of money by way of interest from fixed deposits and the
Liquidator incurred identical expenditures as in the assessment year
1966-67 except for the difference in the amount. The Income Tax
c Officer refused to allow any deduction of any part of the expenditure
claimed by the assessee. Even in this assessment year the entire
interest income was taxed under section 56 of the Act under the head
''Income From Other Sources''. The appeals filed in respect of this
assessment year also were unsuccessful.
D
In respect of both these assessment years the following identical
question was directed to be referred by t!i.e High Court under section
56(2) of the Act on the refusal of the Tribunal to refer the same under
section 256(1):
E "Whether on the facts and in the circumstances of the case,
the assessee is entitled to the deduction of the whole or any
part of the expenses incurred by the Liquidator in the com-
putation of the assessee·s total income''.
It may be mentioned that in respect of the assessment year 1962-
F 63 the assessee had claimed deduction of simmilar expenditure from
the interest income earned from fixed deposit. At the instance of the
assessee the Tribunal referred the following question:
"Whether, on the facts and in the circumstances of the
case, the sum of Rs. 13,023 is an admissible charge against
G the income of the previous year".
In the decision reported in Vijay Laxmi Sugar Mills Ltd. v. Com-
missioner of Income-Tax, Delhi Central, 11972] 861.T.R. 402 All. the
High Court answered that reference holding that the income from the
fixed deposit has to be considered as income from other sources and
H only that expenditure can be deducted which under section 57(iii) of
SUGAR MILL v. C.l.T. [RAMASWAMI, J.[ 387
the Act can be considered as incurred for earning that income and that
A
the expenses claimed are not related to the earning of that income.
Accordingly the High Court answered the question in the negative ar.d
in favour of the Revenue. It may also be mentioned that the assessing
officers and the Tribunal followed this decision which was assessee's
own case for the ear1ier assessment year, in the assessments now in
question. B
The learned counsel for the appellant canvassed the correctness
of the view propounded in Vijay Laxmi Sugar Mills Ltd. v. Commis-
sioner of Income-Tax, Delhi Cenrral, (supra). The learned counsel
contended that among the objects mentioned in the memorandum of
association of the company provision is made for advancing and lend- c
ing money, investment of the company's money and dealing in
debentures, shares, stocks and other securities and carrying on various
other businesses such as the company considered desirable in lieu of
any other business which it was authorised to carry on. Therefore, in
effecting sale and realising of the assets of the company in Liquidation
D
and investing in fixed deposits the Liquidation was engaged in the
businesses of making investment in fixed deposits. Tile interest income
earned therefrom is a business income taxable under section 28 of the
Act and not under section 56 of the Act under the head "Income From
Other Sources''. If this contention of his is right the expenditure incur-
red by the Liquidator shall also be considered as for the purpose of E
earning the above mentioned income or at least could be said as wholly
and exclusively laid out or expended for the purposes of that business
and deductable from the total income earned by the company during
the relevant previous year. We are wholly at a loss to understand how
this argument is possible on the facts and circumstances of this case.
As already stated the company had been directed to be wound up and a
F
Liquidator was appointed by the High Court as early as in 1950. The
company before its Liquidation was engaged in the manufacture of
sugar. The records do not disclose that the Liquidator was carrying on
the business of manufacture of sugar or any trading activity for the
purpose of facilitating the winding up. The statement of facts on
record show that the Liquidator realised certain amount by way of sale G
of the assets of the cl.'mpany in Liquidation and it is those sale pro-
ceeds that was invest<{) in fixed deposit which earned the interest. The
Liquidator in merely realising the assets of the company could not be
considered as carry on any business of the company. The activity of
realising the assets and banking them in fixed deposit was in the course
of winding up and it was not in furtherance of any business activity H
388 SUPREME COURT REPORTS [1991] 3 S.C.R.
A carried on by the company before its winding up.
There may be cases where the Liquidator may be said to carry on
the company's business in so far as is necessary for the winding up or
facilitate the winding up or realise the assets of the company in such a
B way as to involve the carrying on trade. But in this case there is no
evidence in this regard. In fact the winding up order was made as early
as in 1950 and nothing of the winding up activity is in evidence. The
only accepted fact is that the interest income was derived from fixed
deposits purchased out of the proceeds of sale of assets during winding
up. The assessee, therefore, could not be said to have carried on any
business to bring the interest income within the meaning of section 28
c of the Act and that therefore the interest income was liable to be
assessed only under the head "Income From Other Sources".
Very near to the facts of this case is the decision reported in
Morvi Mercantile Bank Ltd. (In Liquidation) v. Commissioner of
D Income Tax, Gujarat, [1976] 104 l.T.R. 568 Guj. In that case the
assessee a banking company was compulsorily wound up and its
licence was suspended by the Reserve Bank. The Official Liquidator 1
realised the assets and invested the money in short term deposit pend-
ing distribution. It was contended on behalf of the company in Liqui-
dation that the income realised by the Liquidator was business income
E and that the Income Tax Officer was not right in treating it as "Income
From Other Sources". Rejecting this contention the Gujarat High
Court held:
t
~-
"That the assets of which the liquidator was seized and
F which he tried to realise for purposes of winding up were of
capital nature and they cannot be said to be business assets;
nor can it be said that merely because he was investing the
realisations, assuming that that was permissible either
under the memorandum or under the statute, the activities
which he was <;arrying on as a liquidator were those of a
businessman. In the circumstances, therefore, we cannot
G
uphold the contention of Mr. Patel that the liquidator was
making for merecantile necessity the investment of realisa-
tions as a business for beneficial winding up of the com-
pany. The Tribunal has found as a fact that the main busi-
ness of the assessee-comp3ny having gone as a result of the
H winding-up order, there did not remain any other activity
SUGAR MILL v. C.l.T. IRAMASWAMI, J.] 389
which can be legitimately said to be a business activity and
A
whatever the liquidator did was merely as a liquidator for
purposes of liquidation of the company".
This is indeed the view to be taken even in this case also. The
Tribunal was, therefore, right in holding that the interest income in the
B
instant case is not governed by section 28 but falls to be considered under
section 56.
The next submission of the learned counsel for the assesee was
that in the course of effecting the winding up of the assessee company
the Liquidator has been incurring expenses such as salaries, legal fees,
travelling expenses and other liquidation expenses and that these c
expenses are allowable deduction from income earned by way of
interest from fixed deposits in the relevant year. In computing the
income chargeable under the head "Income From Other Sources",
section 57(iii) provides that deduction is to be made in respect of
expenditure laid out or expended wholly and exclusively for the
0
purpose of making or earning such income. The question for considera-
tion, therefore, is whether the expenses of the type incurred by the
Liquidator in this case can be said to have been incurred solely for the
purpose of earning the interest income. It is true that the connection
between the expenditure and the earning of income need not be direct
and it may he indirect. But since the expenditure must have been
E
incurred for the purpose of earning that income there should be some
nexus between the expenditure and the earning of the income. There is
not even some sort of an evidence to show that the expenses incurred
by the Liquidator was to facilitate the earning or at least for protecting
of the income. The interest accrues SUI GENERIS. The interest is
payable by the bank whether it is claimed or not and whether there is F
any establishment or not. Normally there was no necessity for spend-
ing anything separately for earning the interest. However we may
hasten to add that if any expenditure was incurred like commission for
collection or such similar expenditures which may be considered as
spent solely for the purpose of earning that income, the position may
be different. But that was not so in this case. It could not also be said
that the expenditure incurred was to preserve or acquire the asset. Nor G
could it be said that the expenses were incurred for the purpose of
maintenance of the source. The requirement under section 57(iii) that
the expenditure should have been incurred "for the purpose of making
or earning such income" show that the object of spending or the end or
aim or the intention of such spending was for earning the interest
H
390 SUPREME COURT REPORTS [1991) 3 S.C.R.
A income. There could be no doubt that the expenditure incurred by the
Liquidator in this case can by no stretch 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 was not a deductable expendi-
ture under section 57.
B
We are, therefore, of the view that the High Court correctly
answered the reference in the negative and in favour of the Revenue.
The appeals are accordingly dismissed with costs.
R.P. Appeals dismissed.
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