Prithvi Raj, J.:— The applicant in the instant case is a private limited Company. The assessee originally was doing business in the manufacture of steel forgings and steel castings. This business of the assessee, however, was dropped and the machinery of the pilot plant of the assessee's Bahadurgarh factory was sold by the company as borne out from the report of the directors of the company for the year 1966-67. The assessee for the said accounting year had shown an income of Rs. 913/- under the head ‘interest’ and another income of Rs. 318/- by way of profit on sale of stores and spare parts. On the expenditure side the assessee had shown Rs. 11080/- on account of power and fuel including minimum consumption charges, Rs. 2200/- as freight and cartage charges and Rs. 2583/- as loss on sale of fixed assets. The assessee during the said accounting year, i.e, 1966-67 had sold machinery worth Rs. 3,34,948/- on credit. The assessee charged interest on dues on that account. Before the Income-tax Officer the assessee claimed deduction of full expenditure incurred by it in the year of account. However, the Income-tax Officer allowed expenses proportionate to the income under the head “Other sources” comprising interest and profit on sale of stores and spares. The order of the Income-tax Officer was challenged in appeal before the Assistant Appellate Commissioner before whom it was contended that the assessee planned to deal in non-ferrous metals and that it was exploring the fields for starting the business. The Appellate Assistant Commissioner did not sustain the claim of the assessee as he found that there was no evidence in that respect. He accordingly confirmed the order of the Income-tax Officer.

Being aggrieved by the order of the Appellate Assistant Commissioner the assessee filed an appeal before the Tribunal where three contentions were raised, namely, (1) that there was no legal justification to disallow the expenses shown on the debit side and take into consideration the items on the credit side of the profit and loss account when the expenses were justified taking into consideration the affairs and activities of the company from 17th October, 1962 to 31st March, 1967, during which period the company was in existence and was functioning properly and the mere fact that there was no income could not in any way adversely affect the inadmissibility of the expenditure incurred and that the brought forward losses of the various years should have been considered. Precise contention raised before the Tribunal was that the assessee was carrying on business and that it had disposed of machinery in the year of account and that the company had also disposed of stores and spare parts; that the company had earned interest on outstanding from the purchaser who had taken over the machinery from the assessee.

The Tribunal issued a direction to the Income-tax Officer that the expenditure under the head “salaries and wages, rent, travelling and conveyance, insurance, audit fees, filing fees, miscellaneous expenses, sales-tax and depreciation” should be allowed in full while the rest of the expenditure claimed was rejected. The Tribunal also allowed the assessee to raise the contention about the carry forward of loss of earlier years although that contention was not raised earlier before the Income-tax Officer and the Appellate Assistant Commissioner but rejected the claim of the assessee on the ground that it did not carry on any business in the year of account, much less, the business in forgings and castings in which loss was incurred. In the result the Tribunal referred the following two questions of law to this Court for its opinion:—

(1) Whether on the facts and in the circumstances of the case, the assessee was entitled to the deduction of any expenditure other than the expenditure allowed by the Tribunal either under the head ‘business’ or under the head ‘income from other sources’?

(2) Whether on the facts and in the circumstances of the case, the assessee was entitled to carry forward the loss in the business of forgings and castings brought forward from earlier years and set it off against any income determined for the assessment year 1967-68?

It may be stated here that the assessment year in question was the year 1967-68 and the corresponding previous year was the year ended on 31st March, 1967.

The learned counsel appearing for the assessee submitted that although the assessee company had dropped the steel forgings and steel castings business yet the assessee was still carrying on business as it was in the process of realisation of charges and the assessee had earned interest on outstanding from the purchaser who had taken over the machinery from it. The question, therefore, would be whether in the circumstances as stated above the assessee company can be said to be carrying on business and as such entitled to the deduction of the expenditure other than the expenditure allowed by the Tribunal either under the head “business” or under the head “income from other sources”.

The learned counsel for the assessee submitted that the company was not only realising the outstanding from M/s. Texmaco but also was earning interest on the said outstanding amount and that according to the Memorandum and Articles of Association of the assessee company one of the objects for which the company was established is to carry on trading business in all its branches and in particular to buy, sell, manufacture and deal in goods, stores, consumable articles, chattels and effects of all kinds, both wholesale and retail and to transact every kind of agency business.

Reference may be made to Commissioner of Income-tax, Punjab v. Lahore Electric Supply Company Limited (60 I.T.R I) (1) in which case the Government of erstwhile province of Punjab acquired the undertaking of the company in respect of supply of electricity to the city of Lahore. The company on 5th September, 1946, handed over its undertaking to the Government with all its assets. The company on the said date received a part of the amount payable to it from the Government towards the value of the undertaking and other assets while the remaining amount was to be paid later on after its assets were listed and evaluated. The Company had also other funds. The company invested all its funds in Government and other securities and shares. After 5th September, 1946, income from funds invested was the only income of the company. For the assessment years 1948-49 and 1949-50 the company claimed certain amounts as deduction allowable under section 10 (2) (xv) of the Income Tax Act, 1922 by way of expenses incurred for the purpose of its business on the ground that it had carried on business during the said accounting years. The Income-tax Officer rejected the contention of the Company. In appeal, the Appellate Assistant Commissioner allowed certain amounts but held that the company did not carry on business so as to come within section 10 of the Act. The Tribunal, however, accepted the contention of the company and allowed large deduction claimed by it. The Tribunal on the asking of the department referred two questions to the High Court, viz., (1) whether on the facts and in the circumstances of the case and conclusion of the Appellate Tribunal that the assessee company had not ceased to carry on business during the relevant accounting period was, in law, correct; and (2) if the answer to the first question be in the affirmative, whether all the expenses which the Tribunal had allowed were admissible under Section 10 (2) (xv) of the Income-tax Act. Both the questions were answered in favour of the assessee-company. In appeal before the Supreme Court the department gave up question No. 2. While considering the first question, their Lordships of the Supreme Court in the majority judgment delivered by Sarkar, J., observed as follows at pages 5 and 6:—

“It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the company was carrying on business arises only because, if it was, it would be entitled under section 10 to deductions from its business income in regard to certain expenses incurred by it for the purpose of that business. Business as contemplated by that section is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities is not an activity which can ever produce such a result. It cannot be said, therefore, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred.”

In the instant case we find from the profit and loss account of the assessee company for the year ended on 31st March, 1967, that no purchases were made by the assessee company during the said year and neither any amount was spent from the stores and spares consumed. The only income shown by the assessee company for the said year is a sum of Rs. 913/- on account of interest and further a sum of Rs. 381/- on account of profit stated to have been made on sale of stores and spare parts. That being so, the company was not engaged in any business and that is why the company made no purchases during the assessment year in question and likewise did not spend any amount on the purchases of stores and spares consumed and had no stock in its possession. From the Directors' report dated 12th August, 1967, to the members of the company, it is evident that the scheme for manufacturing steel forgings and steel castings had been dropped and the machinery of the company's pilot plant at Bahadurgarh had been sold by it. It, therefore, cannot be said that the company was engaged in any business during the relevant assessment year, merely because in realising its assets the company had earned interest on the outstanding dues or in selling its stores and spares it was able to make a profit of small amount of Rs. 381/- on the book value of the said stores and spares. On the admission of the Directors, manufacturing of steel forgings and steel castings business having been closed down, it cannot be urged that the assessee company should be deemed to be carrying on business simply because its outstanding dues were being collected and in that process the company was able to earn a small amount of profit as also interest. As held by their Lordships of the Supreme Court in Lahore Electric Supply Company's case (supra) (1) business as contemplated by section 10, of the 1922 Income-tax Act, would mean such activity of the assessee as is capable of producing a profit which profit can be taxed. Certainly, in selling the stores and spare parts with a view to complete the process of closure of business if a paltry amount of profit was earned, it is not possible to hold that the assessee was engaged in business. Likewise interest accruing on the outstanding dues would not be sufficient to hold that the assessee was engaged in any business.

In Inderchand Hari Ram v. Commissioner of Income-Tax, United Provinces, Lucknow, (23 I.T.R 437) (2) the applicants were the managing agents of the Shankar Sugar Mills Ltd., Gorakhpur. An Ordinance was promulgated by the Government according to which the Sugar Mills had to sell sugar direct to its customers and not through its selling agents. The assessee's selling agency, therefore, came to a stop. The Directors of the Sugar Mill did not apprise the assessee till 7th March, 1945, to disband their establishment and staff but during the period, i.e, beginning of the accounting year 1st October, 1944, upto 7th March, 1945, the Sugar Mill did not send any goods to the assessee and the assessee did not make any sales of the sugar for the Mill. The assessee claimed expenses of the establishment under section 10 (2) (xv). The Tribunal negatived the contention of the assessee holding that the selling agency had to be stopped under the ordinance and the same stood terminated by the Mill who did not send any goods for sale and the assessee as such was not required to maintain any staff or establishment. On the asking of the assessee the question “whether in the circumstances of the case, the expenditure incurred for the maintenance of the staff of the selling agency during the period when it carried on no business was an admissible deduction under Section 10 (2) (xv) of the Income-tax Act against the assessee's other income?” was referred to the High Court. The High Court while dealing with the question observed as follows at page 443:—

“In considering, however, whether the expenditure can be deducted as business expenditure one must remember that sub-section (2) (xv) is a part of Section 10 and at the time of the computation of the income of a business, though that income may be nil, the expenses incurred wholly and exclusively for the purposes of that business may be a permissible deduction, but in order to be deductible under this clause the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. If during the relevant period there was, in fact, no business either because it was discontinued or for some other reason it had ceased to exist, the question of computation of its income after deducting the expenses cannot arise. In the case before us, by reason of the Sugar Control Order and the notification issued thereunder, the assessee could not do any selling agency business in sugar. By merely maintaining an office at Kanpur it cannot be said that he was carrying on business the expenses of which he was entitled to deduct.”

In the present case we find that the Appellate Tribunal has found that the business of the assessee in steel castings and steel forgings had been brought to a close and the Tribunal further held that the assessee company did not carry on business of castings and forgings in the year of account and there was also no evidence to show that the company carried on any other business. That being so, it is a fact found against the assessee which is binding on us. Besides, if there was no business there can be no income for earning on which the assessee had to incur any allowable expenditure. A few items of sale of stores and spare parts cannot be integrated with business activity of the company. It was under similar circumstances that in Inderchand Hari Ram's case (supra I) (2) the Court observed that if during the relevant period there was, in fact, no business, the question of computation of the assessee's income after deducting the expenses would not arise. In the case before us we find that the Tribunal has found it as a fact that the assessee did not carry on business during the relevant assessment year and on their own showing also the assessee company has not been able to dispel the fact that no business was being carried on by the assessee.

The learned counsel for the assessee placed great reliance on Commissioner of Income-tax, Delhi and Rajasthan v. Bharat Nidhi Ltd., (60 I.T.R 520) (3) in which case the assessee under its name of Bharat Bank Limited apart from carrying on other business was engaged in the banking business as well. In 1949, the Banking Companies Act, 1949 (Act 10 of 1949) was enacted. Because of the restrictions imposed under the aforesaid Act the assessee did not wish to continue its banking business and it transferred its banking business to the Punjab National Bank Limited on 10th March, 1951. By a resolution passed by the share-holders of the assessee its name was changed from Bharat Bank Limited to Bharat Nidhi Limited. The assessee after 10th March, 1951, actually did not do any banking business and it was only in September, 1952, that it advanced some money to a borrower. In the year ending December 31, 1951, the Income-tax Officer computed certain loss for the period from January 1 to March 10, 1951 and income for the remaining period, i.e, March 11, 1951 to December 31, 1951, and the Income-tax Officer set off the loss of the first period against the income of the later period. The assessee had incurred certain losses in the earlier years which it sought to carry forward and set off against profits. This was disallowed by the Income-tax Officer on the ground that the assessee terminated its banking business on the 10th March, 1951. The Income-tax Officer held that the loss in the preceding years was from business which could not be set off as carry forward loss against income after March 10, 1951 because the Income-tax Officer took the view that the said income did not arise from business, profession or vocation but was income from other sources. The Income-tax Officer disallowed certain other claims of the assessee as well. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer in appeal. In further appeal the Tribunal held that the assessee's business of money lending remained intact and accepted the claim of the assessee and granted the relief sought by it. The Tribunal found from the balance sheet that even after the assessee dropped its banking business, the assessee maintained its capital with its assets. Besides, the Tribunal found that the assessee continued to realise income from its assets and discharged liabilities and that the assessee maintained its staff to which regular payments were made; that it continued to incur legal expenses connected with its business and it continued to pay its Directors for maintaining its affairs. Before the High Court the contention raised on behalf of the Revenue was that the assessee advanced no money to anybody after March, 1951, until sometime in September, 1952 and as such it could not be held to have continued its business of financing other than banking. The contention was repelled by the High Court on the ground that mere inactivity for a period did not mean that its business ceased to exist or that it did not carry on business at all. In this connection the High Court observed as follows at page 528:—

“A business may be inactive for a period and merely because of the dormancy of the business, the conclusion that it has ceased does not arise.”

The other contention of the Revenue that before March 10, 1951, the assessee was carrying on both the banking as also the business of financing in general but thereafter it dropped the banking business but carried on the business of financing in general, was not sustained and the High Court held that after March 10, 1951, the business that remained with the assessee and was carried on by it was the business which it had carried on previously as well before that date. In the result the High Court held that all the amounts claimed as allowable under section 10 (2) (xv) were rightly allowed by the Tribunal to the assessee being laid out or expended wholly or exclusively for the purpose of its business.

Support was also drawn from General Corporation Ltd., v. Commissioner of Income Tax, Madras, (3 I.T.R 350) (4) in which case the petitioner company carried on business in Motor accessories and in mica mining. The latter business had to be stopped on account of a cyclone. For the assessment year 1929-30 the company claimed a certain sum on account of loss incurred in respect of the mining business. This loss was entirely made up of expenses on account of salary and wages, depreciation, legal expenditure etc. The Income-tax Officer disallowed the amount stating that the loss was of a capital nature and not a loss incurred in the course of regular business as the Company had not done any mining business in the year of account. The Appellate Assistant Commissioner agreed with the order passed by the Income-tax Officer. It appears that the Tribunal also agreed with the Revenue. The High Court on the facts of the case observed that according to the memorandum of the Company one of its objects was to search for, win, work and get mica and that when production of mica was stopped by a cyclone, the company started prospecting to find out whether the business could be carried on, and incurred the expenses in question, with a view to resume production. In the circumstances the Court held that it could not be said that mica mining business had stopped, more especially when the old staff of the company doing the mica mining business was maintained by the company though on a reduced scale; that the work of prospecting was done by that staff and that expenses were incurred by the company in trying to find out whether production of mica could be resumed. Further, it was held, the fact that there was some period of inactivity in the carrying on of the business and the consideration that the business was not resumed after the expenses were incurred, were not of much consequence. The Court accordingly held that the expenses incurred in connection with the re-starting of the old business, though the same, was not resumed afterwards, were with respect to the carrying on of the mica business which the company carried on with its other business and the amount so spent was, therefore, allowable as a deduction against the profits and gains of the company's other business.

The learned counsel drawing support from the above-cited cases contended that even assuming that the business of the assessee was inactive for a period and that the business was in a state of dormancy, it would not per se lead to the conclusion that the assessee had ceased its business. The learned counsel drew our attention to the Memorandum and Articles of Association of the assessee company and stated that there are various and varied objects for carrying out which the company was established. That being so, it was urged that it was open to the company to engage itself in one of those business and may be that the assessee was exploring the possibility of engaging itself in one of those business.

We are afraid this argument is not open to the assessee as the Tribunal has found it as a fact against the assessee that the business of the assessee in castings and forgings had been brought to a close and the sale of the machinery in the year of account was an active step in the process of the closure. Moreover, there is no material on the record from which it could be gathered that the assessee company is exploring the possibility of engaging in any other trade or business in which it may legitimately engage being one of the objects for which the assessee company was formed.

Lastly, the learned counsel for the assessee relied upon the decision in In the Matter of Chuni Lal Kalyan Das (A.I.R 1925 Allahabad 469) (5) wherein the Court while examining the scope of the word “business” held that it would include any adventure and that it was not possible to exclude from the expression “adventure”, indeed successful adventure, the negotiation of a sale of a large mill which resulted in a commission payable to the value of Rs. 75,000/-. In the result it was held that the receipt was from a transaction which was from business of a broker and that came within the definition of business. The learned counsel accordingly contended that the sale of the machinery of assessee's pilot plant at Bahadurgarh factory and the resulting dues against that by itself would constitute business. That being so, the assessee company was entitled to all deductions by way of expenditure incurred by it.

We are unable to sustain the contention advanced by the learned counsel for the assessee. The authority in In the Matter of Chuni Lal Kalyan Das (Supra) (5) is distinguishable on its own facts. In that case the sale of a large mill resulted in a commission to the value of Rs. 75,000/- and it was as a result of that receipt that it was held that the transaction was from the business of a broker but in the instant case in the sale of machinery of the pilot plant of Assesee's Bahadurgarh factory, no commission has accrued and, therefore, it cannot be said that the sale of the machinery of the pilot plant was a transaction of the business of a broker.

Reference may also be made to The Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar, (25 I.T.R 265) (6). In that case the assessee sold its factory including machinery and plant to one ‘A’. During the period August 9, 1943, when the assessee obtained a firm offer from ‘A’ to December 10, 1943, when the possession of the factory was made over to ‘A’ the assessee never used the machinery and the plant for the purpose of manufacturing sugar or for any other purpose except that of keeping them in trim and running order. Rather throughout the accounting period the machinery and the plant were not used by the assessee.

The Income-tax Officer held that the profits made by the company on the sale of the machinery and plant were liable to assessment under section 10 (2) (vii). The appeals filed by the Company were rejected both by the Assistant Appellate Commissioner and the Tribunal. The Tribunal held that the company was carrying on business and treated the surplus received by the company on the sale of its assets as taxable profits. While examining the contention of the assessee their Lordships of the Supreme Court observed that in order to attract the operation of clauses (v), (vi) and (vii) the machinery and plant must be such as were used at least for a part of the accounting year and if the machinery and plant had not at all been used at any time during the accounting year no allowance could be claimed under clause (vii) in respect of them and the second proviso to section 10 (ii) (vii) could have no application to the sale proceeds of such machinery and plant. Their Lordships found that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of winding up of its business and observed as follows at page 275:—

“The sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding up of its business which eventually culminated in the voluntary liquidation of the company”.

In the case before us, as already stated, the company had sold its pilot plant of the Bahadurgarh factory and discontinued the business of steel castings, and steel forgings. That being so, it cannot be said that the sale of the pilot plant was in any manner in furtherance of the business carried on by the assessee. Rather after the sale of the pilot plant the assessee company was only engaged in the realisation of its assets.

In view of our discussion above, question No. 1 has to be answered in the negative.

The next question is that if the net result of the computation under the head “profits and gains of business or transaction” is a loss to the assessee not being a loss sustained in speculative business, whether the assessee is entitled to have the amount of loss set off against his assessable income under any other head or whether such a loss can be carried forward to the following assessment year. The learned counsel for the Revenue submitted that the loss could be carried forward and not set off provided if any business was carried on by the assessee during the relevant assessment year. The learned counsel further submitted that if the assessee carried on no business as in fact in the present case no business has been carried on in the relevant assessment year by the assessee, the loss cannot be carried forward. Reliance was placed by the learned counsel on Commissioner of Income-tax, Punjab, v. Paff Sewing Machine Company (India) Ltd., (30 I.T.R 518) (7). In that case the assessee company was formed to deal primarily in the purchase and sale of sewing machines and accessories. The Company under its memorandum of association had power to invest its funds in the stock and shares and to deal in them. Due to the outbreak of War in 1939 its business in machines stopped as it was not possible for the company to import machines from Germany. The company accordingly utilized its working capital for the purpose of holding securities and in dealing with them. After the cessation of hostilities it again became possible for the company to resume its normal trade in sewing machines and accessories. The company accordingly sold all its shares to raise funds for resuming its sewing machines business. In selling its shares the company incurred some loss which it claimed as business loss in its return for the assessment year 1949-50 which was allowed by the Income-tax Officer. The company, however, in the assessment year 1950-51 claimed to carry forward and set off the un-absorbed loss of 1948 against its profits from the sewing machines business in the year 1949. This claim was made on the ground that the company's business was not only confined to the purchase and sale of sewing machines and accessories but also to the purchase and sale of shares. That being so, it was claimed that the Company was entitled to set off the loss under the head “business” carried forward from 1949-50, against any profits under the head “business” for the assessment year 1950-51. The Income-tax Officer disallowed the claim. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In appeal the Tribunal sustained the contention of the company and directed the Income-tax Officer to modify the assessment by allowing the loss which was held to be in the business of the company to be set off against the profits of the company's business in the relevant accounting year. The High Court, on reference, observed that when a company which was dealing in a number of commodities discontinued its dealings in one commodity and concentrated its attention on dealing in another commodity, it could not be said that it carried on another business and that it changed the nature of its business.

There can be no dispute that the unabsorbed loss can be carried forward provided if the business of the company continues during the relevant assessment year. Section 72 (1) of the Income-tax Act, 1961, permits an assessee to carry forward the unabsorbed losses to the following assessment year provided the business or the transaction for which the loss was originally computed continued to be carried on by the assessee in the previous year. That being so, it would be permissible to the assessee to carry forward the unabsorbed loss if the assessee had continued its business of manufacturing of steel castings and steel forgings. In the present case, as we have already noted above, the Tribunal has concluded the question that no business was carried on by the assessee. It is a fact found against the assessee. The losses could be carried forward provided there was any business run by the assessee but on their own showing the assessee had discontinued its business and is only engaged in realising assets from the sale of its machinery. In the present case we also note that the assessee was only engaged in the business of steel castings and steel forgings and did not engage itself in any other business. That being so, the question of setting off the loss sustained by the assessee in its aforesaid business does not arise as the loss can be set off against income from any other source of income of the assessee. Earning of interest on the realisation of the sale of the machinery or earning of a paltry sum in disposing of the stores and spare parts by no stretch of imagination can be termed as income from another source of the assessee's business. It is, therefore, not open to the assessee to claim set of under the circumstances. Since the assessee had wound up the business of steel castings and steel forgings the question of carrying forward the losses does not arise as the loss could be carried forward if the business had been carried on by the assessee.

In view of above discussion question No. 2 has also to be answered in the negative.

The Revenue will have costs of this application. Fee of counsel for the Revenue is assessed at Rs. 150/-.

Reference answered in negative.