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Income Tax Laws – I

Notes that the above decision did not lay down the correct law. He relied on the decision of the
Calcutta High Court in Madanlal Sohanlal v. Commissioner of Income-tax in support of
his contention. In that case, P. B. Mukharji J. said:
“Whether a return of income under section 12 ultimately is reduced to nil or a loss is
immaterial so long as there is some gross income or return, but where there is only an
expenditure and no income whatever and no return whatever, than, I do not think it will
be proper to apply the principle of deduction recognised in section 12(2) of the Act.”
Bose J. took the same view by a concurring judgment. The question has been considered at
some length by the learned judges in the above case; and it would be seen that they
followed the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v.
Commissioner of Income-tax as against the view taken by the Bombay High Court in
Ormerods (India) Private Ltd. v. Commissioner of Income-tax and the High Court of
Allahabad in Chhail Behari Lal v. Commissioner of Income-tax. All these three decisions
were considered by the Madras High Court in K. Appa Rao v. Commissioner of Income-
tax; and that court adopted the view of the Bombay High Court, which dissented from the
view of the Patna High Court. Now all these decisions including the Calcutta case relied
on by the learned counsel for the revenue have been reviewed in the decision of the
Madras High Court in P. V. Mohamed Ghouse v. Commissioner of Income-tax. All that
could be said for and against the contention that an expenditure incurred solely for the
purpose of making or earning an income under “other sources” is an allowable deduction
under section 12(2) of the Act, even if there is no income under that head during the
previous year, has been said and considered in the aforesaid decisions; and it is, therefore,
unnecessary for us to re-state them. With respect, we may say that the view taken by the
High Courts of Bombay, Allahabad and Madras appeals to us as the correct one.
Lord Thankerton, in his speech in the decision of the House of Lords in Hughes v. Bank of
New Zealand, said:
“Expenditure in the course of the trade which is unremunerated is none the less a proper
deduction, if wholly and exclusively made for the purposes of the trade. It does not
require the presence of a receipt on the credit side to justify the deduction of an expense.”
In Eastern Investments Ltd. v. Commissioner of Income-tax, the Supreme Court was dealing
with a claim under section 12(2) of the Act for deduction of interest paid by the assessee on
debentures; and it said:
“It is not necessary to show that the expenditure was a profitable one or that in fact any
profit was earned.”
According to the decision of the Patna and the Calcutta High Courts, the question of
allowance of the expenditure under section 12(2) of the Act does not arise, unless there is
some income actually received under the head “other sources”. It is this view that was
pressed before us by the learned counsel for the revenue. He did not say that the position
would be the same in respect of income under other heads. But he submitted that it was so
in the case of income under “other sources”; and he relied on the following statement of P.
B. Mukharji J. in Madanlal Sohanlal v. Commissioner of Income-tax:

“The principles for deduction of expenditure are different in different sections under
different heads of income. It is a wrong attempt to find or seek any universal principle of
deduction for allowance for expenditure.”
With respect, we agree with the above observation; but it does not lead to the conclusion
that a claim under section 12(2) of the Act for deduction of expenditure would lie only

Contd...

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