1. This is a Reference under Section 66(1) of the Indian Income-tax Act by the Calcutta Bench of the Appellate Tribunal of the following question of law :
'Whether on the facts and in the circumstances of the case, the deduction of Rs. 6,000/- was permissible under Section 12 of the Indian Income-tax Act.'
2. The Reference has been made at the instance of the Commissioner of Income Tax, West Bengal. Appearing for him, Mr. Meyer made it clear at the very outset that he was not concerned at all with the amount of deduction which had been allowed by the Tribunal, but his whole concern was to have certain erroneous principles upon which the Tribunal had proceeded corrected in order that the decision in the present case might not be utilised as a precedent in other similar cases.
Likewise, the learned Advocate for the assessee said that to him also, the amount of Rs. 6,000/-was of no concern and that he wanted rather to defend the principles upon which the Tribunal had allowed the deduction. We may therefore leave the amount of Rs. 6,000/- to itself and see whether the principles are wrong as the Commissioner has contended or whether they are right, as contended by the learned Advocate for the assessee.
3. The assessee is a public limited company and was at the relevant time in the second year of its existence. The relevant time was the accounting year, 1946-47. As its name shows, it is a spinning and weaving mills, but the finding of fact is that in the accounting year in question it has not yet commenced the business. It appears however to have been preparing to do so and had certain investments from which it derived some income. Thus, It had an income of Rs. 18,465/- by way of interest from its managing agents, a further sum of Rs. 386,/-, also by way of interest, from Banks and a still further sum of Rs. 2,457/- from investments in Victory Bonds. I am leaving aside a large amount sought to be assessed by the Income-tax Officer on the basis of certain high denomination notes encashed by the company, because that item was excluded by the Tribunal and the Commissioner of Income-tax has not pursued the matter further.
4. As the company is a spinning and weaving company and as the interest income was not from any of the sources mentioned in Section 8 of the Act, the entire amount was assessed under Section 12. The assessment order states specifically that the Income brought tinder assessment is Incomefrom 'other sources'. As against that income, the assessee claimed a deduction of Rs. 21,654/- on account of office and establishment expenses but the income-tax officer did not allow any deduction at all. The Appellate Assistant Commissioner, on appeal, upheld the Income-tax Officer's, disallowance and did so on the ground that the assessee company was still at the development stage and therefore the expenses claimed could not be allowed.
5. When the matter went up to the Tribunal on further appeal, the Tribunal applied the principles which it had applied to the previous year's, assessment to which it expressly referred. In accordance with those principles, the Tribunal estimated, the allowable expenditure at Rs. 500/-per month and granted a total deduction of Rs. 6,000/-. It is that amount of Rs. 6,000/- which finds place in the question referred.
6. As the reasons upon which the Tribunal proceeded are not to be found in the appellate order relative to the assessment year 1947-48, reference has got to be made to their order relative to the previous year that is, the assessment year 1946-47. It is stated in that order that the Tribunal could not agree to the proposition that any expenses, which could not be directly attributed to the interest receipts, must be considered to be development expenses and treated as capital rather than revenue expenditure in view of the stage at which the company's business was. The Tribunal thought that even though 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 character.
The tribunal pointed out further that although there had been a receipt of interest of a fairly substantial amount, no expenditure had been allowed at all even under that head. Having referred to those two grounds, the Tribunal proceeded to hold that a certain amount was, in its judgment, 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 amount ultimately allowed as deduction was thus arrived at by an estimate.
7. The point taken by Mr. Meyer was that although the Tribunal might, if it liked, estimate the amount of the expenditure incurred in collecting the interest income at Rs. 6,000/- or even a higher figure, it could not base the allowance upon the principles which it had purported to follow. The learned Advocate for the assessee, on the other hand, stated that the observations of the Tribunal indicated that they were proceeding on two lines, one of which had reference to the business activities of the company and the other of which only had some reference to the interest income.
If I understood the learned Advocate aright, what he intended to say was that the Tribunal had allowed the deduction on the basis that the assessee was entitled to some deduction under Section 10 of the Act. Indeed, he even asked us to reframe the question by omitting the reference to Section 12 and by recasting it so that it might comprise Section 10 as well.
8. I am entirely unable to see how the scope of the controversy can be enlarged in the manner suggested by the learned Advocate for the assessee. The assessment was under Section 12 of the Act and, as I have already pointed out, the assessment order says quite clearly that the Income that was being brought under assessment was income from 'other sources.' That being so, the only question before the Income-tax authorities and ultimately before the Tribunal was whether the expenses claimed as office and establishment expenses could be allowed in an assessment under Section 12 against the income which was solely interest income. There was no other controversy before the Income-tax authorities or before the Tribunal and therefore no other question arises out of the Tribunal's order.
9. 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, as the learned Advocate for the assesses faintly suggested. There is not the slightest trace of any allegation of any such activity before any of the authorities below.
The simple position is that the company had collected some funds and perhaps rather, than allowing those funds to lie idle, it had invested them so that some interest income might be earned. It seems to have made a somewhat bad bargain, because although, there is no finding as to what the actual expenses were of collecting the interest, there is some suggestion that the expenses of collecting the interest from the Managing Agents themselves were considerable. Be that as it may, 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 it is 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.
It is elementary that allowances admissible under one or other of the heads under the Income-tax Act are not claimable against the income under another head, and secondly, allowances which are entirely foreign to a particular head and for which the Act makes no provision, cannot possibly be claimed. The interest in this particular case being interest assessable under the head 'other sources' and under Section 12, the only allowances which could be properly claimed and legally allowed are allowances provided for in the section itself. The first head of deduction mentioned in the section, which is practically in the same terms as Section 10(2)(xv), is 'expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains.' Under those words the only deduction which an asses-see could claim from his interest income, chargeable under Section 12, would be the expenses actually incurred in earning and collecting the interest Income brought under assessment. Nothing more is allowable under that head.
The learned Advocate for the assessee referred us to the decision of the Madras High Court in the case of -- 'Mahalakshmi Textile Mills Ltd. v. Commr. of Income Tax, Madras', 6 I. T. C. 83 (Mad.) (A); which, instead of supporting him, seems to point exactly in the contrary direction. There also, the company seems to have been at the development stage and a large claim on account of office & establishment expenses was made. The learned Chief Justice pointed out that allthat the assessee company was entitled to by way of deduction was the amount of actual expenditure incurred in earning the income and proved to the satisfaction of the income-Tax Officer
'There must have been', observed the learned Chief Justice,
'some expenditure to gain that profit and if the assessee company is able to snow the income-tax Officer what that expenditure actually was-
-- it must be expenditure solely for the purpose
-- the assessee company will be entitled to a deduction in respect of that'.
Similarly, in the present case, 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 the Section 12.
I am therefore of opinion that in so far as the Tribunal held that some deduction could be properly claimed and legally allowed to an assessee in the position of the present assessee company on account of expenditure incurred for maintaining its establishment or, to use the Tribunal's expression, 'keeping itself alive', it was utterly wrong. At a stage when a company has not yet started carrying on any business and at a stage when there is no business income yet to assess, but the only income is an interest income chargeable under Section 12, the only allowance claimable and allowable is the allowance provided for in Section 12(2) of the Act and any other expenditure which that section may allow. 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. The principles upon which the Tribunal purported to act are therefore entirely erroneous.
10. But the Tribunal also referred to the expenditure which must have been incurred in earning and collecting the interest income. What it exactly meant by saying that it did not consider it necessary to go into the question as to how much of the expenditure could be attributed to the earning and collection of the interest receipts, it is not easy to understand. Probably, it thought that having regard to its view that some allowance was admissible even as establishment expenses and haying regard to the small amount at which it was fixing the deduction, it did not consider it necessary to carry out any further operation of computation under the different heads. As I have already stated, the amount of deduction was fixed by an estimate. Mr. Meyer did not wish the amount of the deduction to be disturbed and I think in view of all the facts of the case the amount can be maintained on the footing that it is an estimated amount of the expenditure actually incurred for earning and collecting the interest income which was brought under assessment.
11. For the reasons given above, the answer to the question referred will be 'Yes', but only on the basis that the amount was an amount flx-ed by estimate of the expenditure Incurred solely for the purpose of earning the interest income and not on the basis adopted by the Tribunal.
12. As the amount of the deduction is not being disturbed, there will be no order for costs.
13. I agree.