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Judgment
D. Murugesan, J.—This tax case appeal, at the instance of the Revenue, was admitted on the following substantial questions of law: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner was not justified in revising the assessment order u/s 263?
Whether, in the facts and in the circumstances of the case, business expenditure and the business loss can be set off against the income returned by the assessee being only the income from the house property after the closure of the business in the earlier years?
The respondent-company, hereinafter referred to as "the assessee", was engaged in the business of manufacturing and selling of aluminium conductors. On completion of the assessment u/s 143(3) of the income tax Act for the assessment year 2001-02, it was noticed that the assessee had taken land on sub-lease and constructed godowns and getting rental income in which no manufacturing activity was carried on. The only income derived by the assessee was rental income and related charges. Hence, after a show-cause notice, the benefit of the provisions of section 71 was not made available to the assessee. The Commissioner of income tax, Chennai-III, in his order dated January 27, 2004, exercising jurisdiction u/s 263, found that the assessee had stopped the business of manufacturing and selling of aluminium conductors for the relevant assessment year once for all and the assessee started distributorship to market certain different items of a sister company. In view of the above, he found that it cannot be said that the assessee had revived the old business for the purpose of claiming the benefit u/s 71. The Commissioner also found that the interest expenditure of Rs. 7,64,562 for belated payment ought not to have been allowed, as the liability did not pertain to the relevant assessment year. In view of the above finding, the Commissioner was of the view that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue. Therefore, he passed a revised order u/s 263 rejecting the entire claim of the assessee with a direction to the Assessing Officer to disallow the same.
Aggrieved by that order, the assessee filed an appeal before the income tax Appellate Tribunal on the ground that the Commissioner had no jurisdiction to revise the order and, therefore, sought to set aside the revisionary order. The income tax Appellate Tribunal allowed the appeal of the assessee by holding that the Commissioner of income tax was not justified in passing a revisionary order u/s 263 of the income tax Act. Challenging the said order, the Revenue has preferred the present tax case appeal.
The learned counsel for the Revenue vehemently contended that the order passed by the Tribunal is illegal, wrong, without any basis and, therefore, the same should be set aside. It was further contended that the Tribunal is wrong in holding that the Commissioner of income tax was not justified in revising the assessment order. It was also contended that when the assessee had closed the business, the assessee is not entitled to claim the deduction of expenditure and set off of business loss against the income from house property. The Tribunal ought to have seen that there was no accrual of interest expenditure during the relevant accounting year. Therefore, the order passed by the Tribunal is erroneous and also prejudicial to the interests of the Revenue. Under these circumstances, the order passed by the Tribunal should be set aside.
The learned counsel for the assessee contended that the Tribunal had considered all the facts and circumstances of the case and ultimately came to the conclusion that the Commissioner of income tax had no jurisdiction to revise the order u/s 263 of the income tax Act. She has further contended that there was only a lull in the business and, therefore, the Tribunal may also give a finding that the assessee is carrying on distributorship of certain items of the sister concern. It was also further contended that there are enough materials available on the record to show that the assessee is entitled to the relief on the merits.
We have heard the learned counsel for the parties and perused the documents available on record. The Commissioner of income tax on two grounds held that the order passed by the Assessing Officer was erroneous and against the interests of the Revenue. In respect of the first ground, the Commissioner of income tax was of the view that the business of manufacturing and selling of aluminium conductors of the assessee had stopped once for all and also there is no manufacture and sale of the conductors. The assessee was only carrying on the distributorship of marketing certain different items of a sister company and, therefore it cannot be said to be revival of the old business. So far as this issue is concerned, we may refer to the Division Bench judgment of this court in Commissioner of Income Tax Vs. S.S.M. Ahmed Hussain, ), wherein this court, following the judgment of the Supreme Court in The Standard Refinery and Distillery Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, observed that in the event there had been unity of control and management in respect of a composite business, the benefit of section 71 would be available to the assessee. That was a case where the assessee was initially carrying on the business of distribution of cinema films and purchase and sale of National Defence Remittance Scheme Certificates. As there was a business loss for the assessment year 1967-68, the loss was sought to be carried forward and set off against the profits of the year 1968-69 at which point of time the assessee ceased to carry on the activity of purchase and sale of National Defence Remittance Scheme Certificates. While considering the said issue, the Division Bench found that there had been interconnection between the two business activities and merely because the purchase and sale of National Defence Remittance Scheme Certificates was ceased to be carried out, it cannot be held that the assessee had ceased to carry on the business which he was originally carrying on in the assessment year 1967-68.
A careful reading of the said judgment shows that to approach the issues like this, the test is to find out whether the two business activities have any interconnection, interdependence and unity to show the existence of common management, common business organisation, common administration, common fund and a common place of business. The facts of the present case disclose that though the assessee was doing the business of manufacturing and selling of conductors, from the assessment year 2003-04, the assessee started to purchase and sell aluminium foils and other materials as a distributor of a group concern. The distribution of aluminium foils has an interconnection with the manufacture and sale of conductors and both the business activities cannot be considered to be independent or separate. The Commissioner of income tax, having referred to the fact that the assessee had started the business of purchasing and selling of aluminium foils and other materials as a distributor from the year 2003-04, has gone wrong in holding that the said activity cannot be considered to be a revival of the old business. The Commissioner had not adverted to the judgment of the Division Bench of this court, which we have referred to in the earlier portion of the order. Having noticed the above, the Tribunal has rightly appreciated the law and issue and has found that even though there was a temporary break, the assessee continued the business in distributorship and also maintained the establishment, thereby incurred the expenditure which were wholly and exclusively for the purpose of the business. This finding of the Tribunal is in tune with the order of the Division Bench in the above case. Even though the Tribunal had recorded the facts and the principles of law, while concluding, the Tribunal has not considered the case on the merits. In view of the same, the Commissioner of income tax is wrong to that extent and the order of the Commissioner is set aside.
In respect of the other ground, viz., the assessee claimed interest expenditure of Rs. 7,64,562 is concerned, the assessee purchased aluminium from Nalco and was making regular payments to the purchaser and the Commissioner of income tax, in paragraph 11 of the order and also the annexure, held this issue as follows:
I am unable to agree with the learned submissions of the assessee for the following reasons:
The assessee was purchasing aluminium from Nalco and was making regular payments towards purchases. The chart showing the date of invoice, the date of payment and the interest working is enclosed as annexure I to this order. As per this chart the last payment towards the purchase amount was made on March 14, 1996. On this date amount of 8 invoices was paid. Corresponding purchases were made in the year 1994. As per the agreement with Nalco on any delayed payment the assessee had to pay 9 per cent. interest. Therefore, the liability to pay interest accrued in the respective years themselves. No liability towards interest has accrued after March 14, 1996. It is undisputed that the assessee has been following mercantile system of accounting and on this basis this liability does not pertain to the year under consideration and just because payment has been made it cannot be allowed as an expenditure of this year.
Annexure I
Madras Electrical Conductor
Sl. No
Inv. No.
Date
Amount (Rs.)
Due date
Date of payment
Default day
Rate
Int. (Rs.)
1
CCS6679
26-2-1994
10,21,816
13-3-1994
29-3-1994
16
4,031
2
CCS6773
3-2-1994
14,63,591
17-3-1994
29-3-1994
12
9
4,330
3
CCS6796
3-3-1994
14,60,504
18-3-1994
29-3-1994
11
9
3,961
4
CCS6917
3-8-1994
4,80,991
23-3-1994
4-11-1994
19
9
2,253
5
CCS0078
4-7-1994
2,85,385
6-6-1994
5-4-1994
6
CCS0416
23-4-1994
4,72,764
22-6-1994
14-3-1996
631
9
73,556
7
CCS0436
25-4-1994
4,60,375
24-6-1994
14-3-1994
620
9
71,402
8
CCS0480
26-4-1994
4,66,692
25-8-1994
14-3-1996
628
9
72,267
9
CCS0508
27-4-1994
4,63,823
26-6-1994
14-3-1996
627
9
71,708
10
CCS0561
29-4-1994
2,95,974
28-6-1994
14-3-1996
625
9
45,612
11
CCG1330
27-5-1994
13,95,493
6-11-1994
14-3-1996
642
9
2,20,908
12
CCG1368
28-6-1994
9,43,822
6-12-1994
14-3-1996
641
9
1,49,175
13
CCG1396
30-5-1994
2,87,884
14-6-1994
14-3-1996
639
9
45,359
Total
7,64,562
From a reading of the above, it is clear that there is a delayed payment. Therefore, the assessee had to pay 9 per cent. interest. But the learned counsel appearing for the assessee was unable to produce any material to show that the liability to pay interest accrued during the accounting year. The only argument advanced by the counsel was that the assessee deducted TDS and the amount was also remitted into Government account. Therefore, the interest payment accrued during the accounting year. From the record, there is no material to show that the liability towards interest had accrued after March 14, 1996, since the assessee is following the mercantile system of accounting. There is also no material to show that there was any compromise between the assessee and Nalco as to the payment of interest and by virtue of the agreement, paid the interest during the accounting year. When we asked a specific question on the above to the learned counsel for the assessee, the counsel was unable to produce any evidence. Even though these facts were already recorded by the Tribunal in its order, no finding in respect of the same was given on the merits. In view of the above factual position, to that extent the order of the Commissioner of income tax passed u/s 263 is valid in law and he has jurisdiction to revise the order. Under these circumstances, we answer the first substantial question of law in favour of the Revenue and against the assessee. In respect of the second substantial question of law, we partly allow the appeal in favour of the assessee, i.e., the business loss is allowed to be set off against the income from house property. In respect of the interest expenditure of Rs. 7,64,562, the Assessing Officer is wrong in allowing the same. Therefore, we hold against the assessee, i.e., the total amount of business loss is Rs. 17,45,392. Out of the same, Rs. 7,64,562 is disallowed against the assessee and the balance would be set off against the income from house property. Under these circumstances, the second substantial question of law is answered partly in favour of the assessee and partly in favour of the Revenue. Even though the Tribunal has not given any finding on the merits in spite of the materials available on record, instead of remanding the matter to the Tribunal, since the assessment year is relating to 2001-02, we have considered the case on the merits and accordingly dispose of the tax case appeal on the above terms. There shall be no order as to costs.