PETROFILS CO- OPERATIVE LTD. ,VADOADARA vs. THE DCIT, CIRCLE-1(2), VADODARA

At the outset itself, it was pointed out by the ld.counsel for the assessee that the issues raised in the present three appeals are identical to the issues raised in the assessee’s four appeals in to 15/Ahd/2017 for Asst.Year 2009-10, 2011-12 and 2012- 13 and ITA No.1273/Ahd/2017 for Asst.Year 2004-05 which were , 549 and 551 /Ahd/2020 (3 Appeals) 2 heard by the ITAT, Ahmedabad “B” Bench comprising of the same combination of members on 4.3.2024. To this proposition, the ld.DR fairly agreed.

The ld.counsel for the assessee drew our attention to grounds raised in Asst.Year 2006-07, which read as under:

“1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the action of the Assessing Officer in disallowing the Administrative Expenses on the ground that the same are not allowable from other income assessed as Income from Other Sources on the ground that the appellant has failed to prove that such expenses were deductible under section 57(iii) of the Act. 1.1 The learned Commissioner (Appeals) ought to have appreciated that the matter had already been travelled upto Tribunal and the appellant has brought on record the facts on the basis of which the issue was set aside in earlier years. 2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the rejection of the claim of set off of brought forward unabsorbed depreciation of earlier years on the ground that no appeal lies on this ground.

He stated that the only grievance of the assessee was with respect to that raised in ground no.1.0 and 1.1 which were identically raised in assessee’s appeal for Asst.Year 2009-10, 2011-12 and 2012- 13 and for Asst.Year 2004-05. With respect to ground no.2, the ld.counsel for the assessee stated before us that the issue had become infructuous since the assessee had been allowed relief on the issue of set off of unabsorbed depreciation of earlier years.

The ld.DR fairly agreed with the above. , 549 and 551 /Ahd/2020 (3 Appeals) 3

Ground No.1.0 and 1.1, it was common ground was identical to that raised in assessee’s appeal for Asst.Year 2009-10, 2011-12 and 2012-13 and for Asst.Year 2004-05, which were heard by ITAT, “B” Bench on 4.3.2024 where the said issue has been adjudicated.

We have dealt with this issue and decided against the assessee. The relevant para-6 to 26 of that order are reproduced hereunder:

The ld.counsel for the assessee pointed out that the common issue arising in all the appeals pertained to the claim of expenses under section 57(iii) of the Act against the income from other sources earned by way of interest income on fixed deposits.

We have heard both the parties; gone through the decisions cited before us as also documents placed before us.

Going forward, we have perused the order of the ITAT in the first round in the case of the assessee for Asst.Year 2004-05, copy of which was placed before us, which judgment was rendered in order dated 13.1.2012. To understand the directions of the ITAT, it is relevant to go through its finding and directions contained in para-7 and 7.1 of the order as under:

Following the said decision, we hold that the decision in each case would depend upon the facts of its own case and according to the facts of the present case, the Tribunal recorded a clear finding that the expenses were incurred by the official liquidator to maintain the infrastructure for the earning of the interest income and without incurring the expenditure, it would not have been possible for the official liquidator to earn the interest income. We are of the view that the finding of the Tribunal clearly shows that there is a nexus between the expenditure and the interest income earned and that finding regarding the nexus, in our opinion, is a finding of fact. In view of the finding of the Tribunal, we hold that the Tribunal was correct in holding that the entire expenditure incurred by the assessee is deductible under the provisions of s. 57(iii) of the Act.” 7.1. Likewise, in cited decision of Palani Sri Murugan Textiles Ltd. vs, Asst.CIT 254 ITR 333 (Mad.) the view expressed was that the receipt of the income by way of interest and dividends was made possible by reason of the pendency of the winding up proceedings. The deposits and investments being the amounts which were part of the amounts to be distributed among creditors and to the extent of any surplus among the contributors for which expenses had to be incurred was continuing with the winding up proceedings. It was held that the expenses so incurred, therefore, were required to be given deduction for the purpose of determining the net taxable income of the company in liquidation.”

A bare perusal of the above would reveal that the ITAT had restored the matter back to the AO, primarily noting the fact that the expenses incurred by the assessee had not been thoroughly examined and scrutinized at the time of assessment in the light of provisions of section 57(iii) of the Act. Interpreting the said provisions, the ITAT held that the assessee has to establish that the earning of interest income was directly linked with liability of interest paid on the government loans which were invested in FDs and interest income earned thereon. The ITAT held that only then the assessee would in a position to say that the expenditure was incurred, wholly and exclusively for earning of interest. The order goes on to cite, the decisions of the Madras High Court in the case of Palani Sri Murugan Textiles Ltd. Vs. ACIT (supra) for having taken this view.

We have gone through the order of the AO in the second round. We find that the AO went on to hold that the assessee was unable to establish , 549 and 551 /Ahd/2020 (3 Appeals) 7 any such nexus while confirming the disallowance of expenditure, and the ld.CIT(A), we have noted, confirmed the order of the AO, following the decision of the Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra).

The assessee’s contention, though before us was that the claim was allowable, since the assessee has established the factum of incurrence of expenditure for liquidation in the course of which the interest income was earned, and therefore, the decision of the Hon’ble Madras High Court, stated above, was applicable in its case.

We have gone through the decisions of both the Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra) and also two decisions of the Madras High Court referred by the ITAT in the first round, and relied upon by the ld.counsel for the assesse before in support of its claim of entire expenses under section 57(iii) of the Act. These decisions cited by both the parties are not, in any way, contradictory. In fact the principle of allowability of claim of expenditure incurred in liquidation against the interest income earned on deposits made by the liquidator has been laid down by the Hon’ble Apex Court in the Vijaya Lakshmi Sugar Mills Ltd.(supra) very clearly, wherein in the facts of the case before it, where the assessee’s claim was with respect to the expenses incurred by the assessee’s liquidator in the process of liquidation, the same were held clearly to be not allowable, since the Hon’ble Supreme Court noted that the said expense could not be said to have been incurred solely for the purpose of earning interest income. The Hon’ble Apex Court held that there should be some nexus between the expenditure and earning of income, and noted no such evidence to show that the expenditure incurred by the liquidator were to facilitate the earning or atleast for protecting of its income. The Hon’ble Apex Court held that the expenses were not allowable in terms of section 57(iii) of the Act. The Hon’ble Apex Court went on to add that even if the expenses were found to have been incurred to preserve or acquire the assets and/or to maintain source from which the interest income was so earned, it would have been allowable in terms of section 57(iii) of the Act. Noting the absence of any such fact in the case before it, the Hon’ble Apex Court held the expenses incurred by the liquidator not allowable in terms of section 57(iii) of the Act. The finding of the Hon’ble Apex Court at para-8 of its order in this regard are as under: “8. The next submission of the learned counsel for the assessee was that in the course of effecting the winding up of the assessee-company the Liquidator has been incurring expenses on items such as, salaries, legal fees, travelling expenses and other liquidation expenses and that those expenses are allowable deduction from income earned by way of interest from fixed deposits in the relevant year. In computing the income chargeable under the head 'Income from other sources', section 57(iii) provides that 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. The question for consideration, therefore, is whether the expenses of the type incurred by the Liquidator in this case can be said to have been incurred solely for the purpose of earning the interest income. It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been incurred for the purpose of earning that income, there should be some nexus between the expenditure and the earning of the income. There is not even some sort of an evidence to show that the expenses incurred by the Liquidator were to facilitate the earning or at least for protecting of the income. The interest accrues sui generis. The interest is payable by the bank, whether it is claimed or not and whether there is any establishment or not. Normally there was no necessity for spending anything separately for earning the interest. However we may hasten to add that if any expenditure was incurred like commission for collection or such similar expenditures which may be considered as spent solely for the purpose of earning that , 549 and 551 /Ahd/2020 (3 Appeals) 8 income, the position may be different. But that was not so in this case. It could not also be said that the expenditure incurred was to preserve or acquire the asset. Nor could it be said that the expenses were incurred for the purpose of maintenance of the source. The requirement under section 57(iii) that the expenditure should have been incurred 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. There could be no doubt that the expenditure incurred by the Liquidator in this case can by no stretch be said to have been incurred with the object or for the purpose of earning the interest income. The Tribunal was, therefore, right in holding that the expenses claimed are not related to the interest income and was not a deductible expenditure under section 57.”

The Hon’ble Madras High Court, in both cases i.e. in the case of CIT Vs. Gannon Dunkerley and Co. P.Ltd. and Palani Sri Murugan Textiles Ltd. Vs. ACIT (supra) allowed the claim of liquidation expenses under section 57(iii) of the Act against the interest income earned, considering the decision of the Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra). The Hon’ble High Court noted that in the facts of the case before it, there was a clear finding of the fact that the expenses were incurred to maintain the infrastructure for earning interest income, and without incurring the expenditure, it would not have been possible for the liquidator to earn interest income. The Hon’ble Madras High Court noted the decision of Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd. (supra) and applied the same to the facts of its own case while allowing the claim of liquidation expenses. The decision of the Hon’ble Madras High Court, therefore, was rendered, following the decision of the Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd., (supra), applying it to the facts of the case of the Hon’ble Madras High Court.

Having said so, what derives from the above is that allowability of claim of expenses in the present case under section 57(iii) of the Act, is to be construed in the light of the principles laid down by the Hon’ble Apex Court and Madras High Court read together. And the underlining principle for the same undoubtedly is as laid down by the Hon’ble Apex Court in the case of Vijaya Lakshmi Sugar Mills Ltd.,(supra),which is that for the allowability of expenses there has to be a nexus between the incurrence of expenditure, and the earning of interest income. The expenses ought to have been incurred directly and/or indirectly for the purpose of earning interest income. It is for the purposes of determining this fact that the matter was restored to the AO by the ITAT in the first round in A.Y 2004-05 & 2009-10.

Applying the above proposition to the facts of the case before us, we find that as far as the claim of interest expenditure is concerned, the same has been stated to have been incurred on interest bearing loans granted by the Government to the assessee to meet its liquidation expenses. In this regard several copies of letters from the Government of India, Ministry Chemical and Fertilizers for releasing funds to the assessee for liquidation purpose were filed before us in PB Page No.42 to 55. The contents of the same reveal that the interest bearing funds were granted for meeting the expenditure for running the office of the Liquidator. The assessee contends that the surplus remaining out of these loans granted, were deposited by the Liquidator in FDs till utilization of funds for the stated purpose, and interest income earned thereon. There is no stipulation from the government that even the interest earned on the loans granted to the assessee deposited in banks is to be utilized for meeting the liquidation expenses. It is only the unsecured loans given which are to be utilized for meeting the liquidation expenses. Therefore, purpose of taking unsecured loans or being granted , 549 and 551 /Ahd/2020 (3 Appeals) 9 unsecured loans from the government was for meeting the liquidation expenses. The purpose clearly was not to earn interest income there from. Therefore, the interest expenditure incurred on these unsecured loans has nexus only with the incurrence of liquidation expenses, and has no nexus with the earning of interest income.

The same follows for all different expenses which were incurred by the liquidator which admittedly were incurred only for the purpose of carrying out the process of liquidation. The purpose of incurring the expenses definitely was not to earn any interest income. Therefore, even with respect to the expenses of liquidation, there is no nexus, direct or indirect, with the earning of interest income. Therefore, on the touch-stone of the conditions to be fulfilled under section 57(iii) of the Act, for allowability of claim of expenses incurred by the liquidator against the interest income earned during liquidation, we find that, all the claims of the assessee fail ,with no nexus established between incurrence of expenditure and earning of interest income. The assessee’s contention before us is that the liquidator, in the process of liquidation, has earned interest income and also incurred liquidation expenses, and both being earned/ incurred in the process of liquidation therefore, the liquidation expenses are allowable against the interest income.

We do not find any merit in this contention of the ld.counsel for the assessee. The allowability of any claim, whether of income or expense, is to be determined as per the provisions of law. In the present case only expenses which were incurred for the purpose of earning interest income are allowable as per section 57(iii) of the Act. Merely because the incidence of both the income and expenses happen in the same process of liquidation does not establish nexus of the expenses incurred with the earning of interest income. Interest income has been earned on deposits of funds while expenses are incurred for liquidation process. If the directive of granting interest bearing loan included, besides the loan also the interest earned therefrom to be utilised for meeting expenses of liquidation, it could be said that the interest expenses had a nexus with the earning of interest income, because the purpose of incurring interest expenses in that case would be to meet liquidation expenses out of loan and to earn interest again for meeting liquidation expenses. In such circumstance the interest expense would be allowable u/s 57(iii) of the Act having nexus with the earning of interest income. But that is not the case before us.

In the present case, it was the duty of the liquidator to have retained a portion of interest income to meet the income-tax liability arising as per law, and to use only the balance for the purpose of incurring the liquidation expenses.

In the light of the same, we find no merit in the contentions of the assessee that all the expenses incurred, including the interest paid on the loan obtained from the Government for carrying out the liquidation process, were allowable in terms of section 57(iii) of the Act against the interest income earned on deposits from the surplus remaining with liquidator out of unsecured loans given to it to meet the liquidation claims. , 549 and 551 /Ahd/2020 (3 Appeals) 10 In view of the above the issue of allowability of expenses incurred during liquidation as per 57(iii) of the Act stands decided against the assessee.

The assessee has also raised a connected ground before us of claim of set off of losses under the head “income form other sources” against the income returned to tax under other heads. This ground also needs to be dismissed since we have disallowed the claim of expenses under the head “income from other sources” and there arises consequently no losses to the assessee under the head Income from Other sources.

Since the issue raised in Ground no.1.0 and 1.1 is admittedly identical to that dealt with the assessee’s appeals in earlier assessment years (supra), our decision rendered therein will apply squarely to the grounds raised in the present appeal. Following which, we dismiss ground no.1.0 and 1.1 raised by the assessee.

Other residuary grounds raised in ground no.3.0 i.e. challenge to the initiation of penalty under section 271(1)(c) of the Act being premature at this stage, the same is accordingly disposed of. While ground No.4 challenging charging of interest under sections 234B, 234C and 234D being consequential, the same is also dismissed.

Resultantly, all the above three appeals are dismissed.