P.D. Desai, J.
1. The Income-tax Appellate Tribunal has referred the following three questions of law for our opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was the justified in holding that Steel-O-Style Unit of the assessee and the units (a) carrying on business of purchase and sale of cloth, (b) processing and manufacturing of colours and chemicals in the name of M/s. Ban Dyes, did not constitute the same business and hence the retrenchment compensation of Rs. 9,603 paid to the workers of Steel-O-Style unit after its closure was not an allowable deduction
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the activities of steel rolling mill and machinery manufacturing units which were closed in 1961 and 1962, respectively, did not constitute the same business as purchase and sale of cloth and manufacturing of chemicals and dyes and that the appellant was not entitled to deduction of bad debts of Rs. 34,617 (Rs. 18,772 relating to machinery department and Rs. 15,845 relating to steel rolling mill) against the income of the assessee for the assessment year 1967-68
(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the capital loss of Rs. 47,381 in the year of account ?'
At the hearing of the reference, it was stated on behalf of the assessee that the third question set out above is not pressed. It is, therefore, not necessary to consider the said question and to set out the facts bearing on the said question.
2. The assessee is a private limited company. The assessment year is 1967-68, the previous year being the financial year ended March 31, 1967.
3. The assessee was carrying on different business activities at different points of time and the following table gives a brief summary of those activities :
--------------------------------------------------------------------Nature of business activity Period--------------------------------------------------------------------1. Purchase and sale of cloth The business continued up tothe year of account and eventhereafter.2. Processing of cloth and The business was closed in themanufacturing of chemicals year of account.and dyes in the name and styleof M/s. Ban Dyes.3. Manufacture of machinery The business was closed onAugust 1, 1961.5. Steel plant and rolling The business was closed onmill September 30, 1961.
It appears that upon the closure of the business run in the name and style of 'Steel-O-Style' in the year of account, the total sum paid by way of retrenchment compensation was Rs. 9,603. It further appears that upon the closure of the other two businesses, namely, manufacture of machinery and steel plant and rolling mill, the assessee could not recover outstanding dues in the total sum of Rs. 34,617 (Rs. 18,772 in respect of the business of manufacture of machinery and Rs. 15,845 relating to the business of steel plant and rolling mill) and that the said amounts were written off as bad debt in the year of account.
4. In the course of proceedings for the assessee's assessment to income-tax, the assessee claimed as a deduction under s. 37 the sum of Rs. 9,603 paid as retrenchment compensation and it also claimed as a deduction under s. 36(1)(vii) the amount of Rs. 34,617 by way of bad debts. The ITO and, on appeal, the AAC and, on further appeal, the Income-tax Appellate Tribunal, rejected both the claims. The Tribunal's decision was that since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the assessee, the deductions could not be allowed in the assessment of the assessee. At the request of the assessee, however, the Tribunal has referred the questions set out above for our opinion.
5. The Tribunal relied upon the following facts and circumstances in arriving at its decision, (i) the several business were widely different in nature and they covered both manufacturing and trading activities; (ii) the different business were carried on at different places; (iii) each business had its own staff including different managers and the staff was not interchangeable; (iv) inter se transactions between the various businesses were separately and meticulously recorded; (v) the closure of one business was not shown to have affected the other businesses - in fact, out of five different businesses, three had closed down without affecting the remaining two businesses which were still functioning; (vi) different books of account were maintained for each business and separate profit and loss account and balance-sheet were prepared in respect of each business although ultimately the accounts were consolidated into a common account; (vii) the overall control of the board of the directors over all the businesses, common ownership of the various businesses, common source of finance, consolidation of accounts and common assessment proceedings in different years were factors of no material importance; (viii) even in the case of a limited company, there can be different businesses, although overall control is retained by the same board of directors.
6. The question as to what constitutes 'same business' has been considered in several decisions. We shall, however, briefly refer only to some of the leading decisions on the subject.
7. In CIT v. Prithvi Insurance Co., Ltd. : [1967]63ITR632(SC) , the assessee carried on the business of life insurance as well as of general insurance. Both the businesses were attended to by its branch managers and agents without any distinction. There was one common administrative organisation and administrative expenses were incurred from a common fund. Against the aforesaid factual background, the question was whether the unabsorbed losses incurred by the assessee in the earlier years in its life insurance business were available for set off against the profits of the general insurance business in the relevant previous year under s. 24(2) of the Indian I.T. Act, 1922. It was held that interconnection, interlacing, interdependence and unity were furnished by 'the existence of common management, common business organisation, common administration, common fund and a common place of business'. It was observed that merely because special or distinct methods of computation of taxable income of the insurance business was required to be adopted, it did not follow that the two business would not be regarded as the same business within the meaning of 24(2). Whether two or more lines of business may be regarded as the 'same business' or 'different business' depends not upon the special methods prescribed by the I.T. Act for computation of the taxable income but upon 'the nature of the businesses, the nature of their organisation, management, source of the capital and fund utilised, method of book-keeping used and other related circumstances which stamp them as same or distinct'. It was further observed that the test whether one of the businesses can be closed without affecting the conduct of the other business was not decisive in determining whether the two constituted the same business. However, if one business cannot conveniently be carried on after the closure of the other there would be a 'strong indication' that the two businesses constituted the same business.
8. In Standard Refinery & Distillery Ltd. v. CIT : [1971]79ITR589(SC) , the assessee-company, which owned a distillery and had acquired a sugar refinery, obtained on lease a sugar and gur refining company with effect from June 1, 1945. The assessee purchased certain number of shares of that company in 1946, and sold them in 1947, at a loss. A part of this loss was unabsorbed and the question which arose was whether the assessee could carry forward that loss and set it off against the income from sugar manufacturing and distillery for the subsequent year. The question had to be examined in the light of the provisions of s. 24(2) of the Indian I.T. Act, 1922. It was held that the share transaction as well as the other businesses of the company were dealt with by a common management, common business organisation, common administration, common fund and common place of business and that the business were, therefore, the same. In arriving at this decision, the following facts found by the Tribunal were relied upon; (a) that there was a single trading and profit and loss account; (b) that the share transactions as well as the business had been dealt with by a common organisation and the business of the company as well as the transactions relating to the shares were attended to as part and parcel of the assessee-company; (c) that a common fund was utilised for both business purposes as well as for the purchase of shares; and (d) that the share transaction work as well as the other business of the assessee-company were carried on in the same place of business. It was reiterated that the decisive test was unity of control and not the nature of the two lines of business.
9. In B.R. Ltd. v. V. P. Gupta, CIT : [1978]113ITR647(SC) , the assessee-company, which had incurred a loss in the business of import and sale of woollen fabrics, etc., in the calendar year 1952, closed the business towards the end of that calendar year and it started from the commencement of the calendar year 1953, the business of exporting cotton textiles and earned profit in the business in that year and subsequent years. The question was whether the assessee was entitled to carry forward and set off the loss in the import business against the profit of the export business in the subsequent years. The decisions which have referred to earlier and one more decision of the Supreme Court in Hooghly Trust (P.) Ltd. v. CIT : [1969]73ITR685(SC) and the celebrated judgment in Scales v. George Thompson & Co., Ltd., [1927] 13 TC 83 (KB) were referred to and it was held that upon application of the tests laid down in those decisions the conclusion was inevitable that the business which the assessee was doing in the relevant assessment years was the same business which it was doing when it incurred the unabsorbed loss. It was observed that the circumstance that there was a distinct and market difference in the nature of goods dealt with and that the procedure involved in the import of articles from foreign countries and the export of articles manufactured in India to different foreign countries was entirely different was not by itself sufficient to establish that the business of import was not the same business as that of export. It was reiterated that the decisive test was unity of control and not the nature of the two lines of business. It was also emphasised that the fact that one business cannot conveniently be carried on after the closure of the other may furnish a strong indication that the two businesses constitute the same business but not decisive inference can be drawn from the fact that after the closure of one business, another may or may not be conveniently carried on. The circumstance that there was a common control and common management of the same board of directors in regard to the business of import and export was highlighted and it was pointed out that that circumstance, coupled with the other circumstances, showed that there was unity of control and dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constituted the same business.
10. In CIT v. Alembic Glass Industries Ltd. : [1976]103ITR715(Guj) , the assessee-company had an existing unit manufacturing glass at Baroda. For establishing a new glass manufacturing unit at Bangalore, the company incurred certain expenditure in the relevant years. The said unit did not go into production during the year in question. During the course of the assessee's assessment to income-tax, the ITO, inter alia, held that the Bangalore unit was not a branch of the assessee's factory and that it was, therefore, a new business and since that new business had not started production, the payment of interest on the borrowings made for incurring the expenditure for setting up the new unit could not be allowed as revenue expenditure. On the same ground, he also disallowed some miscellaneous expenditure and travelling expenditure referable to the establishment of the Bangalore unit. This decision was reversed on appeal by the AAC who held that the Bangalore unit did not become a distinct business undertaking although it was a new unit and the Income-tax Appellate Tribunal agreed with the AAC. On a reference, this court held that there was one company which controlled the administration of both the units and which supplied staff to both the units. One company alone managed the whole of the business organisation of both the units and the production of both the units was considered the production of that company itself. The mere fact that there was no common place of business because the Bangalore unit was situate many miles away from Baroda was not a matter of any consequence because the head office of the assessee was at Baroda and it was the head office which controlled the affairs of both the businesses. It was pointed out that the closure of any of the two units would surely affect the working and the business of the remaining unit for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit. Having regard to all these circumstances, it was held that the factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business and that the amounts in question were allowable as revenue expenditure.
11. These decisions lay down clear guidelines for the determination of the questions arising herein. In the instant case, the board of directors of the assessee, which is a private limited company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of business was also worked out by a consolidated profit and loss account and balance-sheet. The source of finance for running the various businesses was thus one and single and there was a consolidation of accounts for the purpose of ascertaining the ultimate working result of the business carried on by the assessee. Merely because there was a separate staff, which was not inter-transferable, the unity of control was not affected since, at the apex, there was a common management and administration in view of the overall control of the various business vesting in the board of directors of the assessee-company. Though some or most of the businesses were carried on at different places, the ultimate control was exercised at the registered office of the assessee-company and that circumstance also, therefore, did not detract from the unity of control. The emphasis on the widely different nature of the business activities, though not altogether irrelevant, is not by itself decisive. The fact that manufacturing business was combined with trading activities is again a matter of no consequence because that by itself, or coupled with the other circumstances present herein, cannot lead to the conclusion that there was no interlacing or interdependence, since there was unity of control. Even if different books of account were maintained and the transactions inter se between the different business units were recorded in those books of account, once it is found that ultimately there was a common profit and loss account and balance-sheet, that circumstance would pale into insignificance because such a method of accounting would be more for convenience of business than for the purpose of maintaining the different identities. The fact that the closure of one business did not affect or lead to the closure of the other businesses is also not of much consequence because no decisive inference can be drawn therefrom. In fact, the closure of two businesses in two years in succession and the third within five years thereafter is a circumstance which leads to a reasonable inference that the various businesses were in all probability so closely interconnected that one could not bear the impact of the death of another.
12. In our view, on the application of the settled tests and judging the facts found in this case on the basis of the those tests, the conclusion is inevitable that there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and that all those activities really constituted one and single business.
13. Once this conclusion is reached, the further conclusion is inevitable that the deduction on account of retrenchment compensation paid by the assessee upon the closure of one of the businesses was wrongly disallowed by the Tribunal. And similar will be the position with regard to bad debts. Be it noted that the only ground on which the deductions were disallowed was that those three business, as a result of the closure of which the assessee had to pay retrenchment compensation in one case and write off its outstanding dues as bad debts in the other, were different and distinct businesses. Since that basis disappears, the deductions must be held to be permissible.
14. As a result of the foregoing discussion, we answer questions Nos. 1 and 2 in the negative, that is to say, in favour of the assessee and against the revenue. Question No. 3 is not required to be answered as the assessee has not pressed the same. There will be no order as to costs in the circumstances of the case.