JUDGMENT
K.P. Balanarayana Marar, J.
1. At the instance of the assessee, the following questions have been referred to this court for decision under Section 256(1) of the Income-tax Act, 1961 :
“(1) Whether, on the facts and circumstances of the case, the Tribunal is right in law in holding that the expenses incurred by the assessee including the salary paid to the managing director could not be allowed as a deduction in computing the assessee’s income assessed under the head ‘Other sources’ for both the assessment years ?
(2) Whether, on the facts and circumstances of the case, the Tribunal was right in law in upholding the Income-tax Officer’s disallowance of 90% of the total expenses incurred by the assessee for the assessment year 1978-79 and in allowing only 10% of the assessee’s income as admissible expenses for the assessment year 1979-80, in computing the assessee’s income for the respective years ?”
2. The assessee had a managing agency business which was stopped by it. During the accounting years 1977-78 and 1978-79 for which the accounting periods ended on March 31, 1978, and March 31, 1979, respectively, the only income of the assessee was the dividend which was shown under the head “Other sources”. For the assessment year 1978-79, the assessee claimed deduction of a total expenditure of Rs. 15,087,57 and for the
assessment years 1979-80, it claimed deduction of a total expenditure of Rs. 15,541,28. The Income-tax Officer allowed deduction of 10% of the total administrative expenses for the assessment year 1978-79 and 10% of the income from other sources for the assessment year 1979-80. On appeal before the Commissioner of Income-tax (Appeals), the assessee claimed deduction of the salary paid to the managing director as well as other expenses. The contention of the assessee was accepted by the Commissioner of Income-tax (Appeals). On further appeal before the Appellate Tribunal by the Revenue, the Tribunal held that the Income-tax Officer’s allowance of 10% of the total expenses for the year 1978-79 was more than fair to the assessee and the allowance of 10% of the income for the year 1979-80 was reasonable. The Tribunal upheld the orders of the Income-tax Officer. It is thereafter at the instance of the assessee that the questions formulated above were referred to this court for decision.
3. Originally, the assessee had income from managing agency which was being assessed under the head “Business”. After the abolition of the managing agency system by statute, the only income that the assessee had was income from dividends which was shown under the head “Other sources” by the assessee for the two assessment years 1978-79 and 1979-80. No claim was made by the assessee before the authorities below that they were carrying on any business. In other words, the assessee was chargeable for the relevant years only on the income which they had as dividends which would come under the head “Other sources”.
4. The contention of the assessee before the Appellate Tribunal and reiterated before us was that the amount claimed as deduction out of the total expenditure represents expenditure laid out or expended wholly and exclusively for the purposes of the business carried on by the assessee and as such allowable in computing the income chargeable under the head “Profits and gains of business or profession”. It was also contended that these expenses were incurred to maintain the identity of the company and to carry out the statutory liability of the company. On the other hand, it is urged on behalf of the Revenue that the income chargeable for tax is the income from “other sources” and deduction is allowable only of such amounts which are incurred solely for the purpose of earning that income. After hearing the assessee and the Revenue, the Appellate Tribunal held that the assessee is entitled only to such other expenditure that has been laid out or expended wholly and exclusively for the purpose of making or earning such income. The deduction claimed were found to be not expended wholly and exclusively for such purpose. The direction of the Income-tax Officer allowing 10% of the total expenses for the year 1978-79 was found to be more than fair to the assessee and the deduction of 10% of the income for the next assessment year was found to be reasonable. It was for these reasons that the Appellate Tribunal set aside the orders of
the Commissioner of Income-tax (Appeals) and restored the orders of the Income-tax Officer. On hearing learned counsel for the assessee and counsel for the Revenue, we are of the opinion that no error of law has been committed by the Appellate Tribunal.
5. The only income which the assessee had for the two assessment years 1978-79 and 1979-80 is the income from dividends which comes under the head “income from other sources”. In computing the income of the assessee under this head, deduction has to be made for any expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purposes of making or earning such income (vide Section 57 of the Income-tax Act). No deduction can be allowed under this section unless the expenditure is incurred wholly and exclusively for the purpose of making or earning the income. Furthermore, it should not be in the nature of capital expenditure or in the nature of personal expenses of the assessee. The only aspect which the Appellate Tribunal was called upon to consider was whether the deductions claimed represent expenditure incurred wholly and exclusively for the purpose of making or earning the income. Since the assessee was not having any business during the relevant assessment years, deduction of expenditure expended wholly and exclusively for the purpose of business does not arise. Such deduction has to be made only in computing the income chargeable under the head “Profits and gains of business or profession” and not by charging the income under the head “Income from other sources” as in the present case.
6. As early as 1964, the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, held that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits”. It was held that the expression “for the purpose of business” may take in not only the day-to-day running of the business, but also the rationalisation of its administration and modernisation of its machinery. It may include measures for the preservation of the business and for the protection of its assets. It was further held that the purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. The Supreme Court further held that this will not include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.
7. The expression “wholly and exclusively” used in Section 10(2)(xv) of the Indian Income-tax Act, 1922, corresponding to Section 37(1) of the Income-tax Act, 1961, came up for consideration before the Supreme Court in Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261. It
was held that the expression does not mean “necessarily” and such expenditure expended wholly for the business purposes may be incurred voluntarily and without any necessity. It was further held that the assessee can claim deduction under Section 10(2)(xv) if it is incurred for promoting the business and to earn profits even though there was no compelling necessity to incur such expenditure. In the above-mentioned decisions, the Supreme Court was only considering the effect of the expression “wholly and exclusively” contained in Section 10(2) (xv) of the Indian Income-tax Act, 1922, relating to deduction of expenditure incurred for the purpose of the business. The deduction sought to be made by the assessee is not in respect of expenditure incurred for the purpose of business, but expenditure incurred for the purpose of earning income which directly comes under Section 57(iii) of the Income-tax Act. The principle enunciated by the Supreme Court in these two decisions is, therefore, of no assistance to the assessee.
8. The Madras High Court had occasion to consider an identical question in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469. The assessee-company in that case was carrying on the business of supplying electricity at various places in Madras State. The business was taken over by the Madras Electricity Board with effect from June 1, 1957. 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 the 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 assessee claimed allowances for expenses relating to establishment, salaries, etc. The Income-tax Officer held that those expenses cannot be said to have been incurred entirely in me course of earning the items of income accounted for. That assessment was confirmed in appeal by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal concurred with the finding of the Appellate Assistant Commissioner. On a reference to the Madras High Court under Section 256(1) of the Income-tax Act, 1961, it was held that the income assessed was the “interest income” and the expenditure allowed was not incurred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not carrying on any business during the relevant assessment years, it was held that the deductions claimed by the assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest.
9. Incidentally, the question of the estimate of the expenditure made by the Income-tax Officer for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that
the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year. The Income-tax Officer had estimated the expenses at 10% of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that no material had been produced by the assessee to show that he was entitled to a larger allowance. In such circumstances, the Madras High Court held that the allocation made by the Income-tax Officer has to be taken as a reasonable estimate.
10. The facts of the case on hand are similar to the facts of the case considered by the Madras High Court in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469. The only income of the assessee is from dividends, For collecting the dividends, no effort is necessary and no expenses need be incurred by the assessee. Learned counsel for the assessee contended that an office has to be maintained for the purpose of collecting the dividends. Expenses are alleged to have been incurred by way of rent, travelling expenses, audit fees, legal charges, etc., and by way of salary of the managing director. These expenses are to be met according to the assessee and are necessary for the earning of the income. As observed by the Madras High Court, these expenses are not incurred solely for the purpose of earning the interest income and the expenses stated to have been incurred are so remote that they have no connection with the earning of the interest.
11. Learned counsel for the assessee has drawn our attention to the decision of this court in Commr. of Agrl. I. T. v. Kartikulam and Alathur Estates [1988] 169 ITR 386. Therein, this court considered the question whether the expenses incurred for professional fee for taxation work is an allowable deduction under Section 5 of the Agricultural Income-tax Act. After referring to Malayalam Plantations’ case [1978] 115 ITR 624, a Division Bench of this court held that legal expenses incurred and classified as professional fee for taxation work is not an admissible expenditure in computing the agricultural income under Section 5(j) of the Kerala Agricultural Income-tax Act which enables a person to deduct expenditure expended wholly and exclusively for the purpose of deriving the agricultural income for the purpose of assessment under the Agricultural Income-tax Act. It was observed therein that once it is accepted that the language of Section 5(j) of the Kerala Agricultural Income-tax Act and that of Section 10(2)(xv) of the Indian Income-tax Act, 1922, are only kindred expressions, it cannot admit of any doubt that any expenditure laid out or expended for the purpose of agricultural income will be a deductible expenditure. This court has only found that the language of Section 5(j) of the Agricultural Income-tax Act and that of Section 10(2)(xv) of the Indian Income-tax Act, 1922, are kindred expressions. Section 57 of the Income-tax Act, 1961, had not come up for consideration before this court in that decision. The question whether the expenditure regarding which deduction was claimed was by way of expenditure wholly and exclusively for the purpose of making or earning such income or whether it was expended wholly and exclusively for the purpose of business did not also come up for consideration in that case. The decision in Commr. of Agrl. I. T. v. Kartikulam and Alathur Estates [1988] 169 ITR 386 (Ker) is, therefore, of no help to the assessee.
12. The Appellate Tribunal was, therefore, justified in holding that the expenses incurred by the assessee including the salary paid to the managing director could not be allowed as a deduction in computing the assessee’s income. For the assessment year 1978-79, the Income-tax Officer has allowed deduction of 10% of the expenses claimed by the assessee. The Appellate Tribunal is of the view that, in allowing 10% of the total expenses claimed, the Income-tax Officer has been more than fair to the assessee. For the next assessment year, an allowance of 10% of the total income was made. This, according to the Tribunal, was reasonable. Apart from claiming some amounts by way of expenses, no other material has been placed by the assessee to show that they are entitled to a larger allowance than 10% of the expenses incurred or 10% of the total income. In the circumstances, the Appellate Tribunal was right in finding that the allowance of 10% of the total expenses for the assessment year 1978-79 is more than fair to the assessee and that the allowance of 10% of the total income for the next assessment year is reasonable. No error of law has been committed by the Appellate Tribunal.
13. Question No. 1 referred to us is, therefore, answered in the affirmative, i.e., against the assessee and in favour of the Revenue. Question No. 2 is also answered in the affirmative i.e., against the assessee and in favour of the Revenue.
14. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.