This is an appeal by the assessee directed against the order of CIT(A)-III, Ahmedabad, dt. 16th July, 1991, relating to asst. yr.
1989-90.
2. In the instant appeal, the assessee has raised as many as 12 grounds of appeal. However, the grievance of the assessee projected in these grounds of appeal is that the CIT(A) was wrong in holding that the assessee was not entitled to set off of unabsorbed business losses of earlier years against the income of the current year.
3. During the assessment year under consideration the return of income was filed on 15th December, 1989, declaring total income of Rs. 50,610.
The assessee-company had earned the income from the business of sales of scrap. The assessee-company while computing the income claimed the deduction of unabsorbed losses for asst. yr. 1983-84 to 1985-86 amounting to Rs. 1,45,919. The unabsorbed losses were in respect of the business of manufacturing of lifts and trading in electrical motors.
The set off of the unabsorbed losses has been claimed on the income of the sale of scrap. The AO observed that after claiming set off of the unabsorbed business losses from income of sale of scrap the assessee-company has shown income at Nil and offered for taxation Rs. 50,610 as short-term capital gain on sale of machinery under s. 50 of the IT Act. The AO afforded an opportunity to the assessee-company to explain that when the unabsorbed business loss was for the business of manufacturing of the lifts and trading in electrical motors, how the same could have been allowed as set off from the income of the sale of scrap, which was a different business. The assessee-company vide its letter dt. 15th February, 1991 stated that the income from sale of scrap was the business income and, therefore, the set off of the unabsorbed loss of the business income from the scrap sale was permissible under the IT Act. It was also claimed that during the year, the assessee-company had sold their machinery and plant which was depreciable asset on which depreciation was claimed and allowed. Profit arisen on depreciable asset by selling the same at a price higher than the WDV is a profit taxable under s. 41(2) (since omitted w.e.f. 1st April, 1988) as business income. The assessee also stated that it was only on account of simplification process that s. 41(2) has been omitted and the same has been replaced by s. 50 of the IT Act. However, the methodology of determining taxable surplus both under old s. 41(2) as well as under s. 50 is the same. The assessee, therefore, stated that merely a change of nomenclature or change of section does not alter the nature and character of the income especially where quantification process and the amount ultimately to be brought to tax remains the same. Therefore, the income under s. 50 of the Act, regarded as short-term capital gain is nothing also but a business income arising purely out of business assets on which depreciation has been allowed in the earlier years. The assessees contention was that even under this income the deduction would have been allowed.
Alternatively, it was also stated that business loss should be allowed to carry forward in the subsequent years. The AO examined the assessees case in detail and observed that the loss pertains to asst. yrs.
1983-84 to 1985-86. From the assessment orders of these years, it was evidence that loss was in respect of assessees business on manufacturing of lifts and trading in electrical motors. According to the AO, the said business was not in continuation in the previous year relevant to the assessment year under consideration. In fact there was income from sale of scrap which was quite a different business from the manufacturing of lifts and trading of electrical motors and, therefore, the AO was of the view that the assessee was not entitled to allowability of the said set off of the unabsorbed loss of the income from scrap.
4. The AO further observed that the decision of Honble Madras High Court in the case of Tube Suppliers Ltd. vs. CIT (1985) 152 ITR 694 (Mad), was brought to the notice of the assessee and it was specifically pointed out that in view of the judgment of Madras High Court (supra), the claim of the assessee was not acceptable and allowable. This time also, the AO provided an opportunity to the assessee to justify its claim. The assessee vide its letter dt. 28th February, 1991, submitted as follows : "1. We refer to the judgment in the case of Tube Suppliers Ltd. vs. CIT (Madras High Court) reported in (1985) 152 ITR 694 (Mad).
2. The test laid down in this judgment is that benefit of s. 72 can be claimed only when the business in respect of which loss has been occurred and which is ought to be carried forward and set off is carried on in the previous year, relevant to assessment year in which benefit to carry forward and set off is claimed." 3. We have to, therefore, decide whether in the case of our client, the business is carried on or not.
4. On this point, we reply on two judgments of Honble Gujarat High Court, in the case of : 5. We also rely upon the judgment of Honble Supreme Court in the case of :B. R. Ltd. vs. U. P. Gupta, CIT (e) Standard Refineries & Distilleries Ltd. vs. CIT (1971) 79 ITR 589 (SC).
In all these judgments, it has been held that the business is said to be carried on and continued, where there is common management, common control and inter-linking and interdependence of two or more activities.
6. We, therefore, state that on the facts of the case of our clients and on the basis of the tests laid down by the above judgments the business of our clients is carried on, continued and, therefore, the unabsorbed loss of earlier years are available as set off as claimed in the return of income.
7. We lastly and respectfully state that the judgment referred to in (1985) 152 ITR 694 (Mad) (supra) is of Honble Madras High Court.
8. We submit that when judgments of Honble Gujarat High Court and Supreme Court are available and which are in favour of the assessee, the same must be made applicable and, therefore, also we state that the claim of set off of loss is allowable.
5. The AO noted that the decision relied upon by the assessee were not applicable in the facts and circumstances of the instant case since, these decisions were not in the context of allowability of the set off of the business loss. He further observed that in all the above cases relied upon by the assessee-company, the business of none of the assessees was discontinued or stopped, while in the case of assessee the business of manufacturing of machinery and trading of electrical motors was completely discontinued. The AO was of the view that the decisions quoted by the assessee-company were not helpful in the instant case in any manner. However, he was of the confirmed view that the decision of Madras High Court (supra), was squarely applicable in the facts and circumstances of the present case.
6. The AO also rejected the claim of the assessee that the income was deductible out of the income chargeable under s. 50(2) of the Act on the ground that the section is a part of the old s. 41(2) of the Act (since omitted). The AO observed that in the case of Kar Valves Ltd. vs. CIT (1987) 168 ITR 416 (Ker) the Honble Kerala High Court has held that the income chargeable under s. 41(2) would not tantamount to the continuation of the business. He, therefore, held that the assessees contention on this score also was not acceptable. In this view of the matter the carry forward of loss of Rs. 1,45,919 was not allowed as set off against the business income of the year under consideration.
7. Aggrieved by the order of AO, the assessee went in appeal before the CIT(A). The assessee submitted written arguments before the CIT(A) wherein it was stated that the assessee-company was carrying on business activities for last 32 years and during these years, it had been carrying on various activities such as assembling and selling of electrical motors, repairing work, etc. It was also stated that the scrap sold by the assessee was obtained from its main activity of assembling, repairs, etc. In these circumstances income earned from the sale of scrap was income from same business. The assessee while relying upon the judgment of Honble Gujarat High Court in the case of Bansidhar (P) Ltd. vs. CIT (supra), has submitted that the Board of directors was empowered in overall control of the business activities of the assessee-company and all the activities were being carried on from the same funds, there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee. Therefore, the assessees contention was that its case was covered by the decision of Honble Gujarat High Court in the case of Bansidhar (P) Ltd. vs. CIT (supra), rather than the decision of Madras High Court in the case of Tube Suppliers Ltd. (supra) relied upon by the AO.8. The first appellate authority while deciding the assessees appeal observed that in asst. yr. 1982-83, there was only sale of scrap to the extent of Rs. 1,53,868. In the following year there was a sale of scrap to the extent of Rs. 11,743. He further observed that during the asst.
yrs. 1984-85 to 1988-89, the total turnover of the assessee was less than Rs. 1,50,000 out of which Rs. 21,500 was in respect of sale of chemicals, according to the CIT(A) which could not yield scrap. The only scrap would be obtained, was from electric motors or castings or warper beam. The CIT(A) was also of the view that the nature of activities in respect of electric motors was assembling and selling.
The said activity could have hardly left any scrap. He was also of the view that turnover of casting business was less than Rs. 20,000 and warper beam only Rs. 34,000 and from the said business activity also, the scrap of the nature and quantity shown by the assessee could not have been obtained. He, therefore, concluded that the scrap of the nature described and sold by the assessee would not have been obtained from the business activities of the assessee for the last 6-7 years.
He, therefore, did not accept the assessees contention that it had sold the scrap obtained in the processing of goods manufactured and consequently upheld the action of the AO in refusing to adjust the carry forward business loss.
9. Before us, Shri K. H. Kaji, the learned counsel for the assessee submitted that the assessee-company was engaged in the business of manufacturing and other allied equipment and assessee was carrying on said business for last 32/33 years. He further submitted that the assessee was not dealing in buying and selling of scrap and scrap which was a bye-product of waste, arising out of its main activities was being sold from year to year and as and when occasion arose. The learned counsel for the assessee further submitted that in asst. yr.
1982-83 sale of scrap was to the tune of Rs. 1,53,868. In asst. yr.
1983-84, it was at Rs. 11,743 and during the year under consideration it was at Rs. 2,00,304. Similarly in asst. yr. 1991 the assessee-company had sold scrap of Rs. 24,210. The learned counsel for the assessee submitted that the sale of scrap was not the assessees main business but it is evident from its activities that in past also that the assessee has declared sale of scrap as income from business and the Revenue Department has accepted the same from year to year and hence it can be said that the assessee is also a dealer in scrap. The learned counsel emphasised that the income from sale of scrap was the same business as manufacturing, assembling and selling of lifts, electric motors, moulding, assembling, etc.
10. The learned counsel for the assessee while reiterating the submissions made before the authorities below submitted that the assessee had rightly claimed brought forward business losses, as allowable deduction against business income, which included sale of scrap. His further contention was that both the authorities below have misapplied the decision of Madras High Court in the case of Tube Suppliers Ltd. (supra), which is contrary to the facts of the instant case. The learned counsel for the assessee also submitted that in the case of CIT vs. Veecumsees (1987) 152 ITR 708 (Mad), the Honble Madras High Court relied on the decision in the case of Tube Suppliers Ltd. (supra) and the said decision of Madras High Court in the case of CIT vs. Veecumsees (supra) has been reversed by the Honble Supreme Court, which judgment is reported Veecumsees vs. CIT (1996) 220 ITR 185 (SC).
11. The learned counsel for the assessee also submitted that the assessee-company was selling scrap, lifts, electric motors, etc. during asst. yrs. 1983-84 to 1985-86 and the company continued the same business of sale of electric motors, castings, warper beams all along from asst. yrs. 1983-84 to 1987-88. During the assessment year under consideration, the various items of scrap sold, were scrap material and old discarded items manufactured or assembled. It was also contended that from the details regarding the goods sold and the copies of bills, would show that the realisation of the scrap is the same and of the same business as the one carried on by the assessee-company in asst.
yrs. 1983-84 to 1986-87 when the loss had occurred which was computed and carried forward and the set off is now claimed in asst. yr.
1989-90. The learned counsel vehemently argued that the sale of scrap is an integrated part of the business activity arising directly from the main activities of the company. Sale of scrap has been accepted as income from business by the Revenue in earlier years as well as in the subsequent year. He, therefore, submitted that sale of scrap, could be treated as business income and before taxing the same the claim of loss of earlier years is clearly allowable. Reliance was also placed on the following decisions :B.R. Ltd. vs. CIT 12. On the other hand the learned Departmental Representative Shri V.K. Mathur, while supporting the orders of the authorities below submitted that the sale of scrap was quite different business from the business of manufacturing of lifts and trading in electrical motors.
According to him the business in which loss was suffered, was not continued during the period relevant to the assessment year under consideration. In fact, the assessees income was from sale of scrap and business of scrap was quite different business from the business of manufacturing of lifts and trading in electrical motors. He also submitted that the decision of Honble Supreme Court reported at (1996) 220 ITR 185 (SC) (supra) was not applicable in the facts and circumstances of the present case. He, therefore, submitted that the order of the CIT(A) should be upheld.13. In rejoinder, the learned counsel for the assessee submitted that the scrap did not belong to this year only but it included unserviceable parts, machinery parts, etc. as it would be evident from the details furnished by him before the authorities below.
14. We have carefully considered the rival submissions and have also perused the material to which our attention was drawn during the course of hearing of the appeal. The assessee has also filed a paper-book running into pp. 1 to 37. Directors report and accounts for the year ended on 31st March, 1989 (33rd Annual Report) was also filed before us. The assessee-company carried on the following activities from asst.
yrs. 1982-83 to 1989-90 : C.I. scrap of pulley weight body bracket, cylinder, pump pulley & heavy patla.
M.Sc. scrap shaft, plate, rotor farma, pipe, stand, rails, pedastal and rack.
16. The assessee had claimed unabsorbed carried forward loss of Rs. 1,45,919 against total income. It is an admitted fact that entire amount of unabsorbed loss of earlier years had been carried forward by earlier orders of concerned AO. It is important to note that in asst.
yr. 1982-83, the assessee had sold scrap to the tune of Rs. 1,53,868.
Similarly, in asst. yr. 1983-84 also scrap worth Rs. 11,743 was sold by the assessee. In the past, sale price of scrap has been treated as business income of the assessee by the Revenue. In the year under consideration also the Revenue has not doubted the sale of scrap to the tune of Rs. 2,00,304. We find substance in the submissions of the learned counsel for the assessee that the assessee was not dealing in scrap or dealing in scrap was not its main business but it is evident from the records of the case that in past the Revenue has accepted the amount received from sale of scrap as assessees income from business.
It is also not the case of the Revenue that the assessee had purchased the scrap from outside parties. We also find considerable force in the assessees contention that the scrap was its business asset, which was realised out of and in the course of regular business activities. The assessee-company has been carrying on the same business as it has been doing since asst. yr. 1983-84. It is also evident from details of sales, profits and loss as per balance sheet for asst. yrs. 1982-83 to 1989-90 (p. 26 of assessees paper-book), the assessee-company has continued the same business of sale of electric motors, castings, warper beams, etc. The assessee has also filed the details regarding the goods sold and the copies of bills, totalling to Rs. 2,00,304 which are available at pp. 11 to 25 of assessees paper-book. During the year under consideration the assessee has sold scrap material and old discarded items manufactured or assembled and articles dealt by the assessee during the asst. yrs. 1983-84 to 1989-90. It had filed the details of the same before the AO during the course of assessment proceedings.
17. The contention of the learned Departmental Representative was that the business of scrap is quite different business from the manufacturing of lifts and trading electrical motors and, therefore, the assessee was not entitled to set off of carry forward loss against the income from sale of scrap. The Revenues further case is that the business loss can be carried forward and adjusted against the profits of any business of the years following only, if the business, in which the loss was suffered, continues to be in existence.
18. The law is well settled that in order to determine whether two businesses are separate business or one and the same business, the Honble Supreme Court in the case of B. R. Ltd. vs. CIT (supra) held that the decisive test was unity of control and not the nature of two lines of business. The Honble Supreme Court has further held that the fact that one business cannot be conveniently carried on after the closure of the other may furnish a strong indication that the two business constitute the same business. The Honble Supreme Court also pointed out that in view of common management and common control of the business, the assessee was entitled to carry forward the loss in the import business in the asst. yr. 1953-54 and set it off against the profits of export business of the asst. yrs. 1954-55 to 1956-57.
19. In the case of Produce Exchange Corpn. (supra) it was held that the decisive test was unity of control and not the nature of two lines of the business. It was further held that the share business and the other business carried on by the assessee-company constitute the same business and, therefore, it was entitled to claim carry forward and set off of losses.
20. In the case of Vacuumsee vs. CIT (supra) the Honble Supreme Court held that business of jewellery and that of exhibitor of films was a composite one. In the said decision the Honble Supreme Court has reversed the judgment of the Madras High Court reported at (1987) 152 ITR 708 (Mad) (supra). The Madras High Court was of the view that, since the closing of the cinema business had not affected the earlier business in jewellery and hence, there was no interconnection, interlacing or interdependence in between jewellery and cinema business. It is pertinent to note that the Honble Madras High Court while deciding the case of Veecumsees (supra) relied on its earlier decision in the case of Tube Suppliers (P) Ltd. (supra).
21. The Honble Madras High Court in the case of CIT vs. Kothari & Sons (supra) held that managing agency business and commission agency business were the same business. In the said case managing agency business was closed due to abolition of the managing agency system. The Honble High Court held that the losses incurred by managing agency business could be carried forward and set off against income from commission agency. It is pertinent to note that the Honble Madras High Court while deciding the case of Kothari & Sons (supra) has also considered their earlier decisions rendered in the cases of (i) Tube Suppliers Ltd. (supra) and (2) Veecumsees (supra).
22. The learned counsel for the assessee while relying upon the decision of jurisdictional High Court in the case of Bansidhar (P) Ltd. vs. CIT (supra) has submitted that in the instant case also the board of directors was in overall control of all the business activities of the assessee-company and all the activities were being carried on from the same funds and hence there was complete interconnection, interlacing interdependence and dovetailing of different business activities carried on by the assessee-company. Therefore, all activities constitute the same business.
23. In view of the above discussions, we are of the view that sale of scrap is an integrated part of business activity arising directly from the main activities of the assessee-company. Therefore, all activities constitute the same business. We also find that both the authorities below had no occasion to go through the later judgments of the Honble Madras High Court particularly in the case of CIT vs. S. S. M. Ahmed Hussain (1987) 164 ITR 525 (Mad). In the said decision the Honble Madras High Court held that in the light of the decision of the Supreme Court in Standard Refinery & Distillery Ltd. vs. CIT (supra), it must be taken that in the instant case, there was a composite business of the assessee and, hence, merely because he had 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 earlier assessment year. Consequently, the Tribunal was right in its view that the assessee was entitled to carry forward and set off the loss of Rs. 2,32,485 under s. 72(1) in the asst. yr. 1968-69. In our view both the authorities below were not justified in rejecting the assessees claim without appreciating the facts of the case.
24. In view of the judgments of the Honble Supreme Court referred to above, we hold that the assessee is entitled to set off of its business losses of earlier years to the extent of Rs. 1,45,919.
25. In this view of the matter, we set aside the impugned order and allow the assessees claim.