Law:

Section:

JUDGMENT Pathak, J.-Messrs. Vijay Laxmi Sugar Mills Ltd., a private limited company, was incorporated in 1946. Mathura Prasad and his two sons, Ladli Prasad and Radhey Lal, were its only shareholders. They were also directors of the company from its inception. On August 4, 1949, the members of the company passed a resolution for its winding-up. A similar resolution was passed by the creditors the next day. Two joint liquidators were appointed. Upon subsequent litigation in relation to the winding-up of the company, the High Court made an order dated November 8, 1949, directing the company to be wound up under the supervision of the court. On February 3, 1950, the court also directed the liquidators to submit a report every three months respecting the progress of the winding-up proceedings and realisation of assets. The liquidators, in the course of the winding-up, realised amounts due to the company from time to time and put them in fixed deposits with certain banks. For the assessment year 1962-63 (the relevant previous year being the calendar year 1961), the income from interest on the fixed deposits amounted to Rs. 13,965. The company, during the previous year, had incurred an expenditure of Rs. 13,023.63, which was made up of Rs. 5,565 on account of litigation expenses incurred in a suit brought by the liquidators against the former directors of the company for misfeasance, Rs. 6,802 on account of travelling allowance allowed to the liquidators and smaller items for postage, stationery, salary and liquidation expenses. The company claimed that this expenditure was liable to be set off against the income and, therefore, filed a return of net income of Rs. 941. The Income-tax Officer rejected the claim for deduction of expenses and treated the entire sum of Rs. 13,965 as the company's assessable income. The Appellate Assistant Commissioner, on appeal by the assessee, affirmed the action of the Income-tax Officer. In second appeal before the Income-tax Appellate Tribunal, the assessee urged that on the commencement of liquidation the liquidators had engaged themselves in realising the outstandings and assets and had deposited them with the bank, and this…

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