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Judgment
P.D. Desai, J.—The Income Tax Appellate Tribunal has referred the following three questions of law for our opinion :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was the justified in holding that Steel-O-Style Unit of the assessee and
the units (a) carrying on business of purchase and sale of cloth, (b) processing and manufacturing of colours and chemicals in the name of M/s. Ban
Dyes, did not constitute the same business and hence the retrenchment compensation of Rs. 9,603 paid to the workers of Steel-O-Style unit after
its closure was not an allowable deduction ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the activities of steel rolling mill and
machinery manufacturing units which were closed in 1961 and 1962, respectively, did not constitute the same business as purchase and sale of
cloth and manufacturing of chemicals and dyes and that the appellant was not entitled to deduction of bad debts of Rs. 34,617 (Rs. 18,772 relating
to machinery department and Rs. 15,845 relating to steel rolling mill) against the income of the assessee for the assessment year 1967-68 ?
(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the capital loss of Rs. 47,381 in the year of account ?
At the hearing of the reference, it was stated on behalf of the assessee that the third question set out above is not pressed. It is, therefore, not
necessary to consider the said question and to set out the facts bearing on the said question.
The assessee is a private limited company. The assessment year is 1967-68, the previous year being the financial year ended March 31, 1967.
The assessee was carrying on different business activities at different points of time and the following table gives a brief summary of those
activities :
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Nature of business activity Period
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Purchase and sale of cloth The business continued up to
the year of account and even
thereafter.
Processing of cloth and The business was closed in the
manufacturing of chemicals year of account.
and dyes in the name and style
of M/s. Ban Dyes.
Manufacture of machinery The business was closed on
August 1, 1961.
Steel plant and rolling The business was closed on
mill September 30, 1961.
It appears that upon the closure of the business run in the name and style of ""Steel-O-Style"" in the year of account, the total sum paid by way of
retrenchment compensation was Rs. 9,603. It further appears that upon the closure of the other two businesses, namely, manufacture of machinery
and steel plant and rolling mill, the assessee could not recover outstanding dues in the total sum of Rs. 34,617 (Rs. 18,772 in respect of the
business of manufacture of machinery and Rs. 15,845 relating to the business of steel plant and rolling mill) and that the said amounts were written
off as bad debt in the year of account.
In the course of proceedings for the assessee''s assessment to Income Tax, the assessee claimed as a deduction under s. 37 the sum of Rs.
9,603 paid as retrenchment compensation and it also claimed as a deduction under s. 36(1)(vii) the amount of Rs. 34,617 by way of bad debts.
The ITO and, on appeal, the AAC and, on further appeal, the Income Tax Appellate Tribunal, rejected both the claims. The Tribunal''s decision
was that since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the
assessee, the deductions could not be allowed in the assessment of the assessee. At the request of the assessee, however, the Tribunal has referred
the questions set out above for our opinion.
The Tribunal relied upon the following facts and circumstances in arriving at its decision, (i) the several business were widely different in nature
and they covered both manufacturing and trading activities; (ii) the different business were carried on at different places; (iii) each business had its
own staff including different managers and the staff was not interchangeable; (iv) inter se transactions between the various businesses were
separately and meticulously recorded; (v) the closure of one business was not shown to have affected the other businesses - in fact, out of five
different businesses, three had closed down without affecting the remaining two businesses which were still functioning; (vi) different books of
account were maintained for each business and separate profit and loss account and balance-sheet were prepared in respect of each business
although ultimately the accounts were consolidated into a common account; (vii) the overall control of the board of the directors over all the
businesses, common ownership of the various businesses, common source of finance, consolidation of accounts and common assessment
proceedings in different years were factors of no material importance; (viii) even in the case of a limited company, there can be different businesses,
although overall control is retained by the same board of directors.
The question as to what constitutes ""same business"" has been considered in several decisions. We shall, however, briefly refer only to some of
the leading decisions on the subject.
In Commissioner of Income Tax, Madras Vs. Prithvi Insurance Co. Ltd., , the assessee carried on the business of life insurance as well as of
general insurance. Both the businesses were attended to by its branch managers and agents without any distinction. There was one common
administrative organisation and administrative expenses were incurred from a common fund. Against the aforesaid factual background, the question
was whether the unabsorbed losses incurred by the assessee in the earlier years in its life insurance business were available for set off against the
profits of the general insurance business in the relevant previous year under s. 24(2) of the Indian I.T. Act, 1922. It was held that interconnection,
interlacing, interdependence and unity were furnished by ""the existence of common management, common business organisation, common
administration, common fund and a common place of business"". It was observed that merely because special or distinct methods of computation of
taxable income of the insurance business was required to be adopted, it did not follow that the two business would not be regarded as the same
business within the meaning of 24(2). Whether two or more lines of business may be regarded as the ""same business"" or ""different business
depends not upon the special methods prescribed by the I.T. Act for computation of the taxable income but upon ""the nature of the businesses, the
nature of their organisation, management, source of the capital and fund utilised, method of book-keeping used and other related circumstances
which stamp them as same or distinct"". It was further observed that the test whether one of the businesses can be closed without affecting the
conduct of the other business was not decisive in determining whether the two constituted the same business. However, if one business cannot
conveniently be carried on after the closure of the other there would be a ""strong indication"" that the two businesses constituted the same business.
In The Standard Refinery and Distillery Ltd. Vs. Commissioner of Income Tax, Calcutta, , the assessee-company, 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 assessee purchased certain
number of shares of that company in 1946, and sold them in 1947, at a loss. A part of this loss was unabsorbed and the question which arose was
whether the assessee could carry forward that loss and set it off against the income from sugar manufacturing and distillery for the subsequent year.
The question had to be examined in the light of the provisions of s. 24(2) of the Indian I.T. Act, 1922. It was held that the share transaction as well
as the other businesses of the company were dealt with by a common management, common business organisation, common administration,
common fund and common place of business and that the business were, therefore, the same. In arriving at this decision, the following facts found
by the Tribunal were relied upon; (a) that there was a single trading and profit and loss account; (b) that the share transactions as well as the
business had been dealt with by a common organisation and the business of the company as well as the transactions relating to the shares were
attended to as part and parcel of the assessee-company; (c) that a common fund was utilised for both business purposes as well as for the
purchase of shares; and (d) that the share transaction work as well as the other business of the assessee-company were carried on in the same
place of business. It was reiterated that the decisive test was unity of control and not the nature of the two lines of business.
In B.R. Limited Vs. V.P. Gupta, Commissioner of Income Tax, Bombay, , the assessee-company, which had incurred a loss in the business of
import and sale of woollen fabrics, etc., in the calendar year 1952, closed the business towards the end of that calendar year and it started from
the commencement of the calendar year 1953, the business of exporting cotton textiles and earned profit in the business in that year and
subsequent years. The question was whether the assessee was entitled to carry forward and set off the loss in the import business against the profit
of the export business in the subsequent years. The decisions which have referred to earlier and one more decision of the Supreme Court in
Hooghly Trust (Private) Ltd. Vs. Commissioner of Income Tax, West Bengal and Andaman and Nicobar Islands, and the celebrated judgment in
Scales v. George Thompson & Co., Ltd., [1927] 13 TC 83 (KB) were referred to and it was held that upon application of the tests laid down in
those decisions the conclusion was inevitable that the business which the assessee was doing in the relevant assessment years was the same
business which it was doing when it incurred the unabsorbed loss. It was observed that the circumstance that there was a distinct and market
difference in the nature of goods dealt with and that the procedure involved in the import of articles from foreign countries and the export of articles
manufactured in India to different foreign countries was entirely different was not by itself sufficient to establish that the business of import was not
the same business as that of export. It was reiterated that the decisive test was unity of control and not the nature of the two lines of business. It
was also emphasised that 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 not decisive inference can be drawn from the fact that after the closure of one business,
another may or may not be conveniently carried on. The circumstance that there was a common control and common management of the same
board of directors in regard to the business of import and export was highlighted and it was pointed out that that circumstance, coupled with the
other circumstances, showed that there was unity of control and dovetailing or interlacing between the business of import and the business of
export carried on by the assessee and that they constituted the same business.
In Commissioner of Income Tax, Gujarat II Vs. Alembic Glass Industries Ltd., , the assessee-company had an existing unit manufacturing glass
at Baroda. For establishing a new glass manufacturing unit at Bangalore, the company incurred certain expenditure in the relevant years. The said
unit did not go into production during the year in question. During the course of the assessee''s assessment to Income Tax, the ITO, inter alia, held
that the Bangalore unit was not a branch of the assessee''s factory and that it was, therefore, a new business and since that new business had not
started production, the payment of interest on the borrowings made for incurring the expenditure for setting up the new unit could not be allowed
as revenue expenditure. On the same ground, he also disallowed some miscellaneous expenditure and travelling expenditure referable to the
establishment of the Bangalore unit. This decision was reversed on appeal by the AAC who held that the Bangalore unit did not become a distinct
business undertaking although it was a new unit and the Income Tax Appellate Tribunal agreed with the AAC. On a reference, this court held that
there was one company which controlled the administration of both the units and which supplied staff to both the units. One company alone
managed the whole of the business organisation of both the units and the production of both the units was considered the production of that
company itself. The mere fact that there was no common place of business because the Bangalore unit was situate many miles away from Baroda
was not a matter of any consequence because the head office of the assessee was at Baroda and it was the head office which controlled the affairs
of both the businesses. It was pointed out that the closure of any of the two units would surely affect the working and the business of the remaining
unit for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit.
Having regard to all these circumstances, it was held that the factory at Bangalore did not constitute a new business but was only an establishment
of a new unit of the existing business and that the amounts in question were allowable as revenue expenditure.
These decisions lay down clear guidelines for the determination of the questions arising herein. In the instant case, the board of directors of the
assessee, which is a private limited company, was in overall control of all the five business activities which were owned and carried on by the
assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The
ultimate gain or loss of business was also worked out by a consolidated profit and loss account and balance-sheet. The source of finance for
running the various businesses was thus one and single and there was a consolidation of accounts for the purpose of ascertaining the ultimate
working result of the business carried on by the assessee. Merely because there was a separate staff, which was not inter-transferable, the unity of
control was not affected since, at the apex, there was a common management and administration in view of the overall control of the various
business vesting in the board of directors of the assessee-company. Though some or most of the businesses were carried on at different places, the
ultimate control was exercised at the registered office of the assessee-company and that circumstance also, therefore, did not detract from the unity
of control. The emphasis on the widely different nature of the business activities, though not altogether irrelevant, is not by itself decisive. The fact
that manufacturing business was combined with trading activities is again a matter of no consequence because that by itself, or coupled with the
other circumstances present herein, cannot lead to the conclusion that there was no interlacing or interdependence, since there was unity of control.
Even if different books of account were maintained and the transactions inter se between the different business units were recorded in those books
of account, once it is found that ultimately there was a common profit and loss account and balance-sheet, that circumstance would pale into
insignificance because such a method of accounting would be more for convenience of business than for the purpose of maintaining the different
identities. The fact that the closure of one business did not affect or lead to the closure of the other businesses is also not of much consequence
because no decisive inference can be drawn therefrom. In fact, the closure of two businesses in two years in succession and the third within five
years thereafter is a circumstance which leads to a reasonable inference that the various businesses were in all probability so closely interconnected
that one could not bear the impact of the death of another.
In our view, on the application of the settled tests and judging the facts found in this case on the basis of the those tests, the conclusion is
inevitable that there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the
assessee and that all those activities really constituted one and single business.
Once this conclusion is reached, the further conclusion is inevitable that the deduction on account of retrenchment compensation paid by the
assessee upon the closure of one of the businesses was wrongly disallowed by the Tribunal. And similar will be the position with regard to bad
debts. Be it noted that the only ground on which the deductions were disallowed was that those three business, as a result of the closure of which
the assessee had to pay retrenchment compensation in one case and write off its outstanding dues as bad debts in the other, were different and
distinct businesses. Since that basis disappears, the deductions must be held to be permissible.
As a result of the foregoing discussion, we answer questions Nos. 1 and 2 in the negative, that is to say, in favour of the assessee and against
the revenue. Question No. 3 is not required to be answered as the assessee has not pressed the same. There will be no order as to costs in the
circumstances of the case.