Residual income deduction cannot include earlier capital outlay on leased buildings under section 12(2) when later rental income arises.

Section 12(2) of the Indian Income Tax Act, 1922 allows only non-personal, non-capital expenditure incurred solely to earn the income of the relevant year under the residual head of income. An outlay made years earlier on erecting buildings on leased land cannot be carried forward and deducted against later rental income, because the allowance must relate to expenditure incurred in the year in which the assessable income arises. The claimed deduction was therefore not admissible.

---

---

Issues: Whether expenditure incurred years earlier on erecting buildings on leased land could be deducted under section 12(2) of the Indian Income Tax Act, 1922 while computing income from other sources.

Analysis: Section 12 applies only to income not falling under the preceding heads, and sub-section (2) permits deduction only for expenditure, other than personal expenses and capital expenditure, incurred solely for the purpose of making or earning the income of the relevant year. The allowance contemplated by the provision must therefore relate to expenditure incurred in the year in which the assessable income arises. An outlay made many years earlier for erecting buildings cannot be carried forward and apportioned as an annual deduction against later rental income under section 12(2).

Conclusion: The assessee was not entitled to the deduction claimed under section 12(2); the answers allowing such deduction were wrong and were reversed in favour of the Revenue.

---