VIJAYA LAXMI SUGAR MILLS LTD. versus COMMISSIONER OF INCOME TAX, KANPUR

Citation: [1991] 3 S.C.R. 383 · Decided: 06-08-1991 · Supreme Court of India · Bench: K. JAGANNATHA SHETTY · Disposal: Dismissed

Judgment (excerpt)

y 
VIJAYA LAXMI SUGAR MILLS LTD. 
v. 
COMMISSIONER OF INCOME TAX, KANPUR 
AUGUST 6, 1991 
A 
[K. JAGANNATHA SHETIY, V. RAMASWAMI AND 
B 
YOGESHWAR DAYAL JJ.) 
Companies Act, 1956: Company in liquidation-Liquidator-
Rea/isation of assets-Whether carrying on a business of the Company. 
income Tax Act, 1961: Ss. 28, 56, 57(iii)-Company in liquida-
C 
tion-Sale of assets-investment of sale proceeds in fixed deposits-
Whether a business of the company: inrerest income-Whether to be 
assessed under s. 28: expenditures incurred by liquidator-Deduction 
of-Whether admissible under s. 57(iii): interest accrues sui generis. 
The appellant-company was ordered to be wound up in 1949. In D 
the course of its winding up the liquidator sold certain assets of the 
company and invested the sale proceeds thereof in fixed deposits with 
certain banks. The liquidator incurred certain expenditures on salaries, 
legal fees, travelling expenses, postage and stationery. The assessee-
company claimed a ·deduction of the said expenses from the interest 
income. The I.T.O. did not allow it, and assessed the entire interest E 
income as taxable u/s 56 of the Income Tax Act, 1961 under the head 
"Income from other sources". The assessment orders were confirmed 
by .the Appellate Assistant Commissioner and by the Income Tax Appel-
late Tribunal in appeal. 
On a reference by the Tribunal the High Court held that the F 
income from fixed deposit was income from other sources; and it disal-
lowed deduction of the expenditure u/s. 57(iii) on the ground that the 
expenses claimed were not related to the earning of the interest 
income. Aggrieved the assessee-company preferred appeal by special 
leave to this Court. 
On the questions whether: (1) in effecting the sale and realisation 
of the assets of the Company in liquidation and investing the same in 
fixed deposits the liquidator was engaged in the business of the company 
and the interest income was a business income taxable n/s 28 of the Act 
and not under s. 56 under the head "Income from other sources", and 
G 
(2) the expenses incurred by the liquidator were incurred solely for the 
H 
383 
A 
384 
SUPREME COURT REPORTS 
[1991] 3 S.C.R. 
purpose of earning the interest income so as to claim deduction u/s. 
57(iii). 
Dismissing the appE,al, this Court, 
HELD: I. The Liquidator in merely realising the assets of the 
B 
Company could not be considered as carrying on any business of the 
Company. [387G] 
c 
2. In the instant case, the company before its liquidation was 
engaged in the manufacture of sugar. The records did not disclose that 
the liquidator was carryiE1g on the business of manufacture of sugar or 
any trading activity for the purpose of facilitating the winding up. The 
only accepted fact was th"t the interest income was derived from fixed 
deposits purchased out of the proceeds of sale of assets during winding 
up. The assessee, could not be said to have carried on any business to 
bring the interest income within the meaning of s. 28 of the Act and, 
therefore, the interest income was liable to be assessed only under the 
D 
head "Income from other sources". The Tribunal was, therefore, right 
in holding that the interest income in the instant caSe was not governed 
bys. 28 but fell to be consid.ered under s. 56. [387F; 388B-C; 389A-B] 
E 
Vijay Laxmi Sugar Mills Ltd. v. Commissioner of Income Tax, 
Delhi Central, [1972] 86 I. T.R. 402 All., affirmed. 
Morvi Mercantile Bank Ltd. v. Commissioner of Income Tax, 
Gujarat., [1976] 104 I. T.R. 568 Guj., approved. 
3.1 In computing the income chargeable under the bead "Income 
from other sources", requirement under s. 57(iii) of the Act is that the 
F 
expenditure should have been incurred "for the purpose of making or 
earning such income" and the 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. [389C-D & G] 
3.2 It is true that the connection between the expenditure and the 
G 
earning of income need not be direct and it may be indirect. But since 
the expenditure must have been incurred for purpose of earning that 
income, there should be some nexus between the expenditure and the 
earning of the income. [389D-E] 
3.3 The interest accrues sui generis. The interest is payable by the 
H 
bank whether it is claimed or not and whether there is any establish-
ment or not. [389E-F] 
J, 
SUGAR MILL v. C.l.T. [RAMASWAMI, J.] 
385 
3.4 In the inst

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