(a) Income-tax---

----Other sources---Deductions---Interest received by Administrator -- General---Expenditure incurred to file suit to recover amount with interest-- Expenditure was deductible---Indian Income Tax Act, 1961, S. 57.

(b) Income-tax---

----Income---Assessability---Estate taken -over by Administrator-General under order of Court---Administrator-General under statutory duty to follow cash system of accounting---Interest, which had accrued but was not received by Administrator-General could not be assessed in his hands.

IC died in August, 1968. After her death, the estate was taken over by the Administrator-General of Madras under an order made by the High Court. The High Court ordered that possession be taken on August 28, 1968. Probate was granted on March 26, 1970. The Administrator-General filed a nil return on the ground that the entire income of the estate was held for charitable purposes. The Income-tax Officer found that the income arose between the period August 14, 1968, 'and March 31. 1969. wherethe letters of administration were obtained only on May 5, 1970. Under the will the disbursements to charities and other legacies could take place only after taking charge of the assets and completely disposing of them. Since this process was still going on even on the date of the assessment, the entire income of the estate was assessable in the hands of the Administrator General. IC had advanced amounts to N and C. Suits were filed by the Administrator-General against N and C. A sum of Rs.28,082 was spent for that purpose. The Income-tax Officer assessed him on interest receipts of Rs.47,539 and Rs.18,915 on the basis of receipt from C and Rs.26,538 on the basis of accrual. The claim for expenses of Rs.23,850 on account of stamp duties and Rs.2,384 being other expenses was disallowed by the Income-tax Officer. The Tribunal held that the Administrator-General had to maintain accounts on receipt basis and he could not follow the mercantile system of accounting, which was followed by the deceased and since the assessee had not received interest of Rs.26,538 actually during the year in question, the amount could not be assessed; and that he was entitled to the deduction of Rs.23,850. On a reference:

Held, (i) that, in view of the Administrators-General Act; the Administrator-General can follow only one method of accounting, viz., accounting showing the receipt basis. If that is so in the accounting year relating to the assessment year, the interest amount of Rs.26,538 did not reach the hands of the Administrator-General. Therefore, it could not be taxed in the hands of the Administrator-General for the relevant assessment year.

(ii) that the expenditure was incurred by way of stamp duty in order to file the suit to recover the amount with interest from the debtor. If the amount was not realised, it would become time-barred. Therefore, in order to preserve the estate and to collect the amount due to the estate, the suit was filed and the expenditure was incurred. The expenditure was wholly and exclusively incurred for earning the income. The expenditure of Rs.23,850 was allowable as a deduction under section 57(iii) of the Income Tax Act; 1961.

CIT v. Rajendra prasad Moody (1978) 115 ITR 519 (SC); CIT v. Rampur Timber and Turnery Co. Ltd. (1981) 129 ITR 58 (All.); Dubash (J.K.) (Executors of the Estate of) v. CIT (1951) 19 ITR 182 (SC) and Vijay laxmi Sugar Mills Ltd. v. CIT (1991) 191 ITR 641 (SC) ref.

C. V. Rajan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

K.A. THANIKKACHALAM, J---At the instance of the department, the Tribunal referred the following question for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the sum of Rs.26,538 was assessable as accrued interest and the sum of Rs.23,850 was allowable as expenses against interest income?"

One Mrs. Ida L. Chambers died on August 13, 1968, leaving an estate covered by her. Will, dated October 29, 1949, with a codicil, dated June 3, 1950. After the death of Mrs. Ida L. Chambers, the estate was taken over by the Administrator-General of Madras under an order made by this Court. The Administrator-General of Madras applied to this Court for permission to take possession of the estate and the Court ordered to take possession on August 28, 1968. On April. 28, 1969, the Administrator had made an application to prove the Will. Probate was granted on March 26, 1970. The Administrator filed a return, showing "nil" income and claiming that the entire income of the estate of the late Mrs. Ida L. Chambers was held for the purpose of certain charities and as such was exempted. The Income tax Officer found that the income arose between the period August 14, 1968 and March 31, 1969, whereas the letters of administration were obtained only on May 5; 1970. Under the Will, the disbursement of charities and other legacies could take place only after taking charge of the assets and completely disposing of them. Since this process was still going on even on the date of the assessment, the entire income of the estate was assessable in the hands of the Administrator-General.

The said late Mrs. Ida L. Chambers had advanced amounts to one A. Nagappa Chettiar. At the time of her death, the total outstanding consisting of the amounts advanced to A. Nagappa Chettiar and also to Chrome Leather Company. Limited stood at about Rs. 11 lakhs. The Administrator-General filed a suit, C. S. No. 61 of 1979 against Shri A.Nagappa Chettiar. The plaint refers to a promissory note in favour of the late Mrs. Ida L. Chamber, promising to pay a sum of Rs.5,94,000 with interest thereon. On the date of the plaint, the sum due to the plaintiff was Rs.7,29,719. The suit was filed to recover the above sum of Rs.7.29,719 with subsequent interest at 6 per cent. per annum and also the cost, Likewise, a suit C. S. No. 60 of 1979 was filed to recover a sum of Rs.5,25,000 from Chrome Leather Company. Both the suits were settled out of Court. The assessee incurred a sum of Rs.28,082 by way of court-fee and expenses in respect of the above said two suits. As already stated, the assessee had field a "nil" return.

The Income-tax Officer, however, assessed him on interest receipts of Rs.47,539 and Rs.18,915 on the basis of receipt from Chrome Leather Company and Rs.26,538 on the basis of accrual. The claim. for expenses of Rs.23,850 on account of stamp duties and Rs.2,384 being other expenses were disallowed by the Income-tax Officer.

The assessee-claimed before the Tribunal that the interest income was assessable and assessed on receipt basis and so expenses incurred for realising the income are allowable. In the case of A. Nagappa Chettiar. The interest was calculated on the basis of accrual. The Tribunal found that out of the overall amount due to the assessee by way of capital and interest of Rs. 11 lakhs on account of the compromise made out of Court, the assessee not only did not receive the interest but even had to forgo a part of the capital. As far as the year under consideration was concerned, the position was that though the assessee had lost his capital in respect of these amounts, he had been assessed on interest of . Rs.45,453 on the one hand and not allowed the expenses incurred by way of stamp charges etc., on the other. According to the Accountant Member, there being a loss even in the capital, interest could not be collected. Therefore, he held that sum of Rs.26,538 should not have been added as accrued interest. In the alternative the amount recovered even going towards the capital had been recovered only after spending the amount by way of court-fee and other expenses. Even if accrual could be justified, the accrued amount had to be subsequently collected on the basis of accrual only by spending amounts, even during the year of account such collection could be done only after the expenditure of amount for litigation. Therefore, e Accountant Member held that on an accrual basis the interest ought not to have been taxed at all but the interest having been treated as partly accrued, the amounts actually spent on realising it should be allowed as expenditure. He, therefore, deleted the addition of Rs.26,538 being accrued interest and allowed an expenditure of Rs.26,244.

On the contrary, the Judicial Member held that the assessee could not be said to have not only received interest but also lost a part of the capital. He held that it could not be said that the expenditure had not been incurred for earning the interest portion of the out standings. According to the Judicial Member, part of the expenditure attributable to the interest realised, only could be allowed.

The matter went to a Third Member, in view of the difference of opinion between the Judicial Member and the Accountant Member. The Third Member supported the Accountant Member's view and also held that the sum of Rs.26 538 was not to be included in the total income. With regard to the expenditure, it was held that the sum of Rs.23,850 having gone out of the coffers by way of cash dealing in the accounting year should be allowed as expenditure.

The first item of dispute arising in this reference relates to interest accrued to the extent of Rs. 26, 538. In so far as the amount, due from A. Nagappa Chettiar is concerned, C.S. No 61 of 1969 was filed. The said suit was said to have been compromised outside the Court. According to the assessee, in the compromise, the assessee had to forgo not only interest but also a part of the capital, i.e., the principal amount. Therefore, it was contended that, as a matter of fact, there being a loss even in capital, interest cannot be collected and un-collectable interest cannot be said to accrue to the lender merely for the reason that the money advanced has been collected. Therefore, according to the assessee, a sum of Rs.26,538 should have been added as accrued interest. In the alternative, it was stated that the amount -recovered even towards the capital has been recovered only after spending amounts even during the year of account and such collection could be done only>after the expenditure of amounts for litigation. Therefore, according to the assessee on an accrual basis the interest ought not to have been taxed at all. That was the view expressed by the Accountant Member.

On the other hand, the Judicial Member was of the view that the balance of the interest of Rs.26,538 accruing on the death of the assessee for the period from August 14, 1968, to March 31, 1969, has to be assessed in the hands of the assessee for the assessment year under consideration. According to the judicial Member, the assessee was following the mercantile system of accounting and the Administrator-General, representing the estate of the deceased is not entitled to change the said method of accounting into that of cash system. The Judicial Member also pointed out that the assessee has not produced the compromise decree so as to enable the Tribunal to appraise whether the assessee had not only forgone the interest, but also a part of the capital, as alleged. In this view of the matter, the Judicial Member held that the interest accrued is liable to be taxed in the hands of the Administrator-General, who is a representative assessee on accrual basis.

The Third Member, following a decision of the Supreme Court in the case of Executors of the Estate of J. K. Dubashi v. CIT (19511 19 ITR 182, held that the Administrator-General is a new assessee under section 168 of the Act and that he is bound by the rules that are applicable to him with regard to the maintenance of- various cash books. Taking into account the fact that under the rules framed under the Administrators-General Act, 1913, which were followed in the 1963 Act also, the third Member held that the Administrator-General has got to maintain the account on receipt basis and he cannot follow the mercantile system of accounting, which was followed by the deceased. Since the assessee had not received interest of Rs.26.538 actually during the year in question, he came to the conclusion that the said amount of Rs.26,538 cannot be assessed in the hands of the assessee. In view of the Administrators-General Act, 1913, which was followed by the 1963 Act also, the Administrator-General can follow only one method of accounting, viz., accounting showing the receipt basis. If that is so in the accounting year relating to the -assessment year, the interest amount of Rs.26,538 did not reach the hands of the assessee. Therefore, it cannot be taxed in the hands of the assessee for the relevant assessment year. In that view of the matter, there is a statutory prohibition. prohibiting the Administrator-General from following any other method of accounting other than the accounting method, on the receipt basis. Inasmuch as the interest income has not reached the hands of the assessee during the assessment year. it is not taxable in the assessment year tinder consideration. Accordingly we answer the first part of the question referred to us in the negative and against the Department.

The second pat of the question referred to us is relating to deduction of Rs.23,850 as expenditure for earning the income . Before the Income-tax Officer, a claim was made for deduction of expenses of Rs.23,850 incurred on account of stamp duties for filing the suit against Sri Nagappa Chettiar. However, the Income-tax Officer disallowed the same. On appeal the Commissioner held that the income of the assessee is assessable under the head "Other sources" and only such deduction as provided for in section 57 of the Act can be allowed. According to him, the expenditure claimed must have been incurred for the purpose of earning the income. He further held that the expenditure incurred by the assessee for recovering the interest due from Nagappa Chettiar has obviously been laid out for the purpose of recovering a specified sum of money and that, therefore, it cannot be said to have been expended for the purpose of earning it. When the matter came up before the Tribunal, on appeal, the Accountant Member held that the expenses of Rs.23,850 should be allowed as deduction. According to the Accountant Member, the interest having been treated as partly accrued, the amount actually spent on realising it should be allowed as expenditure. It was pointed out by the Accountant Member that the amount recovered even going towards the capital has been recovered only after spending the amounts even during the year of accounting, such collection should be done only after the expenditure of amount for reduction. According to the Accountant Member, the expenses incurred have to be allowed. According to the Judicial Member, the expenditure has not been incurred for earning the interest portion. He was, therefore, of the opinion that a part of the expenditure as is attributable to the interest of Rs.1,60,719 referred to above. The Judicial Member also has held that the Income-tax Officer should reconsider this particular claim and allow only that portion of expenditure, which is relatable to the earning of the interest income. The Third Member held that only such expenditure as relatable to the 'interest alone would be admissible and not that relating to the capital because the assessment was made under section 57(iii) of the Act. Therefore, he ultimately held that whatever expenses incurred were applicable to the realisation of interest, if they have been incurred during the year on the basis of cash system they should be allowed. The Third Member further pointed out that before him; the Department is representative did not dispute the figure of Rs.23,850 as having gone out of the coffers by way of cash during the accounting year relevant to the assessment year in question.

So, he held that on the basis of cash system of accounting the same has got to be allowed. There was no controversy on the principle that the said sum has been incurred for earning or making the income.

Learned standing counsel for the Department submitted, that inasmuch as the interest income was not realised even according to the assessed, the expenditure incurred is not attributable for earning the interest income. Therefore, under the provisions of section 57(iii) of the Act, the assessee is not entitled to claim any deduction. Learned standing counsel. For the Department further submitted that there is no nexus between the earning of interest income and the expenditure involved in the present case. Learned counsel further submitted that the expenditure was incurred only to realise the capital and, therefore, it has got absolutely no connection in the matter with either making or earning the interest, so as to enable the assessee to make a claim for deduction under section 57(iii) of the Act.

However, learned counsel appearing for the assessee submitted that the expenditure was incurred for filing the suit. If the suit was not filed, the principal amount itself could. not be recovered. Therefore, in order to preserve the estate and collect the principal amount and the interest, the expenditure incurred is allowable under section 57(iii) of the Act.

The Supreme Court in Vijaya Laxmi Sugar Mills Ltd. v. CIT (1991) 191 ITR 641, while considering the provisions of section 57(iii) of the Act held that the expenditure incurred were to facilitate the earning of for preserving the estate, which is allowable as deduction under section 57(iii) of the Act. Under section 57(iii) of the Act, the expenditure incurred should have been for the purpose of making or earning such income. .

The Supreme Court in CIT v. Rajendra Prasad Moody (1978) 115 ITR .519, held that the plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. The Allahabad High Court in the decision reported in CIT v. Rampur Timber and Turnery Co. Ltd. (1981) 129 ITR 58, had held that the expenditure incurred for retaining the status of the company, viz., miscellaneous expenses, salary, legal expenses, travelling expenses and the like would be expenditure incurred wholly and exclusively for the purpose of making or earning income.

According to the facts arising in this case, the expenditure was incurred by way of stamp duty in order to file the suit to recover the amount with interest from the debtor. If the amount was not realised, it would become time barred. Therefore, in order to preserve the estate and to collect the amount due to the estate, the suit was filed and the, expenditure was incurred. Therefore, it cannot be said that such an expenditure would not fall under section 57(iii) of the Act as wholly and exclusively incurred for making and earning the income. In that view of matter, we are in agreement with the Tribunal's view that the expenditure of Rs.23,850 is allowable. as deduction under section 57(iii) of the Act.

Accordingly, we answer the second part of the question referred to us in the affirmative and against the Department. There will be no orders as to costs.

M.B.A./4004/FC Reference answered accordingly.