JUDGMENT
K.P. Radhakrishna Menon, J.
1. The Revenue is before us. The question referred reads:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the deduction of Rs. 20,000 incurred by the assessee as constituting expenditure laid out wholly and exclusively for the purpose of earning the income ?”
2. Facts lie in a narrow compass. The year of assessment is 1974-75, the corresponding accounting year ending on March 31, 1974. The assessee, a public limited company, formerly known as Cochin State Power and Light Corporation Ltd., was carrying on the business of distribution of electricity in Ernakulam. On December 2, 1970, the undertaking was taken over by the Kerala State Electricity Board.
3. Subsequent to the nationalisation, the assessee-company changed its name from Cochin State Power and Light Corporation Ltd. to M/s. Kar Valves Ltd. and with a view to start a new business of manufacturing automobile engine valves, chalked out a programme. During that period, the assessee had to retain some of its staff and a mini office for purposes like realisation of the compensation amount from the Government, recovery of amounts due from consumers, etc. 20% of the expenditure the assessee-company had to meet in the year for the running of the office which came to Rs. 45,215 and this was claimed as revenue expenditure. This amount accordingly was claimed as a deduction from the income received by the assessee-company as interest on investments and securities and term deposits and dividend of Rs. 2,144, all together coming to Rs. 87,797. During the year, the assessee had sold certain motor vehicles. The profit in this deal came to Rs. 2,470. This amount, however, was treated as profit falling under Section 41(2) of the Income-tax Act, 1961.
4. The assessing authority rejected the claim of the assessee for deduction of the above 20% of the overhead expenditure, as the same, according to the assessing authority, cannot be said to be an expenditure falling under Section 57, Clause (iii), of the Income-tax Act. The Appellate Assistant Commissioner allowed the appeal the assessee had filed against the above assessment order. The Appellate Tribunal disposed of the second appeal the Revenue had filed challenging the order of the Appellate Assistant Commissioner, entering the following findings :
“13. This would take us to the question as to what is the extent of the expenses incurred in respect of the business which was deemed to be done by virtue of Section 41(2). The assessee has a separate account in
the printed balance-sheet for the electricity undertaking. In that account no expenses has been debited towards this business. However, we cannot on that ground alone conclude that nothing could have been spent. The assessee has to recover substantial amount from the Kerala Electricity Board. We think that a portion of the expenses could be held to be attributable to the electricity business. After considering the facts of .the case, we are of the opinion that Rs. 20,000 could be treated as referable to the business as well as the interest and dividend income. The Income-tax Officer is directed to allow a deduction of Rs. 20,000.”
5. The question of law arises from the above order of the Appellate Tribunal.
6. Certain facts are admitted and they are : The business of distribution of electricity in Ernakulam carried on by the assessee was taken over by the Kerala State Electricity Board with effect from December 2, 1970. The new business the assessee-company intended to start had not commenced production during the relevant period. It, therefore, follows that the assessee-company did not carry on any business in the relevant accounting year. After the nationalisation of the undertaking and before the commencement of a new business, what the company did was to invest its moneys in securities and receive interest therefrom. Merely on account of the fact that the company has not gone into liquidation, it cannot be said that the company was having an intention to do business. In such circumstances, it is irrelevant to enquire whether the business, the company was carrying on, was permanently closed. Business as understood under the Income-tax Act is “an activity capable of producing profit which can be taxed”. Payment of outstanding liabilities is not an activity producing any profit. Because liabilities were not liquidated and outstandings were not collected, it could not be said that the business was continuing. The assessee, therefore, cannot be said to have carried on the business of distribution of electricity in Ernakulam or any other business during the relevant period. We are fortified in this view by a decision of the Supreme Court in CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1. The decision of this court in Josna Bank Limited v. CIT [1985] 151 ITR 473 is also relevant in the context.
7. The Tribunal, however, has held that since the business of distribution and supply of electricity must be deemed to have existed during the relevant year by virtue of the provisions contained in Section 41(2), the expenses attributable to the electricity distribution business is an allowable deduction. Accordingly, a sum of Rs. 20,000 was allowed to be deducted from the income. It should in this connection be remembered that “a legal fiction is to be limited to the purpose for which it has been created and cannot be extended beyond that legitimate frame”. (See
Akola Electric Supply Co. Pvt. Ltd. v. CIT [1978] 113 ITR 265 (Bom)). The receipts which were deemed to be income under the head “Business or profession” would not have been assessed but for the deeming provision under Section 41(2) because, admittedly, none of these receipts was otherwise chargeable as income in a year in which the business to which they related was not in existence. This section, therefore, would not support the reasoning of the Tribunal that the business for all purposes continues to exist in the year in question.
8.
The assessee, therefore, cannot take advantage of Section 41(2) to sustain its plea that the expenditure claimed is referable to the business it was carrying on before the nationalisation.
9. We are, therefore, of the view that the assessing authority had rightly refused the claim of the assessee for deduction of 20% of the overhead charges as revenue expenditure.
10. The question accordingly is answered in the negative, i.e., in favour of the Revenue and against the assessee.
11. We direct the parties to bear their respective costs in this tax referred case.
12. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench.