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Standard Refinery And Distillery Ltd. v. Cit
Factual and Procedural Background
The assessee, a public limited company incorporated in 1942, originally owned a distillery at Unnao and later acquired a refinery. On 1 June 1945 it took the New Sawan Sugar and Gur Refining Co. on lease and, between 29 January 1946 and 23 April 1946, purchased 41,300 shares of that company for Rs 12,17,006. The entire block was sold on 30 April 1947 for Rs 8,46,750, resulting in a loss of Rs 3,70,356.
The assessee treated this loss as a trading loss for Assessment Year 1948-49, carried forward an unabsorbed balance of Rs 2,27,085 under Section 24(2) of the Indian Income-tax Act, 1922, and sought to set it off against sugar-business profits in Assessment Year 1949-50. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal all disallowed the set-off on the ground that the share dealings constituted a business distinct from sugar and distillery operations.
At the assessee’s instance, the Tribunal referred the following question to the High Court under Section 66(2): “Was there any evidence before the Tribunal on which it could hold that the business in dealing with shares was distinct and separate from the business of sugar manufacturing and distillery?” The High Court answered in the affirmative and against the assessee. The assessee obtained a certificate and appealed to the Supreme Court.
The Supreme Court twice remitted the matter for supplementary statements of case, ultimately reframing the question as: “Whether the business of the company of dealing in shares and the business of manufacturing sugar and other commodities constitute the same business within the meaning of Section 24(2) of the Indian Income-tax Act, 1922, in force in the year of assessment?” The Tribunal’s second supplementary statement set out detailed factual findings on common accounts, organisation, funds and place of business.
Legal Issues Presented
- Whether, on the facts found, the assessee’s activities of dealing in shares and of manufacturing sugar and allied products constituted “the same business” under Section 24(2) of the Indian Income-tax Act, 1922, so as to permit carry-forward and set-off of the unabsorbed loss.
Arguments of the Parties
Revenue's Arguments
- The share-dealing activity could be easily separated from the manufacturing business; hence there was no inter-connection, inter-lacing, inter-dependence or unity between the two.
- Relying on Scales v. George Thompson & Co. Ltd., counsel argued that two businesses can be treated as the same only when they “dovetail” and are not easily severable, a condition not met here.
- Consequently, the loss from share dealings could not be set off against profits from sugar manufacturing.
No detailed arguments of the assessee are recorded in the provided opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Prithvi Insurance Co. Ltd. | Inter-connection, inter-lacing, inter-dependence and unity between two businesses may be evidenced by common management, organisation, administration, fund and place of business. | Supreme Court adopted these objective tests to assess whether the assessee’s share dealings and manufacturing activities constituted the same business. |
| Produce Exchange Corporation Ltd. v. CIT (1970 2 SCC 92; 77 ITR 739) | The decisive test is unity of control, not the intrinsic nature of the different lines of business. | Cited to reinforce that common control can render diverse trading activities a single business for Section 24(2) purposes. |
| Scales v. George Thompson & Co. Ltd. (King’s Bench) | Businesses must not be easily severable and should “dovetail” to be regarded as the same. | Relied upon by Revenue; ultimately not accepted as controlling because Supreme Court preferred the objective tests in Prithvi Insurance and Produce Exchange. |
Court's Reasoning and Analysis
The Court examined the Tribunal’s supplementary findings, which established that:
- A single trading and profit-and-loss account recorded both sale of products and share transactions;
- Common organisation and management handled all activities;
- Common funds, including bank overdrafts, financed both manufacturing operations and share purchases;
- The same premises housed all business activities.
Applying the criteria from Prithvi Insurance Co. Ltd.—common management, organisation, administration, funds and place of business—the Court held that these objective indicators demonstrated the requisite inter-connection, inter-lacing, inter-dependence and unity. It rejected the Revenue’s reliance on Scales v. George Thompson, observing that the unity-of-control test endorsed in Produce Exchange Corporation Ltd. was decisive. Consequently, the share-dealing and manufacturing activities were parts of the same business for Section 24(2) purposes.
Holding and Implications
Appeal Allowed; Question Answered in the Assessee’s Favour.
The Supreme Court discharged the High Court’s earlier answer and held that the assessee’s share-dealing activity and manufacturing operations constituted the same business. The assessee is therefore entitled to carry forward and set off the unabsorbed loss of Rs 2,27,085 against profits of Assessment Year 1949-50. The Revenue must pay the assessee’s costs in both the High Court and the Supreme Court. The judgment reinforces the “unity of control” test and does not create a new doctrine, but reaffirms existing Supreme Court precedent on the interpretation of Section 24(2).
K.S Hegde, J.— This is an assessee's appeal. The assessee is a public limited company and the appeal relates to the assessment for Assessment Year 1949-50, corresponding to the accounting year which is the calendar year ending on December 31, 1948. The assessee company was incorporated in 1942. At the beginning it owned a distillery at Unnao. It acquired a refinery in 1943. With effect from June 1, 1945, the assessee company obtained on lease the New Sawan Sugar and Gur Refining Co. During the period from January 29, 1946 to April 23, 1946, the assessee company purchased 41,300 shares of the said company for Rs 12,17,006. On April 30, 1947, the entire block of shares was sold to Produce Exchange Corporation Ltd. for Rs 8,46,750. The transaction resulted in a loss of Rs 3,70,356. This loss was treated by the assessee as a trading loss for Assessment Year 1948-49. After setting off this loss against the other income of the assessee company, a loss of Rs 2,27,085 was carried forward under Section 24(2) of the Income Tax Act, 1922 (to be hereinafter referred to as the Act) to the year 1949-50 and later years. The assessee claimed to set-off this unabsorbed loss pertaining to the share business against its profits in the sugar business for Assessment Year 1949-50. The Income Tax Officer did not permit this set-off. The Appellate Assistant Commissioner confirmed the order of the Income Tax Officer. In a further appeal, the Appellate Tribunal agreed with the conclusion reached by the Income Tax Officer. Thereafter at the instance of the High Court, the Appellate Tribunal stated a case under Section 66(2) of the Act on the following question of law:
“Was there any evidence before the Tribunal on which it could hold that the business in dealing with shares was distinct and separate from the business of sugar manufacturing and distillery?”
2. By its judgment, dated April 23, 1963, the High Court answered the question in the affirmative and against the assessee. This appeal has been brought against the decision of the High Court after obtaining a certificate under Section 66(a)(2) of the Act.
3. The appeal came up for hearing before this Court on February 6, 1969. After hearing the counsel for the parties this Court observed:
“In the present case however it is not possible for us to satisfactorily dispose of this appeal because the statement of the case submitted by the Tribunal is incomplete and has omitted to State material facts bearing upon the question referred. For instance, it is not clear as to whether the assessee adduced any evidence as to why it started purchasing the shares of the lessor company about six months after the commencement of the lease. It is also not stated by the Tribunal whether there is any evidence of inter-relation between the purchase of shares and the manufacture of sugar.”
4. In view of that conclusion this Court directed the Tribunal to submit a supplementary statement of case on some of the points formulated in the order.
5. The Tribunal accordingly submitted a supplementary statement of case. Even after considering that supplementary statement, this Court found itself unable to record its opinion on the question referred to. This Court was also of the opinion that the question which the Tribunal was directed to and did refer was defective and restricted the scope of the enquiry. It accordingly reframed the question as follows:
“Whether the business of the company of dealing in shares and the business of manufacturing sugar and other commodities constitute the same business within the meaning of Section 24(2) of the Indian Income Tax Act, 1922, in force in the year of assessment?”
6. It further directed the attention of the Tribunal to the decision of this Court in CIT v. Prithvi Insurance Co. Ltd. In order to assist the Tribunal to find out the relevant points for consideration. In the order calling for a further supplementary statement, this Court observed:
“As pointed out by this Court in CIT v. Prithvi Insurance Co. Ltd. In determining whether two lines of business constitute the ‘same business’ within the meaning of Section 24(2) of the Income Tax Act, the Income Tax Authorities must consider the inter-connection, interlacing, inter-dependence and unity furnished by the existence of common management, common business organisation, common administration, common fund and a common place of business.”
7. The Tribunal has now submitted the second supplementary statement of case called for by this Court. The facts found by it are as follows—
“(1) there is a single trading and profit and loss account. In the same account the sales of spirit, sugar and molasses as well as stock and shares appear;
(2) the share transactions as well as the business has been dealt with by a common organisation, though the sale of shares is a single transaction and the purchase of those shares is also more or less of the same character;
(3) the business of the company as well as the transaction relating to the shares were attended to as part and parcel of the business of the assessee company;
(4) A common fund was utilised both for business purposes as well as for the purchase of shares. A part of the over-draft of Rs 6,80,046 taken from the bank on December 31, 1947, has been discharged from out of the income of the business; and
(5) the share transaction work as well as the other business of the assessee company were carried on in the same place of business.”
8. From the facts found by the Tribunal, it is clear that the share transaction as well as the other businesses of the company were dealt with by a common management, common business organization, common administration, common fund and common place of business.
9. It was urged by Mr Mitra, learned counsel for the Revenue that from the facts found by the Tribunal, it is not possible to conclude that there was inter-connection, inter-lacing, inter-dependence and unity between the transactions of the assessee company relating to the shares as well as its other business and therefore the two activities cannot be considered as “the same business”. He contended that this Court in Prithvi Insurance Co. Ltd. case has accepted the correctness of the decision of the King's Bench in Scales v. George Thompson and Co. Ltd. and in that case Rowlatt, J., had held that before two or more businesses can be considered as “the same business” they should not be easily separable and there must be a dovetailing of the one with the other. According to Mr Mitra the transactions relating to the shares could have been easily separated from the other business of the company and therefore there is no inter-connection; equally there is no inter-lacing because the share transaction business does not dovetail itself into the other business of the assessee company. Further there is neither inter-dependence or unity between the two businesses. The concepts of inter-connection and inter-lacing, inter-dependence and unity are not free of ambiguity. But this Court has laid down certain objective tests for finding out the existence of inter-connection, inter-lacing, inter-dependence and unity between two or more businesses. In CIT v. Prithvi Insurance Co., Ltd., this Court ruled that inter-connection, inter-lacing, inter-dependence and unity were furnished by the existence of common management, common business organisation, common administration, common fund and a common place of business. This conclusion was reiterated by this very Bench in Produce Exchange Corporation Ltd. v. CIT (1970) 2 SCC 92, 1970 77 ITR 739. Therein the assessee company carried on business as a dealer in diverse commodities and also stock and shares. In the year of account 1949, it had suffered loss of Rs 3,71,700 in the sale of shares which the company claimed to carry forward and set off against the profits of subsequent years from transactions in other commodities. The Tribunal found that there was complete unity of control and shares were one of a number of commodities in which the company dealt in the ordinary course of business and that there was no element of diversity or distinction or separateness about the transaction in shares, and accordingly upheld the claim. On a reference the High Court held that the essential matter to be considered was the nature of the two lines of business and not merely their unity of control and that therefore the Tribunal erred in holding that the whole trading activity formed one business. Reversing the decision of the High Court this Court ruled that the decisive test was unity of control and not the nature of the two lines of business.
10. For the reasons mentioned above we allow this appeal, discharge the answer given by the High Court and answer the reframed question in the affirmative and in favour of the assessee. The Revenue shall pay the costs of the assessee both in this Court and in the High Court.
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