M/S Vijaya Laxmi Sugar Mills Ltd. v. Commissioner Of Income Tax, Kanpur ., Supreme Court Of India, Judgment, Law, casemine.com

Factual and Procedural Background

The appellant, Vijay Laxmi Sugar Mills Ltd., is a private limited company in liquidation pursuant to a winding-up order dated 8 November 1949 passed by the High Court. A Liquidator was appointed to realise the company’s assets and file quarterly reports. The Liquidator sold certain assets and placed the sale proceeds in fixed-deposit accounts. During the previous years relevant to assessment years 1966-67 and 1967-68 the Liquidator earned interest of Rs 32,237.60 (1966-67) and similar amounts in 1967-68, while incurring liquidation-related expenses (salaries, legal fees, travelling allowance, postage, stationery, etc.) aggregating Rs 12,379.45 for 1966-67, with comparable expenditure in 1967-68.

The assessee sought to deduct those expenses from the interest income. The Income-tax Officer, Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disallowed the deductions and assessed the entire interest as “income from other sources” under Section 56 of the Income-tax Act, 1961. The Tribunal refused to state a case; the High Court, acting under Section 256(2), directed reference of the following question for both assessment years: whether the assessee is entitled to deduct the whole or any part of the Liquidator’s expenses in computing its total income. The High Court answered the question in the negative, relying on its earlier judgment in the assessee’s own case for 1962-63. The present appeals challenge that decision.

Legal Issues Presented

Whether interest earned by the Liquidator from fixed-deposit investments of realised assets constitutes business income taxable under Section 28, or “income from other sources” taxable under Section 56 of the Income-tax Act, 1961.

If taxable under Section 56, whether the expenses incurred by the Liquidator (salaries, legal fees, liquidation expenses, etc.) are deductible under Section 57(iii) as expenditure laid out “wholly and exclusively” for the purpose of earning such income.

Arguments of the Parties

Appellant’s Arguments

The company’s memorandum of association empowers it to lend and invest money; therefore, the Liquidator’s placement of funds in fixed deposits amounts to carrying on an investment business.

Consequently, the resulting interest should be treated as business income under Section 28.

On that footing—or even if treated under Section 56—the expenses incurred by the Liquidator were wholly and exclusively for earning that income and ought to be deducted.

The opinion does not detail the revenue’s submissions separately.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Vijay Laxmi Sugar Mills Ltd. v. CIT (1972) 86 ITR 402 (All)	Interest on fixed deposits made by a Liquidator is assessable as “income from other sources”; only expenditure directly incurred to earn that interest is deductible under Section 57(iii).	Followed as binding precedent in the assessee’s own earlier assessment year; relied upon to reject the contention that the interest constituted business income.
Morvi Mercantile Bank Ltd. (in Liquidation) v. CIT (1976) 104 ITR 568 (Guj)	Activities of a Liquidator in realising assets and temporarily investing proceeds do not amount to carrying on the company’s business; interest earned is taxable under Section 56.	Court adopted the same reasoning to hold that the Liquidator’s investment activities did not transform the interest into business income.

Precedent

Rule or Principle Cited For

Application by the Court

Vijay Laxmi Sugar Mills Ltd. v. CIT (1972) 86 ITR 402 (All)

Interest on fixed deposits made by a Liquidator is assessable as “income from other sources”; only expenditure directly incurred to earn that interest is deductible under Section 57(iii).

Followed as binding precedent in the assessee’s own earlier assessment year; relied upon to reject the contention that the interest constituted business income.

Morvi Mercantile Bank Ltd. (in Liquidation) v. CIT (1976) 104 ITR 568 (Guj)

Activities of a Liquidator in realising assets and temporarily investing proceeds do not amount to carrying on the company’s business; interest earned is taxable under Section 56.

Court adopted the same reasoning to hold that the Liquidator’s investment activities did not transform the interest into business income.

Court's Reasoning and Analysis

The Court rejected the appellant’s characterization of the interest as business income. Once a winding-up order is passed, the company’s ordinary business ceases; the Liquidator’s role is limited to realising and safeguarding assets. The mere placement of realised funds in bank deposits does not constitute a commercial venture or continuation of the company’s objects. Accordingly, Section 28 is inapplicable and the interest necessarily falls under Section 56 as “income from other sources”.

Turning to deductibility, Section 57(iii) permits a deduction only where expenditure is laid out “wholly and exclusively” for earning the income in question. The Court found no nexus between the Liquidator’s general winding-up expenses (salaries, legal fees, travelling, etc.) and the earning of interest, which accrues automatically (“sui generis”) on the fixed deposits. Such expenses neither facilitate the earning of interest nor preserve the income-producing asset. Illustratively, commission paid for collecting interest might be deductible, but that situation was not present. Therefore, none of the claimed expenses satisfied the statutory test.

Holding and Implications

Appeals Dismissed; reference answered in the negative in favour of the revenue.

The Court affirmed that: (i) interest earned by a Liquidator on fixed deposits of liquidation proceeds is assessable under Section 56 as “income from other sources”; and (ii) liquidation expenses not directly incurred to earn that interest are not deductible under Section 57(iii). The ruling maintains consistency with prior High Court decisions and clarifies that routine liquidation costs cannot be offset against passive interest income. No new legal doctrine was created, but the judgment reinforces existing principles governing the taxation of companies in liquidation.

M/S Vijaya Laxmi Sugar Mills Ltd. v. Commissioner Of Income Tax, Kanpur .

V. Ramaswami, J.— The appellant is a private limited company in liquidation. The winding up order was made by the High Court on November 8, 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 winding up the Liquidator 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:

Salaries Rs 1215.00 Legal fees Rs 9725.00 Liquidation expenses Rs 538.85 TA and DA Rs 751.51 Postage Rs 95.34 Stationery Rs 53.75 Total Rs 12,379.45

The assessee-company claimed a deduction of the above said sum of 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 sources”. This assessment order was confirmed by the Appellate Assistant Commissioner and the Tribunal on an appeal.

2. 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 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 to this assessment year also were unsuccessful.

3. In respect of both these assessment years the following identical question was directed to be referred by the High Court under Section 56(2) of the Act on the refusal of the Tribunal to refer the same under Section 256(1):

“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 computation of the assessee's total income.”

4. It may be mentioned that in respect of the assessment year 1962-63 the assessee had claimed deduction of similar 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 the income of the previous year.”

5. In the decision reported in Vijay Laxmi Sugar Mills Ltd. v. CIT (1972) 86 ITR 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 only that expenditure can be deducted which under Section 57(iii) of the Act can be considered as incurred for earning that income and that the expenses claimed are not related to the earning of that income. Accordingly the High Court answered the question in the negative and 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 earlier assessment year, in the assessments now in question.

6. The learned counsel for the appellant canvassed the correctness of the view propounded in Vijay Laxmi Sugar Mills Ltd. v. CIT (1972) 86 ITR 402 (All). The learned counsel contended that among the objects mentioned in the memorandum of association of the company provision is made for advancing and lending 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 and investing in fixed deposits the Liquidator was engaged in the businesses of making investment in fixed deposits. The 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 incurred by the Liquidator shall also be considered as for the purpose of earning the abovementioned income or at least could be said as wholly and exclusively laid out or expended for the purposes of that business and deductible 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 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 statements of facts on record show that the Liquidator realised certain amount by way of sale of the assets of the company in liquidation and it is those sale proceeds that was invested in fixed deposit which earned the interest. The Liquidator in merely realising the assets of the company could not be considered as carrying 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 carried on by the company before its winding up.

7. There may be cases where the Liquidator may be said to carry on the company's business insofar as is necessary for the winding up or to facilitate the winding up or realise the assets of the company in such a way as to involve the carrying on of 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 of the Act and that therefore the interest income was liable to be assessed only under the head “income from other sources”.

8. Very near to the facts of this case is the decision reported in Morvi Mercantile Bank Ltd. (in Liquidation) v. CIT (1976) 104 ITR 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 realised the assets and invested the money in short term deposit pending distribution. It was contended on behalf of the company in liquidation that the income realised by the Liquidator was business income 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: (ITR p. 580)

“That the assets of which the liquidator was seized and 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 carrying on as a liquidator were those of a businessman. In the circumstances, therefore, we cannot uphold the contention of Mr Patel that the liquidator was making for mercantile necessity the investment of realisations as a business for beneficial winding up of the company. The Tribunal has found as a fact that the main business of the assessee-company having gone as a result of the winding-up order, there did not remain any other activity which can be legitimately said to be a business activity and whatever the liquidator did was merely as a liquidator for purposes of liquidation of the company.”

9. 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 instant case is not governed by Section 28 but falls to be considered under Section 56.

10. 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 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 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” shows that the object 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. 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.

Civil Appeal Nos. 1103 and 1104 of 1979, decided on August 6, 1991

M/S Vijaya Laxmi Sugar Mills Ltd. v. Commissioner Of Income Tax, Kanpur .

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant’s Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M/S Vijaya Laxmi Sugar Mills Ltd. v. Commissioner Of Income Tax, Kanpur .

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