JUDGMENT
M.N. Chandurkar, C.J.
1. The two questions which have been referred under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue are as follows :
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to carry forward and set off the loss of Rs. 2,32,485 under section 72(1) of the Income-tax Act, 1961, for the assessment year 1968-69 ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal’s finding that there was unity of control and management of the two businesses carried on by the assessee was relevant for the purpose of deciding the question whether the assessee was entitled to carry forward the loss under section 72(1) of the Income-tax Act, 1961, or not and whether that finding is supported by materials on record ?”
2. The assessment year in question is 1968-69. During the prior assessment year, the assessee, who is not represented before us, was carrying on business activity consisting of distribution of cinema films and purchase and sale of “National Defence Remittance Scheme Certificates”. The net business loss for the assessment year 1967-68 was determined at Rs. 2,32,485. In the assessment year in question, the assessee carried on only the business of distribution of cinema films and claimed that the unabsorbed loss of previous assessment year amounting to Rs. 2,32,485 should be carried forward and set off. The loss which was sought to be carried forward related only to the business activity of purchase and sale of National Defence Remittance Scheme Certificates. This activity was not carried on in the accounting year relevant to the assessment year 1968-69.
3. The Income-tax Officer took the view that since the business of purchase and sale of National Defence Remittance Scheme Certificates, hereinafter referred to as “Certificates”, was not carried on in the assessment year in question, the assessee was not entitled to carry forward and set off the unabsorbed loss under section 72(1) of the Income-tax Act, 1961. The Appellate Assistant Commissioner took the view that the transactions had been entered in a single set of account books and that the funds required for the two items of activities had also been shown to be from a common source both in the account books and also in the bank accounts maintained by the assessee and, therefore, there had been unity of control and management in respect of these two activities.
4. In the appeal filed by the Department, the Tribunal following the decision of the Supreme Court in Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739, observed that the test to determine whether the business activity of distribution of films and the activity of purchase and sale of the certificates constituted the same business, was not the nature of the activity and the maintenance of single set of account books and the same source of funds for the two items of activities were sufficient to show that there was unity of control and management. In view of this finding, the Tribunal took the view that the Appellate Assistant Commissioner had come to the correct finding that the same business continued in the assessment year 1968-69 also and the assessee was rightly held entitled to carry forward and set off of the loss. Arising out of this order, the two questions reproduced earlier have been referred to this court for opinion.
5. Mr. Jayaraman, on behalf of the Revenue, has, with regard to question No. 1, contended that the business of distribution of cinema films and the business of “National Defence Remittance Scheme Certificates”, cannot be treated as one and the same business and according to him, the closure of any one of these activities could not affect the carrying on of the other business activity. Learned counsel argued that the interdependence of the several activities cannot be determined merely with reference to the financial aspect and notwithstanding that funds for both the business activities came from a common source, if the distribution of films activity could be carried on even though the business activity of purchase and sale of “Certificates” was discontinued, it clearly indicates, according to learned counsel, that there was no interdependence between the two activities. Learned counsel pointed out that the decisions on which the Tribunal has relied on were decisions given in the case of companies which were the assessees, but the assessee in the present case was an individual. In such a case, according to learned counsel, funds for the two different kinds of activities were bound to come from a common source and, consequently, the test of interlacing and interdependence must be determined with reference to the possibility of one activity being carried on with or without the aid of the other activity.
6. The relevant provision is in the first proviso to clause (i) of section 72(1) of the Income-tax Act, 1961. By that proviso, before business loss is permitted to be carried forward and allowed to be set off in the subsequent assessment years, it has to be established that the business or profession for which the loss was originally computed continued to be carried on by the assessee in the previous year relevant to that assessment year. The parallel provision under the Indian Income-tax Act, 1922, is to be found in section 24(2), where also a similar proviso was incorporated.
7. The question as to what should be the test which should be applied in order to decide whether the assessee is carrying on the same business so as to entitle him to claim the advantage of carrying forward the business loss in the succeeding assessment year was considered in the context of section 24(2) of the Indian Income-tax Act, 1922, for the first time by the Supreme Court in CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632). That was a case in which the assessee-company carried on the business of life insurance as well as general insurance. Both the 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 which arose for consideration before the Supreme Court was whether the unabsorbed losses of the assessee-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. The Supreme Court took the view that the life insurance business and the general insurance business constituted one composite business and that the 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. The Supreme Court also pointed out in that decision that the question whether the life insurance business and the general insurance business carried on by the assessee may be regarded as the “same business” or different businesses depends not upon the special methods prescribed by the Income-tax Act for computation of the taxable income, but upon the nature of the businesses, the nature of their organisation, management, source of the capital fund utilised, method of book-keeping used and other related circumstances which stamp the businesses as the same or distinct. While pointing out that if one business cannot conveniently be carried on after the closure of the other, there would be a strong indication that the two constituted the “same business”, the Supreme Court made it clear that no decisive inference may be drawn from the fact that after the closure of one business, another may conveniently be carried on. The test of interconnection, interlacing, interdependence and unity was the test which was laid down by the decision in Scales v. George Thompson and Co. Ltd. [1927] 13 TC 83 (KB). The test was once again considered in Produce Exchange Corporation Ltd. v. CIT . There again, the Supreme Court laid down while dealing with a case under section 24(2) of the Indian Income-tax Act, 1922, that the decisive test was unity of control and not the nature of the two lines of business. This decision is of some importance so far as the case before us is concerned, because, in this decision, the Supreme Court expressly disapproved of the test laid down by the Calcutta High Court in Shree Ramesh Cotton Mills Ltd. v. CIT [1967] 64 ITR 317 (Cal). The Calcutta High Court was dealing with section 24(2) of the Indian Income-tax Act, 1922. The assessee, before the Calcutta High Court, was a manufacturer of yarn and cloth, who had entered into forward transactions in hessian, sacking, bullion and castor seed. For the assessment year 1952-53 relevant to the year ending December 31, 1951, the assessee sustained a net loss in the manufacture of yarn and cloth as against a profit in its forward transactions. The assessee claimed a set-off of its carried forward loss of prior years in the manufacturing activity against the net profit of the year from the forward transactions on the ground that they constituted the “same business” within the meaning of section 24(2), as it stood before its amendment in 1953. This was negatived by the Departmental officers and the Tribunal. On a reference at the instance of the assessee, the High Court also took the view that the business in forward transactions had nothing to do with the manufacturing activity of the assessee so as to constitute them as parts of one business and, hence, the losses of prior years from the one cannot be set off against profits from the other in the subsequent years. The essential thing to be considered, according to the Calcutta High Court, was the nature of the business in the two different years and the way it is conducted in each year and as the question can only arise in the case of one assessee, factors like employment of same capital or same management or the ventures being carried on under the same roof were not matters of such importance. The Calcutta High Court held : “The principal thing to consider is whether the activities are of such nature and are so linked as to appear to be one unity”. The test was elaborated in the context of the facts of the case before the Calcutta High Court as follows (at page 329) :
“In the light of the observations made, I find myself unable to hold that the activity in forward transactions in hessian, sacking and castor seed can have anything in common with the activity of the manufacture of yarn and cloth so as to constitute parts of one business. In all such cases, there is bound to be unity of ownership. Common finance and the employment of common staff do not carry the matter much farther. The maintenance of one set of account books is easily accomplished by suitable directions given to the clerks and accountants. The essential thing is the nature and texture of the activities said to constitute one business. Selling shares and selling petrol both involve transfer and delivery. Yet a petrol dealer’s business is as far removed from a share dealer’s as Digboi is from Dalal Street. The test whether the cessation of one activity will affect the texture of the other is a fairly useful test in such cases. In my opinion, the subordinate tests as to whether there was employment of common staff and unity of control, or whether there was user of common finance and common books of account, are only to be applied when it has been found that there is such interconnection or coherence between the different activities that they appear so linked together as to form a composite whole.” (Underlining is ours).
8. The above observation will show that the predominant test which is almost conclusive in the opinion of the Calcutta High Court was, whether the cessation of one activity will affect the texture of the other for testing whether the businesses carried on were the same business. We have extracted the above paragraph because the Supreme Court in Produce Exchange Corporation Ltd.’s case [1970] 77 ITR 739, has expressly disapproved of this view of the Calcutta High Court. In the Produce Exchange Corporation Ltd.’s case, the Supreme Court observed with reference to the decision of the Calcutta High Court as follows (p. 742) :
“Was there any interconnection, any interlacing, any interdependence, any unity at all embracing those two businesses ?’
That interconnection, interlacing, interdependence 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.”
9. We need not consider whether the ultimate decision of the High Court in Shree Ramesh Cotton Mills Ltd. v. CIT [1967] 64 ITR 317 (Cal), on which reliance was placed is correct. But we are unable to agree with the High Court that the decisive test for determining whether the two lines of business constituted the “same business” is the nature of the two businesses. In Produce Exchange Corporation’s case [1970] 77 ITR 739, 742, the Supreme Court reproduced the following observations from the judgment in Prithvi Insurance Co. Ltd.’s case [1967] 63 ITR 632, 637 :
“A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt J. said in Scales v. George Thompson & Co. Ltd. [1927] 13 TC 83, 89 (KB).”
10. It must now, therefore, be taken as established that the test whether the cessation of one activity will affect the texture of the other activity cannot be the test for I deciding whether the businesses carried on are the same business for the purposes of section 72 of the Income-tax Act, 1961. The matter was considered once again by the Supreme Court in Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 9. The Supreme Court laid down in that case a proposition of law as follows (headnote) :
“As pointed out by this court in Commissioner of Income-tax v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632, in determining whether two lines of business constitute the ‘same business ‘ within the meaning of section 24(2) of the Income-tax Act, the Income-tax Authorities must consider the interconnection, interlacing, interdependence and unity furnished by the existence of common management, common business organisation, common administration, common fund and a common place of business.”
11. These observations, in our view, must be treated as exhaustive of the circumstances which have to be taken into account for the purposes of determining whether in a given case, two or more lines of business constitute one and the same business. The Supreme Court has not merely laid down the test of interconnection, interlacing, interdependence and unity, but the Supreme Court has also indicated as to what must be the material which should be taken into account and the circumstances of common management, common business organisation, common administration, common fund and common place of business are all circumstances which will establish the interconnection, interlacing, interdependence and unity of two or more lines of business. Once again these tests have been reiterated by the Supreme Court in B. R. Ltd. v. V. P. Gupta, CIT [1978] 113 ITR 647. The Supreme Court in that case has pointed out that in the context of set-off of carried forward loss under section 24(2) of the Indian Income-tax Act, 1922 for the purpose of ascertaining whether the two lines of business constitute the same business the decisive test is unity of control and not the nature of the two lines of business. The court further held 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 it was made clear 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.
12. Learned counsel appearing for the Revenue has, however, argued that from the two decisions, this court has read the above Supreme Court decisions in a different way. He has relied on a decision of this court in CIT v. Blue, Mountain Estates and Industries Ltd. [1985] 151 ITR 616. The decision will show that this court adopted the test which was laid down by the Supreme Court, but on the facts reached a different conclusion. The assessee-company in that case which was carrying on the business of growing and selling tea and coffee and also of the manufacture and sale of fertilizers, claimed a deduction of the entire managing agency commission against the aggregate income of all the three businesses relating to tea, coffee and fertilisers. The Income-tax Officer rejected this claim. He found that the income from tea to the extent of 40 per cent. and the income from fertilisers and other sources was taxable. The balance of 60 per cent. of the income from tea and the entire income from coffee was not taxable. He, therefore, took the view that the expenses should be allowed only on a proportionate basis. The appellate authority allowed the deduction of the entire managing agency commission. The Tribunal held that there was unity of control as there was common management, common administration, common fund and common head office from which control over all units was exercised and, hence, the businesses should be taken to be a single business and, consequently, the entire managing agency commission should be allowed as a deduction. The assessee’s claim for deduction of the entire amount of sitting fees as well as the head office expenses was directed to be allowed as a deduction by the Tribunal on the same basis. On a reference, this court, however, took the view that the assessee in that case was originally carrying on business in tea and later began dealings in coffee and ultimately began to carry on an industrial activity and, in such circumstances, it could not be said that it was not possible to carry on one activity without reference to the other activity and that 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. It was further held that fertilisers could not be said to be one of the commodities in which the company dealt with in the ordinary course of business in coffee or tea and pointed out that it was not the case of the assessee that the manufacture of fertilisers was undertaken to meet its own needs. The court took the view that 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 and, accordingly, the deduction under the heads of managing agency commission, sitting fees and head office expenses should be restricted with reference to the income earned in the businesses carried on in tea and fertilisers and the deduction under those heads could not be given in relation to the expenses incurred in connection with the business in coffee. It is undoubtedly true that the Division Bench in that case has held that the new business undertaken by the assessee did not have any connection with the earlier business in coffee and tea. It appears to us that this decision does not affect the test which has been laid down by the Supreme Court and what seems to have weighed with the learned judges was that fertiliser was not a commodity in which the company dealt with in the ordinary course of business in coffee or tea. What is, however, important is that even in this decision, this court has not in any way departed from the test which is laid down by the Supreme Court. This decision must, therefore, be read as merely applying the test to the facts in the case which the court was called upon to consider. The decision must be treated as one given on its own facts.
13. The other decision relied on is also a decision of this court in Tube Suppliers Ltd. v. CIT [1985] 152 ITR 694, 695. The facts found in that case were that :
“(a) the assessee carried on originally three businesses, namely, refractory works, lamp works and collapsible tubes, but it decided to close the business in lamp works and collapsible tubes long before the assessment year in question and those businesses were not carried on during the assessment year 1970-71,
(b) during the said year in question, the assessee carried on business only in refractory works and, hence, the entire income returned for the said assessment year related only to the said business in refractory works; and
(c) the assessee had sold certain spares and machineries of the lamp works as well as the collapsible tubes and finished goods and loose tools during the year ending July 31, 1969, relevant to the assessment year 1970-71.”
14. The Tribunal found that the business of collapsible tubes was closed in 1965 and merely because some finished goods were sold in the year 1970-71, it could not be held that the business relating to collapsible tubes existed in the year 1970-71. The Tribunal further had held that the business in which the loss was originally sustained by the assessee was not carried on by it till the year in which the carried forward loss was sought to be set off and, hence, the assessee was not entitled to carry forward the unabsorbed loss in the business of collapsible tubes and set off the same against the income of the refractory works business. In so far as the unabsorbed depreciation relating to the business of collapsible tubes factory and lamp works was concerned, those two businesses having ceased to exist before the assessment year 1970-71, it was held that the unabsorbed depreciation relating to those two businesses could not be permitted to be carried forward and set off against the income from a totally different business, viz., refractory works. It was on these facts that this court in reference held that the Tribunal was justified in holding that the mere fact that some spare parts and finished goods remaining with the assessee had been sold during the accounting year in question would not lead to the inference that the assessee carried on the collapsible tubes business during the accounting period relevant to the assessment year 1970-71 and the assessee was not, therefore, entitled to have the unabsorbed losses relating to collapsible tubes factory for the years 1964-65 to 1967-68 carried forward and set off against the income determined in the business of refractory works for the assessment year 1970-71. Before this court, the assessee had relied on the decisions of the Supreme Court in Produce Exchange Corporation. Ltd. v. CIT [1970] 77 ITR 739, Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 589 and B. R. Ltd. v. Gupta (V.P.), CIT [1978] 113 ITR 647. It is pertinent to point out that this court observed that in all these cases, it had been found that the business which had been stopped was an integral part of the business which had been continued and as such the assessee was held entitled to claim the benefit of carry forward and set off of the unabsorbed depreciation. What is important is that these cases were held to be inapplicable by the Division Bench with the observation (p. 706 of 152 ITR) :
“But such is not the position here. Here the businesses have been held to be separate and independent without any interconnection between the two.”
15. These observations clearly distinguish the decision from the present case and these observations only mean that on facts the Division Bench was inclined to take the view that the businesses carried on were separate and independent, and without any interconnection. The decision in Tube Suppliers Ltd. v. CIT [1985] 152 ITR 694 (Mad), must also be treated as a decision on the facts of that case. A reference was made on behalf of the Revenue to the decision in L. M. Chhabda and Sons v. CIT [1967] 65 ITR 638, to which a reference was also made before the Tribunal. That decision is also liable to be distinguished as pointed out by the Tribunal as on facts it was found that the assessee carried on several distinct and independent businesses.
16. In view of the law laid down by the Supreme Court, we must take the view in this case that there was a composite business of the assessee and, therefore, merely because he has ceased to carry on the activity of purchase and sale of National Defence Remittance Scheme Certificates, it could not be held that he had ceased to carry on the business which he was originally carrying on in the assessment year 1967-68. Accordingly, question No. I has to be answered in the affirmative and against the Revenue.
17. In so far as question No. 2 is concerned, we have merely to read the order of the Tribunal, which has based its conclusion with regard to the unity of control and management on the basis of the maintenance of a single set of account books and the circumstance that the source of funds was the same for the two kinds of activities. These two circumstances were sufficient material to support the finding of the Tribunal that there was unity of control and management. Accordingly, question No. 2 has to be answered in the affirmative and against the Revenue.
18. The questions are accordingly answered as follows :
Question No. 1 : In the affirmative and against the Revenue.
Question No. 2 : In the affirmative and against the Revenue.
Since there is no appearance on behalf of the respondent, we make no order as to costs.