Judgment:
As these two appeals preferrred by the Revenue against the appellate order dated 22-3-1995 of Commissioner (Appeals)-IV, Madras for the two successive assessment years 1991-92 and 1992-93 in the case of the assessee Mrs. Vanishree Karunakaran, Madras, consisted of common grounds of appeal, the same were clubbed together, heard together and are being disposed of by this common and consolidated order for the sake of convenience and brevity. The common grounds of appeal by the Revenue read as under: - 1. The Commissioner (Appeals) erred in holding that there was only a lull in the business of the assessee during the period under consideration and that the business must be considered to have been continued.
2. The Commissioner (Appeals) failed to note that AVK Industries had suspended its manufacturing activity as early as in 1989 and the expenditure claimed during the year under consideration was just the interest on bank loans outstanding.
3. The Commissioner (Appeals) has failed to give any consideration for the case laws referred to by the Assessing Officer in his elaborate discussion in the asst. order but simply relied on the case laws cited by the assessee, the facts of which are distinguishable.
4. The Commissioner (Appeals) ought to have followed the judicial decisions reported in 185 ITR 535,126 ITR 779, 126 ITR 476 and 65 ITR 643 and upheld the order of the Assessing Officer.
2. Briefly stated, the facts of the case are that the assessee is a cine actress by profession. Besides she is deriving income from property and also income from manufacturing and trading activity done under the name of AVK Chemical Industries. It is stated that the manufacturing activity in respect of AVK Chemical Industries was stopped since the year 1989 and that during the year 1984 the assessee had made some efforts to revive trading activity in respect of that business. In the course of the assessment proceedings the assessee had taken a plea before the Assessing Officer that the loss claimed under the head 'business' is allowable either for the reason that there is only a lull and inactivity of its business activities or for the reason that there is complete unity of control in respect of the assessee's activities both business as well as professional. The assessee also furnished a number of case laws in respect of both the contentions raised by her. However, the Assessing Officer had negative all the contentions raised by the assessee and held that as there was no business activity, the entire expenses claimed against business income cannot be allowed. Hence the Assessing Officer had disallowed the loss of Rs. 3,73,328 and Rs. 2,88,257 claimed for the assessment years 1991 -92 and 1992-93 respectively in respect of the business from AVK Chemical Industries on the ground that there was no business activity at all.
3. Aggrieved by this order of the Assessing Officer the assessee moved the matter in appeal before the first appellate authority. Before the first appellate authority the learned counsel for the assessee contended that he had furnished enough evidence before the Assessing Officer to prove that AVK Chemical Industries was having both manufacturing and trading operations. According to him the concern was interested in manufacturing chemicals needed by pharmaceutical concerns and it was also doing some trading activities even in the past. The expenditure claimed mostly related to interest on the borrower made for the purpose of investments in the assessee's business and professional activity. According to the learned counsel for the assessee there was only a period of lull and inactivity in the business due to reasons.
beyond the control of the assessee and that since the year 1989 the assessee was making all efforts to revive manufacturing and trading activity. In fact during the year 1994 the manager of the concern Dr.
Karunakaran had been in correspondence with a foreign concern for supply of steam coal. The counsel also relied on the following decisions in support of his contention that there was only a temporary set back in the business activity and that all steps were being taken to revive the manufacturing and trading activities: - The counsel also further submitted that even though the department was not agreeable with the above argument yet the loss claimed had to be allowed since the assessee had been maintaining the common account for all her activities, namely profession and business. For this proposition the counsel relied on the Madras High Court decision in the case of CIT v. S.S.M. Ahmed Hussain [1987] 164 ITR 525. It was further submitted that according to the decision of the Madras High Court case, though the assessee's activity consisted of two entirely different lines of business, namely film business and national bonds (buying and selling) yet the High Court held that so long as there was unity of control for both the businesses like inter connection, inter lacing and inter dependence the loss claimed in one head of business can be allowed even though that business had been discontinued. It was further argued that the said Madras High Court decision was again based on the clear principles laid down by the Supreme Court in the case of Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 9. Therefore it was contended before the first appellate authority, for the reasons discussed above that the assessee's claim for allowance of loss under AVK Chemical Industries was admissible against her income from profession both on the ground of (a) temporary lull and inactivity and (b) unity of control in respect of both business and professional activity. After considering the submissions of the learned counsel for the assessee the first appellate authority had concluded that there was only a temporary period of inactivity in the business and hence the loss was allowable. He, however, did not deal with the alternative contention regarding unity of control in respect of both business and professional activities.
4. Aggrieved by this order of the first appellate authority the Revenue is on appeal before us with the grounds of appeal extracted elsewhere in this order. Before us the learned Departmental Representative placed on record his written submissions and reiterated the same as his arguments. To say in brief he submitted that: 4.1 In the ground No. 1 the Commissioner (Appeals) has erred in holding that there was only a lull in the business of the assessee during the period under consideration and that the business must be considered to have been continued. The finding of the Commissioner (Appeals) is not correct as found on perusal of the assessee's assessment records for the assessment years 1989-90 to 1991-92 and 1992-93.
4.2 In the statement of total income for the year ending on 31 -3 -1989 (filed alongwith the return for the assessment year 1989-90) it has been mentioned that the assessee had sold the land pertaining to the AVK Chemical Industries and capital gains have been offered for assessment. Likewise the building pertaining to M/s. AVK Chemical Industries had also been sold and the capital loss was shown. It is very clear that the building which had been used for AVK Chemical Industries had been sold as the cost of the building had been taken at the written down value.
4.3 In the profit and loss account of AVK Chemical Industries for the year ending on 31-3-1990 the only bank interest of Rs. 5,50,160 and expense of Rs. 28,000 and depreciation of Rs. 57,441 had been debited.
And the loss of Rs. 5,90,601 had been shown. No trading account has been filed. It shows that there has been no manufacture or trading in the assessment year 1990-91.
4.4 For the assessment year 1991-92 the assessee filed only the profit and loss account for M/s. AVK Chemical Industries and no trading or manufacturing account had been filed which shows that there has been no trading or manufacturing. The Profit and loss account filed shows only profit on sale of land amounting to Rs. 1,59,400 and debit of Rs. 5,80,727 being the bank interest and debit of expense of Rs. 24,000.
4.5 For the assessment year 1992-93 the assessee has filed only the profit and loss account where only the bank interest of Rs. 2,88,257 had been debited and this is the only expenditure which resulted in loss of Rs. 2,88,257 in the case of M/s. AVK Chemical Industries.
4.6 From the above it is very clear that there has been a complete cessation of the business activity of the assessee, Le., namely M/s.
AVK Chemical Industries right from the assessment year 1989-90 upto 1992-93. Even beyond it is clear from the profit and loss account filed by the assessee for the assessment year 1993-94 where only sale of old items of Rs. 2,750 has been reported.
4.7 The case of Vikram Cotton Mills Ltd. (supra) quoted by the assessee is not relevant to the present case. This is the case where the point considered by the Apex Court was where the rental income on letting of mills on lease was business income or not and whether earlier years' losses could be set off against the rental income. The stoppage of business as in the assessee's case was not considered at all by the Apex Court in the cited case.
5. The assessee argued that she had maintained common accounts for all her activities, namely, here professional activity as a cine artist and for manufacturing and trading the activity of M/s. AVK Chemical Industries. The assessee has maintained separate income and expenditure account for her professional receipts right from the assessment year 1989-90 and separate profit and loss account for M/s. AVK Chemical Industries. She contended that there was interlacing, interconnection and interdependence of both the businesses and therefore the loss incurred under one head of business even though discontinued can be set off against the income of the other business. She quoted in this connection the case of S.S.M. Ahmed Hussain (supra).
6. In the assessee's case there is no intermingling, interlacing or interdependence of her two businesses. She is following the profession of a cine artist and carrying on the business of M/s. AVK Chemical Industries. The success in her profession depends entirely on her talent, her artistic attainments and her intellectual arid creative skill as an artist and these have nothing to do with the business such as M/s. AVK Chemical Industries. It fails one's comprehension how there can be inter-connection, interlacing and interdependence of her profession and such business as said above. The assessee is bringing this unbelievable proposition only to set off her business losses against her professional income. In the context of the assessee the profession and the business carried on by her can only be mutually exclusive. It has been said in the case of CIT v. Lallubai Nagardas & Sons [1993] 204 ITR 93 (Bom. ) that the expression 'Business and profession' have been used in the Act in mutually exclusive sense. This was more in the case of the assessee where her profession as a cine artist is far apart from the business of Chemical Industries which she may be carrying on with the help of her husband or the workers.
7. The case of L. VE. Vairavan Chettiar(supra) quoted by the assessee is also not relevant to the facts of the present case. In the above case the Madras High Court has dealt with the fact of two businesses one in arecanuts and other a rice mill and held that the profit or loss of all of them were to be added together and the aggregate sum so arrived at would represent the profits or gains in the business of the assessee. But in the case of the assessee the assessee has unreasonably claimed the set off of so called loss of business against the income from profession of the cine artist.
7.1 The case of Assam Biscuit Mfg. Co. Ltd. v. CIT [1990] 185 ITR 535 (Gauhati) squarely applies to the facts of the assessee's case. In the above case the assessee-company was incorporated with the object of manufacturing biscuits and other bakery products. From the inception the company proved to be a non starter. In June,1973 the Board of Directors in a report to the shareholders stated that the company had suffered heavy losses. The company did not manufacture biscuits after 1-3-1973. The plant, machinery and other equipments of the company were sold and the sale proceeds were utilised to liquidate the liabilities of the company. The factory premises alongwith the furniture and fixtures were leased out. The assessee claimed that its business was not discontinued and pointed out from the records that goods worth Rs. 762 had been purchased after June,1973. It also claimed that the rent from factory premises was assessable as income from business.
7.2 Held that there was no evidence to show that the assessee had not discontinued its business. The purchase of goods worth Rs. 762 was not sufficient to prove that the business of manufacturing biscuits had been continued. Hence it was not entitled to the benefit to carry forward and set off of earlier losses. It was not entitled to current depreciation allowance and deduction of interest on borrowing.
7.3 In the assessee's case there was manufacturing activity by the concern of M/s. AVK Chemical Industries. The assessee has said that the concern has started trading activity and in support of it has filed a copy of bill No. 1 dated 10-3-1994 for the so called sale of sodium sulphate. But the single instance of sale of sodium sulphate will not take the character of resumption of the earlier manufacturing activity of the concern namely M/s. AVK Chemical Industries. It can be seen from the above case that the High Court has held that the purchase of goods worth Rs. 762 would not constitute the business. Nor the rent from the factory premises leased out could be assessable as income from business. The assessee has contended that since the year 1989 she has taken all out efforts to revive manufacturing and trading activity. But she has been doing all along was only meeting her interest liabilities to the bank on the loans borrowed from the bank while the business was on in M/s. AVK Chemical Industries. The instance of some sales of Rs. 11,300 was shown in the assessment year 1994-95 for which return was filed on 31-3-1995 much after the dates of assessment on 5-10-1994 in respect of the assessment years 1991-92 and 1992-93. This instance of so called sale of Rs. 11,200 certainly seems to have been made up in order to beat disallowances made by the Assessing Officer in the orders for the assessment years 1991-92 and 1992-93. This single instance of so called sale in the absence of any such activity during the assessment years 1989-90 to 1993-94 coupled with the fact of sale of the factory building and the land thereon in the assessment year 1989-90 itself would not give any credence to the assessee's contention that there was business activity during the previous years relevant to the assessment years 1991-92 and 1992-93 or earlier in the assessment years 1989-90 to 1990-91 or later than two years. In this connection the decision of the Allahabad High Court in the case farmhand & Sons Sugar Mills (P. ) Ltd. v. CIT[ 1972] 86ITR 645 and the decision of the Supreme Court in the case of Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 9 also were relied on. Hence no allowance can be made with regard to the interest payable by the assessee to the bank in respect of M/s. AVK Chemical Industries and consequently any loss resulting there from could not be set off against the professional income of the artist assessee.
8. On the other hand, the learned counsel for the assessee reiterated the submissions made before the first appellate authority as his submissions. Apart from that he contended, to say in brief that: Section 72 deals with carry forward of business loss and that is totally different from Section 36, which deals with allowability of current year's expenses and the loss. Inere was lull in the activity or me business or M/s. AVK Chemical Industries. The income earned from profession was used for repayment of bank loan. Adverting to page 3 of the annexure to the assessment order for the assessment year 1991 -92, it may be seen that the assessee had shifted to trading activity from manufacturing activity and had not stopped the business in entirety.
Even in the assessment year 1994-95 trading activity was there. The bank account and the bank loan continued and was not wiped off. The management and the finance for both profession and the business of M/s.
AVK Chemical Industries were common and thus there was interlacing, interconnection and inter dependence of profession and business. Inter lacing, inter dependence and inter connection do not depend on physical attention of the assessee alone. All the decisions relied upon by the learned Departmental Representative were all in the context of carry forward and set off of losses and not for the current year's losses.
The decision of the Supreme Court in the case of Veecumsees v. CIT [1996] 220ITR 185", squarely applies to the facts of the case on hand.
The facts of that case dealt with by the Supreme Court were that the assessee ran a jewellery business. It then commenced business also in the exhibition of cinematographic films. In 1961, it obtained loans for building a cinema theatre. The said theatre was built in 1962 and was run by the assessee until 31-7-1965, when it was transferred to another firm. For the years during which the assessee exhibited films in the said theatre the interest paid on the loans obtained for constructing it were allowed by the Revenue as a deduction under the provisions of Section 36(1)(iii) of the Income-tax Act,1961. The Income-tax Officer declined the deduction for the assessment years 1967-68,1968-69 and 1969-70 on the ground that the business of exhibition of films in the said theatre was no longer in existence. The Appellate Assistant Commissioner allowed the deduction. The Tribunal found that there was no dispute that for the construction of the theatre the assessee had made heavy borrowings and the interest on such borrowings had been allowed by the Revenue as a deduction as the assessee was running the said theatre as its own business; that the assessee had admittedly paid the interest in question for the years under appeal in respect of the loans which had been obtained for the purpose of investing in the business of exhibition of films. The Tribunal also found that the business carried on by the assessee as a jeweller and in the running of the said theatre, restaurant, etc. were composite; that the assessee was carrying on both the businesses in jewellery and in the exhibition of films till 31-7-1965 and that only thereafter was the activity of exhibition of films discontinued and that the liability to pay interest had arisen in respect of the business carried on by the assessee till 31-7-1965. The Tribunal accordingly upheld the decision of the Appellate Assistant Commissioner to permit the deduction under Section 36(1)(m). The High Court came to the conclusion that since the closing of the cinema business had not affected in the least the assessee's business in jewellery, there was no interconnection, inter-lacing or interdependence between the jewellery business and the cinema business.
The High Court disallowed the deduction. On appeal the Supreme Court held: "The Tribunal was right in concluding that such interest had to be treated as a deduction under Section 36(1)(iii) of the Act. The loans had been obtained for the purposes of the assessee's business.
The fact that the particular part of the business for which the loans had been obtained had been transferred or closed down did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business. Apart from this, the Tribunal found as a fact that the business carried on by the assessee as jeweller and in running the cinema theatre, etc., was composite. In view of this finding also, the assessee was entitled to the deduction of the interest paid on the loans in question under Section 36(1)(iii)". In the case on hand the loss claimed by the assessee was mainly due to interest payment on borrowed funds. Hence even if the loss claimed by the assessee from M/s. AVK Chemical Industries is not allowed to be set off against the income from profession, following the decision of the Supreme Court cited supra, atleast the same is to be allowed to the extent of interest payments under Section 36(1)(m) of the Act.
9. In his rejoinder, the learned Departmental Representative contended that the learned Authorised Representative of the assessee was wrong to say that in all the cases relied upon by the Revenue it was only carry forward and set off of loss was the issue. In the case laws in Vikram Cotton Mills Ltd. 's case (supra) and L. VE. Vairavan Chettiar's case (supra) the set off of losses were within the same year and not the carry forward of losses. Even in the case law relied upon by the assessee's counsel in Veecumsees' case (supra) there were two lines of business and whereas in the case on hand it was a profession and a business and both were not business.
10. We have heard the rival submissions and considered the facts and the materials on record. The question before us is not set off of the carried forward losses under Section 72 of the Act, but only the set off of the current year's loss from the business against the profit from the profession of the same assessee. Section 28 of the Income-tax Act reads as under: - The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession', - (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;** ** ** Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
The profits and gains or loss arising from business or profession are to be considered under the head 'profits and gains of business or profession' as per Section 28 of the Income-tax Act. In case there is loss in one of the sources under the same head of income, the manner as to how it is to be dealt with is found in Section 70 of the Income-tax Act,1961. According to Section 70, as already extracted above unless otherwise stated in the Act, if the net result in respect of any source falling under the same head of income is a loss, the assessee is entitled to have the amount of such loss set off against his income from any other source under the same head. The assessee is having two sources under the same head, namely profession as cine artist and proprietrix of M/s. AVK Chemical Industries. Applying the provisions of Section 28 and Section 70 of the Income-tax Act it is to be concluded that the loss from the business activity of M/s. AVK Chemical Industries is to be adjusted against the profit from profession as cine actress while computing 'Profits and gains of business or profession' for any assessment year. When Section 70 of the Income-tax Act uses the phrase 'shall be entitled' it is to be construed that the current loss from the business is necessarily to be set off against current profit from profession. In our considered opinion the Income-tax Act itself in Section 70 authorizes such set off and hence there is no question of arguing that the current loss from business cannot be set off against the current profit from profession.
11. Now, having concluded that the current year's loss from the business can be set off against the current year's profit from the profession of the same assessee let us consider whether in this case on hand there was business loss or not during the relevant assessment year. Even though the assessee has not sold any material, the assessee had definitely paid interest on the borrowed funds which had been utilised for the business of the assessee and claimed it as expenditure along with some small expenditure claimed by the assessee. Just because there is nothing on the credit side of the profit and loss account, we cannot say that there was no business loss when the assessee has incurred expenditure towards interest in connection with the borrowals taken for the business of the assessee. Further in the assessment year 1994-95 the assessee had shown a sale of Rs. 11,300. There are case laws that even a single venture can be in the nature of trade. It is well settled that it is not necessary to constitute trade that there should be a series of transactions, both of purchase and sale. Neither repetition nor continuity of similar transaction is necessary to constitute a transaction an adventure in the nature of trade. Even though there is not even a single transaction, in our opinion the assessee cannot be prevented from claiming the expenditure which she has actually incurred by way of interest payments or salary payments, etc. just because there is nothing on the credit side of the profit and loss account. Further in our considered opinion there was interlacing, interconnection and interdependence between the profession and the business of the assessee sofaras the finance is concerned. Hence even though it is to be construed that the business was not there the assessee is entitled to claim the interest on borrowed funds taken for the purpose of business against her income from profession in view of the interdependence of the funds. Further just because there was no purchase or sale transaction during these years we cannot conclude that the assessee was not attempting to revive the business because the assessee had shown a sale of Rs. 11,300 in subsequent year 1994-95.
Hence we do not find any infirmity in the finding of the first appellate authority that there was only a temporary lull in the business and as such the assessee was entitled to set off the current loss from the business against the current income from the profession.
Since we have considered that there was loss from the business during the relevant assessment years and as Sections 28 and 70 of the Income-tax Act, 1961 as discussed above entitle the assessee to set off the business loss against the income from profession, we do not find any necessity to discuss the catena of case laws relied upon by the learned Departmental Representative and the assessee's learned Counsel.
12. In view of the observations above in the light of the facts and circumstances of the case we are inclined to uphold the order of the first appellate authority. The Revenue's appeals are dismissed.