1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as ' the Act '), the Income-tax Appellate Tribunal, Indore Bench, Indore, has referred the following question of law to this court for its opinion :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the order u/s. 263 passed by the Commissioner of Income-tax for the assessment year 1976-77 ?'
2. The material facts giving rise to this reference, briefly, are as follows:
The assessee is a company and is being wound up voluntarily. For the assessment year 1976-77, the ITO passed an order of assessment treating the income as nil. Later on, the Commissioner of Income-tax, while examining the record of the assessee, found that during the accounting period relevant for the assessment year 1976-77, the assessee-company had derived income from interest on bank deposits and Government securities and that no business was carried on by the assessee-company. The ITO had allowed the expenditure of Rs. 10,372 claimed by the assessee. The Commissioner was of the view that since no business was carried on by the assessee, the ITO should have allowed only such expenses as were attributable to the income under the heads of interest on securities and other sources. The Commissioner, therefore, issued a show-cause notice to the assessee under Section 263 of the Act and after taking into consideration the reply filed by the assessee, the Commissioner set aside the order of assessment passed by the ITO and directed him to pass a fresh order in accordance with law. Aggrieved by that order, the assessee preferred an appeal before the Tribunal. The Tribunal held that by virtue of the provisions of Section 487 of the Companies Act, 1956, after the commencement of the winding up, the assessee-company could carry on business only for the realisation of its capital and, therefore, any expenditure incurred by the assessee for realising the capital would amount to a capital expenditure. The Tribunal, therefore, held that neither any income from business could be charged to tax being a capital receipt, nor any expenditure could be allowed in the nature of a revenue expenditure. In this view of the matter, the Tribunal set aside the order passed by the Commissioner and allowed the appeal preferred by the assessee. Aggrieved by the order passed by the Tribunal, the department sought a reference and it is at the instance of the department that the aforesaid question of law has been referred to this court for its opinion.
3. Having heard learned counsel for the parties, we have come to the conclusion that this reference has to be answered in the negative and in favour of the Revenue. The Commissioner had passed an order under Section 263 of the Act on the ground that the order of assessment was erroneous and prejudicial to the interests of the Revenue as the ITO failed to include the income received by the assessee from securities and other sources and that he should have allowed only such expenses as were attributable to the income under the aforesaid heads. The fact that no business was carried on by the assessee was found by the Commissioner and this finding was upheld by the Tribunal. The Tribunal has also found that income was derived by the assessee-company during the assessment year in question in the form of interest on deposits and interest on Government securities. But, in our opinion, the Tribunal erred in holding that the income received by the assessee in the form of interest on deposits and Government securities would be a capital receipt. The Commissioner was right in holding that such income would be income under the head ' Income from other sources' and ' Interest on securities'. The Tribunal relied upon the provisions of Section 487 of the Companies Act but those provisions merely lay down that in the case of a voluntary winding up, the company shall, from the commencement of the winding-up, cease to carry on its business, except so far as may be required for a beneficial winding up of such business. The reference to that provision, in our opinion, would not be relevant because that provision does not prohibit the company, which is being voluntarily wound up, from receiving income from other sources and interest on securities. The Commissioner, therefore, was right in holding that the order passed by the ITO was erroneous and prejudicial to the interests of the Revenue. Our answer to the question referred to this court, therefore, is that, on the facts and in the circumstances of the case, the Tribunal was not justified in law in cancelling the order under Section 263 of the Act passed by the Commissioner of Income-tax for the assessment year 1976-77.
4. In the circumstances of the case, parties shall bear their own costs of this reference.