The Judgment of the Court was delivered by

Ramaswami, J.:— The assessee-company was formerly carrying on the business of supplying electricity at various places in Madras State. The business was taken over by the Madras Electricity Board under the Madras Electricity Undertakings Acquisition Act, 1954, with effect from June 1, 1957. As from this date the assessee-company ceased its business of supplying electricity and did not derive any income from the business as such. The assessee's year of account is the calendar year. During the periods relevant to the assessment years 1959–60 to 1962–63, the income derived by the company consisted of interest from fixed deposits from bank, interest paid by the Government on the compensation amount payable by the Government for taking over the assets of the company, and share transfer fees. This income was assessed under the head “Income from other sources”. The income so assessed 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

2. 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

3. 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. In 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 establishment though it did not derive any business income in these years and that the expenditure incurred by it related to its business and was, therefore, allowable as an expenditure wholly laid out for the purpose of its business. Secondly, even if the assessee's claim were to be entertained only under section 12(2) of the Indian Income-tax Act, 1922, the entire expenditure claimed by the assessee was incurred for the purpose of earning the income which was assessed in these years and, therefore, the whole of the expenditure was allowable under section 12(2) of the Act. Thirdly, even if the entire expenditure was not referable to the income earned in these years, the estimate of such expenditure at 10 per cent. of the receipt determined by the Income-tax Officer was too low. The Appellate Assistant Commissioner held that the assessee-company neither carried on any business during the years under reference nor did it intend to carry on any business and, therefore, the expenditure claimed by the assessee could not be allowed under section 10(2)(xv) of the Indian Income-tax Act 1922. He further held that the entire expenditure did not relate to the earning of the income which was assessed in these years and that, therefore, the entire expenditure could not be allowed under section 12(2) of the Act. He finally held that the estimate of expenditure at 10 per cent. was quite reasonable. In this view, he confirmed the assessment and dismissed the appeal. The assessee preferred further appeals to the Appellate Tribunal. At the time of hearing, the learned counsel for the assessee conceded before the Tribunal and stated that, in view of the decision of the Supreme Court in Commissioner of Income-tax v. Lahore Electric Supply Co. Ltd. [1966] 60 I.T.R 1, he was not pressing the contention that the assessee was carrying on any business during the assessment years under reference and that the expenditure claimed by the assessee was laid out wholly and exclusively for the purpose of the assessee's business. The Tribunal, therefore, confirmed the finding of the Appellate Assistant Commissioner that during the relevant period the assessee neither carried on any business nor intended to carry on any business and that the expenditure claimed by the assessee cannot be allowed under section 10(2)(xv) of the Act as laid out wholly and exclusively for the business of the assessee-company. It was then contended before the Tribunal that the expenditure is allowable even under section 12(2) of the Act as having been incurred 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-cornpany 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 assessee 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 Tribunal further held that it would be unreasonable to say that in order to earn this interest income the assessee-company had to maintain a big establishment and pay sitting fees and travelling allowance to the directors. In support of its view, the Tribunal also referred to the decision in Commissioner of Income-tax v. Bihar Spinning and Weaving Mills Ltd. and ultimately held that the entire expenditure claimed by the assessee cannot be allowed under section 12(2) of the Act. As regards the allocation of 10 per cent. of the income received in estimating the expenditure for the purpose of earning the income, the Tribunal observed that the assessee had not placed any material to show that it was entitled to a larger allowance. The Tribunal, ultimately, held that the estimate of expenditure for the purpose of earning this income at 10 per cent. of the income was quite reasonable. In that view, the Tribunal dismissed the appeal. At the instance of the assessee the following question has been referred, under section 66(1) of the Indian Income-tax Act, 1922, and section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the entire expenditure claimed by the assessee is allowable under section 12(2) of the Indian Income-tax Act, 1922, in respect of the assessment years 1959–60 to 1961–62, and under section 57(iii) of the Income-tax Act, 1961, for the assessment year 1962–63?”

4. The learned counsel for the assessee contended that the Government initially determined the compensation payable at Rs. 23,69,791. The company was claiming that properly computed the compensation payable would be Rs. 36,14,031.25 and this dispute went on for a considerable time. Further, the Government had made deductions amounting to Rs. 9,15,230.05 from the computed figure. The accredited representative questioned the validity of the said deductions. The matter had been in dispute. The company had to take competent technical and legal advice and fight the issue which involved heavy expenses. The compensation was in the nature of an income producing asset. To acquire that asset the company had to spend. If the company had succeeded in getting additional com pensation, interest on the same would be payable from June 1, 1957, the date of acquisition, and, therefore, the expenses incurred should be deemed to have been “solely” or “wholly and exclusively” 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 necessary expenditure for earning the share transfer fees. The learned counsel also contended that these expenses had to be looked at equitably and considered and not breaking up the income and allocating the expenditure with respect to each item of income.

5. On the other hand, the learned counsel for the revenue contended that the expenditure incurred wholly and exclusively for the purposes of business is not to be understood as meaning the same as expenditure incurred for the purposes of making or earning the income. The expenses in this case are mostly, if at all, for the purpose of business and not for making or earning such income within the meaning of section 12(2) of the Act. The interest payable on the additional compensation, if any, received is a statutory payment. The interest will be paid whether it is claimed or not and whether there is any establishment or not. No necessity arose for spending anything separately for earning this interest. The expenditure was, therefore, not for the purpose of earning that interest. The expenses incurred to preserve or acquire the assets, so to say, has too remote a connection for the earning of the interest as the interest payment is a statutory payment. The expenditure should be “for the purpose” of making or earning the interest and the expenses incurred in this case is too remote and could not be allowed under section 12(2) of the Act. We are of the view that the learned counsel for the revenue is well-founded in his contention.

6. section 12(2) of the Indian Income-tax Act, 1922, sets out the allowances permitted in the computation of the “income from other sources”. It provides that “any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains” shall be deducted in computing the income from other sources. The corresponding provision in the Income-tax Act, 1961, is section 57(iii). The only difference between these two sections is, instead of the word “solely” occurring in section 12(2), the words “wholly and exclusively” are used in section 57(iii). As observed by this court in Commissioner Of Income-Tax, Madras v. S. Devaraj.*, though the scope of section 12(2) presents not much of difficulty, its application to particular facts is a matter of nicety. Sometimes it baffles beyond imagination when it comes to the question of its application 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.

7. In Commissioner of Income-tax v. Bihar Spinning and Weaving Mills Ltd. [1953] 24 I.T.R 108 Cal.. 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 at the development stage it was still entitled to some deduction on account 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 alive a company of the size and nature of the assessee-company and that, therefore, it was not necessary to go into the question as to what expenditure, if any, could be attributed to the interest receipts. The Tribunal estimated the allowable expenditure at Rs. 500 per month as the barest minimum necessary for keeping alive the company. In the reference before the High Court, the revenue contended that though it was open to the Tribunal to estimate the amount of expenditure incurred in collecting the interest income at Rs. 500 per month or even a higher figure, it could not base the allowance upon the principle which it had purported to follow. Accepting this contention, the court held:

“Turning now to the reasons given by the Tribunal, I am of the opinion that they are entirely erroneous. This is not a case where the company was carrying on a business in money-lending…. It is impossible to see how before the company had even commenced its business and when it was carrying on no business at all and when it had no business income which was being brought under assessment under section 10, there could be any item of expenditure allowable as office and establishment expenses of a business. Nor is it easy to see how the company could claim any deduction on the ground that some expenditure was necessary in order to keep the company alive against the interest income chargeable under section 12…. whatever could be proved to the satisfaction of the Income-tax Officer as having been actually incurred in earning and collecting the interest income would be allowable, but again nothing by way of office and establishment expenses unconnected with the earning of the income nor anything necessary for keeping the company alive. Indeed, if a company which is at the development stage and as yet doing no business has only an interest income chargeable under section 12 and claims the expenses necessary for keeping itself alive, it really claims personal expenses which are expressly forbidden under clause (a) of sub-section (2) of section 12…. Considerations such as the necessity of keeping the company alive or such as the necessity of maintaining an establishment for the purposes of the prospective business, are wholly extraneous and cannot be utilised for enlarging the amount of the deduction nor can any allowance which is claimable only under section 10 be allowed or claimed before a business income assessable under the Act has emerged.”

8. 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, Madras 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, West Bengal 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, held3:

“…. section 12(2) is narrower in scope than section 10(2)(xv), but the narrowness lies in this that whereas under the former provision the expenditure should be for the purpose of the business, profession or vocation, under the latter provision, an expenditure to qualify for deduction should be for the purpose of making or earning such income, profits or gains which is undoubtedly a narrower concept than ‘business’, the scope of which would include the earning of income, profits or gains. For section 12(2) to apply, the following requisites should, therefore, be satisfied. The expenditure should not be in the nature of a capital expenditure. That means, the expenditure is not intended or does not operate to create a source of income or add to it, but it should be of a revenue character as in the course of or for the purpose of maintenance of the source. The expenditure should have been actually incurred as indicated by the word ‘incurred’ in section 12(2). The expenditure should also be solely for the purpose of making or earning such income that is to say, if the purpose of the expenditure is a mixed one, it will take it outside the scope of section 12(2). The word ‘solely’ has the same sense as the words ‘wholly and exclusively’ in section 10(2)(xv). Further, by the use of the words ‘for the purpose of’, it is obvious that there must be a nexus between the character of the expenditure and earning of income, profits or gains. If the expenditure is not for that purpose, or is unrelated to or unconnected with the activity of earning such income, profits or gains, it will not be allowed as a deduction.”

9. On the merits of the case, it was held:

“What is necessary to see is whether the nexus necessary, as we indicated earlier, is satisfied by the expenditure in this case. We are unable to see any connection, direct or indirect, between the status of the assessee as an adopted son and the investments which produced the dividends. It is true that, unless his adoption is upheld, the assessee's title to the investments will fail. But the two things cannot be mixed up and the one cannot be taken for the other. Adoption is a matter of status, which is personal to the assessee. That necessarily does not bear upon the investments, though the status of the assessee as the adopted son once established may entitle him to the investments. But the question of status and the dispute relating to it does not spring from, or arise out of, or is not directly or indirectly connected 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).”

10. 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 Cotton Spinning & 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.”

11. 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.

12. The learned counsel for the assessee contended that the assessee-company was disputing the quantum of compensation and that if it had succeeded in establishing its right for additional compensation it would also get interest thereon from the date of acquisition. Therefore, according to him, the company was making a claim not only for additional compensation but also interest thereon and any expenditure incurred would, therefore, be an allowable deduction under section 12(2). We are of the view that this argument is misconceived and unacceptable. The assessee-company had ceased to do any business after June 1, 1957, when the undertaking was taken over by the Government. That was the finding of the Tribunal also and that is not in dispute in these proceedings. It is not also suggested that the assessee was carrying on any money-lending business during the assessment years in question or that the additional compensation which he was claiming formed part of a stock-in-trade of a money-lending business. Thus the assessee was not fighting for preserving or establishing any right to a business asset while carrying on business. The expenditure, therefore, was incurred not in its capacity as a company which was carrying on the business. The Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. pointed out with reference to the expression “for the purpose of business” that “however wide the meaning of the expression may be its limits are implicit in it. The purpose, especially for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.”

13. The assessee was assessed in this case under the head “Income from other sources”. The income assessed was the interest income. The expenditure allowed under section 12(2) is one incurred solely for the purpose of making or earning the interest income. The meaning given for the word “purpose” in Webster's New International Dictionary is that which one sets before himself as object to be obtained; the end or aim to be kept in view in any plan, measure, exertion or operation, design, intention. We have already pointed out that the assessee was not carrying on any business during the relevant assessment years., The “source” which is taxed is also not the business income, whether it is money-lending business or any other business. 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 earning of the interest.

14. The learned counsel for the assessee then questioned the estimate of the expenditure for the purpose 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 held that the assessee had not placed any material to show that it 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 to be referred to the High Court, in his applications under section 66(1) of the Indian Income-tax Act, 1922, and 256(1) of the Income-tax Act, 1961, along with the question now referred. But the Tribunal refused to refer this question of reasonableness of allocation. Thereupon, the assessee filed a petition in this court under section 66(2) for referring that question. This court dismissed that application holding that the question referred to in T.C No. 136/67 is comprehensive enough to include the question of allocation.

15. We are also of the view that the question referred in this reference (T.C No. 136/67) is comprehensive enough to include this question of allocation. We, therefore, proceed to consider that question. As noted by the Tribunal the assessee had not placed any materials to show that it was entitled to a larger allowance. We have already seen that so far as the interest receivable from fixed deposit and the compensation, no effort is necessary and the expenditure incurred could not be also considerable. The share transfer fee as noted earlier was very little compared to the interest income. The Income-tax Officer and the Appellate Assistant Commissioner had estimated it at 10 per cent. having regard to all these factors. In these circumstances, we hardly think that this is a matter with which we can interfere as involving any principle. The true principle is not a percentage of this or that. The percentage in this case was not decided on any principle of apportionment also. The Income-tax Officer considered that this much alone could have been spent or attributable for earning of the income from other sources. Neither the Appellate Assistant Commissioner nor the Tribunal decided it as a principle of apportionment. This allocation will have to be taken as a reasonable estimate in the absence of any definite evidence on that account. We are, therefore, unable to interfere with that finding. In the result, the question referred to is answered in the negative and against the assessee. The respondent will be entitled to his costs. Counsel's fee Rs. 250.

16. Question answered in the negative.