ORDER
S. C. TIWARI, A.M. :
This appeal filed by the assessee-company is directed against the order under s. 263 passed by the CIT (Central-I), Calcutta. In this case, the assessment order was passed under s. 143(3) on 26th November, 1990, and the AO allowed in the assessment of total income a sum of Rs. 18,40,250 as payment of closure compensation. As the learned CIT held the view that this sum debited to the P&L a/c towards provision of compensation was not allowable as deduction against the other income of the assessee, he initiated proceedings under s. 263. During the course of proceedings before him, it was contended by the assessee that the expenditure was incurred in relation to closure of one of the factories of the assessee-company which was running at a loss. The business of the assessee-company was still in existence and, therefore, the expenditure was on account of genuine needs. It was emphasised that for prevention of loss being incurred by the assessee at Allahabad unit, the company was compelled to retrench its workers and, therefore, compensation was payable out of commercial expediency. The assessee placed reliance on the decisions in the cases of Sasoon J. David & Company (P) Ltd. v. CIT (1979) 118 ITR 261 (SC), CIT v. Assam Oil Company Ltd. (1985) 154 ITR 647 (Cal) and CIT v. P. I. Simon (1991) 187 ITR 302 (Kar). The learned CIT held that the expenditure was for the purpose of closure of assessees manufacturing unit at Allahabad and not for the purpose of carrying on business of this unit. Hence, the expenditure could not be regarded as business expenditure. The facts of the case of S. J. David & Co. (P) Ltd. (supra) related to compensation paid to an employee on termination of his appointment. It was not a case of closure compensation. The expenditure in the case of Assam Oil Co. Ltd. (supra) related to payment of compensation on rationalisation of manpower requirements. Again it was not the case of closure compensation. The facts of Simon (supra) were altogether different. As against this, the learned CIT found that the ratio of the decision of the Honble Calcutta High Court in the case of Binani Printers (P) Ltd. v. CIT (1983) 143 ITR 338 (Cal) is rather applicable to the facts of the assessee-company. The learned CIT, therefore, came to the conclusion that the decision of the AO in allowing deduction of Rs. 18,40,250 on account of closure compensation was erroneous and prejudicial to the interests of the Revenue. This claim of the assessee-company should have been rejected by the AO. He, therefore, directed the AO to modify the assessment order by disallowing this claim of the assessee.
2. During the course of hearing before us, the learned counsel of the assessee referred to annual report of the assessee-company for the previous year ended 31st March, 1987. It was pointed out that the business of the assessee-company comprised of numerous activities apart from carrying on the business of tea estates. The assessee-company was also engaged in the business of plywood, chemical and fertilisers, tyres and rubber products and shipping business. All these numerous activities were being carried on by the assessee-company as a single business under common management and control. As such, there was considerable inter-connection amongst the various business units of the assessee located at different parts of the country. All these units constitute part of the same business. During this accounting year the assessee was compelled to close its cycle tyre and tube manufacturing activity which was being carried on under the name and style of Jay Shree Tyres & Rubber Products, Allahabad, with effect from 2nd November, 1986. All that the assessee did was to close manufacturing activity at Allahabad but the assessees business as a whole was continued and, therefore, cannot be said that there was any closure or discontinuance of business. As the Allahabad unit was run by the assessee as part of one and the same business, the liability incurred for compensation on closure of this unit was rightly claimed as deduction by the assessee. The assessee placed reliance on the Supreme Court decisions in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC), B. R. Ltd. v. V. P. Gupta, CIT (1 (1978) 113 ITR 647 (SC), Products Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC) and Hooghly Trust (P) Ltd. v. CIT (1969) 73 ITR 685 (SC). Relying on the ratio of these decisions, the learned counsel of the assessee argued that closure of manufacturing unit at Allahabad was only closure of one of the units of the same business while the other units continued to be in business.
3. The learned counsel also argued that it cannot be said that the business of the assessee at Allahabad unit came to an end with closure of production. During the year only manufacturing unit was closed down but the assessee continued to carry on the business inasmuch as, the unit had considerable stock-in-trade. During the year ended 31st March, 1987, out of the total sales of over Rs. 85 lacs, the sales to the extent of about Rs. 35,64,000 was carried out by the assessee after the closure of unit. There were also certain sales of this stock in the subsequent year ended 31st March, 1988. It, therefore, cannot be said that even the business of this unit came to a halt after the closure of the unit.
4. The learned counsel of the assessee argued that the reliance placed by the learned CIT on Calcutta High Court judgment in the case of Binani Printers (P) Ltd. v. CIT (supra) was not justified because the facts of that case are different. In that case, there was clear finding that the assessee was carrying on two lines of business, printing and publication which were separate from each other. The Honble High Court based their decisions on the Tribunal having found that there was closure of the business, the amounts paid to the workmen could not be considered to be a payment necessary for carrying on the business.
5. The learned Departmental Representative argued that the assessee-company was carrying on more than one business which is apparent from the different types of manufacturing activity carried on by the assessee. It could not be said that the assessees business of manufacturing tyres and tubes at Allahabad was related to other business of the assessee which were tea estates, plywood, chemicals and fertilisers and shipping, etc. The learned Departmental Representative also emphasised the judgment of Honble Calcutta High Court in the case of Binani Printers (P) Ltd. v. CIT (supra) and stated that the assessees case falls squarely in the ratio of that judgment.
6. In his rejoinder, the learned counsel of the assessee argued that the different products being manufactured at different places could not lead to the conclusion that they were not part of one and the same business. At any rate, it could not be said that cycle tyres and tubes being manufactured at Allahabad could be of no use in the manufacturing activity being carried out by the assessee at other places or in the business of tea estates. Different units of the assessee had made purchases from Allahabad unit. The learned counsel also emphasised that the directors report clearly mentions that the closure of Allahabad unit is sub-judice. He, however, admitted that the assessees action of closing down this unit has not been set aside.
7. We have carefully considered the contentions and submissions of the parties and perused the records. On perusal of the assessment order, we see that the AO has computed the total income of the assessee under the heads of 21 different units of the assessees business as separate P&L a/c of all these 21 units had been prepared and furnished by the assessee. In the concluding part of the assessment, the AO has aggregated the income/loss thus computed in respect of each unit separately. On perusal of the assessment order it is also noticed by us that there are no observations or remarks or mention of the assessees claim of deduction of Rs. 18,40,250 on account of closure compensation at Allahabad unit.
8. From the judgment of the Honble Supreme Court in the case of CIT v. Gemini Cashew Sales Corporation reported in (1967) 65 ITR 643 (SC), it is settled legal position now that liability to pay retrenchment compensation which arises for the first time after the closure of the business cannot be said to be arising in the course of carrying on of the business. The case of the assessee is that Allahabad unit which was closed down, was not the only business of the assessee-company but it was part of a single business comprising of several manufacturing units of numerous products located at several places in the country and, therefore, business of the assessee continued even after the closure of Allahabad unit and, therefore, the liability to pay compensation has to be seen as arising during the course of the business. As the dominant object of the closure of unit was curtailment of loss at that unit, the liability to pay compensation was incurred for the purposes of carrying on of business. Reliance has been placed by the assessee on various Supreme Court judgments as already mentioned. The case made out by the assessee springs from the fact that the assessee-company is still in existence and carrying on business. Cycle tyre and tube manufacturing at Allahabad was under the same control and management as the other manufacturing units and tea estates, etc. of the assessee. Thus, there was unity of control and according to the learned counsel of the assessee there was also interconnection and interlacing between these various units of business. But, the learned counsel of the assessee has not brought any material before us to show as to whether and if so what interconnection/interlacing existed between Jay Shree Tyres & Rubber Products, Allahabad, on the one hand and various other units of the assessee-company. Of course, the Allahabad unit closed down during the previous year under consideration belonged to the assessee-company just as various other units of business and thus, it can safely be assumed that this unit was under the same control and management as the other units which have continued to be in business even after the closure of the Allahabad unit with effect from 2nd November, 1986.
9. In the case of L. M. Chhabda & Sons v. CIT (1967) 65 ITR 638 (SC), the assessee was carrying on the business of exhibiting cinematograph films in Ahmedabad and in Bombay. The lease in respect of one cinema theatre, the Prakash Talkies, expired and thereafter the landlord filed a suit to obtain a decree for possession and an order for payment of mesne profits. The ITO disallowed the claim on the ground that business of Prakash Talkies was not carried on by the assessee in the year in which the claim of deduction of mesne profit was made by the assessee. The Tribunal affirmed the disallowance holding that the cinema theatres acquired by the assessee from time to time were run independently of one another and with separate identifiable books and that the opening of a new theatre or closure of another did not affect the working of the remaining theatres. The Honble Supreme Court held that it could not be said that the venture of Prakash Talkies was a part of a general business of exhibiting films carried on by the assessee and, therefore, the deduction claimed by the assessee was not allowable. From the mere circumstance that the result of the accounts of the different ventures was entered in the accounts maintained in the head office, no inference necessarily arose that the exhibition of films in different theatres constituted the same business. The Honble Supreme Court further held that there is no general principle that where an assessee carries on business ventures of the same character at different places, it must be held as a matter of law that the ventures are parts of a single business : Whether, different ventures carried on by the assessee form parts of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the different ventures constitute parts of the same business.
10. In the case of Binani Printers (P) Ltd. v. CIT (supra), the assessee carried on two lines of business, printing and publishing. Due to heavy losses in the printing establishment it was closed down and services of all workers in the printing establishment were terminated and they were paid compensation and notice pay. The assessee, however, continued the other business, viz., the business of publication. The assessee claimed deduction of the amount paid as retrenchment compensation and notice pay. The ITO disallowed the claim on the ground that the expenditure was incurred not in the course of business but after the closure of the business. This finding of the ITO was upheld by the Tribunal. On reference, the Honble Calcutta High Court held so far as the Tribunal held that the payment was made on the closure of the business, such a payment could not be considered to be a payment necessary for carrying on business.
11. In the case of CIT v. Blue Mountain Estates and Industries Ltd. (1985) 151 ITR 616 (Mad), the assessee-company was carrying on business of growing and selling tea and coffee and also of the manufacture and sale of fertilisers. The ITO did not allow the assessees claim for deduction of the entire managing agency commission on the ground that only income from tea to the extent of 40 per cent and income from fertilisers and other sources was taxable, while the balance 60 per cent income from tea and the entire income from coffee was not taxable. He allowed the assessees claim only on a proportionate basis. The Tribunal, on the other hand, held that there was unity of control as there was a common management, common administration, common fund and common head office and hence, the business should be taken to be a single business and, consequently, the entire managing agency commission should be allowed as a deduction. On reference, the Honble Madras High Court held that the assessee was originally carrying on business in tea and later began dealings in coffee and ultimately, began to carry on an industrial activity. In such circumstances, it could not be said that it was not possible to carry on one activity without reference to the other activity. Even though the test of unity of control was established as the finances and control were from the head office of the company, the new business undertaken by the assessee could not be taken to have any connection with the earlier business in tea and coffee. Further, fertilisers could not be said to be one of the commodities in which the assessee dealt with in the ordinary course of business in coffee or tea. It was not the case of the assessee that the manufacture of fertilisers was undertaken to meet its own needs. There was a clear diversity or distinction or separateness in regard to the fertilisers qua the other trading activities of the company such as, the sale of coffee or tea. The Honble Madras High Court held that the deduction was available to that assessee-company only on portion attributable to income liable to tax under the IT Act.
12. During the course of hearing before us, the learned counsel of the assessee has placed heavy reliance on the Supreme Court decisions in the cases of CIT v. Prithvi Insurance Co. Ltd. (supra), B. R. Ltd. v. V. P. Gupta, CIT (supra), Produce Exchange Corporation Ltd. v. CIT (supra) and Hooghly Trust (P.) Ltd. v. CIT (supra)
It is seen that the Honble Madras High Court have in their judgment reported in CIT v. Blue Mountain Estate & Industries v. CIT (supra) examined the legal position as emerging from those Supreme Court judgments relied upon by the assessee except the last named case of Hooghly Trust (P.) Ltd. v. CIT (supra). After close examination of the legal position the Honble Madras High Court have observed as under :
“The learned counsel for the assessee strongly relies on the decision of the Supreme Court in B. R. Ltd. v. V. P. Gupta, CIT (1978) 113 ITR 647 (SC), and contends that the decisive test to be applied in this case is the unity of control and not the nature of the lines of business, and that as this case satisfies the test of unity of control, it should be held that the assessee is carrying on the same business though the lines of business carried on by it may be different. But we are of the view that the said decision of the Supreme Court cannot be taken as laying down that unity of control is the only and sole test to be adopted as contended by the assessee. On the facts of that case, the Supreme Court had to consider the efficacy of the two tests, one, unity of control and, the other, the different lines of business, and as between the two tests, the Supreme Court expressed the view that the test of unity of control should prevail over the other test relating to nature and the lines of business. The said decision of the Supreme Court cannot be taken to have overruled its earlier decisions which laid down the multifarious tests to determine whether the various businesses run by an assessee is one and the same or different and independent business. If unity of control is taken to be the sole and exclusive test, then in all cases where an assessee finances, controls and carries on more than one business, then all businesses will have to naturally be treated as one business, because there is unity of control. We are of the view that the decision of the Supreme Court in B. R. Ltd. v. Gupta, CIT (1978) 113 ITR 647 (SC), can be taken as an authority only for the proposition that merely because the assessee carries on various lines of business, it cannot straightaway be said to be different businesses and the question as to whether the different lines of business formed part of the same business has to be decided with reference to the other tests such as interconnection, interlacing, interdependence and unity of control. It is no doubt true, in this case, the test of unity of control is satisfied as has been held by the Tribunal but the other tests such as interconnection, interlacing and interdependence, are not satisfied. As pointed out by the Supreme Court in Standard Refinery & Distillery Ltd. v. CIT (1971) 79 ITR 9 (SC), the concepts of interconnection, interlacing and interdependence are not free from ambiguity. Therefore, the objective tests pointed out in CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) and Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC), for finding out the existence of interconnection, interlacing and interdependence have to be applied. Applying the objective tests formulated in the two cases referred to above, we have to find out whether the concepts of interconnection, interlacing and interdependence are established in this case”.
We have perused the judgment of the Honble Supreme Court in the case of Hooghly Trust (P.) Ltd. v. CIT (supra) and we find that in that case their earlier decision in the case of CIT v. Prithvi Insurance Co. Ltd. (supra) has been reiterated.
13. Taking into consideration the legal position explained in the judgments as mentioned in the foregoing paragraphs, it is clear to us that the test of unity of control i.e., common management, common administration, common fund and common head office in itself will not signify that various lines of business carried on by an assessee constitute a single indivisible business. There have to be, in addition other tests such as, interconnection, interlacing and interdependence. As already noticed by us, the computation in this case has been made separately in respect of 21 units of the assessee as separate P&L a/c were drawn up. It is also seen that these units have been scattered at diverse places throughout the country and dealt in diverse products or lines of business. During the course of hearing before us, the assessee has filed a detailed paper book which, inter alia, contained the assessees submissions before the CIT during the course of proceedings under s. 263. Though the learned counsel of the assessee argued that there was considerable interconnection amongst various units of the assessee, no material in this behalf has been produced before us. On perusal of the assessees submission during the course of proceedings under s. 263 also we do not find any specific details of any interconnection, interlacing and interdependence prevailing between the discontinued unit of the assessee, namely, Jay Shree Tyre & Rubber Products, Allahabad, on the one hand and various other units of the assessee-company so as to constitute a single integrated business. We have already mentioned that in the case of L. M. Chhabda & Sons v. CIT (supra), the Honble Supreme Court have clearly held that it is for the assessee to establish that the different ventures constitute parts of the same business. The Honble Rajasthan High Court have reiterated this position in the case of CIT v. Mohan Enterprises (1994) 208 ITR 146 (Raj), that the burden is on the assessee to establish the unity of control and interrelation of the business or the possibility of one after being closed affecting the other business and sufficient evidence is to be produced.
13a. During the course of hearing before us, the learned counsel of the assessee, however, stated that it could not be said that cycle tyres and tubes being manufactured at Allahabad could be of no use in the manufacturing activity being carried out by the assessee at other places or in the business of tea estates. Different units of the assessee were making purchases from Allahabad unit for meeting their own requirements. In our view, merely because certain purchases were made by various units of the assessee-company, it cannot be said that there was interconnection, interlacing and interdependence of such magnitude as to constitute a single business carried on by the assessee. In any case, we have already mentioned that the assessee has not brought forward any facts on record to justify/establish its claim that there was interconnection, interlacing and interdependence between the discontinued Allahabad unit and other units of the assessee-company.
14. During the course of hearing before us, the learned counsel of the assessee argued it could not even be said that the assessees Allahabad unit was closed down, when the liability of closure compensation was incurred. During the year only manufacturing unit was closed down, but the assessee continued to carry on the business as the unit had considerable stock-in-trade. During the year ended 31st March, 1987, large amounts of sales were made by the assessee during the period subsequent to the closure of manufacturing unit w.e.f. 2nd November, 1986. Even certain sales were carried out during the subsequent year ended 31st March, 1987. The learned counsel for the assessee, therefore, argued that it could not be said that the assessees business at Allahabad was discontinued even though there was closure of the manufacturing unit. It is noticed by us that a similar argument has been considered by the Madhya Pradesh High Court in the case of Perfect Pottery Co. Ltd. v. CIT (1987) 166 ITR 196 (MP). In that case, the assessee had closed down its manufacturing business and no manufacturing business was carried on during the relevant previous year. The only business carried on during the previous year was the sale of manufactured goods which had been manufactured prior to the closure of manufacturing business. The assessee incurred certain expenditure on account of repairs of machinery and overtime wages. The Honble High Court held that the only business carried on by the assessee was the sale of manufactured goods manufactured prior to the closure of its business and repairs to the machinery having been carried out after the closure of the business it had no nexus with the business carried on by the assessee.
In this case, after closure of manufactured unit w.e.f. 2nd November, 1986, all that the assessee had done is to carry out sale of goods already manufactured. The liability of closure compensation as claimed by the assessee cannot be said to have the necessary nexus with the sale of manufactured goods which was the only activity carried out by the assessee after closure of manufacturing unit.
15. In view of our discussion in the foregoing paragraphs, this appeal fails and is, accordingly, dismissed.