Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the ITO to examine the details of expenditure claimed by the assessee and deal with their allowability from the view point of the necessity of the assessee-company to retain its status as a company under the Companies Act, 1956, and the expenditure directly or indirectly incurred for earning the income which has been assessed under the head ‘Other sources’?

AJIT K. SENGUPTA J.:

In this reference under s. 256(1) of the IT Act, 1961, for the asst. yr. 1976-77, the following question has been referred to this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the ITO to examine the details of expenditure claimed by the assessee and deal with their allowability from the view point of the necessity of the assessee-company to retain its status as a company under the Companies Act, 1956, and the expenditure directly or indirectly incurred for earning the income which has been assessed under the head ‘Other sources’?”

The facts relating to this reference are that from a scrutiny of the accounts, the ITO found that the assessee- company did not carry on any business whatsoever during the relevant previous year and had only income from interest in investments amounting to Rs. 5,560 and that the expenses were claimed at Rs. 75,044 under different heads, such as, salary, travelling expenses, miscellaneous expenses, loss on sale of motor car, etc. Considering the facts and circumstances of the case, the ITO held that the assessee had not carried on any business during the year and had only income from investments which had to be considered as “income from other sources” and that expenses attributable to such income were admissible under s. 57(iii) of the IT Act, 1961. He estimated the admissible expenses which were wholly and exclusively expended for the purpose of earning such taxable income at Rs. 1,000 only.

In the appeal before the CIT (A.), the assessee contended that though no business activity in the form of coal mining or trading in coal was carried on, it had to incur the minimum expenditure on office establishment and administration till such time it received the entire compensation amount with interest under the Coal Mines ( Nationalisation ) Act. The assessee pleaded that the balance of expenses of Rs. 74,044 should be allowed as a deduction. The CIT (A.) held that the assessee was not entitled to the deduction of expenses totalling Rs. 74,044 as no business activity was carried on during the relevant previous year.

In the second appeal filed by the assessee, the Tribunal found that the assessee’s coal mines have been nationalised under the Coal Mines (Nationalisation) Act, 1973, that under s. 32 of the said Act the proceedings for the winding up of the assessee- company could not be taken up except with the consent of the Central Government and that the assessee-company was retaining its status as a company under the Companies Act, 1956. The Tribunal set aside the order of the CIT (A.) and the order of the ITO and restored the matter to the ITO. It had directed the ITO to look into the details of the expenditure claimed by the assessee and deal with their allowability from the view- point of the necessity of the assessee-company to retain its status as a company under the Companies Act, 1956, and the expenditure directly or indirectly incurred for earning the income which has been assessed under the head “Other sources”.

From the narration of facts it will be evident that in this case the Tribunal, in fact, did not decide the question of allowability of the expenditure claimed by the assessee. The Tribunal asked the ITO to decide the allowability of the items in question from the view-point of the necessity of the assessee- company to retain its status as a company under the Companies Act, 1956, and whether the expenditure was directly or indirectly incurred for earning the income which was assessed under the head “Other sources”.

In our view, so long as a company is not formally struck off the Register of Companies, a company continues to have certain statutory obligations. The company has to file various statements and returns. For that purpose and also for the purpose of retaining its status as a company, it has to incur certain expenditure. Admittedly, the company was earning certain income from other sources. For that purpose, it might have been necessary to incur certain expenditure.

In our view, on the facts and circumstances of the case, the Tribunal was justified in giving the direction as it did, to the ITO to find out the allowability of expenditure and to see whether any expenditure was incurred for earning the income assessed under the head “Other sources”.

For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.

Shyamal Kumar Sen J.:

I agree.

[Citation : 201 ITR 498]