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Commissioner Of Income-Tax, West Bengal v. International Industries Ltd. Calcutta .
Structured Summary of the Opinion
Factual and Procedural Background
This matter is a reference under Section 66(1) of the Indian Income Tax Act made by the Commissioner of Income Tax, West Bengal. The reference arose from a dispute over whether an assessee-company could carry forward and set off a loss sustained in one year against profits of a subsequent year when the company had ceased the business in which the loss was incurred and, in the later year, derived profits from different lines of business.
The assessee was a public limited company whose Memorandum of Association authorised diverse activities, including manufacture and sale of celluloid articles, managing agency, commission, share transactions and joint ventures. In practice, the company carried on only the celluloid business until 1944. The celluloid business was closed down in or after March 1944, and the company thereafter engaged in different activities (managing agency, commission, share dealings and joint ventures).
During the accounting year 1944–1945 the company sustained a loss while carrying on the celluloid business; it sought to carry that loss forward and set it off against profits of the accounting year 1945–1946, when it no longer carried on celluloid business but conducted other lines of activity. The Income-tax Officer and the Appellate Assistant Commissioner refused the claimed set-off under Section 24(2) on the ground that the profits were not derived from the same business. The Tribunal accepted the assessee's contention that Section 24(2) did not require the profits to be from the same business and allowed the set-off. The Commissioner obtained a reference to the High Court on a question of law under Section 66(1).
On an earlier hearing the High Court (a Bench comprising the Chief Justice and Mr. Justice Sinha) found the Tribunal's legal view on Section 24(2) to be incorrect but remanded for further factual findings because the Tribunal had not clearly found whether the businesses in the two relevant years were the same. The Tribunal furnished an additional statement of case finding that the celluloid business was entirely different from the later activities, that the latter began only after the celluloid business was closed, and that the mere continuation of the same books, staff and bank account did not mean the same business was carried on.
Legal Issues Presented
- Whether, on the facts and upon a proper construction of sub-section (2) of Section 24 of the Indian Income-tax Act, 1922, the loss in the celluloid business in the assessment year 1945–1946 can be carried forward and set off against the profits of the other businesses in the assessment year 1946–1947 when the assessee ceased to carry on the celluloid business during the assessment year 1946–1947.
Arguments of the Parties
Assessee's Arguments
- Before the Tribunal, the assessee contended that sub-section (2) of Section 24 did not require the profits, against which a carried-forward loss from a prior year could be set off, to be profits derived from the same business that had incurred the loss.
- It was pointed out that the various types of business were authorised by the company's Memorandum of Association. (The record indicates the assessee relied on this fact but did not successfully argue that it made the businesses the "same" within the meaning of Section 24(2).)
Revenue's / Income-tax Officer's Arguments
- The Income-tax Officer and the Appellate Assistant Commissioner took the view that the loss could not be set off against profits of 1945–1946 because those profits were not derived from the same business as that in which the loss was sustained, as required by Section 24(2).
- The Commissioner, by filing the reference under Section 66(1), contested the Tribunal's legal conclusion and sought the High Court's determination of the point of law.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mitchell v. Egyptian Hotels Ltd. (1915) AC 1022 | One of the judicial authorities used to test whether different activities constitute the "same business" (judicial attempts to seek tests and patterns such as inter-connection, dovetailing). | The court observed that by the tests laid down in such decisions the assessee's contention must fail; the case was relied on to support the proposition that different activities here did not amount to the "same business". |
| Scales v. George Thompson & Co. Ltd. (1927) 13 Tax Cas 83 | Another judicial authority illustrating tests for when separate activities may be regarded as one business (phrases like "dovetailing" and "inter-lacing" cited). | The court referred to this decision among others and stated that applying those tests the assessee's contention that the businesses were the same must fail. |
Court's Reasoning and Analysis
The court proceeded in a sequence of legal and factual steps:
- The court noted that on an earlier hearing it had already held that the legal view of the Tribunal (that Section 24(2) did not require the profits to be from the same business) was wrong. Because the Tribunal had not made clear factual findings about whether the businesses in the two years were the same, the Court remanded the matter for further factual findings.
- On remand the Tribunal found as a matter of fact that the celluloid business was entirely different from the later activities; the other activities began only after the celluloid business was closed; the continuation of the same books, staff, office and bank account was explained as practical reuse rather than evidence of a continuing single business; and the celluloid business had been sold after March 1944.
- The court accepted the Tribunal's factual finding. It observed that Mr. Mitra (for the assessee) conceded there was little else to urge beyond the memorandum authorising multiple businesses, and he did not seriously contest the Tribunal's factual conclusion.
- Applying Section 24(2) as properly construed, the court reasoned that a loss sustained in one business cannot be set off against profits of another distinct business. The statutory phrase is "same business" — evidencing that identity of business, not mere identity of company, is the requirement. The court relied on established judicial tests (including the cited authorities) for determining when separate activities amount to the same business and concluded those tests were not satisfied on the facts of this case.
- P. B. Mukharji, J., in a concurring opinion, emphasized a construction point: the statute uses "same business" (not "same company"), and so separate businesses carried on by the same company do not qualify for set-off under Section 24(2) merely because they are carried on by the same corporate entity.
- The court therefore concluded that, on the established facts, the loss sustained in the celluloid business could not be carried forward and set off against profits derived from different activities in the later year.
The court awarded costs to the Commissioner of Income-tax, West Bengal, including costs of the earlier hearing before the Chief Justice and Mr. Justice Sinha and the costs of the present hearing.
Holding and Implications
Holding: The reference is answered in the negative.
Implications:
- Direct effect on the parties: The assessee is not entitled to carry forward and set off the loss sustained in the celluloid business in 1944–1945 against the profits derived from the company's different business activities in 1945–1946. The Commissioner of Income-tax, West Bengal, is awarded the costs of the reference, including earlier and current hearing costs.
- Broader legal implication: The court reaffirmed the established principle that a loss incurred in one business cannot be set off against profits of a different business under sub-section (2) of Section 24; the phrase in the statute is "same business" (not "same company"). The opinion relied on and applied existing judicial tests for what constitutes the "same business." The opinion does not purport to lay down a new principle of law beyond applying established authority to the facts of this case.
Reference answered.
Chakravartti, J.:— This is a reference under Section 66(1) of the Indian Income Tax Act at the instance of the Commissioner of Income Tax, West Bengal, on a question of law relating to a claim made by the assessee for a set off of its loss, carried forward from the previous year, against the profits and gains of the year of account. It appears that the reference came up for hearing on a previous occasion, but the Bench dealing with it felt that the statement of case submitted by the Tribunal was not adequate. Accordingly, it directed the Tribunal to submit a further statement which has since been done. In making the order of remand, however, the High Court dealt with the basis of law upon which the Tribunal had decided the question and pronounced it to be wrong.
2. The assessee is a public limited company and is authorised by its Memorandum of Association to engage in diverse types of business. Among the business activities so authorised, it is necessary to mention, for the purposes of this case, only manufacture and sale of celluloid articles, Managing Agency, Commission, Share transactions and what is described as “joint ventures”. Although the Company was authorised by the Memorandum of Association to undertake and carry on various lines of business, in actual fact it did only celluloid business upto the year 1944. In that year, the celluloid business was closed down and it appears that the Company switched over to other lines of business, such as Managing Agency, Commission, share dealings and joint ventures. In the accounting year 1944–1945, when the Company was carrying on the celluloid business, it suffered some loss in business, the amount of which, however, has not been stated. It was this loss which the Company carried forward and wanted to set off against the profits derived from the new lines of business in the accounting year 1945–1946. I have already stated that in the year of account 1944–1945 when the loss was sustained, the Company was carrying on only the business of manufacture and sale of celluloid articles and no other business; in the year 1945–1946, against the profits of which that loss was sought to be set off, the Company was no longer carrying on celluloid business but was carrying on other types of business which I have already mentioned. On those facts it was held by the Income-tax officer and the Appellate Assistant Commissioner that the Company was not entitled to set off its loss of the previous year against the profits of the year 1945–1946, because the profits had not been derived from the same business, as required by Section 24(2) of the Income-tax Act. Before the Tribunal, it appears to have been contended that it was not necessary under S. 24(2) that the profits, against which the loss carried forward from the previous year could be set off, must be the profits derived from the same business. That contention was accepted by the Tribunal and the assessee Company was allowed the set off claimed. Thereupon the Commissioner of Income-tax asked for and obtained a reference to this Court on the following question of law:
“Whether in the facts and circumstances of the case and upon a proper construction of sub-section (2) of Section 24 of the Indian Income-tax Act, 1922, the loss in the celluloid business in the assessment year 1945–1946 can be carried forward and set off against the profits of the other businesses in the assessment year 1946–1947 when the Assessee ceased to carry on the celluloid business during the assessment year 1946–1947.”
3. It will be seen that the question presupposes that the loss which had been sustained in the accounting year 1944–1945 was the loss suffered in the celluloid business, whereas the profits of the year 1945–1946 against which the loss was sought to be set off were profits derived from, “other business”. In other words, the question presupposes that the business in which the loss was sustained and the business against the profit of which that loss was sought to be set off were not the same business.
4. It is not surprising that when the reference came to be heard by this Court, My Lord the Chief Justice and Mr. Justice Sinha had no difficulty in holding that the view of S. 24(2), on which the Tribunal had proceeded, was utterly wrong. They, however, found themselves unable to dispose of the question finally, inasmuch as the Tribunal had not recorded any clear finding as to whether in the accounting year 1944–1945 the assessee Company had carried on any business other than the celluloid business. Neither had the Tribunal found whether the various activities of the assessee Company in the next year were such as could be said to have been inter-linked and dovetailed into each other or with the celluloid business carried on up to the year 1944–1945. They accordingly directed the Tribunal to submit a further statement of case in which it was to find whether the business carried on in the year 1945–1946 was in fact the same business as that carried on in 1944–1945.
5. The finding now recorded by the Tribunal and sent up to this Court in the additional statement of the case is expressed in the following words:
“We have no hesitation in coming to the conclusion that the celluloid business was entirely different from the other activities of the Assessee Company. The other activities were started only after the celluloid business was closed. The accounts of the other activities were no doubt written up in the same books, but all it comes to is that the same set of books were continued after the close of the celluloid business. When the other activities were started, there was no celluloid business.”
6. The Tribunal has also pointed out that after March 1944, the Company actually sold off the celluloid business and took to other lines of business such as Managing Agency, Commission and Share dealings. It had been pointed out to the Tribunal that there was one cash book, one Ledger, one Office, one set of office staff and one bank account for the new lines of business and for the celluloid business previously carried on. But the Tribunal pointed out that those circumstances did not, in the facts of the present case, indicate that the same business had been continued or that the celluloid business and the other lines of business were, in the sum, parts of one undertaking, but what it meant was that, after the closing down of the celluloid business, the services of the same staff were utilised as also the blank pages of old books were made use of.
7. On the facts now finally found by the Tribunal, there can be little doubt as to what the answer to the question referred ought to be. As a matter of fact Mr. Mitra, who appeared for the assessees, very fairly conceded that besides pointing out that all the various types of businesses were authorised by the Memorandum of Association, he could hardly urge any other contention which might induce us to return an affirmative answer to the question referred. Mr. Mitra made no attempt to support the view of S. 24(2) on which the Tribunal had proceeded and, in any event, that matter is now closed by reason of the previous decision of this Court rendered on the occasion when the reference was first heard by My Lord the Chief Justice and Mr. Justice Sinha. The only question which can possibly be urged at the present stage is whether the Tribunal was right in law in holding that the business activities of the petitioner Company in the year 1945–1946 were different from those in the year 1944–1945. That is primarily, if not wholly, a question of fact and Mr. Mitra was unable to point out any error which the Tribunal had committed in applying the principles upon which questions of that type ought to be decided. The question as to whether various business activities of an individual or a firm or a Company — constitute one business or are in fact distinct and separate businesses may, at times, prove to be one of extreme difficulty, but in the present case there is no difficulty whatever, inasmuch as, according to the finding of the Tribunal, the celluloid business was sold off after March, 1944, and nothing of it was left in the year 1945–1946, against the profits of which the loss suffered in the previous year could be set off. Indeed, I shall be doing no injustice to Mr. Mitra if I say that he did not seriously contend that the finding of fact recorded by the Tribunal was wrong.
8. If then the business carried on by the Company in the year 1945–1946 was different from the business carried on by it in the year 1944–1945, the loss sustained in the course of the latter business could not, under the terms of S. 24(2), be set off against the profits of the former. The section is perfectly clear and its true meaning has been laid down in cases, too numerous to mention, including the judgment delivered by My Lord the Chief Justice in this very case on the previous occasion.
9. For the reasons given above, the answer to the question referred must, in my opinion, be in the negative. The Commissioner of Income-tax, West Bengal, will have the costs of the Reference, including the costs of today's hearing as also the costs of the previous hearing before My Lord the Chief Justice and Mr. Justice Sinha.
10. P.B Mukharji, J.:— I entirely agree with the conclusion and the reasons given in the judgment just delivered by My Lord. I will add however a few observations of my own.
11. Loss in one business cannot be set-off against the profit of another business under sub-section (2) of Section 24 of the Indian Income Tax Act, even though it is the same company which carries on these different businesses and even though such different businesses are permitted by the Memorandum and Articles of the Company.
12. A good many legal hares have run on this trace of income-tax law but in my judgment it is quite unnecessary to pursue them here to explain the legal meaning of what is the “same business” within the meaning of this sub-section or what facts will constitute inter-connection and unity in business. Many felicitous phrases like “dovetailing” and “inter-lacing” have become familiar in this branch of the law. Such well known decisions on the point as — ‘Mitchell v. Egyptian Hotels Ltd.’, (1915) AC 1022 and — ‘Scales v. George Thompson & Co. Ltd.’, (1927) 13 Tax Cas 83 are only a few among the many judicial attempts to seek a pattern or a test when a business can be regarded as the “same”. I am satisfied that by the tests laid down in these cases the assessee's contention must fail.
13. But quite apart from the wealth of judicial learning on the point, I reach the same conclusion in this case on a short point of construction of Section 24(2) of the Income Tax Act. The language used in this sub-section of the Statute is “same business”. It is not the same company. Business and company are words of different categories of connotation in this textual context of the Statute. The same company may have more than one business but to be entitled to set-off under sub-section (2) of Section 24 of the Income Tax Act, the business must be the same and not merely the Company.
14. I concur in the conclusion that the question raised in this Reference must be answered in the negative.
B/D.R.R
15. Reference answered.
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