1. This is a statement of a case submitted to this Court by the Income-tax Tribunal, Delhi Bench (C) at the assessee's instance inviting this Court to answer the following question: --
Whether the share of loss from business carried on through Madho Lal Padam Prasad and Jeewan Lal Kailash Chand in 1949-50 and 1950-51 can be allowed to be carried forward and set off under Section 24(2) against profits through other firms which were continued from earlier years and through a new firm Kailash Chand Tara Chand where business done through the various firms was business in the same commodities and of similar nature The assesses is a Hindu undivided Family and carried on business as a partner in several firms. Upto 1050-51 it was a partner in five firms. (1) Madholal Chiranjilal, (2) Madholal Phool Chand, (3) Madholal Sualal, (4) Madholal Padam Prasad and (5) Jiwanlal Kailash Chand. In the accounting year relevant to 1949-50 assessment year three of the firms showed a loss and two earned a profit and the result was a net loss to the assessee. In the accounting year relevant to 1950-51 assessment year three firms showed a loss and two earned a profit and the net was again a loss. The firms Madholal Padam Prasad and Jiwanlal Kailash Chand were dissolved and did not exist in the accounting year relevant to the assessment year 1951-52. Instead there came into existence a new firm Kailash Chand Tara Chand, of which the assessee was a partner. In the accounting year relevant to the assessment year 1951-52 there was a profit earned by all the four firms, the total amount of the shares of the assessee in the profits being Rs. 34,523. The total amount of its shares in losses sustained by some of the firms in the accounting years relevant to the earlier assessment years came to Rs. 21,423. The assessee contended that it was entitled under Section 24(2) of the Indian Income-tax Act to set off the whole of the loss suffered by it in the earlier years from the profit earned by it in the accounting year. The Income-tax Officer refused to set off the loss incurred in an earlier year in a firm from the profit earned in the accounting year from another firm; he set off the loss only from the profit of the particular firm, if any, in the accounting year. He did this on the view that the business carried on by a firm could not be said to be the 'same' as that carried on by another firm within the meaning of Section 24(2). Thus it set off some of the losses but not all. The assessee filed an appeal and it was dismissed by the AppellateAssistant Commissioner with minor alterations; he agreed with the Income-tax Officer that the loss incurred in one firm could not be set off from a profit earned in another firm because the businesses carried on by the two firms could not be said to be 'same . The judgment or me Appellate Assistant Commissioner wasupheld by the Tribunal. Then at the instance of the assessee the Tribunal has referred the case to this Court. The firms Madholal Padam Prasad and Jiwanlal Kailash Chand sustained losses in the previous years. They did not exist in the accounting year, relevant to the assessment year 1951-52. The firm Kailash Chand Tara Chand did not exist in the earlier years; it was formed in the accounting year in which it earned a profit. So the question is whether the losses sustained by the two firms in the earlier years could be set off against the profit earned by Kailash Chand Tara Chand in the accounting year.
2. The set off is claimed under Section 24(2) of the Indian Income-tax Act which, as it stood in 1951-52 prior to its amendment in 1955, was as follows:-
'24 (2). Where any assessee sustains a loss of profits or gains in any year. .... .under thehead 'Profits and gains of business.... and theloss cannot be wholly set off under Sub-section (1), the portion not so 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 for that year.'
It is to be noted that the provision speaks of an assessee, his sustaining a loss and his setting it off from the profits of the same business. Of course the assessee must have suffered a loss in an earlier year and he claims the set off from his profit of the accounting year. There must be identity of the person suffering a loss in an earlier year and the person earning profit in the accounting year but identity between the person carrying on the business resulting in loss and the person carrying on the business yielding profit is not required. It is not essential that the same person should have carried on the two businesses; the reference is not to the carrying on of the business but to the sustaining of loss and the earning of profit in the businesses. A person is liable to income-tax not only on the profit of a business carried on by him but also on the profit of a business carried on by another person, if he receives a share in it. A partnership is not identifiable with any of its partners; the personality of a partner is distinct from that of the partnership. Though a business carried on by a partnership cannot be said to be carried on by any of its partners, each one of them is liable to pay income-tax on his share in the profit realised from it if it is a registered partnership. It cannot be said that the benefit of the provision is not available merely because the loss occurred in a business carried on by a registered partnership of which the assessee was a partner and the set off is claimed from a profit of the business carried on by another registered partnership of which also he is a partner. The benefit may be disallowed to him on the ground that the two businesses are not same but not on the ground that they are carried on by two different persons (e.g., partnership). Though they are carried on by two different persons the sustainer of the loss in one is same as the earner of the profit in the other and the provision will apply If the other condition is fulfilled.
The other condition that is to be fulfilled it that it must be the same business which resulted in a loss in an earlier year and in a profit in the accounting year. We agree with Sri Gulati that two businesses do not constitute same business just because they are similar and that there is a distinction between 'same business' and 'similar businesses'. What is meant by 'same business' is 'one business'. A business is a continual series of activities and if carried on from hour to hour, or day to day or year to year. Different activities done on different days may constitute one business or may constitute more than one business; the test for determining whether they constitute one business or more than one is similar to that laid down by Rowlatt, J. in Scales v. George Thompson and Co. Ltd., (1929) 13 Tax Cas 83. He said at p. 89 that 'the real question is, was there any inter-connection, any interlacing, any interdependence, any unity at all embracing those two businesses'. He dealt with two sets of activities; one set did not depend upon the other; they were not inter-laced, they did not dovetail into each other, one set of activities could be stopped without the other set being affected and they had nothing to do whatever with each other and held that they did not constitute one business. Different activities do not constitute different businesses merely because they are done al different times.
In this case we are concerned with the activities resulting in a loss in an earlier year and the activities resulting in a profit in the accounting year and the question is whether they can be said to constitute same business or not but nothing turns upon the fact that the two activities were done in two different years. Division of time into years is purely artificial; we have to deal with years because income-tax is payable on the income of every year. If an activity done in the first month of a year and an activity done in the last month of it can constitute one business, so also can an activity done in one year and an activity done in another year. The criterion is not whether they are done in the same artificial division of time or in two artificial divisions but whether they are so connected with each other that they can be said to constitute same business. It would be obvious that what is meant by 'same' is 'one' or 'continuing'.
3. 'Same' also means in a modified sense 'having the same attributes with another or with itself at another time; exactly agreeing in (amount, quality, operation, etc.)' but the word is not used in this sense in the provision. Had the legislature intended that a loss incurred in a business may be set off from a profit earned in a similar business though different it would not have used the word 'same', the primary meaning of which is 'identical'
4. A business has three elements, (1) an actor (such as an individual, a partnership, a Hindu undivided family, a company and any other association of persons), (2) an act (such as buying selling, hiring and entertaining) and 3. a thine in respect of which the act is done (such as foodgrains, cloth, shares, motor vehicles and films). If two actors are different, each carries on his own business even though the acts and the things are identical and there are two businesses though similar and not one or same business. A business of buying and selling foodgrains carried on by A cannot be said to be the same business as that of B even though it is of buying and selling foodgrains. If there is one actor and one act but it is in respect of two different things it may be a case of one or same business or of two businesses depending upon circumstances.
Similarly if there is one actor but the acts are different it may be a case of one business or two businesses depending upon circumstances. In the instant case we are concerned with similar acts and similar things but different actors and the businesses done by the different actors cannot constitute one or same business. If they are two businesses they cannot be said to be same business. There are two actors because one business was carried on by one partnership and the other by another partnership. There is not a mere difference of time; there is a difference also in the persons carrying on the businesses. Time is immaterial if it is the same person who carries on the activities constituting the business. It is immaterial when there is a continuity so that all the activities can be said to be part of one business. There can be no question of continuity when the activities are done by different persons; an activity by one person cannot be in continuation of an activity by another person (not the former's successor-in-interest). Though the provision does not expressly lay down that the business resulting in a loss must have been carried on by the same person by whom the business resulting in a profit was carried on the legislature by requiring that the two businesses must be same has meant that they should have been carried on by the same person. Unless the actor is same two activities cannot constitute one business.
5. There is sense in the law that when a business is carried on for a number of years a loss sustained in one year may be set off from a profit made in a subsequent year but there is no sense in permitting a loss sustained in a year in one business to be set off from a profit in another business in a subsequent year merely because it is of the same nature as the other. If a loss is permitted to be set off from a profit of another business I fail to understand why it should be permitted only when the two businesses are similar. In respect of one business on account of its artificial division into yearwise portions there may occur a loss in some portions and a profit in other portions and the net result in the end may be anything. There is sense in requiring that the assessee should not pay tax merely because in an artificial portion he makes a profit though in another artificial portion he suffers a loss and the net result is either a loss or a small profit or neither a loss nor a profit. This consideration does not apply when he carried on two businesses even though of similar nature.
The question whether it is same business or, not can arise in different circumstances; it canarise when the actors are different or when the acts are different or when the things are different or when the activities are clone at different times or in a mixture of these circumstances. The principles according to which it is answered when it arises in one circumstance may not form basis for answering it when it arises in another circumstance. Therefore, though activities in respect of different acts or different things or done at different times may be said to form same business it does not follow that when the actors are different they may form same business. Hence precedents answering the question arising in different circumstances are of no assistance.
6. Just as a business carried on by any individual A is not same as that carried on by another individual B even though the acts done by them are of the same nature and are done in respect of same things so also a business carried on by a firm A is not same as that carried on by another firm ft even though the two firms do the same acts and in respect of the same things. Further a firm A is different from a firm B even though same individuals may be partners of both. It follows that a business carried on by a firm A cannot ordinarily be said to be same as that carried on by another firm B. Only one authority having a direct bearing on the question has been brought to our notice and it is Commr. of Income-tax, Andhra Pradesh v. Dhurma Reddy, AIR 1965 A P 6. It is a decision by Chandra Reddy, C. J. and Chandrasekhara Sastry, J. to the effect that a loss incurred by a registered partnership consisting of A and B carrying on business in bidi leaves can be set off from a profit in a subsequent year by another registered partnership consisting of A, B and C, carrying on business in bidi leaves because they constitute same business within the meaning of Section 24(2). The reasons given by the learned Judges were: (1) A and B partners were common to both partnerships, (2) the two partnerships did business in the same thing, (8) in the case of a registered partnership the business is carried on by the partners and entering into partnership with another is only a mode of carrying on the business, and (4) Section 24(2) does not require that the business should continue to be carried on by the partnership. With great respect. I find myself unable toagree with them. When the question is whether two activities constitute same business or not one cannot but take into consideration the three elements which constitute business. Unless there is identity in respect of the elements or some of them or absence of dissimilarity one cannot find that they constitute same business. A business carried on by X is not same as a business carried on by Y merely because the two businesses are in respect of the same thing. A registration of firms has no bearing on the question whether two activities carried on by them constitute same business or not; it only affects the mode of assessment. The real question is what is meant by 'same business', whether 'similar' or 'one',
In the ease of George Thompson and Co. Ltd., (1920) 13 Tax Cas 83 (supra) the question before Rowlatt, J. was not of sameness of business curried on by two partnerships but of sameness of different activities carried on by one company which is not quite the same. But the facts that may lie taken into consideration in deciding whether two activities carried on by a person constitute same business can also be taken into consideration in deciding the question whether two activities carried on at different limes by different partnerships constitute same business or not. Rowlatt, J. also observed that the question was of tact and that all that he had to consider was whether there was evidence upon which the Commissioner could decide that there were two businesses and not one,
The question decided by Shah and S. T. Desai, JJ. in Manilal Dahyabhai v. Commr. of Income-lax : 37ITR398(Bom) , was similar, it being whether a business in cloth carried on by a partnership and a business in speculation in gold silver, cotton, shares and other commodities carried on by it constituted same business and was answered in the negative on the basis of the test laid down by Rowlatt, J. The same test was applied by the Supreme Court when dealing with a similar question in Setabganj Sugar Mills Ltd. v. Commr. of Income-tax : 41ITR272(SC) .
7. The following statement shows profits and losses of the various partnerships in the accounting years relevant to the assessment years 1949-50, 1950-51 and 1951-52:--
Kailash Chand Taraehand
Madholal Chiranji Lal
Madholal Phool Chand
Madholal Padam Chand
Jowwanlal Kailash Chand
+ Rs. 2609
+ Rs. 7504
+ Rs. 21521
What has been done by the Income-tax Officer, which has been confirmed by the Appellate Assistant Commissioner and the Appellate Tribunal is that the profit of Rs. 2,609 earned by Madholal Chiranjilal for the assessment year 1949-50 has been set off against part of the loss incurred by Madholal Padam Prasad and thebalance of the loss of Rs. 1,728 has been carried forward as the loss of Madholal Padam Prasad. There were three partnerships which suffered loss in that year and the income-tax authorities have set off the profit against (part or) the loss suffered by Madholal Padam Prasad and carried forward the balance as the loss ofthat firm. There was no basis for selecting the loss suffered by Madholal Padam Prasad to be so set off and not the loss suffered by Madholal Sualal or that suffered by Jeewanlal Kailash Chand. It might be thought that they have acted somewhat arbitrarily but their difficulty was that the legislature has given them no guidance in the matter. Section 24(1) makes an assessee entitled to have a loss suffered in one business set off against a profit of another business. It is a right granted to an assessee and it is for him to claim the set off. It follows that if it has suffered loss in two or more businesses and the total loss cannot be set off against a profit earned from another business ho has the right to select the loss to be set off, e.g., select the business, the loss of which is to be set off. This is on the analogy of the right of appropriation which vests initially in a debtor. Naturally he would make the selection through the return by claiming a particular loss to be set off against a profit. If the assessee in the instant case itself selected the loss of Madholal Padam Prasad to be set off against the profit of Madholal Chiranjilal for the assessment year 1949-50, the Income-tax Officer was bound to allow the set off and to carry over the excess as the loss of Madholal Padam Prasad to the next assessment year 1950-51. If, however, the assessee did not make the selection then he acted arbitrarily in selecting the loss of Madholal Padam Prasad instead of that of Madholal Sualal or of Jeewanlal Kailash Chand. By selecting the loss of one business instead of that of another business and thereby carrying over to the next assessment year a reduced loss of one business instead of that of another business he could favour or disfavour the assessee; he could favour the assessee by selecting the loss of that business which was carried on in the next year and in which there was a profit against which it could be set off and he could disfavour him by selecting the loss of another business for set off. The firms Madholal Padam Prasad dissolved for the assessment year 1951-52; there was, therefore, no question of its earning any profit against which a loss sustained by it earlier could be set off. By selecting the loss suffered by it for the assessment year 1949-50 it carried over the entire loss suffered by Madholal Sualal so that whole of it could be set off against profits made by it in subsequent years. Surely he should not have this arbitrary power but unfortunately there is nothing in Section 24(1) to guide his discretion. One may say that in such a case in the absence of a claim for a particular loss to be set off by an assessee the Income-tax Officer should take prorate losses of all businesses which suffered a loss and set off the aggregate against the profit made by other businesses. However, we are not concerned in this reference with this question which does not arise out of the question framed by the Tribunal.
8. The answer to the question should be in the negative. A copy of this judgment shall be sent under the seal of the Court and the signature of the Registrar to the Tribunal as required under Section 66(5) of the Income-tax Act. The Commissioner of Income-tax shall get hiscosts of this reference which I assess at Rs. 200.
Counsel's fee is assessed at Rs. 200.
Question answered in negative.