1. These appeals are directed against the order of the CIT(A)-II, Rajkot, dated 13-1-2000 for the A.Ys. 1994-95 and 1995-96.
2. The above appeals have been decided by the ld. CIT(A) vide his consolidated order as the issues involved in both the appeals are similar, for the sake convenience. The main grounds of appeals are regarding the discontinuance of the textile business and the payment of interest to directors. According to the assessee, the business activity of the assessee company cannot be said to be discontinued. It is also stated by the assessee in the grounds of appeal that the Assessing Officer has erroneously held that the new business of land development was not commenced. According to the assessee, the Assessing Officer has wrongly not allowed the current year's losses under the head 'business income' against the short-term capital gains and 'income from other sources'. It has also been taken up in the grounds of appeal that the Assessing Officer erred on facts and in law in not allowing the set off of unabsorbed loss of earlier years against the short-term capital gain and income from that source. It is also stated that even if the interest held to be capital expenditure, the same should have been added to block of assets and the resultant capital gain would then be NIL. The assessee has also denied its liability to charge interest under section 234B of the Income-tax Act, 1961.
3. The assessee is a private limited company. The assessee has been engaged in the silk-textile business. It filed the return of income for A.Y. 1994-95 showing loss for the current year amounting to Rs. 3 lacs and carry forward loss of earlier years of Rs. 1,01,45,901. The return for A.Y. 1995-96 was filed showing loss of Rs. 7,65,000 in the current year and also claiming carry forward of loss of earlier years. As per the Assessing Officer the assessee was running a textile mill long back and the same was closed with effect from 1-1-1982 because running of silk-textile mill at Bhavnagar ceased to be profitable because of the competition from similar mills from Surat. The Board of Directors of the company passed a resolution to that effect. It is also stated by the Assessing Officer that later on, workers were also retrenched in 1983. The assessee also tried to sell its machineries in 1988. The assessee company also entered into an agreement to sell its machineries to M/s. Swaham Engineering Corpn. as per agreement dated 20-2-1988.
Swaham Engineering Corpn. is a sister concern of the assessee. Thus, the Assessing Officer came to the conclusion that the business of the assessee was closed in 1982 itself. He also found from the directors' report that the company had no intention of revising its business of silk mill. In the annual reports, the directors had intimated to the members that the company had taken steps in the direction of development of the company's land property which was in progress. From these facts and the reports of the directors, the Assessing Officer was of the view that the company had closed its business of textile in 1982 and a new business of land development had not yet started. Thus, the Assessing Officer disallowed the expenditure. The Assessing Officer has also stated that in the A.Ys. 1992-93 and 1993-94, the assesses had shown small transaction of sale of cloth valued less than Rs. 10,000 just to show that the company was still doing business. The Assessing Officer held that by showing such single transaction of nominal amount, the company had tried to give colour to the situation as the company was still running business. According to the Assessing Officer, the business of cloth as shown was bogus and since there was no business all the expenses should be disallowed. The Assessing Officer also observed in his order for the A.Y. 1993-94 that the expenditure incurred was relating to stamp, postal charges, miscelleneous expenses, provident fund etc. These expenses were in addition to the two major expenses of interest paid to directors and compensation for breach of contract in assessment year 1993-94. The Assessing Officer found that the interest to directors was paid because the company had borrowed money from them for paying of its liabilities. The Assessing Officer held that since no business was carried out since 1982, the money borrowed from the directors cannot be taken as borrowing for the purpose of business. He concluded that the money borrowed had been invested not for running the new business but for keeping the company alive. Similarly compensation for breach of contract had arisen because the assessee had agreed on 26-2-1988 for the sale of machinery of loom-shed and pressing department to its sister concern for Rs. 40 lakhs. Rs. 20 lakhs were payable before 1-3-1988 and balance Rs. 20 lakhs were payable on or before 1-9-1988. Therefore, the delivery was to be effected and in case of default the buyer was to reimburse the amount together with incidental charges. The assessee had received the advance but could not deliver the machinery due to technical and other legal reasons. For breach of contract the assessee had to pay compensation. All these losses have been carried forward to be allowed in subsequent years by the assessee.
4. The Assessing Officer assessed the income of A.Y. 1994-95 at Rs. 11,73,000 under the head 'other than business' and held that the same cannot be set off against past losses because the assessee had closed down its business. The income arose to the assessee on account of short-term capital gain of Rs. 11,43,000 and miscellaneous income of Rs. 30,000. Short-term capital gains were in respect of sale proceeds of scrap of building demolished and it was assessed as short-term capital gains under section 50 of the Act. The miscellaneous income included dividend income etc. Similarly, in A.Y.1995-96 profit on sale of its assets of Rs. 9 lakhs was held as taxable under the head "short-term capital gains" and benefit of Rs. 450 was held to be taxable under the head 'other sources". The Assessing Officer also did not allow carry forward of the loss of earlier years since the assessee company had closed down its business long back.
5. During the course of appellate proceedings the CIT(A) passed an order under section 250(4) of the Act for both the assessinent years.
The Assessing Officer was required to examine the evidence relating to commencement of Land Development business. In his remand report the Assessing Officer had stated that the assessee stopped its textile mill in 1982. Thereafter in the year 1986, the assessee arrived at a settlement with the Bank. Original documents of lease-agreement were in custody of bank against bank facility enjoyed and there was a liability of Rs. 110 lakhs which was settled at Rs. 55 lakhs. On getting the original documents, the assessee claimed to have started land development business. It has also been pointed out by the Assessing Officer that no separate books of account for its cloth business and land development business were maintained. Solitary transaction of purchase and sale of cloth in various years shown by the assessee is in order to claim that its business was continued. Although year after year the assessee had shown the intention of starting new business but no effective steps were taken in that direction and no new business i.e. land development was set up. Therefore, it cannot be said that the assessee started new business activity of land development. The Assessing Officer also pointed out that the assessee filed before him the minutes of the Board of Directors resolving to start business of Land Development. As per the object clause of the company in the Memorandum of Association, the assessee company cannot alter its main object and empower itself to embark entirely new kind of business. As per procedure, the special resolution has to be passed at general meeting to alter the object clause. The alteration cannot take effect until it is confirmed by the Company Law Board. The Board has to be satisfied that sufficient notices have been given to every person whose interest is affected by the alteration and that the consent of the creditors had been obtained etc. Two shareholders filed petitions before the Gujarat High Court. Thus, according to the Assessing Officer the assessee has not followed the legal procedure laid down by the Company Law for change in its business activity and therefore, it is evident that the assessee in fact has not started any genuine business activity of development of land as claimed by it. Thus, it is concluded by the Assessing Officer that the assessee had not started the business of land development.
6. The ld. CIT(A) after considering the facts of this case and also going through the various court cases on this issue came to the conclusion that no composite business of silk mill and land development was ever in existence in the case of the assessee. According to him the silk mill was closed in 1982 and process of starting new business of land development started only in 1990 when the permission of the Bhavnagar Municipal Corporation for the conversion of land use was taken. Thus, the learned CIT(A) fully supported the findings of the Assessing Officer for not allowing the carry forward of loss and unabsorbed depreciation as claimed by the assessee. Regarding the interest claimed by the assessee, the ld. CIT(A) has started that no composite business of silk mill and land development ever existed so that it could be said that the loan was taken for the purpose of composite business and as such allowable as held by the Hon'ble Supreme Court in the case of Veecumsees v. CIT [1996] 220 ITR 185. He further stated that the business for which the loan was taken ceased to exist and therefore, any expenditure relating to that business is not allowable. According to him, the existence of business is pre-condition for allowance of expenditure under sections 29 to 42D of the Act. As the income has been assessed on the sale of dismantled material etc.
which is not the business of the assessee, therefore, the claim of the assessee is not allowable against such income. Regarding the short-term capital gains and miscellaneous income, the ld. CIT(A) concluded that since the business had come to an end in the year 1982, any subsequent claim of loss by the company cannot be allowed to be set off against any future profit and also in view of the provision of section 72 of the Act, brought forward business loss, if any, cannot be set off against current year's capital gain.
7. During the course of hearing the ld. counsel of the assessee invited our attention to the Tribunal's order dated 24-8-1998 for the assessment years 1992-93 and 1993-94 in the case of the assessee. It is contended by the ld. counsel that the orders for the A.Ys. under considerations have been passed by the Assessing Officer on the basis of the stand taken by the Department in assessment order for the A.Y.1993-94. He thus, contended that assessment for both the A.Ys. 1992-93 and 1993-94 have been set aside by the ITAT vide their order mentioned above. He further stated that the de novo assessment for the A.Ys.
1992-93 and 1993-94 have not yet been made, therefore, the assessments for the A.Ys. under consideration which involve the identical issue may also be restored to the file of the Assessing Officer.
8. On merits of the case, the ld. counsel submitted that in both the years the company has earned sale-proceeds on sale of scrap of building demolished in earlier year. It has also incurred business loss during the year on account of various expenses including interest on borrowings. He stated that company has also carried forward huge losses. He contended that the company had closed down the silk textile mill but the trading in silk textile continued even during the years under appeal. He invited our attention to the profit and loss accounts for the A.Ys. under consideration. For the A.Y. 1994-95 the purchases have been shown at Rs. 7,800 whereas the sales are to the tune of Rs. 9,000. Similarly for the assessment year 1995-96 these figures have been shown at Rs. 8,200 and Rs. 9,400, respectively. The ld. counsel has further stated that the assessee has sold some of its appreciable business assets used in the silk mills during the years under consideration has shown profit of Rs. 11,43,000 and Rs. 9,00,000 respectively in the profit and loss accounts. According to him short term capital gain/loss arising from sale of depreciable assets constitutes the business income of the assessee. The ld. counsel referred to the decision of the ITAT Bombay in the case of J.K.Chemicals [IT Appeal No. 8206 (Bom.) of 1989 dated 1-11-1993] wherein it has been laid down that the computation of short-term capital gains has to be computed in accordance with the provisions of section 50 but the same has to be dealt with under the head "profits and gains of business or profession".
9. The ld. counsel also contended that the company has already commenced its business of development of land in pursuance of the object clause in Memorandum of Association. It is stated that since the assessee is a private limited company, it does not require to undergo any formalities for commencing a new business mentioned in the object clause of its Memorandum of Association. It is argued that the company has taken steps in the direction of development of its property.
Necessary steps have also been taken for getting approval of local authority and State Government for implementing commercial and industrial project. Necessary resolution has also been passed in the Board Meeting regarding the land development business. According to the ld. counsel, the assessee company took the following steps for the development of the property :-- (i) Vide an amendment dated 15-10-1990 between the company and Bhavnagar Municipal Corporation end use of land had been connected with the approval of the Municipal Corporation.
(ii) The Bhavnagar Municipal Corporation has granted permission on 7-11-1990 for construction of new building called 'Diamond Commercial Complex.' (iii) The assessee company was with a view to construct a new commercial complex after removing all the old structures of erstwhile textile factory and has further dug the land upto a depth of 8' to 15' in the entire 5000 sq. yard. The assessee company has incurred total expenses of Rs. 12,28,387 upto 31st March, 1997. This includes expenses of Rs. 8,56,000 on account of digging of land.
(iv) The assessee-company has approached the banks with the project, seeking finance.
(v) Having set up and commenced the business of development of real estate, the company, could not make such progress initially due to different suits filed by the shareholders and workers and pendency of various legal actions before different courts.
(vi) The Tribunal vide their stay order dated 7-4-1997 laid down the condition that no new construction or development activities will be taken on said property without informing the Tribunal at the right time.
10. Regarding the commencement of business under the Income-tax Act, the ld. counsel referred to the commentary of Chaturvedi and Pithisaria, wherein citing the various decisions, the ld. authors have stated that the business commences as soon as the essential activity of that business is started. The ld. counsel also referred to the decision of IT AT, Chandigarh in the case of Goindwal Industrial & Investment Corpn. of Punjab Ltd. v. ITO [1994] 49 ITD 149 wherein it has been held that in case of the assessee involved in development of land and Industrial Complex, business commences from date of acquisition of land. In the case of the assessee the land is already held, the end use has been connected to development of commercial complex permission for construction has been obtained from Bhavnagar Municipal Corporation.
Thus, according to the ld. counsel the business has already commenced.
11. Regarding the interest on borrowing, the ld. counsel argued that the borrowings from the directors were mainly for clearing the dues of Bank and also payment of dues of Central Government, State Government, G.E.B. and Municipal Corporation. The major portion of the loan was utilised in settlement of outstanding dues from Union Bank of India since long. According to the ld. counsel, the assessee company had deposited original title deed of lease of land with the Union Bank of India on 25-11-1965 to avail the borrowings.
In order to commence the land development business, it was necessary to release this deed. The company got the deed released by paying a lump sum amount of Rs. 55 lacs. He further stated that original borrowings from the bank was for the purpose for the silk mill business. Interest on these borrowings has been allowed in the past. The borrowings from bank had never been held for non-business purposes. According to him even if the silk mill business of the assessee company is considered as discontinued, interest relating to such borrowings is an allowable business expenditure. He placed his reliance on the following court cases :-- 12. Regarding the sale of scrap of building, the ld. counsel contended that the proceeds on sale of land of scrap of demolished building is inextricably linked with the process of setting up of land development business. It is not income from any independent source and is, therefore, required to be adjusted against the cost for land development business. The ld. counsel placed his reliance on the decision of Supreme Court in the case of CITv. Bokaro Steel Ltd. [1999] 236 ITR 315 wherein on page 322 the Supreme Court has approved the direct decision of Delhi High Court on the subject.
13. The ld. counsel further argued that even if the proceeds are treated as short-term capital gains, they relate to depreciable business assets and therefore, in any case ought to have been set off against business losses. According to him, the old business has not been totally discontinued. Some trading activities are still being carried on and the assets used in the business of silk mills have not been fully disposed of. Some of the assets used in the business of silk mills have been disposed of in both the years. He further contended that the short-term capital gains/loss computed in accordance with section 50 constitute the business income and therefore the set off of current years business loss as well as carried forward business loss should not be denied.
14. The ld. DR contended that the business was closed in the year 1982.
According to him the loss has to be allowed as per the provisions of section 72. He further argued that the loss incurred in a particular business would be allowed to carry forward and set off against the profit of that business only. Silk business was discontinued in the year 1982, therefore, the loss carried forward cannot be allowed against the income which has been earned from other sources. Regarding the interest the ld. DR contended that the borrowing were old and the same are not for the purpose of the business of the assessee which has been commenced after the closure of the old business. He also contended that even the new business has not yet started. He also fully relied on the orders of the authorities below.
15. We have heard both the parties. We have also gone through the written submissions filed by the ld. counsel and various other documents produced before us during the course of hearing. The first issue is regarding the setting aside of the assessments under consideration on the basis of the order passed by the ITAT for the A.Ys. 1992-93 and 1993-94. The ITAT set aside the order of the CIT(A) for the assessment years 1992-93 and 1993-94 on the basis of the new evidence produced them. It is stated that the CIT(A) called for a remand report for the assessment years under consideration after receiving the fresh evidence from the assessee. The evidence produced before the CIT(A) for the assessment years 1994-95 and 1995-96 was similar to the evidence produced before the ITAT for the A.Ys. 1992-93 and 1993-94. Therefore, the ITAT concluded that the assessments for the A.Ys. 1992-93 and 1993-94 could be framed afresh by the Assessing Officer as the evidence produced before them is being considered by him for the subsequent years also. But, the Assessing Officer has already submitted his remand report for the assessment years under consideration and the ld. CIT(A) has also considered this remand report in his order, therefore, the basis on which the ITAT set aside the order of the CIT(A) for the assessment years 1992-93 and 1993-94 is not applicable to the order of the CIT(A) for the assessment years under consideration as the fresh evidence has been fully considered by the CIT(A) after calling for the remand report from the Assessing Officer.
Therefore, we are of the opinion that this is not a fit case for set as and the same is being decided on merits.
16. The ld. counsel contended that the silk mill business had not been closed. He stated that the silk textile mill had been closed but the trading in silk textile continued even during the year under consideration as has been discussed above. On the other hand, the ld.D.R. vehemently argued that the business was closed in the year 1982.
As per the profit and loss for the assessment year 1994-95, the assessee has shown the purchase of cloth at Rs. 7,800 and the sale of cloth at Rs. 9,000. Similarly, for the assessment year 1995-96, the purchase of cloth has been shown at Rs. 8,200 whereas the sale of cloth has been shown at Rs. 9,400. These insignificant figure of purchases and sales do not support the contention of the ld. counsel that the business of the assessee is continued. These small figures of sales and purchases, moreover, support the view that the business of the assessee has been finally closed. The assessee has to prove with evidence that the business out of which loss was incurred in the past is still continued. The assessee was running textile mill long back and the same was closed with effect from 1-1-1982 because running a silk textile mill at Bhavnagar ceased to be profitable because of competition from similar mills at Surat. Even the Board of directors of the company had passed resolution to that effect. Later on the workers were also retrenched in 1983. The assessee also sold machineries to its sister concerns. All these instances clearly support the view that the business was finally closed in the year 1982. The assessee has also not produced any evidence before us regarding the planning to do trading in textile. The assessee has also not produced any material before us which would prove that the business of trading in textile was in existence along with the business of manufacturing business of textile before the closure of the textile mill. It appears from the materials produced before us that the assessee was trading in its own goods of textile which were manufactured in their mill and there was no trading of goods which were purchased from the open market. Therefore, the business of trading in textile goods by purchasing the goods from the open market has been started after the business of manufacturing of goods was discontinued. Therefore, there was no continuity of the business which was in existence prior to the year 1982. Therefore, the business of the assessee was finally closed in the year 1982 and the assessee now cannot give the colour of continuity of business by showing a single transaction of sale and purchase of insignificant amount. The burden is on the assessee to prove that the two businesses (i) manufacturing of textile goods and (ii) trading of goods which were purchased from the open market were simultaneously in existence prior to the closure of the mill and therefore the trading activity continued. From the material produced before us it is quite evident that the assessee in fact was not doing any trading business in cloth and the single transaction of insignificant amount has been shown in the profit and loss account to give colour of continuity of business and to claim the huge carried forward loss against the future income.
This appears to be a device for the avoidance of payment of taxes on the future income of the assessee which in fact is not permitted by law. It has been held that to allow any deduction of discontinued business would be a total contradiction and violation of the legal principles upon which section 29 stands. Amongs various conditions required for a loss or expenditure to be allowed, the foremost condition is that it should be in the course of the business and it should be incidental to the business. On understanding this basic rule, the simplest inference to arrive at is that in the case of a discontinued business, there is no question of a loss or expenditure incurred in the course of business or incidental to it as the business no longer is in existence.
17. Regarding the sale of depreciable assets used in the silk mill during the years under consideration, the ld. counsel contended that the short-term capital gains under section 50 arising out of such sale constitute the business income of the assessee. The ld. counsel relied on the case of J.K. Chemicals (supra). In the above case the Tribunal, Bombay Bench has held that the short-term capital gains/loss has to be determined in accordance with the provisions of section 50 of the Act but the same has to be dealt with under the head "profits and gains of business or profession".
But the above decision of the Tribunal, Bombay bench is applicable only when the business is in existence. In the present case the business was closed in the year 1982 as we have discussed above and hence the short-term capital gains computed under section 50 cannot be considered as business income of the assessee because the income has not arisen during the course of business. During the assessment years under consideration the assessee was not carrying on any business, therefore, the sale proceeds of the scrap of building demolished has to be considered as short-term capital gains under the provisions of section 50 of the Act. In the case of Assam Biscuits Mfg. Co. Ltd v. CIT [1990] 185 ITR 535 (Gauhati), the High Court held that "Where the assessee sells its business and assets and sale proceeds are used to liquidate liabilities, the business is to be considered discontinued". In the case of CIT v. Lahore Electric Supply Co. [1966] 60 ITR 1, the Hon'ble Supreme Court has laid down that where income is earned by way of interest on debts outstanding or profits on sale of stores after the business has been closed down, then such business cannot be considered to have been continued merely by virtue of such income having been earned, and no set off can be claimed in respect of such income against the losses of the discontinued business. Hon'ble Bombay High Court in the case of Hiralal Jeramdas v. CIT [1965] 58 ITR 1, held that the continuance of business should be without interruption in order to avail of the benefit of carry forward and set off of losses. A business having once been closed and subsequently restarted, cannot be said to have been continued for the purpose of carry forward and set off of losses. On the facts of this case and the material on record, the business was discontinued in the year 1982 and therefore, carry forward of losses of the earlier years cannot be deemed to be set off against the income of the assessment years under consideration or against the income of the future assessment years.
18. The contention of the ld. counsel that the assessee company had already commenced the business is also without any substance. The various steps taken by the company mentioned above may help the company to establish its business of land development in future but it has nothing to do with the textile business which was discontinued in the year 1982. The land development business is yet to commence, therefore, it cannot be said that the same was in existence before the discontinuance of the textile business. According to the ld. counsel the business commenced as soon as the first step of such activity is undertaken. In the present case, though the business of development of land had actually not commenced during the period under consideration but necessary resolutions had been passed in the Board meeting regarding the land development business. This Board meeting is dated 15-2-1988. The company has not taken any concrete steps for the development of its land property. It has been pointed out by the Assessing Officer that only in the amended lease agreement dated 15-10-1990 between the Company and the Bhavnagar Municipal Corporation, the end use of the land has been converted with the approval of the Municipal authorities. The permission for the development of the property was granted by the Bhavnagar Municipal Corporation only on 7-11-1990. Therefore, the question of the development before that date does not arise. The permission for construction of new building called "Diamond Commercial Complex" was given on 7-11-1990 and the same was renewed from time to time, but the commencement of construction was held up till March, 1996. Even after March, 1996 hardly any progress has been made and the fact has not been disputed by the assessee.
Though the land was there but its end use was not known. It was only on 7-11-1990 that the assessee could get the permission for use of the land. Therefore, it cannot be said that the business activities for the land development commenced before 7-11-1990. In view of the above facts of this case there is hardly any link between the textile business which was closed on 1-1-1982 and the land development business which was only commenced after 7-11-1990. Therefore, the losses pertaining to the business of textile cannot be carried forward and set off against the future profits from land development business. All other steps for the land development business have been taken after 7-11-1990. The ld.counsel has relied on the case of Goindwal Industrial & Investment Corpn. of Punjab Ltd (supra) wherein the Tribunal, Chandigarh Bench held that in case of assessee involved in development of land and Industrial complex, business commenced from the date of acquisition of land. We fully agree with the ld. counsel but in the above case the land was acquired for the purpose of development but in the present case the assessee was holding the land and its use for land development business was known only after 7-11-1990, when the Municipal Corporation of Bhavnagar gave permission for such development of the land.
Therefore, the commencement of business in the present case was w.e.f.
7-11 -1990 when the permission was actually obtained from the Municipal Corporation of Bhavnagar. No doubt the land was already held by the company but its end use was not known before 7-11-1990. Therefore, how it can be said that the land was held by the company for development purposes. In the case of CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770' (AP) the Hon'ble Andhra Pradesh High Court held that "As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. Mere inclusion of a business in the main object clause in the memorandum of association is not enough to conclude that the business has commenced; the business pursuant to the object clause should have been started to justify the claim". Similarly, the Hon'ble Gujarat High Court in the case of Hotel Alankar v. C/r[1982] 133 ITR 866 has held that 'It is no doubt true that the business can be said to have been set up when it is established and it is ready to commence business. It does not mean necessarily that the business must be fully equipped in the sense that it could commence all its activities at a time immediately." In view of the above cases, the essential activity for commencing the land development business was started only with effect from 7-11-1990, when the Bhavnagar Municipal Corporation granted the permission for development of the land. Even after getting the permission from the Municipal Corporalion there was hardly any progress in the land development business. In fact the major activity of the land development commenced on 31st March, 1997 when the company incurred expenses of Rs. 12,28,387, out of which the expenses of Rs. 8,57,000 was on account of digging of land. Therefore, carry forward of losses of the business of the textile mill which was closed on 1-1-1982, cannot be allowed to be carried forward and set off against the future profits of the business in fact commenced on 7-11-1990.
19. Upto the A.Y. 1954-55 under the 1922 Act, the carry forward loss from one business could be set off against the profits only from the same business in subsequent years. However, from A.Y. 1955-56 under the 1922 Act, as amended and also under the 1961 Act, carry forward loss from one business can be set off against the profit from any other business and not necessarily from the same business in which the loss was sustained. However, this does not mean that the question whether or not different activities constitute the same business has become irrelevant. While section 72(1)(i) permits the set off of unabsorbed brought forward losses against the income of any business in subsequent years. The proviso thereto stipulates that the same business in which the loss was sustained should be continued to be carried on by the assessee. Now in the present case the business of textile mill and the business of land development and two different activities, therefore, they do not constitute the same business, moreover, the textile business was closed down on 1-1-1982 and the land development business has yet to commence its main activities. Therefore, these two business are separate business. Therefore, there was no interconnection, inter-linking between the old business of textile mill which was closed on 1 -1-1982 and the new business which was commenced only after the year 1990. We are, therefore, of the considered opinion that the carry forward losses pertaining to the old business of textile mill are not allowable against the new business of land development.
20. Regarding the interest paid to the directors of Rs. 14,99,446 and Rs. 14,50,806 respectively for the A.Ys. under consideration, the ld.counsel mainly contended that the interests paid cannot be disallowed as borrowings from the directors were mainly used for clearing the dues of bank and also payment of dues of Central Government, State Government and G.E.B. and Municipal Corporation. He also contended that these borrowings are actually used for the purpose of the business and interest on such borrowing has been allowed in the past. The loan from the directors was taken for the earlier years and the same was utilised for its silk mill business. The ld. counsel mainly relied on the case of Veecumsees' (supra) but the facts of the present case are totally different from the facts of Veecumsees 'case (supra). In the above case the loan was taken for the purpose of composite business and, therefore, the same was considered as allowable by the Hon'ble Supreme Court. In the present case, the business for which the loan was taken ceased to exist, therefore, any expenditure relating to that business is not allowable. The existence of business is pre-condition for the allowance of the expenditure under section 29 to section 43 of the Act.
The decision of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd (supra) is also not applicable to the facts of the present case. In the above case the High Court held that in both the ventures there was one establishment with regard to control of both the units. The management, the organisation, the administration, the funds and the place of business are identical. The deciding test was unity of control and not the nature of the two lines of business. In the present case, the unit of control does not arise as one business was finally closed on 1-1-1982 and the other business commenced on 7-11-1990.
Therefore, the borrowings which were taken for the old business cannot be considered as borrowings for the business which is yet to commence.
Borrowings, if applied for another business the interest paid is not allowable. The main activity in the new business in fact commenced only in the year 1990 as we have already discussed above. Therefore, there was no interconnection or inter-linking of the old business and the new business. Under the circumstances we fully agree with the ld. CIT(A) that the interest paid to the directors is not allowable.
21. Regarding the sale proceeds of scrap of building demolished, the ld. counsel contended that the income is not from any independent source. Therefore, the same is to be adjusted against the income from land development business. In the alternative the ld. counsel has also stated that the short-term capital gains are relating to depreciable business assets and the same should have been set off against the business loss. As we have discussed in detail above, the brought forward losses are not allowable against the income of the A.Ys. under consideration. Therefore, the income arising out of the short-term capital gains cannot be allowed to be set off against the business losses. The scrap of building has been sold after the closure of the business of textile mill. This sale has been effected when the business was not in existence. Therefore, this income has to be assessed under the provisions of section 50 of the Act. The facts of the case in Bokaro Steel Ltd. (supra), are not applicable to the facts of the present case. The sale of scrap of the building is not connected with the business of the land development. Therefore, the same has been rightly brought to tax by the Assessing Officer.
22. In view of the above discussion, we do not find any infirmity with the finding of the ld. CIT(A). His findings are, therefore, upheld.