NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

TAXATION LAW

SEMESTER-VIII

Project

An analysis of

Vijaya Laxmi Sugar Mills Ltd vs Commissioner Of Income Tax

SUBMITTED TO- Prof. Sanjay Yadav

SUBMITTED BY- Soumya Verma

ROLL NO- (2019BALLB35)

ENROLLMENT NO- (A-2077)

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TABLE OF CONTENTS

Acknowledgement……………………………………………………………3

Cover stating the relevant information like bench size, type of verdict etc….5

Introduction and Background of the case……………………………………6

Relevant Provisions………………………………………………………….7

Material Facts………………………………………………………………..7

Issue(s)……………………………………………………………………….8

Arguments presented by the parties………………………………………….8

Appellants Side…………………………………………………………9

Respondents Side…………………………………………………….....9

Judgment…………………………………………………………………….10

In personam…………………………………………………………...11

In rem…………………………………………………………............11

Analysis ……………………………………………………………………..12

Conclusion…………………………………………………………………...17

References……………………………………………………………………19

Cases…………………………………………………………………..19

Statutes………………………………………………………………...19

Books and Websites……………………………………………………19

ACKNOWLEDGEMENT
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This project is successfully completed under the abled guidance of Prof. Sanjay Yadav. I had
his support all through the making of the same. I would also like to thank the faculty and
officials at the Gyan Mandir, NLIU, without the support of whom this would not have been
possible. Their online database and other facilities helped me tonnes in conducting my
research in these troubled times.

I would also like to thank my parents, teachers, friends and seniors who helped me all thought
by having my back, and encouraging me all this while.

Soumya Verma

2019BALLB35

In the Supreme Court of India

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 Vijaya Laxmi Sugar Mills Ltd vs Commissioner Of Income Tax

(1991 AIR 2042)

Decided by- Ramaswami, V. (J) Ii

(Single Bench)

Decided on- 06th August 1991

Name of the advocates:

 Appellant’s- Ashok Grover, Advs.

Introduction and Background of the case

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Liquidated private limited company is the appellant. The High Court ordered the winding up
on November 8, 1949, and the Liquidator had been required to submit quarterly reports on
the proceedings and asset sales. The Liquidator sold assets and put the proceeds in bank fixed
deposits. The appellant earned Rs.32,237.60 in fixed deposit interest in 1966-67. Last year,
the Liquidator spent Rs. 12,379.45. The assessee-company deducted Rs. 12,379.45 from
interest income of Rs.32,237.60. The Income Tax Officer did not allow any of the assessee
company's expenditure and assessed the entire Rs.32,237.60 as taxable under section 56 of
the Income Tax Act, 1961 (the "Act") under the head "INCOME FROM OTHER
SOURCES". The Appellate Assistant Commissioner and Tribunal upheld this assessment
order. The assessee earned some interest from deposit accounts in 1967-68, and the
Liquidator spent the same amount as in 1966-67. The Income Tax Officer denied the
assessee's expenditure deductions. Even in this assessment year, all interest income had been
taxed under section 56 "Income From Other Sources".

Relevant Provisions
This case finds use of Section 28, 56, 57 of the Income Tax Act, 1961.

Material Facts
The material facts of the instant case are as follows:

 The Complainant is a Private Limited Company That is Currently Going Through the
Liquidation Process. On November 8, 1949, the High Court issued an order to wind u
p the company and directed the liquidator to submit progress reports that each three m
onths regarding the ongoing winding up prosecution and the realization of the compan
y's assets. During the process of winding down, the Liquidator sold a number of assets
and placed the proceeds from those sales into fixed deposits with a number of differen
t banks. During the prior year that was relevant to the assessment year 1966-1967, the
appellant earned a total of Rs. 32,237.60 by way of interest from fixed deposits during
that year.
 The following expenses, totaling Rs. 12,379.45, were incurred by the Liquidator
during the relevant year of the prior accounting period. The assessee-company
requested that the aforementioned sum of money, which was Rs. 12,379.45, be
subtracted from the interest income, which was Rs. 32,237.60. The Income Tax
Officer did not grant any of the assessee company's requested deductions for expenses

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 and instead determined that the entire amount of Rs. 32,237.60 was taxable as income
from other sources according to section 56 of the Income Tax Act, 1961 (hereinafter
referred to as the 'Act').
 Following an appeal, this assessment order was upheld by both the Appellate
Assistant Commissioner, who has since passed away, and the Tribunal. The
Liquidator incurred the same expenditures compared to the assessment year 1966-
1967, with the exception of a difference in the amount of money spent; the assessee
earned a certain amount of money in the form of interest from fixed deposits during
both the assessment year 1966-1967 and the assessment year 1967-1968. The Income
Tax Officer did not agree to deduct any of the assessee's expenses, no matter how
much the person claimed they had to spend. Even during this year of assessment, the
full amount of interest income was subject to taxation in accordance with Section 56
of the Act, which is titled "Income From Other Sources."

Issue(s)
The case involves both, issues of facts and issues of law. It is as follows:

1. To what extent, if any, the Liquidator's expenses should be deducted from the
Assessee's income depends on the specific facts and circumstances of each case.

Arguments presented by the parties

Arguments of the Appellant

In place of any other company or organization which it was authorized to carry out, the
learned counsel argued that the company's memorandum of association makes provision for
the advancement and lending of money, the investment of the company's money, the dealing
in debentures, shares, stocks, and other securities, and the carrying on of various those certain
businesses like those that the company considered desirable. Therefore, the Liquidation was
involved in the business of making investments in fixed deposits in order to effect the sale
and realisation of the assets of the company in Liquidation. Earnings from interest on such
investments are business income subject to taxation under Section 28 rather than "Income
From Other Sources" (Section 56). It has been determined that the salaries, legal fees, travel

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expenses, and other liquidation expenses incurred by the Liquidator in the course of adversely
affecting the winding up of both the assessee company are allowable deductions from interest
income earned on fixed deposits there in relevant year.

Arguments of the Respondent

With the information we have at hand, we simply cannot fathom how this argument could be
successful. As previously stated, the High Court ordered the company to be wound up and
appointed a Liquidator as far back as 1950. Manufacturer of sugar prior to Liquidation 1.
Nothing in the files suggests which that Liquida- tor manufactured sugar or engaged in
trading activities to facilitate the winding up. According to the evidence in the case, the
Liquidator sold off the company's assets during the liquidation process and put the money
from those sales into a fixed deposit, from which interest was then withdrawn. The
Liquidator's actions in realizing the company's assets are not to be construed as conducting
the company's business. Realizing the assets and placing the funds in a fixed deposit was
done as part of the winding up process and not to further any business activities undertaken
by the company prior to its dissolution. To the extent that it is required for the winding up, or
to facilitate the winding up, or to realise the assets of such firm in such a manner as to engage
the carrying on of trade, the Liquidator may be deemed to be carrying on the business of the
company. However, there is nothing to support this claim here. In fact, the order to dissolve
the company was issued as far back as 1950, and there is no trace of the winding down
process to be found. Interest was earned only on fixed deposits purchased with proceeds from
asset sales during winding up, as this is the only proven fact. It follows that the interest
income was only subject to assessment under the head "Income From Other Sources," as the
assessee could not claim that she carried on any business that would bring the income within
the meaning of section 28 of the Act.

Judgment
Section 57(iii) stipulates that a deduction is to be made for expenditure laid out or expended
solely for the purpose of making or earning income chargeable under the head "Income From
Other Sources" in determining the amount of income chargeable under that head. As such,
the issue at hand is whether or not the Liquidator's expenditures of the type at issue here are
capable of having been incurred only with the goal of garnering the interest income. It is
correct that there need not be a direct causal relationship between expenditure and the gaining
1
Companies Act, 2013.

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of income. Court for that matter also referred to Morvi Mercantile Bank Ltd. (In Liquidation)
v. Commissioner of Income Tax, Gujarat2. The assessee, a banking company, had its
operations halted and its banking license revoked by the Reserve Bank. The assets were sold,
and the proceeds have been saved in a short-term deposit account by the Official Liquidator.
The company in liquidation argued that the Income Tax Officer erred in classifying the
Liquidator's earnings as "Income From Other Sources" rather than business earnings. The
Gujarat High Court disagreed, ruling:

"That the assets from which the liquidator attempted to realize funds for the purposes of
winding up were of a capital nature and could not be considered business assets; and that
the activities he was charged with carrying out as a liquidator could not be considered those
of a businessman merely for the purpose of investing the realizations, assuming that such
investment was permissible through the memorandum or under the statute. Accordingly, we
cannot support Mr. Patel's claim that the liquidator's investor of realisations as both a
business for beneficial closure of the business was motivated by merecantile necessity. The
Tribunal has ended up finding as a fact that after the winding-up order was issued, the
assessee-company ceased all business operations and the liquidator's actions were those of a
liquidator acting for the purposes of liquidating the company ".

There must be a connection between the expense and the income it generates, however. The
Liquidator has not provided any evidence to suggest that the costs he or she incurred were
necessary in order to generate or, at the very least, safeguard income. Interest is calculated on
an SUI GENERIS basis. Whether or not interest is claimed and regardless of whether or not
there is any establishment, the bank will pay interest. There was typically no out-of-pocket
cost associated with accruing interest. In any case, we feel it necessary to add that the
situation may be different if any expenditure was incurred, such as a commission for
selection or similar expenditures that may be viewed as spent just in the name of earning that
income. However, that was not the case here. The money spent was not necessarily to
maintain or acquire the asset, either. The costs also couldn't be justified as being necessary to
keep the source operational. For an expense to qualify as "incurred for the reason of making
or accruing such income" under Section 57(iii), it must be clear that generating interest
income was the primary motivation for making the purchase. That the Liquidator's expenses
here were incurred with the intent or for the express purpose of producing interest income is
beyond the realm of reasonable doubt. This means that the Tribunal's decision that the
2
[1976] 104 I.T.R. 568 Guj.

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expenditure claimed do not qualify as a deduction under section 57 because they are
unrelated to the investment gains was correct.

Based on this, we believe the High Court's ruling in favor of the Revenue was the correct one.
Therefore, the appeals are overturned and the costs assessed. Appeals were dismissed.

Judgment in personam
After considering the material evidence and facts at hand, it was decided by the single bench
that a tax payer cannot be benefitted overtly just because he has some other business or has
paid for the expenses of winding up the company. Theses two are not interrelated things.

They are entirely different in essence and a person incurring an expenditure like this cannot
escape the liability of payment of tax.

Judgment in rem
The court took hold of various other case laws which iterated the same idea of observing
principles of revenue. Such matters are crucial as people are in the interest of escaping
liability of payment of taxes which is in the negative not appreciated.

Analysis

1. A brief insight into the relevant provisions used:

 Income Tax Act, 1961

2. Precedents frequently referred to by the court

The court referred to a precedent. It has been analysed as follows:

 Morvi Mercantile Bank Ltd. (In Liquidation) v. Commissioner of Income Tax, Gujarat.

The Reserve Bank suspended the assessee's banking license and forced its liquidation. The
Official Liquidator sold the assets and put the money in short-term deposits until distribution.
The company in liquidation argued that the Income Tax Officer misclassified the Liquidator's

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income as "Income From Other Sources" when it was business income. The Gujarat High
Court disagreed:

"That the liquidator was seized and tried to realize for winding up were capital assets and not
financial assets; it can't be said that actually simply because he was investing the
representations, assuming that was permissible under the memorandum or statute, that he was
acting as a businessman. Thus, Mr. Patel's claim that the liquidator was investing
representations as a business for the company's benefit is unfounded. The Tribunal found that
the assessee-main company's business had gone as a result of something like the winding-up
order, so the liquidator's only activity was liquidation ".

3. Application of the Law to the Current Case: An analysis of the judgment at

Since it is a seminal case in the development and application of income tax act, there were
various intricacies involved which are remitted to be cleared through the help of a precedent
and various provisions given under the act. To ascertain the conclusion of the case it was very
seminal to construe the meaning of the provisions and apply them accordingly.

The benefit of the assessee has to be taken care of but with proper application of mind which
has been done very well by the tribunal and Gujarat High Court already.

Conclusion

The Supreme Court has, in past cases very similar to this one, mandated that frivolous benefit
should not be advanced to the assessee. But it should be looked into meticulously the case of
confusion. Therefore, the issue at hand was resolved discreetly with mainly the help of
provisions.

References

1. Cases

1. Morvi Mercantile Bank Ltd. (In Liquidation) v. Commissioner of Income Tax, Gujarat.
[1976] 104 I.T.R. 568 Guj.

2. Websites
1. https://indiankanoon.org/doc/169739345/

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