M/S HARYANA STATE SMALL INDUSTRIES AND EXPORT V. CIT, PANCHKULA

ITA/79/2012

AI Insights

The case involves M/s Haryana State Small Industries & Export Corporation Ltd., the appellant, contesting the disallowance of business expenditures claimed for the assessment year 2007-08. The expenditures included employees' remuneration, interest on bank loans, and other administrative costs, which the Assessing Officer initially disallowed, stating the business was not active. The Commissioner of Income Tax (Appeals) upheld this decision, and the Tribunal remanded the issue back to the Assessing Officer without fully resolving the appellant's claims. The High Court of Punjab and Haryana, upon hearing the appeal, found that the expenditures claimed were not directly related to earning the interest income and thus were not deductible under the cited sections of the Income Tax Act.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 763411 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 01-08-2012
• Assessment Year: misc
• Other Referred Cases: Nakodar Bus Service (P) Ltd. v. Commissioner of Income Tax, Commissioner of Income Tax v. Rampur Timber and Turnery Co. Ltd., Vijaya Laxmi Sugar Mills Ltd. v. Commissioner of Income Tax, Consumer Electronics (Punjab) Ltd. Vs. ACIT, Circle-III, Chandigarh, M/s Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income Tax, Madras
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: RADHIKA SURI
• Keywords: Business expenditure; Deduction; Income from other sources; Interest income; Liquidation Expenses
• Section: 37; 260A; 57(iii); 30; 176

Judgement Text

"ITA No. 79 of 2012 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 79 of 2012 (O&M) Date of Decision: 1.8.2012 M/s Haryana State Small Industries & Export Corporation Ltd. ....Appellant. Versus The CIT, Panchkula ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE G.S. SANDHAWALIA. PRESENT: Ms. Radhika Suri, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1. Delay in refiling the appeal is condoned. 2. This order shall dispose of ITA Nos. 79 and 164 of 2012 as common questions of law and facts are involved therein. For brevity, the facts are being taken from ITA No. 79 of 2012. 3. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 30.8.2011 (Annexure A-3) passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal) in ITA No. 163/Chd/2011, for the assessment year 2007-08, claiming the following substantial question of law:- ITA No. 79 of 2012 -2- “Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal has fallen in error in disallowing the business expenditure incurred by the assessee which is allowable under Section 30 to 37 of the Income Tax Act?” 4. The facts necessary for adjudication of the appeal as narrated and mentioned therein are that the assessee filed its return on 18.9.2008 for the assessment year 2007-08 declaring nil income. The assessee closed its business w.e.f. 30.6.2002, however, the business was under liquidation and for the said purpose expenses on employees' remuneration, interest paid on bank loans, administration, selling and distribution expenses were being incurred. The assessee claimed a sum of ` 1,52,17,861/- inclusive of ` 86,682/- on account of depreciation as business expenditure under Sections 30 to 37 of the Act. The amount of ` 5,20,878/- earned by the assessee on account of interest from bank was treated by the Assessing Officer as income from other sources. The prior period expenses amounting to ` 15,13,649/- were also disallowed. The Assessing Officer vide order dated 11.12.2009 (Annexure A-1) disallowed the said business expenditure holding that the assessee was not carrying on any business activity. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated 9.12.2010 (Annexure A-2) upheld the order of the Assessing Officer and dismissed the appeal. Thereafter, the assessee took the matter before the Tribunal by way of second appeal. The Tribunal vide order dated 30.8.2011 (Annexure A-3) partly allowed the appeal and ITA No. 79 of 2012 -3- remanded the issue to the Assessing Officer to decide the same in terms of its direction given in ITA No. 919/Chd/2009. This gave rise to the assessee to approach this Court by way of instant appeal. 5. According to the learned counsel, the claim of the assessee was required to be considered either under Sections 30 to 37 read with Section 176 of the Act whereby the interest which was received would be business income and any expenditure expended by way of remuneration to the employees etc. was admissible expenditure. Alternatively, it was submitted that the remuneration which was paid to the employees was expenditure which was spent by the assessee for earning interest income which was taxable as 'income from other sources'. Once that was so, the same was deductible under Section 57 (iii) of the Act. Reliance was placed upon the decision of this Court in Nakodar Bus Service (P) Ltd. v. Commissioner of Income Tax (1989) 179 ITR 506 and Allahabad High Court in Commissioner of Income Tax v. Rampur Timber and Turnery Co. Ltd. (1981) 129 ITR 58 in support of her contentions. 6. After hearing learned counsel for the appellant, we do not find any merit in the appeal. 7. The issue raised in the appeal requires answer to the following questions:- (a) Whether the claim of the assessee with respect to deduction on account of expenditure incurred on employees' remuneration, interest paid on bank loans, administration, selling and distribution ITA No. 79 of 2012 -4- expenses were admissible under Sections 30 to 37 of the Act; or (b) Whether the assessee was entitled to take benefit of the provisions of Section 57(iii) of the Act to have the aforesaid expenses reduced from its interest income. 8. Learned counsel for the appellant had laid great emphasis on the plea relating to deduction under Section 57(iii) of the Act. We proceed to examine the admissibility of the aforesaid expenses. 9. It would be expedient to reproduce the provision. Section 57(iii) of the Act, as far as relevant provides:- “The income chargeable under the head 'income from other sources' shall be computed after making the following deductions, namely:- (i) and (ii).............. (iii) 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: Provided ............. Explanation: ............” 10. In Vijaya Laxmi Sugar Mills Ltd. v. Commissioner of Income Tax (1991) 191 ITR 641 (SC) where the company was ordered to be wound up by the High Court, certain income had accrued by way of interest income from monies invested in fixed deposits with certain banks. A claim was made for deduction of expenses incurred towards salaries, legal fees, liquidation expenses, TA and DA, postage and ITA No. 79 of 2012 -5- stationery in computing its income. The Hon'ble Supreme Court held that it could not be said that any business was being carried on by the company and, therefore, interest income would not fall within the meaning of Section 28 of the Act but was liable to be computed only under the head 'Income from other sources'. The expenses claimed by the assessee therein were held to be inadmissible under Section 57(iii) of the Act as it was not established that expenses sought to be deducted were to facilitate the earning of the interest income. It was noticed as under:- “The next submission of the learned counsel for the assessee 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 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 purpose of making or earning such income. The question for consideration, 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 ITA No. 79 of 2012 -6- true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been 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 any establishment or not. Normally there was no necessity for spending 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 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 ITA No. 79 of 2012 -7- of spending or the end or aim or the intention of such spending was for earning the interest 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 deductible expenditure under section 57.” 11. Further, this Court in Consumer Electronics (Punjab) Ltd. Vs. ACIT, Circle-III, Chandigarh, ITA No. 198 of 2003 decided on 29.9.2010 relying upon the judgment of Hon'ble Apex Court in M/s Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income Tax, Madras (1997) 227 ITR 172 under similar circumstances held that the assessee was not entitled to deduction under Section 57 (iii) of the Act. It was observed as under:- “7. For deciding the said questions, it is necessary to refer to statutory scheme under the Act. Section 17 classifies heads of income into five heads and computation of income under different heads has to be as per the statutory scheme. Deduction from business income are governed by the provisions of Chapter IV-D i.e. Sections 28 to 44 whereas income from other sources is dealt with under Chapter IV-F. ITA No. 79 of 2012 -8- Expenses permissible from the said income are specified under section 57 of the Act. Thus, under the scheme of the Act, income from one head cannot be adjusted against expenses under the other head. Provision for inter-head set off under section 71 of the Act applies to set off of loss and not of expenses or deductions for computing income. 8. We may refer to the law laid down by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals to the following effect:- “The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be can made except as provided by the Act. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the ITA No. 79 of 2012 -9- company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under Section 22 as income from House property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under Section 56 of the Act. The Company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under Section 56 of the Act. XX XX XX XX XX XX XX XX There are specific provisions in the Income Tax Act of setting off of loss from one source against income from another source under the same head of income (Section 70), as well as setting off of loss from one head against income from another (Section 71). In the facts of this case the Company cannot claim any relief under any of these two Sections, since its business had not started and there could not ITA No. 79 of 2012 -10- be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly any income from a non- business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement the business of the assessee. XX XX XX XX XX XX XX XX It is true that the Company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the Company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh v. Commissioner of Income Tax, (6 I.T.R. 157) that \"anything which can properly be described as income is taxable under the Act unless expressly exempted\". The interest earned by the assessee is clearly its income and unless it can be shown that any provision like Section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not ITA No. 79 of 2012 -11- detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the Company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under Section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under Section 56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under Section 57 of the Act.” 12. Adverting to the judgments on which reliance had been placed by the learned counsel, suffice it to notice that in view of the subsequent judgment of the Hon'ble Apex Court in Vijaya Laxmi Sagar Mills Ltd's case (supra) and this Court in Consumer Electronics (Punjab) Ltd's case (supra), the pronouncements in Rampur Timber & Turnery Co. Ltd. and Nakodar Bus Service (P) Ltd's cases (supra) would not come to the rescue of the appellant. ITA No. 79 of 2012 -12- 13. From the above, the legal position that emerges is that Section 57(iii) of the Act requires that the expenditure must be laid out or expended, which is not of capital nature, for the purpose of making or earning such income. The purpose of the expenditure is germane for determining its admissibility for deduction and the purpose must be making or earning such income. However, the deduction is not inadmissible if no income is made or earned. To bring a case within the ambit of this section, it is not necessary that there must be direct connection between the expenditure and the earning of the income, but there should be some nexus between the expenditure and the earning of the income. The income on fixed deposit accrues sui generis whether it is claimed or not and whether there is any establishment or not. Ordinarily there arises no necessity for spending anything separately for earning the interest. However, where any expenditure in the nature of commission or collection charges or such similar expenditure which may be essential and had been spent solely for the purpose of earning that income, the same would be deductible. 14. Examining to the factual matrix herein, there is nothing to show that the expenses claimed as deduction were incurred for earning interest income. Equally, the claim of the appellant that the expenditure incurred by the assessee was allowable under Sections 30 to 37 of the Act is inadmissible for the reason that the business of the assessee was lying closed and income from interest was chargeable to tax as 'income from other sources' under Section 56 of the Act. Once that was so, the Tribunal had rightly adjudicated the matter in favour of the revenue. ITA No. 79 of 2012 -13- 15. Accordingly, no question of law muchless a substantial question of law arises in these appeals. Consequently, the appeals are dismissed. (AJAY KUMAR MITTAL) JUDGE August 1, 2012 (G.S. SANDHAWALIA) gbs JUDGE ITA No. 79 of 2012 -14- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 164 of 2012 (O&M) Date of Decision: 1.8.2012 M/s Haryana State Small Industries & Export Corporation Ltd. ....Appellant. Versus The Commissioner of Income Tax, Panchkula and another ...Respondents. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE G.S. SANDHAWALIA. PRESENT: Ms. Radhika Suri, Advocate for the appellant. AJAY KUMAR MITTAL, J. Delay in refiling and filing the appeal is condoned. . For orders, see ITA No. 79 of 2012 (M/s Haryana State Small Industries & Export Corporation Ltd. v. The CIT, Panchkula). (AJAY KUMAR MITTAL) JUDGE August 1, 2012 (G.S. SANDHAWALIA) gbs JUDGE "