JUDGMENT Satish Chandra, C.J.
1. This reference relates to the years 1969-70 and 1970-71. For both these years the Tribunal has referred the following question of law for our opinion:
" Whether, on the facts and in the circumstances of the case, having held that the assessee was not carrying on any business, the Tribunal was legally correct in allowing the entire expenses of Rs. 11,295 in the assessment year 1969-70, and Rs. 10,613 in the assessment year 1970-71, except in so far as it can be related to the income from property ?"
2. The assessee is a public limited company. It carried on business of manufacture and sale of wooden bobbins. That business was discontinued some time in the year 1951. Its stocks, however, remained which were being sold as and when customers were available and the balance was carried forward from year to year. In the accounting year 1968, the stock in hand was Rs. 5,060 while in the accounting year 1969, the stock in hand was reduced to Rs. 4,856. In the year 1969-70, the assessee filed a return showing an income of Rs. 3,839 as interest and Rs. 7,200 as receipts by way of rent. Similarly, for the year 1970-71, it filed a return showing an income of Rs. 3,721 as interest and Rs. 7,200 as rent.
3. It claimed expenses of Rs. 11,295 for the assessment year 1969-70 and Rs. 10,613 for the assessment year 1970-71.
4. The ITO disallowed the entire expenses for both the years. For the year 1969-70, he added an item of interest from M/s. Victoria Mills Ltd. and assessed the company at Rs. 11,707, but for the year 1970-71, in addition to the income as disclosed by the assessee he added Rs. 85,285 as the Written off loan from Raza Textiles Distributing Company and Rs. 11,736 as old liabilities for teak wood supply. For this year, the net income assessed was Rs. 1,09,733. For these years, the claimed expenses were disallowed.
5. The order was upheld in appeal. The AAC, however, allowed Rs. 500 as allowable deduction towards expenses.
6. The assesses took the matter to the Tribunal. The Tribunal confirmed the finding that in the year in question the assessee was not carrying on any business. It, however, held :
" On the other hand, we are unable to accept the contention put forward on behalf of the department that, apart from the amounts allowed by the Appellate Assistant Commissioner no further expenditure was allowable to the assessee against income from other sources. The company has to exist as a company and it has to satisfy certain requirements of the company law. , It is a sine qua non before it can earn any income from any source that the company should exist as a company. Similarly, there are certain expenses which can clearly be related to the source from which the income was earned. The legal expenses for instance were incurred because the Registrar of Companies threatened to discontinue registration of the company as a company. Moreover, the company had necessarily to try for the reduction of its liabilities and for profitable disposal of its assets. Just because these assets had ceased to be assets of the business, they did not cease to be sources of income or loss. The expenditure claimed by the assessee was claimed only for these purposes. We, therefore, direct that the whole of the expenditure claimed by the assessee for both the years should be allowed except in so far as it can be related to the income from property."
7. Learned counsel for the department urged that the assessment for these two years were made under the residuary head " Income from other sources ". Section 57 of the I.T. Act deals with deductions from the income chargeable under the head " Income from other sources ". Clause (iii) provides for any other expenditure not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income.
8. The Tribunal has on facts held that the expenditure claimed by the assessee was claimed only for these purposes, namely, for the purpose of keeping the company alive as a company and for the effective and profitable disposal of the assets of the erstwhile business. For the year 1970-71, the ITO had treated the written-off loan from Raza Textiles Distributing Company and old liabilities for teak wood supply as income from other sources. It is evident that the company had to exist as a company before it could be held liable for earning income because of the writing-off of the loan and because of the old persisting liabilities of the business which had been closed down. Ex hypothesi the expenditure incurred for retaining the status of the company, namely, miscellaneous expenses, salary, legal expenses, travelling expenses, etc., would be expended wholly and exclusively for the purpose of making or earning such income. A sum of Rs. 6,080 was claimed as revenue expense. This amount was paid as interest on a loan taken from the State Govt. The loan was an asset of the company and was retained as such. Payment of interest thereon would be clearly an expense falling within the purview of Clause (iii) of Section 57 of the I.T. Act.
9. Learned counsel for the department relied upon several decisions which interpret Clause (iii) of Section 57 and analogous provisions of the I.T. Act. They are all distinguishable on facts. For instance, in K. Mahesh v. CIT [1968] 70 ITR 240 (Mad), the question was whether the wealth-tax paid by the assessee on the net value of the stock owned by him was not an allowable expenditure. It was held that for an expenditure to come within the ambit of Section 57(iii) of the I.T. Act, 1961, it must be incidental to the making or earning of the income and there must be nexus between the character of the expenditure and the making or earning of income. This test is satisfied in the present case. The Tribunal has on facts found that the expenditure claimed by the assessee was for the profitable disposal of the assets of the company. The Tribunal has clearly excluded the expenditure relatable to the income from the property. We, therefore, do not find that the Tribunal committed any error in holding that the aforesaid sums were allowable as expenses for each of the two years in question.
10. We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs which we assess at Rs."200.