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Issues: (i) Whether the assessee-company was entitled to deduction of the entire expenditure claimed against income assessable as income from other sources under section 12(2) of the Indian Income-tax Act, 1922, and section 57(iii) of the Income-tax Act, 1961. (ii) Whether the estimate of allowable expenditure at 10 per cent. of the receipts was reasonable.
Issue (i): Whether the assessee-company was entitled to deduction of the entire expenditure claimed against income assessable as income from other sources under section 12(2) of the Indian Income-tax Act, 1922, and section 57(iii) of the Income-tax Act, 1961.
Analysis: The statutory allowance is confined to expenditure actually incurred solely for the purpose of making or earning the income assessed under the head "income from other sources". The expenditure must have a real nexus with the earning of that income and cannot be allowed if its connection is remote. The assessee had ceased business, was not carrying on any money-lending activity, and the expenses claimed were largely for maintaining an establishment and directors' expenses. Such outgoings were not shown to have been incurred for earning the interest and share transfer fee income.
Conclusion: The entire expenditure was not allowable under section 12(2) of the Indian Income-tax Act, 1922, or section 57(iii) of the Income-tax Act, 1961, and the answer is against the assessee.
Issue (ii): Whether the estimate of allowable expenditure at 10 per cent. of the receipts was reasonable.
Analysis: The assessee produced no material to justify a larger allowance. The interest income required no active effort to earn, and the share transfer fee income was insignificant compared with the receipts. In these circumstances, the authorities' estimate was treated as a reasonable assessment of the expenditure attributable to earning the income.
Conclusion: The 10 per cent. estimate was reasonable and was not liable to interference.
Final Conclusion: The reference was answered in favour of the Revenue, with the assessee failing to establish entitlement to deduction of the full claimed expenditure.
Ratio Decidendi: For deduction under section 12(2) of the Indian Income-tax Act, 1922, and section 57(iii) of the Income-tax Act, 1961, the expenditure must be directly connected with, and incurred solely for, earning the assessed income from other sources; remote or business-maintenance expenses are not deductible.
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