Liquidation and assessment rules: tax liability, limited deductions for income from other sources, and section 144B procedure upheld.

A company in liquidation remained assessable to income tax, and objections that its return was non est, that it was not chargeable on income or capital gains, or that no rate applied to companies in liquidation were rejected. Omission to compute tax in the body of the assessment order did not invalidate the assessment where the demand notice correctly stated the tax payable. For income from other sources, only expenditure wholly and exclusively incurred to earn the income was deductible, so the full claimed expenses could not be allowed. A prior reference under section 144A did not bar a later section 144B procedure, and the time spent in that process was excluded for limitation purposes.

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Issues: (i) Whether omission to compute tax in the body of the assessment order invalidated the assessments when tax was mentioned in the demand notice; (ii) whether the assessee company in liquidation could resist assessment on the grounds that the return was non est, that it was not chargeable to tax on its income or capital gains, and that no rate of tax was prescribed for companies in liquidation; (iii) whether the assessee was entitled to deduction of the entire claimed expenses against interest income under the head "Income from other sources"; and (iv) whether a reference under section 144B of the Income-tax Act, 1961, was valid after directions had been issued under section 144A, and whether the assessment was barred by limitation.

Issue (i): Whether omission to compute tax in the body of the assessment order invalidated the assessments when tax was mentioned in the demand notice.

Analysis: The assessment orders were challenged only on the ground that the body of the order did not itself compute tax, although the demand notice correctly stated the tax payable. The issue was treated as concluded by binding precedent that the absence of tax computation in the assessment body does not by itself vitiate the assessment where the demand notice contains the correct tax liability.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Issue (ii): Whether the assessee company in liquidation could resist assessment on the grounds that the return was non est, that it was not chargeable to tax on its income or capital gains, and that no rate of tax was prescribed for companies in liquidation.

Analysis: The Court treated the objections relating to liquidation as concluded by earlier binding decisions. A company in voluntary liquidation was not treated as ceasing to be assessable merely because winding-up proceedings had commenced, and the return signed by a liquidator was not held invalid on that account. The Court also accepted that income and capital gains arising in the relevant period remained chargeable in accordance with the Income-tax Act, 1961.

Conclusion: The Tribunal was right in rejecting the assessee's stand on all these liquidation-related objections, and the decision was against the assessee.

Issue (iii): Whether the assessee was entitled to deduction of the entire claimed expenses against interest income under the head "Income from other sources".

Analysis: The Court applied the principle that only expenditure wholly and exclusively incurred for earning the relevant income is allowable against income from other sources. In the case of a company in liquidation, only those expenses that were necessary for the minimal continuing administration of the liquidation and for earning the interest income, such as salary, audit fees, printing and stationery, and similar incidental outgoings, could be allowed. The full claim was not deductible as of right.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Issue (iv): Whether a reference under section 144B of the Income-tax Act, 1961, was valid after directions had been issued under section 144A, and whether the assessment was barred by limitation.

Analysis: The Court held that sections 144A and 144B operate in different fields and that prior recourse to section 144A does not exclude the subsequent application of section 144B where the draft assessment proposes the requisite variation. The binding nature of directions under section 144A does not denude the Income-tax Officer of jurisdiction to frame a draft assessment or to "propose" variation for the purposes of section 144B. Since the recourse to section 144B was legally open, the time spent in that proceeding was excludible and the assessment was not time-barred.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Final Conclusion: All the substantial questions referred were resolved against the assessee, and the assessments for both years were upheld.

Ratio Decidendi: A pre-assessment reference under section 144A does not bar the application of section 144B where the Income-tax Officer still frames a draft assessment proposing variations of the requisite magnitude, and only expenditure wholly and exclusively incurred to earn income from other sources is deductible.

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