B. R. Ltd. Vs. V. P. Gupta, C.I.T.,
Bombay [1978] INSC 102 (3 May 1978)
CHANDRACHUD, Y.V. ((CJ) CHANDRACHUD, Y.V.
((CJ) TULZAPURKAR, V.D.
CITATION: 1978 AIR 1320 1978 SCR (3) 877 1978
SCC (3) 70
ACT:
Income Tax Act, 1922, S. 24(2) as it stood
prior to its amendment by the Finance Act, 1955-Interpretation of the
expression "same business" occurring in S. 24(2)-Decisive tests to
show the "same business" for the purpose of "set off" of
loss in previous year.
HEADNOTE:
The appellant used to carry on business in
(i) general insurance (ii) brokerage and commission and (iii) import and sale
of woollen fabrics, leather beltings, hardware, toilet goods, chemicals and
cotton fabrics etc. The business of import and sale was closed by the appellant
towards the end of the calendar year 1952, corresponding to the assessment year
1953-54. In that year, the appellant suffered an accumulated business loss of
Rs. 56,488/-. From the assessment year 1954-55 i.e. from the commencement of
the calendar year 1953, the appellant started exporting textiles instead of
importing woollen fabrics. "The appellant claimed that the loss of Rs.
56,488/- incurred by it on the import and sale of articles should be set off
against the profits made by it during the assessment years 1954-55, 1955-56 and
1956-57. The Income Tax Officer and the Appellant Assistant Commissioner
rejected the claim on the ground that the business of importing and selling
goods was distinct and separate from the business of exporting goods;
that the import and export business did not
constitute the "same business"; and that as the import business was
discontinued and did not exist in the assessment years 1954- 57 the unabsorbed
loss could not be set off against the profits in the export business. The revision
applications filed before the Commissioner were rejected.
Allowing the appeals by special leave the
Court
HELD,: 1. Under Section 24(2) of the Income
Tax Act, 1922, an unabsorbed loss could be carried forward to be set off
against the profits of a subsequent year or years, only if such profits accrued
to the assessee from the same business and not otherwise. In law, the two words
"same' and "similar" connote different concepts and, therefore,
the carrying on of a similar business will not meet the requirements of the
section. The business has to be the same as before. But though this is so, it
is not possible to evolve a satisfactory test of universal application for
determining whether, the business which an assessee carries--on in a year in
which he has made profits against which a carried forward loss could be set off
is the same business which he was carrying on in the year in which he incurred
the loss. The determination of the question whether an assessee is carrying on
in two different accounting periods the same business depends essentially on
the facts of each particular case, though the decision whether an assessee is
carrying on the same business is a mixed question of law and fact.[881 H, 882
A-D] Satabganj Sugar Mills Ltd. v. Commissioner of Income Tax, Central,
Calcutta, 41 I.T.R. 272; followed.
2. The objective tests or the "fairly
adequate tests" as laid down by the decisions of Courts, for determining
whether the two businesses constituted the same business" within the
meaning of S. 12B(1) of the Act, 1922 are (i) Whether there is any
inter-connection, any inter-lacing, inter-dependency, any unity at all
embracing the two businesses of the assessee.
(ii) Whether there is in-existence a common
management, common fund and a common place of business.
878 (iii) Complete unity of control and not
the nature of the two lines of business should be the deciding factor and;
(iv) Non existence of any element of
diversity or distinction or separateness in regard to both the businesses. [882
G, 883 G- H, 884 F] Scales v. George Thompson & Co. 13 Tax Cases 83;
Commissioner of Income Tax, Madras V.
Prithivi Ins. Co. Ltd., 63 I.T.R., 632; Hooghly Trust (P) Ltd. v. Commissioner
of Income Tax, West Bengal, 73 I.T.R. 685; Produce Exchange Corporation Ltd.,
v. Commissioner of Income Tax (Central) Calcutta 77 I.T.R. 73; Standard
Refinery and Distillery Ltd.
v. Commissioner of Income Tax (Central),
Calcutta, 79 I.T.R.
589; followed.
3. In the instant case (a) The Commissioner
was wrong in taking the view that the business which the appellant was doing in
the relevant assessment years was not the same business which it was doing when
it incurred the unabsorbed loss. A common management, a common business
organisation, a common administration, a common fund and a common place of
business show in the instant case the inter-lacing and interdependence of the
businesses carried on by the appellant.
[884 F-G] (b) The Commissioner relied on the
circumstances that "there is a distinct and marked difference in the
nature of goods dealt with" by the appellant and, "the procedure
involved in the import of articles from foreign countries and the export of
articles manufactured in India to different foreign countries is entirely
different". These circumstances are not by themselves sufficient to
establish that the business of import which the appellant was doing is not the
same business as that of export. The decisive test, as held by this Court in
Produce Exchange Corporation; is unity of control and not the nature of the two
lines of business.
[884 H, 885 A-B] (c) The Commissioner also
fell into the error of supposing that, apart from the fact that the two
activities must form an integral part of the entire business, the "main
consideration which has to prevail is whether, "notwithstanding the fact
that the assessee may close one activity, it does not interfere in carrying on
of the other activity". The fact that one business cannot conveniently be
carried on after the closure of the other may furnish a strong indication that
the two businesses constitute the same business. But the decision of this Court
in Prithvi Insurance Co. shows that no decisive inference can be drawn from the
fact that after the closure of one business, another may or may not
conveniently be carried on.[885 B-C] (d) The Commissioner also overlooked that
in the report dated June 6, 1962, which the Income-Tax Officer made in the
revision application filed by the appellant, it was expressly stated that it
was true that "there was a common control and common management of the
same Board of Directors" of the business of import and export. Thus the
unity of control and the other circumstances adverted to above show that there
was dovetailing or inter-lacing between the business of import and the business
of export carried on by the assesses and that they constitute the same
business. [885 C-D] and (e) The appellant is entitled to set off the unabsorbed
loss of the assessment year 1953-54 against the profits of the assessment years
195455, 1955-56 and 1956-57. [885 E]
CIVIL APPELLATE JURISDICTION : Civil Appeal
Nos. 1594-1596 of 1972.
From the Judgment and Order dated 18-1-1972
of the Commis- sioner of Income Tax at Bombay in Revision Petition B.C. No. RP/
V/Nos. 374-376 of 1960.
879 Ravinder Narain, K. J. John and Talat
Ansari for the Appellant.
R. M. Dhebar, K. C. Dua and A. Subhasini for
the Respondent.
The Judgment of the Court was delivered by
CHANDRACHUD, C.J.-The appellant which is a public limited company incorporated
under the Indian Companies Act is authorised by its memorandum and articles of
association to carry on business, inter alia, as importers, exporters and
insurance agents.
We are concerned. in these appeals with the
assessment years 1954-55, 1955-56 and 1956-57 corresponding to the accounting years
1953, 1954 and 1955. The appellant used to carry on business in (i) general
insurance, (ii) brokerage and commission, and (iii) import and sale of woollen
fabrics, leather beltings, hardware, toilet goods, chemicals, cotton fabrics,
etc. The business of import and sale was closed by the appellant towards the
end of the calendar year 1952 corresponding to the assessment year 1953-1954.
In that year the appellant suffered an accumulated business loss of Rs.
56,488/-.
From the assessment year 1954-55, that is to
say, from the commencement of the calendar year 1953, the appellant started
exporting cotton textiles instead of importing woollen fabrics which, as stated
earlier, it had ceased to do towards the end of the calendar year 1952. The
appellant claimed that the loss of Rs. 56,488/- incurred by it on the import
and sale of articles mentioned above should be set off against the profits made
by it during the assessment years 1954-55, 1955-56 and 1956-57.
The Income-tax Officer and the Appellate
Assistant Commissioner rejected and appellant's claim on the ground that the
business of importing and selling goods was distinct and separate from the
business of exporting goods;
and since the import business which the
appellant was doing till the commencement of the assessment year 1953-54 and
the export business which it commenced in the assessment year 1954-55 did not
constitute the same business and as the business of import in which the loss
was suffered was discontinued or did not exist in the assessment years 1954- 55
to 1956-57, the unabsorbed loss of the assessment year 1953-54 could not be set
off against the profits realised from the other business in subsequent years.
Instead of filing an appeal to the Income-tax
Appellate Tribunal, the appellant filed revision applications to the
Commissioner of Income-tax against the orders of the Appellate Assistant
Commissioner, under section 33A of the Income-tax Act, 1922. The revision
applications were filed on June 15, 1960 but it was on January 18, 1972 that they
were disposed of by the Commissioner, Bombay City-V, Bombay.
The reason for the delay seems to be that the
Commissioner was awaiting the decision of a case which, it seems, was
ultimately withdrawn.
880 It was urged on behalf of the appellant
before the Commissioner that the business of import and export was one and the
same business as both activities involved purchase and sale of goods and that
the place where the goods were purchased or sold would not make any material
difference as far as the nature of business was concerned. In his order dated
January 18, 1972 the Commissioner observed that apparently this argument was
well-founded but a detailed scrutiny of the nature of the two businesses would
show that the nature of the articles imported was entirely different from the
nature of the articles exported and the procedure involved in the import and
export of articles was also entirely different. The Commissioner found that
whereas until the commencement of the assessment year 1954-55 the appellant was
dealing in woollen fabrics and other articles, it started dealing in cotton
textiles only with effect from the assessment year 1954-55. Relying upon a
judgment of the Calcutta High Court in Shree Ramesh Cotton Mills Ltd. v. C.I.T.
Calcutta(1) the Commissioner held that the business of import of certain
articles in one year and the export of other articles in other years were not
dovetailed into one another and there was no inseparable link between the two
activities. The fact that the same capital and the same management looked after
the businesses in the different ventures would not, according to the
Commissioner, make the import and export businesses carried on in different
years the same business. The Commissioner's attention was drawn to a judgment
of this Court in Produce Exchange Corporation Ltd. v. C.I.T. (Central)
Calcutta(2) but he felt that the decision was distinguishable since the
appellant therein was carrying on business in diverse commodities in the same
year and the import business was stopped in subsequent years.
Consequently, the Commissioner rejected the
revision applications pertaining to the three assessment years.
These appeals by special leave are directed
against the orders passed by the Commissioner.
Section 6 of the Indian Income-tax Act, 1922,
which corresponds to section 14 of the Act of 1961, classified all income for
the purposes of charge of income-tax and computation of total income under six
heads, the fourth being "profits and gains of business, profession or
vocation". Section 10(1) of the Act of 1922 taxed the profits of business,
profession or vocation carried on by the assessee. By section 24(1) of that Act
any assessee who sustained a loss of profits or gains for any year under any of
the heads mentioned in section 6 was entitled to have the amount of the loss
set off against his income, profits or gains under any other head in that year.
Section 24(2), prior to its amendment by the Finance Act, 1955, read thus
"Where any assessee sustains a loss of profits or gains in any year, being
a previous year not earlier than the previous year for the assessment for the
year ending on the 31st day of March, 1940, in any business, profession or vocation,
and the loss cannot be wholly set off under sub-section (1), so much of the
loss as is not so set off or the whole loss where the assessee had no other
head of income shall be carried forward 'to the following year and set off
against the profits and gains, if any, of the assessee from the same business,
profession or vocation for that year;
Section 16 of the Finance Act, 1955, in so
far as relevant, substituted the following sub- section for the original
sub-section (2) with effect from April 1, 1955 :
"Where any assessee sustains a loss of
profits or gains in any year, being a previous year not earlier than the
previous year for the assessment for the year ending on the 31st day of March,
1940, in any business, profession or vocation, and the loss cannot be wholly
set off under subsection (1), so much of the loss as is not so set off or the
whole loss where the assessee had no other head of income shall be carried
forward to the following year, and (ii) where the loss was sustained by him in
any other business, profession or vocation, it shall be set off against the
profits and gains if any, of any business, profession or vocation carried on by
him in that year, provided that the business, profession or vocation in which
the loss was originally sustained continued to be carried on by him in that
year; and The Commissioner's orders which are impugned in these Appeals show
that the revision applications were argued before him on the footing that
sub-section (2) of section 24 as it stood before its amendment in 1955 governs
the matter.
The appeals before us were argued on the same
basis and, therefore, our decision must turn on the interpretation of the
expression "same business" which occurs in section 24(2) as it stood
then. We may, however, add that even under the amended provision, the
consideration whether in the year of profit the assessee was carrying on the
same business which he was carrying on in the year in which the unabsorbed
loss, occurred is not irrelevant. Indeed, it is not even irrelevant for the
purposes of section 72 of the Income-tax Act, 1961, which corresponds to
section 23(2) of the 1922 Act. After the amendment of section 24(2) in 1955 and
under section 72 of the Act of 1961, the right to carry forward an unabsorbed
loss depends upon whether the assessee still carries on the business in which
the loss was incurred.
That involves consideration of the question
whether the business carried on by the assessee is the same which he was
carrying on when he suffered a loss.
Under section 24(2) of the Act of 1922, an
unabsorbed loss could be carried forward to be set off against the profits of a
subsequent year or years, only if such profits accrued to the assessee from the
882 same business and not otherwise. It is elementary that in law, the two
words 'same' and 'similar' connote different concepts and therefore the
carrying on of a similar business will not meet the requirements of the
section. The business has to be the same as before. But though this is so, it
is not possible to evolve a satisfactory test of universal application for
determining whether, the business which an assessee carries on in a year in
which he has made profits against Which a carried forward loss could be set
off, is the same business Which he was carrying on in the year in which he
incurred the loss. Decided cases to which we will presently refer show that the
determination of the question whether an assessee is carrying on in two,
different accounting periods the same business depends essentially on the facts
of each particular case though, the decision whether an assessee is carrying on
the same business is, as held by this Court in Setabganj Sugar Mills Ltd. v.
Commissioner of Income-tax, Central, Calcutta(1), a mixed question of law and
fact as the question has to be decided on the application of various tests in
so far as they may be applicable. Since legal principles are required to be
applied to the facts found and legal inferences are required to be drawn from
those facts, the question assumes the form of a mixed question of law and fact
and ceases to be a mere question of fact.
In Scales v. George Thomson & Co.,(2) the
respondent company was incorporated in 1905 to take over as a going concern the
business of George Thompson & Co., ship owners, ship and insurance brokers,
underwriters and merchants. The question regarding the computation of
income-tax liability of the company concerned the underwriting activities
carried on by the company. The Revenue contended that the whole of the
operations of the company constituted one trade, profession or vocation only
while the company contended that the underwriting was a separate trade,
profession or vocation, from that of ship owning and that on the cessation of
the underwriting activities in 1920 the results of these activities in the
years 1918, 1919' and 1920 should not be included in computing the income-tax
liability of the company for the year ending April 1922. For answering the
question whether the operations of the company constituted one trade,
profession or vocation, Rowlatt, J. formulated the following test "I think
the real question is, was there any inter-connection, any interlacing, any
inter- dependence, any unity at all embracing those two businesses".
Applying this test the learned Judge held
that the business, of the company as ship owners was different from its
business as underwriters because the two businesses were not interlaced or
dovetailed into each, other.
(1) 41 ITR 272.
(2) 13 Tax Cases 83.
883 In Commissioner of Income-tax, Madras v.
Prithvi Insurance Co. Ltd.,(1) the respondent company carried on the business
of life insurance as well as general insurance. Both life insurance and general
insurance businesses were attended to by its branch managers and agents without
any distinction.
There was one common administrative Organisation
and the expenses incurred both for administration and for heads of expenditure
such as salary of the staff, postage, staff welfare fund and general charges,
were common. The question was whether the unabsorbed losses of the respondent
company for the assessment year 1950-51 and earlier years in respect of life
insurance business could be set off against its profits of the general
insurance business for the assessment years 1951-52 to 1954-55 under section
24(2) of the Indian Income-tax Act, 1922. Speaking for the Court, Shah, J.
adopted the test evolved by Rowlatt, J. as a
"fairly adequate test" for determining whether the two businesses
constituted the same business and held : "That inter- connection,
interlacing, inter-dependence and unity are furnished in this case by the
existence of common management, common business Organisation, common
administration, common fund and a common place of business".
The Court rejected the Commissioner's
argument that whether one of the businesses can be closed without affecting the
conduct of the other business was a decisive test in determining whether the
two constituted the same business within the meaning of section 24(2). If one
business cannot be conveniently carried on after the closure of the other, said
the Court, there would be a strong indication that the two businesses
constituted the "same business" but, no decisive inference could be
drawn from the fact that after the closure of one business another may
conveniently be carried on.
In Hooghly Trust ( Private) Ltd. v.
Commissioner of Income- tax, West Bengal,(2) the question was whether the cloth
business and the business in the general section carried on by the assessee
constituted the same business within the meaning of section 24(2). Adopting the
test formulated by Rowlatt, J., this Court set aside the judgment of the High
Court and upheld the one of the Tribunal that the cloth business never assumed
the proportion or stature of a distinct and separate business and that there
was sufficient evidence to show dovetailing of the two business.
In Produce Exchange Corporation Ltd., v.
Commissioner of In- come-tax (Central), Calcutta, (supra) the appellant carried
on business as a dealer in diverse commodities and also in stocks and shares.
In the accounting year 1949, it suffered a loss in the sale of shares which it
claimed to carry forward and set off against the profits of the subsequent
years from transactions in other commodities. The Tribunal found that there was
complete unity of control and shares were one of a number of commodities in
which the company dealt with in the ordinary course of business and that there
was no element of diversity or distinction of separateness about the
transaction in shares. Differing from the Tribunal the High Court held that the
(1) 63 ITR 632.
(2) 73 ITR 685.
884 essential matter to be considered was the
nature of the two lines of business and not merely their unity of control and
therefore the entire trading activity of the company did not constitute one
business. Reversing the decision of the High Court it was held by this Court
that the decisive test was unity of control and not the nature of the two lines
of business and therefore the Tribunal was right in its decision that the share
business and other businesses carried on by the company constituted the same
business within the meaning of section 24(2) as it stood before its amendment
in 1955. This conclusion was reached by the Court by applying the test in
Scales, (Supra).
There is only one other judgment to which we
would like to refer and that is reported in Standard Refinery and Distillery
Ltd. v. Commissioner of Income-tax (Central), Calcutta.(1) The appellant which
owned a distillery and had acquired a sugar refinery, obtained on lease a sugar
and gur refining company with effect from June- 1, 1945. The appellant
purchased a certain number of shares of that company in 1 946 and sold them in
1947 at a loss. A part of this loss was unabsorbed and the question which arose
for consideration was whether the appellant could carry forward that loss and
set it off against the income from sugar manufacturing and distillery for the
subsequent year.
Hegde, J. speaking for the Court observed
that the concepts of inter-connection and inter-lacing, inter-dependence and unity
were not free from ambiguity but that this Court had laid down in Prithvi
Insurance Co. (Supra) and Produce Exchange Corporation (Supra) certain
objective tests for finding out the existence of inter-connection,
inter-lacing, interdependence and unity between two or more business. On an
application of those objective tests, to which we have already referred, the
Court set aside the judgment of the High Court and upheld the view of the
Tribunal that the activities of the company constituted the same business since
there was complete unity of control, shares were one of a number of commodities
in which the company dealt in the ordinary course of business and since there
was no element of diversity or distinction or separateness in regard to the
transaction in shares qua the other trading activities of the company- In the
light of the objective tests evolved in these decisions, not forgetting of
course the basic formulation of Rowlatt, J. in Scales, we are of the opinion
that the Commissioner was wrong in taking the view that the business which the
appellant was doing in the relevant assessment years was not the same business
which it was doing when it incurred the unabsorbed loss. A common management, a
common business Organisation, a common administration, a common fund and a
common place of business show in the instant case the interlacing and
inter-dependence of the businesses carried on by the appellant.
In support of his conclusion that the two
businesses are different, the Commissioner relies on the circumstances that
"there is a distinct and marked difference in the nature of goods dealt
with" by the appel- (1) 79 ITR 589.
885 lant and, "the procedure involved in
the import of articles from foreign countries and the export of articles
manufactured in India to different foreign countries is entirely
different". These circumstances are not by themselves sufficient to
establish that the business of import which the appellant was doing is not the
same business as that of export. The decisive test, as held by this Court in
Produce Exchange Corporation, (Supra) is unity of control and not the nature of
the two lines of business.
The Commissioner also fell into the error of
supposing that, apart from the fact that the two activities must form an
integral part of the entire business, the "main consideration which has to
prevail is" whether, "notwithstanding the fact that the assessee may
close one activity, it does not interfere in carrying on of the other
activity". The fact that one business cannot conveniently be carried on
after the closure of the other may furnish a strong indication that the two
businesses constitute the same business. But the decision of this Court in
Prithvi Insurance Co., (Supra) shows that no decisive inference can be drawn
from the fact that after the closure of one business, another may or may not
conveniently be carried on, The Commissioner also overlooked that in the report
dated June 6, 1962, which the Income-tax Officer made in the revision
applications filed by the appellant, it was expressly stated that it was true
that "there was a common control and common management of the same Board
of Directors" of the business of import and export. Thus the unity of
control and the other circumstances adverted to above show that there was dovetailing
or interlacing between the business of import and the business of export
carried on by the assessee and that they constitute the same business.
For these reasons, we set aside the orders
passed by the Commissioner and hold that the appellant is entitled to set off
the, unabsorbed loss of the assessment year 1953-54 against the profits of the
assessment years 1954-5S, 1955-56 and 1956-57. The appellant will get its costs
of the appeals in one set from the respondent.
S.R. Appeals allowed.
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