A. SATYANARAYANA, A.M. ORDER This appeal preferred by Revenue is against order of AAC dt. 3rd Sept., 1983 for asst. yr. 1979-80, for which previous year ended on 31st March, 1979. 2. assessee had purchased lorry bearing No. KLZ 5884 in July 1976 for Rs. 1,15,220. For purchase of same, Motor & General Finance Ltd. advanced sum of Rs. 1 lakh on hire-purchase agreement and total amount repayable was Rs. 1,60,000 which included principal of Rs. 1 lakh, finance charges of Rs. 52,500 and insurance payable for second, third and fourth years of Rs. 7,500. assessee derived income from this lorry for asst. yrs. 1977-78 and 1978-79. This lorry was sold on 1st April, 1978 for Rs. 1,15,000 and out of this Rs. 22,400 was received in cash and balance of Rs. 92,600 was to be paid by purchaser towards outstanding loan, finance charges and insurance under above hire-purchase agreement. written down value of lorry was as on 1st April, 1978 was Rs. 56,458. assessee returned Rs. 25,362 as profit under s. 41(2) of IT Act, 1961 ('the Act') as under : Rs. "Sale proceeds 1,15,000 Less : Written down value 56,458 58,542 Less : Rs. Insurance 5,000 Finance charges 28, 18 33, 18 Profits under s. 41(2) 25,362" ITO assessed profit under s. 41(2) at Rs. 58,542 thereby disallowing Rs. 33, 18on ground that since vehicle was not used by assessee for purpose of business during year, assessee's claim for deduction of finance charges and insurance was not admissible. 3. Aggrieved by order of ITO, assessee preferred appeal to AAC. Before AAC assessee's counsel argued that since profit under s. 41(2) was assessed in this year and according to Explanation to that section where moneys payable in respect of building, machinery, plant or furniture referred to in this sub-section become due in previous year in which business or profession for purpose of which building, machinery, plant or furniture was being used is no longer in existence, provisions of his sub-section shall apply as if business or profession is in existence in that year. It was further argued that by this legal fiction business was deemed to be in existence and all provisions of ss. 30 to 43 of Act will be applicable and expenses claimed would be admissible under s. 37. In this connection he relied on decisions in CIT vs. Official Liquidator, New Era Mfg. Co. LTd. (1977) 109 ITR 262 (Ker) and CIT vs. Rampur Timber & Turnery Co. Ltd. (1973) 89 ITR 150 (All). Alternatively it was urged that out of sale proceeds of Rs. 1,15,000 assessee received only Rs. 22,400 in cash and balance of Rs. 92,600 was adjusted by purchaser towards balance of hire-purchase loan including finance charges and insurance of Rs. 33, 18and hence sale proceeds were only Rs. 81,820 and, therefore, assessee was entitled to deduction of Rs. 33, 18 . AAC, by applying principles ennuciated on Official Liquidator, New Era Mfg. Co. Ltd.'s case (supra), concluded that assessee's claim for deduction had to be accepted since in assessee's case also profit under s. 41(2) had to be treated as business income and expenses claimed, viz., finance charges and insurance, will be expenses admissible under s. 37. But AAC observed that difficulty will arise in quantifying amount admissible for this year since sum of Rs. 33, 18represented finance charges and insurance which was for more than one year. Hence, he considered alternative plea of assessee. AAC noted that total sale value of Rs. 1,15,000 included sale value of vehicle of Rs. 81,820 and Rs. 33, 18being assessee's liability to pay finance charges and insurance which was taken over by purchaser and in taking over assessee's liability of Rs. 33, 18by purchaser there was no profit involved since liability of assessee and amount to be discharged by purchaser was one and same. According to him actual sale proceeds of vehicle after deducting above liability of Rs. 33, 18were only Rs. 81,820 and that profit under s. 41(2) would be Rs. 25,362 as shown by assessee. In this view of matter he held that ITO was not justified in disallowing assessee's claim to deduct Rs. 33, 18while computing profit under s. 41(2) and directed ITO to allow same. As against these findings of AAC Revenue preferred present appeal. 4. arguments of Departmental representative were to following effect : AAC erred in holding that insurance and finance charges amounting to Rs. 33, 18were to be deducted from profit assessable under s. 41(2). As there is no provision to deduct such expenses from profit under s. 41(2) he ought to have confirmed assessment. He ought to have found that since lorry was sold on first day of accounting year assessee was not liable to pay any such charges. non-existent liability was not deductible from profit computed under s. 41(2). He erred in holding that actual consideration received by assessee was only Rs. 81,820. As sale was for Rs. 1,15,000, whether any portion of it was retained with purchaser or not, assessee should be deemed to have received entire amount on date of sale. Hence, profit under s. 41(2) was to be computed on that basis. In decision in Official Liquidator, New Era Mfg. Co. Ltd.'s case (supra), there was no dispute about computation of profit under s. 41(2). expenses claimed in instant case relate to period after sale. sale price agreed was not affected as to how it was paid and as to whom it was to be paid. 5 . assessee's counsel reiterated arguments as advanced before AAC and supported order of AAC. He filed photostat copy of hire- purchase agreement dt. 3rd July, 1976 and English transaction of agreement for sale of lorry by assessee for Rs. 1,15,000. 6. We have considered rival submissions. From persual of s. 41(2), it is clear that it creates legal fiction under which balancing charge is treated as business chargeable to tax. As general rule, legal fiction is limited to purpose for which it has been created. It cannot be extended beyond such legitimate frame. Bombay High Court held in case of Akola Electric Supply Co. (P) Ltd. vs. CIT (1978) 113 ITR 265 that legal fiction created by Explanation to s. 41(2) cannot be extended so as to permit deduction of expenses incurred (viz., establishment expenses and salary and allowances paid to staff) for discontinued business. Here in present case lorry was sold on 1st April, 1978, i.e., first day of accounting year relevant to assessment year under appeal. assessee has not incurred any expenditure towards finance charges and insurance. assessee is claiming deduction for these expenses on ground that these expenses would have been payable if business were to be continued in year of account. Since Explanation deems business to in existence in previous year, assessee contends that these expenses relating to finance charges and insurance should be allowed against balancing charge deemed as business income of year. But this argument of assessee is not tenable for reason that assessee has not incurred any expenditure on these two heads up to date of sale in year of account. case relied on by assessee, i.e., Official Liquidator, New Era Mfg. Co. (P) Ltd.'s case (supra) is distinguishable. In that case unabsorbed depreciation of earlier years was allowed to be set off against profits computed under s. 41(2) because balancing charges under s. 41(2) was, by legal fiction, treated as business income. That case did not deal with expenditure incurred or expenditure which would have been incurred in year of account. 6.1 In case of CIT vs. Bharat Lines Ltd. (1985) 47 CTR (Bom) 344, Bombay High Court held that brokerage and traveling expenses incurred by assessee for arranging sale and delivery of ships were deductible form amount taxable under s. 41(2). Thus, fiction is extended to cover expenses directly referable to realisation of sale price. While coming to this decision Bombay High Court has differed from decision of Mysore High Court in case of Raja Bai Nikam vs. CIT (1967) 65 ITR 496. In instant case expenses claimed by assessee, namely, finance charges and insurance were not directly referable to realisation of sale price. So even as per this decision also claim of assessee is not allowable. 6 . 2 Admittedly, sale price was fixed at Rs. 1,15,000 as per translation of sale agreement dt. 1st April, 1978 filed before us. Out of same, it was agreed that amount of Rs. 22,400 was to be paid to assessee and Rs. 92,600 was to be paid to Motor & General Finance Ltd., towards outstanding loan. Who receives sale price is immaterial. What is material is 'moneys payable' for sale of asset. So, AAC was not correct in holding that Rs. 81,820 represented actual sale proceeds. We, therefore, reverse his order and restore that of ITO. 7. In result, appeal is allowed. *** INCOME TAX OFFICER v. T.A.M. ATTAKOYA THANGAL