ORDER
T.J. Joice, Accountant Member
1. As these six appeals are inter connected and involve a common issue they are consolidated and disposed of by a common order for the sake of convenience.
2. In ITAs 684 & 685/Bang./94, the assessee has impugned the consolidated order of the CIT, Karnataka (Central), Bangalore, passed under Section 263 dated 25-3-1994, wherein he has held that the assessment orders passed under Section 143(3), dated 16-7-1991 and 15-3-1993, for the assessment years 1989-90 and 1990-91, are erroneous and prejudicial to the interests of the revenue insofar as the losses have been computed under the head “Profits and Gains of Business” and allowed to be carried forward for set off against future profits. The learned CIT directed the Assessing Officer to recompute the losses under the head “Other Sources” and not to allow the benefit of carry forward of such losses in the future years.
3. In ITA 293/Bang./1996 filed by the assessee and ITA No. 283/Bang./ 1996, filed by the Revenue, the order impugned is that of the CIT(A)-I, Bangalore, dated 3-1-1996 for the assessment year 1991-92 and in these appeals also, the main dispute is as to whether the assessee is entitled to claim loss under the head ‘business’ for the purpose of carry forward and set off for the future years and also for set off of earlier years’ losses against the current year’s income which, according to the assessee, is to be computed under the head ‘business’ and not under the head ‘other sources’. The Revenue is aggrieved only by that part of the CIT(A)’s order, wherein he has directed the Assessing Officer to allow deduction of expenses towards interest while computing the income under the head ‘other sources’.
4. ITAs 1057 & 1058/Bang./96 are appeals filed by the assessee and are directed against the consolidated order of the CIT(A)-I, dated 10-10-1996 for the assessment years 1992-93 and 1993-94 respectively. Here also the only dispute involved is whether the assessee’s income is to be computed under the head ‘business’ or ‘other sources’.
5. From the above, it is clear that the central issue to be decided is whether the assessee is deriving income from business or incurring losses from business. The Revenue’s contention is that the assessee is not doing any business activity and, therefore, it is not entitled for carry forward and set off of earlier years’ losses to the subsequent years because there is no provision for carry forward of loss incurred under the head ‘other sources’ unlike the loss incurred under the head ‘business’. On the other hand, the assessee has taken the consistent stand in all these cases that it is a trading and investment company and its business consists of investment in shares, lending of funds, trading in liquors and leasing of plant and machinery required for industrial purposes as mentioned in the Memorandum and Articles of Association of the Company.
6. The brief facts of the case in relation to assessment years 1989-90 and 1990-91 on the basis of which the learned CIT passed the order of revision under Section 263 are as under: The assessee company was incorporated on 21-1-1986 with the main object of carrying on business as importers, exporters and dealers in all kinds of merchandise, liquor machinery etc. and the business of manufacturers’ representatives, agents, stockists etc., Clause 9 of the “objects incidental or ancillary to the attainment of the main objects” authorises the company, subject to the provisions of the Companies Act, to invest any money of the company, not for the time being required for any of the purposes of the company in such investments as may be thought proper and to hold, sell or otherwise deal with such investments. Again Clauses 1 and 2 of the other objects of the company authorise it to invest capital and other monies in the purchase of or upon the security of shares, stocks, units, debentures etc. The company’s issued, authorised and paid up share capital amounted to Rs. 10,01,980 made up of 1,01,988 shares of Rs. 10 each fully paid up. During the period ending 30-6-1986 the company obtained unsecured loans from Vijaya Bank to the tune of Rs. 24,66,752. Out of these funds, the assessee subscribed to the shares of 7 different investment companies making a total investment of Rs. 29,75,980. For the period ended 30-6-1986 relevant to the assessment year 1987-88, the company received neither any dividend nor interest. In the return filed for this assessment year it claimed a loss of Rs. 2,05,945 under the head “Profits and gains of business” and this was allowed to be carried forward. For the assessment year 1988-89 also (previous year ended 30-6-1987) the company’s share capital and investment remained the same. There was neither any dividend nor interest receipts during this year as well. However, in the assessment the assessee claimed loss of Rs. 4,59,871 under the head “Profits and gains of business”. The claim was allowed. There was no change either in the share capital or the investments made during the periods relevant to the assessment years 1989-90 and 1990-91. On 2-6-1988 the assessee advanced an amount of Rs. 2,70,000 to M/s. Khoday Finance (P.) Ltd., a sister concern. During the previous year relevant to the assessment year 1990-91, there was however, no fresh advance. The interest(s) accrued on the said advance to M/s. Khoday Finance (P.) Ltd., amounted to Rs. 30,375 and Rs. 40,500 respectively for the assessment years 1989-90 and 1990-91. Deducting substantial interest payments and other expenses like bank charges, audit fees etc., loss for these years was returned at Rs. 9,36,180 and Rs. 7,67,990 respectively. The Assessing Officer accepted these losses while doing the assessments under Section 143(3) for both the years.
7. On the above set of facts, the learned CIT held that apart from the investment by way of advance to a sister concern, viz-, M/s. Khoday Finance Ltd., on 2-6-1988, there was no evidence on record to show that the assessee was engaged in the business of purchase and sale of shares. There was no opening and closing stock of shares. Therefore, according to the learned CIT, the assessee did not carry on any trading activity during the period. In this view of the matter, he set aside the orders passed by the Assessing Officer under Section 143(3)on 16-7-1991 and 15-3-1993 for the assessment years 1989-90 and 1990-91 by holding that the said assessment orders were erroneous and prejudicial to the interests of Revenue and directed the Assessing Officer to disallow the carry forward of losses.
8. While passing the order of revision, the learned CIT has remarked that the case laws cited by the assessee before him in support of this contention were distinguishable on facts and hence, not applicable in favour of the assessee. We will refer to these case laws in a subsequent part of our order.
9. However, in the orders passed for the assessment years 1991-92, 1992-93 and 1993-94, the Assessing Officer computed the income under the ‘other sources’ and did not allow the carry forward and set off of the earlier years’ losses. On appeal by the assessee, the learned CIT(A) in his order for these years upheld the view taken by the Assessing Officer subject to a partial relief relating to expenses to be allowed as deduction while computing the income under the head ‘other sources’. The facts of the case are more elaborately discussed by the CIT(A) in the appellate order for the year 1991-92 as under :
In this case, the assessee filed a return showing income of Rs. 21,16,769 from business and setting this off against carried forward loss of earlier years, and consequently working out the total income at nil was filed on 30-12-1991. The brief particulars of the claim are as under:-
Income
Interest Rs. 40,500
Expenditure
Professional charges Rs. 300
Interest Rs. 6,19,966
Audit fees Rs. 1,000
Preliminary expenses Rs. 935
Filing fees Rs. 260
Bank charges Rs. 1,270
Rs. 6,23,731
Loss for the year Rs. 5,83,231
Add: Loan taken from Investment Co., Rs. 27,00,000
considered as income under Section 2(22)(e) ---------------
Income from business Rs. 21,16,769
Less: set off of carried forward losses :
Assessment year 1987-88 Rs. 2,05,945
Assessment year 1988-89 Rs. 4,59,871
Assessment year 1989-90 Rs. 9,36,180
Assessment year 1990-91 Rs. 5,14,773 Rs. 21,17,769
--------------- ---------------
Total income Nil
2. Giving detailed reasons, the Assessing Officer passed an assessment order dated 29-3-1994, holding that the assessee has not done any business and that the income is to be assessed under ‘Other Sources’. He has also disallowed the claim of expenses. He also disallowed the benefit of set off of carry forward losses of earlier years sought by the assessee. The assessee objects to the treatment as mentioned above of income, expenses and losses in the assessment order.
3. It is admitted that the assessee company was incorporated on 21-6-1986 with a paid up share capital of Rs. 10,01,980. There was initial investment of Rs. 29,75,980 in shares of 7 groups companies whose names are given below :
(a) M/s. Vyjayanthi Investments P. Ltd.,
(b) M/s. Macdonald Investments P. Ltd.,
(c) M/s. Panchaganga Investments P. Ltd.,
(d) M/s. Panchakalyanni Investments P. Ltd.,
(e) M/s. Honeywell Investments P. Ltd.,
(f) M/s. Sri Gurunath Investments P. Ltd.,
(g) M/s. Peterscot Investments P. Ltd.,
For the purpose of investments, the assessee availed a loan from Vijaya Bank, which stood at Rs. 24,66,752 as on 30-6-1986, including interest. The assessee gave a loan of Rs. 2,70,000 to Khoday Finance (P.) Ltd., a company in the same group, on 2-6-1988 on account of which interest is credited to the account of the assessee. The investment by way of loan and liability to bank increased due to the interest factor. Otherwise, it remained unaltered till the previous year relevant to assessment year 1991-92 in which the assessee increased the share capital by Rs. 16.18 lakhs to Rs. 26,19,980 and used this mainly for three purposes :
Share application money for Biotech Consortium,
a group concern : Rs. 5,00,000
Loans to Elkay Finance and Private Ltd., another
group concern (interest free) : Rs. 65,000
Loan to Directors (interest free) : Rs. 5,82,500
These aspects are reflected in the annual accounts, as analysed in the next paragraph.
4. The brief particulars of receipts and payments of interest shown in the P&L accounts for various assessment years by the assessee are as under:
------------------------------------------------------------------
Asst. year Receipt Payment
(Rs.) (Rs.)
------------------------------------------------------------------
1987-88 Nil 1,90,593
1988-89 Nil 4,57,234
1989-90 33,503 9,64,518
1990-91 41,445 8,07,059
1991-92 40,500 6,19,966
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The particulars of source and application of funds as on crucial dates as appearing in the relevant balance sheets and schedules are as follows:
-----------------------------------------------------------------------------------
As on Share capital Unsecured loan Investment Loans &
from banks in shares advances (other
than current
a/c balance in
banks)
-----------------------------------------------------------------------------------
30-6-1986 10,01,980 24,66,752 29,75,980 -
30-6-1987 10,01,980 29,23,986 29,75,980 -
31-3-1989 10,01,980 38,88,503 29,75,980 2,96,538
31-3-1990 10,01,980 46,95,563 29,75,980 3,28,290
31-3-1991 26,19,980 53,26,275 34,49,080 15,11,975
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Note (1) : For the assessment year 1989-90, the assessee had a transitional previous year of 21 months. The interest receipt for the period between 1-6-1986 and 30-6-1987 is Rs. 3128 and for the 9 months period ending on 31-3-1989 is Rs. 30,375. Similarly the interest payment for the 12 months ending on 30-6-1987 is Rs. 5,20,068 while that for the 9 months period ending on 31-3-1989 is Rs. 4,44,450.
Note (2) : The loans and advances were shown as on 30-6-1986 and 30-6-1987 were actually credit balance in bank and cash. However, a sum of Rs. 2,70,000 was given as loan to Khoday Finance (P.) Ltd., an assessee in the same group. The balance in this account was Rs. 2,72,542 as on 30-6-1988, Rs. 3,28,290 and Rs. 3,59,475 by 31-3-1989, 31-3-1990 and 31-3-1991, due to interest factor. In the year ended 31-3-1991, the assessee applied for shares of group companies, and a sum of Rs. 5,05,000 is shown under loans and advances of Rs. 15,11,975 as on 31-3-1991. The other items included in the loans and advances of Rs. 15,11,975 are:
Khoday Finance (P.) Ltd. Rs. 3,59,475 Elkay Finance & Inv. Ltd. Rs. 65,000 Loan to Directors Rs. 5,82,500 Note (3): The interest payment is interest charged by Vijaya Bank and debited to the accounts of the assessee on cumulative interest basis. 10. The learned CIT(A) thereupon observed as under : (i) It can be seen that the bank loan was taken.
(ii) For investment in group companies from which no dividend [Other than the dividend under Section 2(22)(e) admitted for the current assessment year ie., 1991-92] has been received.
(iii) To give loan to Khoday Finance Pvt. Ltd., a company in the same group, and perhaps interest free loan to Elkay Finance and Investment Ltd., and some directors.
(iv) There was no income receipt whatsoever for the assessment years 1986-87 and 1987-88. The only source Of income [other than the income attributed to the legal fiction (for loan taken by the assessee as shareholder) under Section 2(22)(e)] admitted for the current assessment years ie., 1990-91 and 1991-92 are small sums of interest credit attributed to loan given to Khoday Finance Pvt. Ltd.
(v) The interest payment has been much higher than the interest payment.
(vi) The only interest charged, at 15% (simple interest) from Khoday Finance Pvt. Ltd., is less than that payable to the bank on the loan utilised for the purpose and that too on compound interest basis. Apart from interest on loan used for investment in shares in group companies which do not yield any return, this is the single factor contributing to the interest payment being in excess of interest receipts and the loss claim of each assessment year.
(vii) The notable financial activity of the assessee other than the investment in shares of the group companies initially and also in the current financial year, and the relatively small loan at concessional rate to Khoday Finance Pvt. Ltd. incurring loss is giving interest free loan to Directors and Elkay Finance Pvt. Ltd., the latter two activities being in the previous year 1990-91 relevant to the financial year 1991-92.
(viii) The assessee does not maintain business establishment for running business. The only activity of the assessee has been the investments mentioned above which has been designed from the beginning to ensure that it would not yield any income.
11. On the above reasoning, the learned CIT(A) held that the assessee company was only a front created with the ulterior motive of arranging/ giving finances to other companies in Khoday group, either in the form of share capital or in the form of loan as and when needed, ultimately at the cost of public financial institutions (‘banks) from which the funds are derived. According to the learned CIT(A), the assessee is not engaged even in a single activity with the intention or design of earning profit, which is the real test of business. Even assuming for the sake of argument that the investment in shares and giving of loans is business activity, the learned CIT(A) observed that the test of a prudent businessman has to be applied and the assessee did not do the transactions as a prudent businessman. In this view of the matter, he held that the loss claimed is not incurred during the course of business and is not allowable as business loss.
12. In passing the appellate order for the assessment years 1992-93 and 1993-94, the following facts have been noted by the CIT(A)
The Profit and Loss account filed along with the returns for the assessment years 1992-93 and 1993-94 gave the following details of receipts, expenses and net profit.
———————————————————————————–
Asst. year Asst. year
1992-93 1993-94
-----------------------------------------------------------------------------------
Rs. Rs.
-----------------------------------------------------------------------------------
Income :
Dividend income 26,78,382 -
Interest on loan 40,500 -
Share of profit from Thiruvonam Wines (-) 35,852 17,072
Expenses
Interest 4,24,232 -
Audit fees 1,000 1,000
Professional charges 300
Bank charges - 400
Filing charges 120 240
Printing & Stationery 310 -
Preliminary expenses 935 935
-----------------------------
22,56,133 14,497
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In the statement of total income filed with the returns, the following adjustments were made by the appellant:
-----------------------------------------------------------------------------------
Asst. Year 1992-93 : Rs.
Net profit as per P&L A/c 22,56,133
Add: Share of loss from M/s. Thiruvonam Wines 35,852
--------------
22,91,985
Less: Dividend not considered as income under section
2(22)(e) to the extent set off against loans offered as
deemed dividend in the assessment year 1991-92 20,16,153
--------------
2,75,832
Add: Share of profit apportioned from
M/s. Thiruvonam Wines 49,986
--------------
3,25,217
Less: Loss carried forward and set off against business
income from assessment year 1990-91 2,53,217
--------------
Gross total income 72,601
Less: Deduction under Section 80M.
Amount of dividend distributed Rs. 2,00,396.
Deduction restricted to gross total income 72,601
--------------
Total Income Nil
Asst. year 1993-94:
Profit as per P&L A/c 14,497
Less: Items which are exempted/deductible :-
Share of profit from partnership firm - M/s. Thiruvonam
Wines - Not taxable under Section 10(2A) 17,072
--------------
Taxable Income being loss 2,575
Rounded off to Rs. 2,580
13. After noting the above facts, the learned CIT(A) broadly followed the reasoning as given in his appellate order for assessment year 1991-92 for deciding the appeal in respect of the assessment years 1992-93 and 1993-94. Accordingly, he held that the assessee’s income has to be assessed under the head income from ‘other sources’ and the assessee’s claim of loss could not be allowed to be carried forward and set off in the subsequent years.
14. We have heard Shri Sukumar, the learned counsel for the assessee and Shri N.S. Raghavendra, the learned DR. Shri. Sukumar reiterated the arguments advanced before the lower authorities. He referred to the details of statement of income/loss supported by the profit and loss account of the assessee company for the various years. He also referred to the Memorandum and Articles of Association of the company describing the various business activities of the company. He has also placed reliance on the case laws cited before the CIT during the proceedings under Section 263, before the Assessing Officer during the assessment proceedings and before the CIT(A) during the appeal proceedings. He also argued that the learned authorities below erred in law in ignoring the case laws cited in favour of the assessee and in taking a narrow view of the matter while drawing an adverse inference against the assessee.
According to Shri Sukumar, the business of the assessee company has to be viewed as a whole for the various years as an integrated and organised activity and not in isolation on the basis of a few transactions occurring in a particular year or years.
15. On the other hand, the learned DR, Shri Raghavendra, vigorously opposed the arguments advanced by the learned counsel and drew support from the detailed orders passed by the learned CIT while passing the revision order and the learned CIT(A) while passing the appellate orders impugned in these appeals.
16. We have carefully considered the evidence on record, the rival arguments and the ratio of the case laws cited before us. We find that the assessee company was incorporated on 21-1-1986 with a paid up share capital of Rs. 10,01,980, the first assessment year being 1987-88 and the previous year being 21-1-1986 to 30-6-1986. During the said previous year, the appellant company subscribed to the shares of seven investment companies, as listed below :
(a) M/s. Vyjayanthi Investments P. Ltd.,
(b) M/s. Macdonald Investments P. Ltd.,
(c) M/s. Panchaganga Investments P. Ltd.,
(d) M/s. Panchakalyanni Investments P. Ltd.,
(e) M/s. Honeywell Investments P. Ltd.,
(f) M/s. Sri Gurunath Investments P. Ltd.,
(g) M/s. Peterscot Investments P. Ltd.
The amounts invested are Rs. 29,75,980 made up of 42,514 shares in each company of the fact value of Rs. 10 each. For this the company obtained loan from banks to the tune of Rs. 24,66,752. It is also worthwhile to note that the seven investment companies in which this company invested in shares, held the shares of M/s. Khoday Distilleries Ltd., now known as M/s. Khoday India Ltd. The company is a trading and investment company of the Khoday group with a subscribed capital of Rs. 10,01,980 made up of 1,00,198 shares of Rs. 10 each. Besides its own funds the company availed of loans from banks. It acquired shares of other investment companies amounting to Rs. 29,75,980 during the year ended 30-6-1986. The balance of monies together with the share capital funds were advanced as loans to group concerns. In the initial years viz., assessment years 1987-88,1988-89,1989-90 and 1990-91 the company derived income from interest on the advances made but did not derive any income from dividends. The payment of interest was claimed against the interest income and all of them were treated as income from business for all the assessment years i.e., assessment years 1987-88, 1988-89, 1989-90 and 1990-91. During the previous year relevant for assessment year 1991-92 share application money to the value of Rs. 16,18,000 was also received by the company during the year utilizing such funds it further subscribed shares in other comprising viz, Rs. 5 lakhs in Biotech Consortium and Rs. 5,000 as advance for purchase of shares and Rs. 4,73,100 in equity shares of Omar Khayyam Wineries P. Ltd. During the year ended 31-3-1992 it became a partner in Thiruvonam Wines by investing a capital of Rs. 3,60,000. Besides lending monies to sister concerns and others during the year ended 31-3-1994 it has entered into leasing and deployed substantial funds in such business. The company carries on not only business of investment in shares, lending of funds, trading (liquors) in partnership but also in leasing of plant and machinery required for industrial purpose. When the company was formed it had high hopes of mobilizing large funds and earning huge incomes through all these business activities. However, they could venture only step by step with the availability of the funds. Because of huge incomes during the later years when the company had large income from dividends and also availability of further finance and credit facilities the company ventured into all the other activities viz., further purchase of shares, trading, leasing etc., as originally intended. All the business activities could not be carried on in earlier years due to financial constraints. Therefore merely because there were few lines of activity in the earlier years as compared to subsequent years it could not be said that the assessee did not carry on the business. It could not venture into other fields only due to paucity of funds. The assessee is engaged in various activities such as investment in shares, financing, trading and leasing, all of which have to be viewed as part of the integrated and organized course of business.
17. The company also earned dividends from later assessment years Le., 1992-93 onwards and the dividends received are as follows :
————————————————————————
Asst. year Dividend Income ------------------------------------------------------------------------ 1992-93 Rs. 26,78,372 1993-94 Nil 1994-95 Rs. 18,66,365 1995-96 Rs. 29,50,475 1996-97 Rs. 28,80,233 1997-98 Rs. 22,40,488 ------------------------------------------------------------------------ In the later years they also entered into leasing transactions and earned considerable sums as lease income. They are as follows : ------------------------------------------------------------------------ Asst. year Lease Rent ------------------------------------------------------------------------ 1994-95 Rs. 64,000 1995-96 Rs. 7,84,000 1996-97 Rs. 7,68,000 1997-98 Rs. 7,56,000 1998-99 Rs. 4,80,000 ------------------------------------------------------------------------
Moreover, the company invested only Rs. 34,49,080 as on 31-3-1991. But the investment companies in which it had subscribed became entitled to further shares by way of allotment and bonus, the face value of which was Rs. 2.40 crores. Thus only by investing its own funds and by bank borrowals in earlier assessment years, the assessee could earn dividend income of Rs. 1,27,15,942 in subsequent years besides Rs. 28.52 lakhs of lease income.
18. As stated earlier, the assessee’s counsel relied on certain case laws which were cited before the Assessing Officer, CIT and the CIT(A) in the proceedings before them, but the authorities were of the view that these case laws were not applicable to the facts of the instant case. The CIT who passed the revision order briefly discussed the case of Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 (SC) stating that the facts of that case are different. It may be so, but on a careful reading of the judgment of the Hon’ble Supreme Court, we find that the ratio of this decision is still applicable in favour of the assessee. At page 376, their Lordships observed that the word “business” is one of wide import and in fiscal statutes, it must be construed in a broad rather than a restricted sense. Their Lordships further observed at page 367 as under :
The word ‘business’ connotes”, it was observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1946] 28 Tax Case, 280, 259, “some real, substantial and systematic or organised course of activity or conduct with a set purpose.
Even though the Court was interpreting the provisions of Section 42(2) of the Indian Income-tax Act, 1922 with regard to a business carried on with a resident, the above general observations of their Lordships have to be viewed with respect and are still applicable in a case like this before us where the pertinent question raised is whether the assessee is doing a business or not.
19. In the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 the Hon’ble Supreme Court considered the fact that even though interest on securities fell under Section 8 of the IT Act, 1922, as a separate head of income and could not be assessed under a different head of income under Section 10 of the said Act under the head ‘Profit and gains from business’. Even then, the Court found merit in the contention raised by the assessee that purchase and sale of securities was as much the assessee’s business as receiving deposits from clients and withdrawals by them and the securities were held by the assessee as part of its trading assets in the course of its banking business. If that was so, the assessee would be entitled to set off of loss in banking business of earlier years against income from interest on securities in the year of account. It is true that in that case, the appeal of the assessee was treated as allowed but the matter was referred to the High Court for a fresh decision, after getting from the Tribunal a fuller statement of facts as to whether the securities in question were part of the trading assets held by the assessee in the course of its business as a banker. Nevertheless, the main tenor of the judgment of the Apex Court in this case in favour of the assessee is crystal clear to the effect that a broad view of the term ‘business’ has to be taken for the purpose of set off and carry forward of business and the stricter view regarding classification of income under various heads is not to be preferred.
20. In the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Hon’ble Supreme Court considered the case of another banking company in the context of the Revenue authorities refusing to carry forward and set off business losses against income under the head ‘interest on securities’. Even though this case was also decided under the relevant provisions of the IT Act, 1922, the ratio of this decision still holds good in the context of the IT Act, 1961. Referring to Section 24(1) and 24(2) of the IT Act, 1955, the Court observed at page 310 that a comparative study of the sub-sections shows that while Sub-section (1) uses the expression “head”, in Sub-section (2) the said expression is conspicuously omitted and this designed distinction brings out the intention of the Legislature. Thereupon the Court observed as under :
Be it noted that Clause (2) of Section 24, in contradistinction to Clause (1) thereof, is concerned only with the business and not with its head under Section 6 of the Act. Section 24, therefore, is enacted to give further relief to an assessee carrying on a business and incurring loss in the business though the income therefrom falls under different heads under Section 6 of the Act.
Referring to the earlier decision in the case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250,260 (SC), their Lordships further observed at page 312 of 57 ITR as under:
Though some observations divorced from context may appear to be wide, the said decision was mainly based upon the character of the capital gains and not upon their non-inclusion under the head “Business”. The limited scope of the earlier decision was explained by this court in Commissioner of Income-tax v. Chugandas & Co. Therein this court held that interest from securities formed part of the assessee’s business income for the purpose of exemption under Section 25(3). Shah J., speaking for the court, observed :
The heads described in Section 6 and further elaborated for the purpose of computation of income in Sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income; the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this court in the United Commercial Bank Ltd.’s case, that business income is broken up under different heads only for the purpose of computation of the total income; by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian Income-tax Act for computation of income.
The same principle applies to the present case.
We, therefore, hold that under Section 24(2) of the Act the income from the securities which formed part of the assessee’s trading assets was part of its income in the business and, therefore, the loss incurred in the business in the earlier year could be set off against that income also in the succeeding years.
21. A similar decision was taken by the Hon’ble Supreme Court in the case of Western States Trading Co. (R) Ltd. v. CIT [1971] 80 ITR 21, wherein it was held loss in business in earlier years would be set off against dividends from shares held as stock-in-trade. The Court was interpreting the provisions of Sections 6, 12(1A) and 24(2) of the IT Act, 1922 and followed the decision in the case of Cocanada Radhaswamy Bank (supra).
22. In CIT v. New India Investment Corporation Ltd. [1978] 113 ITR 778 it was held by the Hon’ble Calcutta High Court that the dividend earned by the assessee, though assessable under a particular head i.e., “income from other sources” was really the “business income” of the assessee and the income should be allowed under the ‘business income’ and cannot be apportioned against income arising under two different heads Le., ‘business’ and ‘dividend’.
23. In another case decided by the Calcutta High Court in the case of CIT v. Anniversary Investments Agencies Ltd. [1989] 175 ITR 199′, a similar decision was taken following the case of New India Investment Corporation Ltd. (supra). In this case also it was held that dividend income was chargeable under the head ‘business’ and the expenditure incurred including the interest on the amount borrowed on purchase of stock and shares should be deducted as business expenditure in computing the business income and there should be no apportionment between two heads viz., “business” and “other sources”.
24. In this connection we would like to refer to the decision of the Hon’ble Delhi High Court in Snam Progetti S.P.A. v. Addl. CIT[1981] 132 ITR 702. In this case, the assessee an Italian company carrying on business as engineers and contractors in the field of petroleum and petro-chemical plants, was engaged in India having huge contracts, each running into millions of dollars which necessitated the assessee having large liquid funds. Excess business funds were placed in short-term bank deposits yielding interest income. It was held that the earlier years’ carried forward business losses could be set off against such interest income. It is significant to note that this decision has become final as the Hon’ble Supreme Court dismissed the SLP filed by the Department against this judgment as [1991] 189 ITR (St.) 116 (SC).
25. Respectfully following the ratio of the decisions mentioned by us in paras 18 to 24 (supra), we find considerable force in the submission made by the learned counsel for the assessee. It is clearly established in the present case that the assessee has been carrying on a systematic organised activity starting with the initial business activity of investment in companies and followed by venturing into different kinds of activities of business like lending of monies, entering into partnership, buying of further shares in other companies and later entering lease transactions. Merely because the investment or the business activities carried on during the years did not result in sizeable interest or other receipts, it cannot be said that the assessee did not carry on any business during the relevant period. It is well known that profits may not be earned immediately in all business activities. Some activities may yield returns at a later stage. But this does not mean that there was no integrated business consisting of investment in shares, lending of monies to sister concerns, trading by becoming partner in firms and entering into lease transactions. In view of the clear enunciation of the law by the Supreme Court in the case of Cocanada Radhaswami Bank Ltd. (supra), relating to set off of losses from one head against income under other head in terms of subsections (1) and (2) of Section 24 of the IT Act, 1922 which are pari materia with Sections 71 and 72 of the IT Act, 1961, we have to hold that the assessee is entitled to the claim of set off under the provisions of Sections 71 and 72 of the IT Act, 1961, as the case may be for the relevant years under consideration. Hence, we reverse the orders of the lower authorities on this point and direct the Assessing Officer to allow the claim made by the assessee in this behalf.
26. In view of our decision in the assessee’s appeal, we hold that the expenses claimed by the assessee should be allowed in computing the income of the assessee and the restriction of such expenses as done by the CIT(A) in para 7.7 of his order for assessment year 1991 -92 is uncalled for. Hence we modify the order of the CIT(A) in this respect and direct the Assessing Officer to allow the full claim of expenses relating to the business activity of the assessee as spelt out by us in the preceding paragraph. Consequently the Revenue’s appeal for 1991-92 is dismissed.
27. In the result, all the appeals filed by the assessee are allowed. The Departmental Appeal in ITA No. 283/Bang./96 is dismissed.