Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: MANILAL DAHYABHAI VS Respondent: COMMISSIONER OF INCOME-TAX, BOMBAY CITYHonorable Justice SHAHR. J. Kolah,G. N. Joshi
1960 P T D 106
1960 P T D 106
[Bombay (India)]
Before Shah and S. T. Desai, JJ
MANILAL DAHYABHAI
versus
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY
Income‑tax Reference No. 42 of 1958, decided on 16th and 17th June 1959.
Income‑tax Act (XI of 1922), S. 24 (2)‑Loss‑Set‑off‑Loss in speculation business‑Profit in cloth business‑Assessee whether entitled to set‑off‑Speculation business and cloth business whether "the same business."
The assessee family carried on business as a wholesale dealer in cloth (inter alia) in the name of D. S. For the assessment year 1949‑50, the assessee claimed set‑off of the losses suffered by it in the assessment years 1947‑48 and 1948‑49, in speculation in gold, silver, cotton, shares and other com modities, on the ground that the cloth business carried on by it in that name and the speculation business were the "same business" within the meaning of section 24 (2) of the Income‑tax Act. The claim that the businesses were "the same business" was sought to be substantiated by the following six factors; (i) that only one set of accounts was maintained for both, receipts and withdrawals with respect to them being entered therein ; (ii) that both the businesses were carried on in the same premises ; (iii) that they were carried on with the help of the same staff ; (iv) that the capital employed for both the businesses was the same ; (v) that the receipts in respect of one of them were utilised for the purpose of the other indiscriminately ; and (vi) that the terms of overhead and other expenses were common. A majority of the members of the Appellate Tribunal held that the two businesses were not one and the same business within the meaning of section 24 (2) and the claim of the assessee to carry forward its loss in speculation business and set it off against the profits in the cloth business was not allowed. On a reference;
Held; (i) that the six factors relied on by the assessee did not necessarily lead to the inference that the businesses must be regarded as one and the same business for the purpose of section 24 (2) ;
(ii) that the important, though not a conclusive, test in deter mining the question was whether one of the two businesses conducted by the assessee could be stopped without affecting the texture or framework of the other ;
(iii) that in this case it was possible for the assessee to close the cloth business and conduct exclusively the speculation business without affecting the texture and frame‑work of the former, and vice versa ; further, the nature of one line of business was entirely independent of that of the other, there was no unity between them, and the financing of the two lines of business from a common source did not provide the necessary unity;
(iv) that, therefore, the business in speculation and the cloth business did not constitute one and the same business and there was evidence to justify the Appellate Tribunal to arrive at its finding ; and the assessee was not entitled to the set‑off claimed by it.
Scales v. George Thompson & Co. Ltd. (1927) 13 T C 83 applied.
Chidambaram Chettiar v. Commissioner of Income‑tax (1945) 13 I T R 177 ; Govindram Bros. Ltd. v. Commissioner of Income‑tax (1946) 14 I T R 764 ; Hiralal Kalyanmal, In re (1943) 11 IT R 128 ; Rekhabchand Sarogi v. Commissioner of Income‑tax (1947) 15 I T R 465 ; Scales v. George Thompson & Co. Ltd. (1927) 13 T C 83 and Soundrapandia Nadar v. Commissioner of Income‑tax (1950);18 I T R 163 ref.
STATEMENT OF CASE
As requisitioned by their Lordships of the Bombay High Court we hereby draw up a statement of the case and refer it to the High Court of Bombay under section 66 (2) of the Indian Income‑tax Act.
2. The assessee is a Hindu undivided family. The assessment year is 1949‑50 and the relevant previous year is S. Y. 2004 (13th November 1947 to 1st November 1948). The assessee is a wholesale dealer in cloth. It also does speculation in gold, silver, cotton, etc. Two sets of accounts are maintained by it, one in the name of Manilal Dahyabhai, Vithalwadi, Bombay, and the other in the name of Dabyabhai Sobharam, Champa Galli, Bombay. According to the assessee the business in the name of Manilal Dahyabhai recorded transactions with up‑country merchants and in the case of Dahyabhai Sobharam with local parties in Bombay. In the present case we are concerned with the business done in the name of Dahyabhai Sobharam, Champa Galli, Bombay. These books contain an account of the specu lation business.
3. The assessee returned a total income of Rs. 1,38,946 in respect of the business done in the name of Dahyabhai Sobharam.
In arriving at this figure the assessee had deducted a sum of Rs. 1,04,042 on account of losses suffered by it in speculation in shares, cotton, gold, silver, etc. In the assessment years 1947‑48, and 1948‑49, the assessee had suffered losses in respect of speculation business and these losses were allowed to be carried forward by the income‑tax authorities. The amount carried forward was Rs. 3,57,403 and Rs. 66,719 in the two respective years under reference. The total loss suffered by the assessee in respect of these two years was much larger as detailed below 1947‑48:
Loss of Rs. 5,82,700 detailed as below :‑--------
Rs. a. p. Speculation in Gold & Silver ... 5,492 0 6 Cotton ... 21,110 9 0 Shares ... 2,05,524 1 9 'Hessian ... 20,573 2 0 5,82,699 13 3 1948‑49 : Loss of Rs. 2,67,110‑14‑3 detailed as below :‑ Speculation in Cotton ... 1,74,601 6 0 ., Gold & Silver ... 22,409 6 9 Seeds ... ... 39,536 8 0 Hessain ... ... 24,298 7 0 Linseed ... ... 5,435 15 0 Shares ... ... 829 3 6 2,67,110 14 3
4. The Income‑tax Officer made the assessment on the applicant in the following manner
Rs. I. Cloth trade. Net profit as per P. & L. A/c. ... ... 1,37,149 Add back (including speculation losses sepa‑ rately considered of Rs. 1,04,042) 1,18,551
2,55,700 II. Income from second set ... 8,199 2,63,899 III. Speculation losses suffered by the assessee in the year of account less speculation profits ... 1,04,042 1,59,857 IV. Share income ... ... 8,384 V. Income from dividends ... ... 50 VI. Income from property ... ... 550 1,68,841
A sum of Rs. 19,655 (Rs. 18,155 plus Rs. 1,500) being the assessee's share from a partnership was added by taking action under section 35,
5. The assessee claimed that the profit made by it from its cloth business should be set off against losses brought forward from the preceding year. According to the assessee the cloth business and the speculation business formed part of the same business. The matter came up before the Tribunal and was heard by a Bench con sisting of Mr. Malhotra (Accountant Member) and Mr. Agarwal (Judicial Member). The Judicial Member was of the opinion that the speculation business carried on by the assessee is "the same business" within the meaning of section 24 (2) of the Income‑tax Act and the loss carried forward must be adjusted against the assessee's profit under the head "profits and gains of business, profession or vocation". On the other hand, the Accountant Member held that the loss brought forward from the preceding year was not loss arising to the assessee from the same business the profits from which were liable to tax in the year of account. In the year of account the assessee's income from the cloth business was in the neighbourhood of about Rs. 2 lakhs. Speculation losses of over Rs. 1 lakh suffered by the assessee in the year of account were allowed to be deducted. The matter was referred to the then President, Mr. Shah, who agreed with the Accountant Member. A copy of the order of the three Members giving detailed reasons is annexure 'A' and forms part of the case.
6. We refer the following questions directed by their Lordships;
"(1) Whether on the facts and in the circumstances of the case the businesses carried on in speculation and in cloth constitute one and the same business ?
(2) Whether there was any evidence to justify the Tribunal's finding that speculation business and the cloth business were separate businesses and/or whether the Tribunal misdirected itself in law in coming to that conclusion ?
(3) Whether on the facts and in the circumstances of the case the assessee was entitled to set off against the profits from the cloth business in the year of account the losses of Rs. 3,57,403 (Rupees three lakhs fifty‑seven thousand four hundred and three) and Rs. 66,719 (Rupees sixty‑six thousand seven hundred and nineteen) in the speculation business brought forward front the preceding years of account ?"
7. Parties accept the statement of the case. No suggestions are offered.
R. J. Kolah for Assessee. G. N. Joshi with R. J. Joshi for Commissioner.
JUDGMENT
SHAH, J.‑The assessee is a Hiindu undivided family. It carries on business as a wholesale dealer in cloth in two names; (i) Manilal Dayabhai, Vithalwadi, Bombay, and (ii) Dayabhai Sobharam, Champa Galli, Bombay. The business with the up‑country merchants is carried on in the name of Manilal Dayabhai, and the local business, is carried on in the name of Dayabhai Sobharam. The assessee also carries on business in speculation in gold, silver cotton, etc. Two separate sets of books of account are maintained by the assessee in respect of the businesses carried on in the two names. We are in this reference concerned with the business which is carried on by the assessee in the name of Dayabhai Sobharam. For the assessment year 1949‑50, the assessee returned a total income of Rs. 1,38,946 from the business done in the name of Dayabhai Sobharam. In arriving at that figure the assessee deducted from the gross income an amount of Rs. 1,04,042 as loss suffered in the speculation business in shares, cotton, gold, silver and other commodities. In the assessment years 1947‑48, and 1948‑49, the assessee bad suffered losses in speculation in gold, silver, cotton and shares as also in seeds, hessian and linseed. The assessee claimed that‑against the profit made by it in the cloth business in the year of assessment 1949‑50 should be set off the losses suffered in the speculation business which were brought forward from the preceding year. It was claimed by the assessee that the cloth business and the business in speculation in gold, silver, cotton, shares, hessian and linseed constituted the same business. The Income‑tax authorities negatived the contention raised by the assessee. The assessment proceedings were brought before the Income‑tax Appellate Tribunal, and Mr. Aggarwal the Judicial Member and Mr. Malhotra the Accountant Member, constituting the Tribunal, disagreed in their conclusion on that question raised before them. Mr. Aggarwal was of the view that the speculation business and the cloth business constituted the same business within the meaning of section 24 (2) of the Income‑tax Act. He observed;
"Taking all the facts and circumstances into consideration I am firmly of the opinion that the speculation business carried on by the asse9see is `the same business' within the meaning of section 24 (2) of the Indian Income‑tax Act and the loss carried forward must be adjusted against the assessee's profit under the head ` profits and gains of business, profession or vocation' ".
In Mr. Malhotra's view, the speculation business carried on by the assessee had no concern with the normal cloth business conducted by it. In view of the difference of opinion between the two members, the matter was referred to the President of the Tribunal who agreed with the conclusion of Mr. Malhotra. He held that the assessee had failed to prove that the speculation business carried on by it was the same business as the business in cloth, and observed that, if a finding was necessary, in his view, the cloth business and the speculation business were "not one and the same business in spite of the trival connection pointed out by the assessee". We may point out that whereas the two members of the Tribunal expressed their respective opinions on the question whether the cloth business and the business in speculation carried on by the assessee could be regarded as one and the same business, the President decided the appeal primarily on the view that the burden lay upon the assessee to establish that the speculation business was the same business as the cloth business carried on by it and that burden was not discharged by the assessee, and observed that if it was necessary for him to express an opinion he would agree with the view taken by Mr. Malhotra.
In this reference Mr. Kolah for the assessee has strenuously contended that all the usual indicia which are regarded as determinative of "same business" within the meaning of section 24 (2) of the Income‑tax Act are found present in this case by all the three members of the Tribunal, and that Mr. Malhotra and the President were in error in coming to the conclusion that on those indiria the cloth business and the business in speculation carried on by the assessee did not constitute one and the same business.
Normally where the assessee carries on two different lines of business, it is a question of fact whether they constitute two separate and distinct businesses or whether they are in truth branches or departments of one and the same business. It is true that the conclusion of the Tribunal, which is founded on no evidence or which is unreasonable or perverse, may not be regarded as binding even if it is apparently on a question of fact. Again, if the question is one of legal inference to be drawn from the facts proved, it may be regarded as a question of law.
The test for ascertaining whether two lines of business conducted by the same assessee constitute the same business or distinct businesses was happily expressed by Mr. Justice Rowlatt in Scales v. George Thompson & Co. Ltd. ((1927) 13 Tax Cas. 83). The learned Judge observed : " . . the real question is, was there any inter‑connection, any interlacing, any inter‑dependence, any unity at all embracing those two businesses". In considering a similar question in Scales' case Mr. Justice Rowlatt observed that he could not conceive of two businesses that could be more easily separated than the two which were conducted by the assessee in that case. He pointed out that both the businesses had something to do with ships and that was all that could be said about them. He then observed;
"One does not depend upon the other ; they are not inter laced ; they do not dovetail into each other, except that the people who are in them know about ships ; but the actual conduct of the business shows no dovetailing of the ‑one into the other at all. They might stop the underwriting ; it does not affect the ships. They might stop the ships and it does not affect the underwriting. They might carry on underwriting in a country where there were no ships, except that it would not be commercially convenient ; but the two things have nothing whatever to do with one another".
The learned Judge also pointed out that the method of book‑keeping did not seem to him to throw any light upon the matter at all.
Mr. Aggarwal in the reasons in support of his order observed that the cloth business and the speculation business carried on by the assessee constituted the same business and that was clear from the following six factors;
(i) That only one set of accounts was maintained, i.e., in the set of books maintained for the assessee's cloth business the dealings in speculation were also entered. There was one cash book and the bank accounts were also the same both for the dealings in cloth as well as in speculation. Receipts either from the assessee's dealings in cloth or from speculation were deposited in these books‑ and similarly withdrawals for purposes of payment either in regard to dealings in cloth or dealings in speculation were made from these books and accounts ;
(ii) That the speculation business as well as the dealings in cloth were carried on from the assessee's shop in Champa Galli in the name of Shah Dayabhai Sobharam ;
(iii) That the business was
carried on with the help of the same staff ;
(iv) That the capital employed for both the businesses was the same ;
(v) That the receipts in respect of one business were utilised for purposes of the other business indiscriminately and vice versa ; and
(vi) That the terms of overheads and other expenses were common.
In the view of Mr. Aggarwal, all these factors led to the inevitable inference that the two lines of business conducted by the assessee constituted the same business. In his view, it could not be said that merely because the nature of the speculation business was different from that of dealing in cloth that the two lines of business constituted separate businesses. Mr. Malhotra was of the view that the principal business of the assessee was the cloth business and that the speculation business was carried on by the assessee by debiting the funds to the cloth business, and merely because there were withdrawals made from the cloth business for the purpose of the business in speculation it could not be said that there was identity between the two lines of business carried‑ on by the assessee. He analysed the reasons given for drawing the inference from the six factors set out by Mr. Aggarwal and came to the conclusion that between the two lines of business conducted by the assessee there was no inter‑connection, interlacing, inter‑dependence or dovetailing or unity embracing the two lines. With this view, as we have already observed, the President appeared to agree. Prima facie it may appear that when the two members of the Tribunal agreed that there was no inter‑connection, interlacing, inter dependence or dovetailing of the two lines of business nor any unity in conduct thereof, the finding recorded by the Tribunal is binding upon this Court: but we do not propose to rest our judgment merely on this view.
It is true that one set of books of account was maintained in respect of the two lines of business conducted in the name of Dayabhai Sobharam, and in that set of books of account entries were indiscriminately posted in respect of the cloth and the speculation transactions. Again, it appears that withdrawals of funds were made from the banking accounts and were allocated to the two lines of business. But the mere maintenance of one set of books of account will not necessarily lead to the inference that the two lines of business in respect of which entries are made in the books of account are the same business. It may be possible for an assessee to conduct two independent businesses having no connection with each other and post entries in respect thereof in one set of books of account. The posting of entries in the same set of books of account does not justify the inference that the two lines of business constitute the same business, nor does the circumstance that the source from which the monies were obtained for conducting the two lines of business was common lead to the inference that the two lines of business must be regarded as one and the same business.
By section 24 (2) of the Income‑tax Act, as it stood before its amendment by the Finance Act, 1955, it was in so far as it is material provided;
"Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940, in any business, profession or vocation, and the loss cannot be wholly set off under subsection (1), so much of the loss as is not set off . . . shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year . . ."
It is evident that under this section the losses incurred by the assessee in his business in any year may, if unabsorbed, be carried forward to the following year and set off against the profits and gains of the assessee from the "same business" for that year, but not of any distinct business. It is true that the circumstance that accounts were maintained in the same set of books in respect of two different‑lines of business may have to be considered in the context of the other circumstances, but, in our judgment, that is not decisive. The speculation business and the cloth business were, it is true, primarily conducted from the assessee's shop at Champa Galli in the name of Shah Dayabhai Sobharam, but, here again, that circumstance does not establish any inter connection between the two businesses conducted from the same shop. It also appears that in carrying on the speculation business some assistance of the staff employed in the cloth business may have been obtained : but in the view of the President of the Tribunal this assistance must have been trivial. In our view, even if some assistance was obtained from the staff maintained for the cloth business, that is not a circumstance which establishes an inter‑connection or inter‑dependence between the two lines of business. The source of the capital which was employed for the two lines of business was undoubtedly the same and the receipts in respect of the business in cloth and the speculation business went into that source and from that source monies were withdrawn indiscriminately and even the overhead charges and the other expenses in the two lines of business were regarded by the Members of the Tribunal as common. It is true that these circumstances may, in a proper case, together with other circumstances, justify an inference that the two lines of business constituted one and the same business. But we are unable to hold that because these circumstances are found present it must follow that the two lines of business conducted by the assessee were parts of the same business. The Court must in each case ascertain whether, in view of the existence of these circumstances, unity between the two lines of business is established : and we fail to find from the circumstances referred to in the present case any such unity. Though not a conclusive test, an important test, viz., whether one of the two businesses conducted by the assessee could be stopped without affecting the texture or frame‑work of the other, may properly be applied in this case. It was possible for the assessee to close the cloth business and to conduct exclusively the speculation business, and the texture or frame‑work of the speculation business would not have been affected thereby : and by the closure of the speculation business the texture or frame‑work of the cloth business could not have been affected. Again, the nature of the two lines of business conducted by the assessee are not the same. The only similarity‑if it can be called a similarity‑between the two lines of business is that one of the items of the speculation business was cotton whereas the other business conducted by the assessee was of cloth. The cloth business was, it appears, a business of purchase and sale of ready commodity, and the other business which the assessee was simultaneously conducting was forward dealings in gold, silver, linseed, hessian, shares and seeds. The nature of the two lines of business was entirely independent of each other, and there was no unity between the two lines of business conducted by the assessee. The financing of the two lines of business from the same source, conducting of the business from the same shop and attendance to the business by the same owner with the aid of the same staff do not by themselves establish the necessary unity which would constitute the same business.
Mr. Kolah for the assessee cited a large number of decisions in support of his contention that the circumstances which are found in this case were present in the cases cited by him and that in those cases it was held that two lines of business conducted by the assessees in those cases were the same business. It would be fruitless, however, to enter upon a detailed analysis and comparison of the facts on which the various cases cited before us at the Bar were decided. The decisions in those cases evidently proceeded upon inferences drawn from the facts found proved by the Income‑tax Tribunals. It may be sufficient to observe that in none of the cases cited any par ticular circumstance or set of circumstances was held decisive of the question whether two or more lines of business conducted by an assessee constituted the same business within the mean ing of section 24 (2) of the Income‑tax Act. We may make a brief reference to the cases cited at the Bar which have, it is evident, been decided on a collective appreciation of the facts and circumstances of the cases, and not on the application of any general principle.
The first case, which was referred to by Mr. Kolah, was Chidambaram Chettiar v. Commissioner of Income‑tax ((1945) 13 IT R 177). In that case, a money‑lending business carried on by the assessee at Karaikudi in British India and another…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.