Company allowed deduction for establishment expenses to earn income from other sources despite no active business operations

The HC upheld the Tribunal's decision allowing the assessee-company's expenditure as deductible while computing income from other sources. It held that a limited company, even if not carrying on business, must maintain its corporate establishment to comply with statutory obligations so long as it remains in existence and is not dissolved or struck off. Expenses on clerical staff, secretary/accountant, and incidental establishment costs were found to be incurred wholly and exclusively for earning income and for maintaining corporate status. The HC therefore answered the question in the affirmative, in favour of the assessee and against the Revenue.

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Issues Involved:
The judgment involves the interpretation of section 52(2) of the Income-tax Act, 1961, the approval process of the Inspecting Assistant Commissioner, and the deductibility of certain expenses incurred by the assessee for earning income.

Interpretation of Section 52(2):
The High Court referred to a previous decision of the Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597, which concluded that section 52(2) had no application in the present case. Consequently, the first question was answered in the affirmative in favor of the assessee, rendering the second question unnecessary for consideration.

Approval Process of Inspecting Assistant Commissioner:
As the first question was resolved in favor of the assessee based on the Supreme Court decision, the High Court declined to answer the second question related to the approval of the Inspecting Assistant Commissioner.

Deductibility of Expenses:
The Income-tax Officer disallowed certain expenses claimed by the assessee, amounting to Rs. 18,675, as not spent wholly and exclusively for the purpose of earning income. The Appellate Assistant Commissioner allowed a further expense of Rs. 6,855 without specifying which disallowances were to be deleted, leaving Rs. 11,820 still disallowed.

Reasoning for Allowing Expenses:
The Tribunal considered that the expenses claimed by the assessee were necessary for statutory compliance and commercial expediency, such as maintaining an office, appointing staff, and fulfilling legal obligations. The Tribunal concluded that these expenses were wholly and exclusively required for the company's activities to earn income, thus allowing the expenditure.

Judicial Precedent and Conclusion:
The High Court referenced a similar case from the Allahabad High Court to support the allowance of such expenses for maintaining the status of a company and complying with legal obligations. Considering the necessity for a company to maintain its establishment for statutory compliance, the High Court upheld the Tribunal's decision to allow the expenses as deductible. Therefore, the third question was answered in the affirmative and in favor of the assessee, with both judges concurring on the decision.

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