MANCHANDA J. - This is a case stated under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred is :
'Whether the inference of the Tribunal that the activities of textile manufacture and share dealings did not constitute the same business within the meaning of section 24(2) of the Income-tax Act is justified ?'
The material facts are thes : The assessee is a public limited company. It runs a cotton spinning and weaving mills at Kanpur and also deals in share business. The relevant assessment year is 1950-51. In the preceding assessment year i.e., 1949-50 the total loss was determined by the Income-tax Officer at Rs. 14,66,364. Out of the said total loss, the loss in share dealing in that year as per the assessees books of account was Rs. 13,46,628 inclusive of the loss of Rs. 86,171 suffered in tea shares. The assessee conceded that the loss in tea shares could not be set off against the income from business. It, however, claimed that the loss in respect of other share dealings i.e., Rs. 12,60,457 (Rs. 13,46,628 minus Rs. 86,171), suffered in the preceding assessment year and carried forward should be set off against the profits from the textile mills determined in the relevant assessment year because both the activities of dealing in stocks and shares and textile manufacturing constituted one and same business, as the capital, staff and business premises employed were common and these transactions were entered in the same account books and incorporated in one profit and loss account and balance-sheet. The Income-tax officer disallowed the claim of the assessee and shares was not the 'same business'. The Appellate Assistant Commissioner and the Tribunal affirmed this view. Hence, this reference at the instance of the assessee.
The relevant provision that falls to be considered is section 24(2) of the Act, prior to its amendment by the Finance Act of 1955. The material portion reads :
'24. (2) Where any assessee sustains a loss of profits or gains in any year in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is 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, profession or vocation for that year.'
The question that has to be determined in such a case is whether the business in which the loss was incurred was the same business against which the loss is sought to be carried forward and set off in the subsequent assessment year. In other words, what has to be determined is, whether, on the facts and circumstances of this case, the business of manufacturing textiles and the business of dealing in stocks and shares by the assessee constituted one and the same business to enable the loss of the latter to be carried forward and set off against the profits of the former.
This question has come up for consideration before the various High Courts and the Supreme Court and it has not been possible to evolve a test which might be universally applicable. The broad tests however, laid down by Rowlatt J. in Scales v. George Thompson & Co. Ltd., have generally been accepted. The difficulty, however, has been in applying those tests to the facts of a particular case. Rowlatt J. was so clear in his mind as to the test that were to be applied that he did not even consider it necessary in that case to call upon the counsel for the revenue to reply. That was a case where the question was whether the business of the company in under writing as well as running a fleet of steamers was the 'same business' or two separate and distinct businesses. Rowlatt J. observed :
'I cannot conceive two businesses that could be more easily separated than those two. They both have something to do with ships; that is all that can be said about them. 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 under-writing; it does not affect the ships. They might stop the ships and it does not affect the under writing.'
Rowlatt J., after laying down the above tests, considered that the method of book-keeping or the drawing up of a profit and loss account would not throw any light upon this matter at all. He again reiterate : 'I think the real question is, was there any inter-connection, any inter-lacing, any inter-dependence, any unity at all embracing those two businesses; and I should have thought, if it was a question for me, that there was none. But I do not think it was a question of law. I think the Commissioners had ample evidence upon which they could decide, and they did so decide'.
This picturesque language in which the test was propounded of inter-connection, inter-lacing, inter-dependence and dovetailing has become classic, but, in applying it, various courts have stressed different aspects thereof from time to time. In some the stress has been on the common ownership of the business, in others the distinct nature of the two businesses carried on. The existence of a common capital account, business premises, staff, profit and loss account have been held not to prove any conclusive test. The Madras High Court in South Indian Industrials Ltd. v. Commissioner of Income-tax, held that the five business carried on by the assessee in that case of spinning and weaving, cement and tile works, rice mills and foundry, etc., constituted separate businesses as they are not so inter-locked to the main chief business of the company as to be one business. Further, it was observed that the question such as this must always be a question of fact.
In In re Hiralal Kalyanmal, the Bombay High Court held that the business of banking and speculation and the other of commission agency were separate businesses. It was here also emphasised that the question is one of fact.
In Govindram Brothers Ltd. v. Commissioner of Income-tax, speculation in cotton and speculation in silver was held to be the same business.
In Rekhabchand Sirogi v. Commissioner of Income-tax, the Patna High Court in a case where the assessee was carrying on business as a trader in hardware, cement, etc., held that the business in cement, rice, wheat, yarn, salt, grain, hessian and other commodities constituted the same business.
In Ram Chandra Munna Lal v. Commissioner of Income-tax, it was held that where an assessee carries on different varieties of trade, commerce and manufacture, each variety has to be regarded as a separate business for the purpose of section 10 of the Act, unless one or more varieties are so closely connected with each other as to be capable of being regarded as one business. The test applied here was whether the activities of one could be stopped without interfering with the other. In that case the assessee-firm was carrying on business of cloth merchant and also money-lending and the two were held to be separate businesses.
The Madras High Court in K. S. S. Soundrapandia Nadar and Brothers v. Commissioner of Income-tax, held that dealings in forward contract carried on by the assessee in the Rangoon grain market was a part of the general business of the assessee as dealers in rice and grain.
This court, in Ganga Glass Works Ltd. v. Commissioner of Income-tax, held that the business of manufacturing glass and the business of manufacturing sugar, though carried on in the same premises, constituted different businesses, as the Tribunal had found that the two businesses had separate sets of books of accounts and separate profit and loss accounts and there was no inter-dependence or inter-connection between the two businesses. The question here also was treated as one essentially of fact.
In Commissioner of Income-tax v. International Industries Ltd., it was held that the business of manufacturing and dealing in celluloid articles was different from a managing agency business and share transactions. The question again was treated as one primarily, if not wholly, of fact.
In Commissioner of Income-tax v. Pfaff Sewing Machine Co. (India) Ltd. the Punjab High Court held that as the assessee-company was formed primarily to deal in sewing machines but owing to the outbreak of war it had to switch over to dealings in shares and after the termination of hostilities it resumed its business in sewing machines, the business of share dealing and of selling sewing machines was held to constitute one business.
In Manilal Dahyabhai v. Commissioner of Income-tax, the assessee was carrying on business as wholesale dealer in cloth as well as speculation in gold and silver and cotton shares. Shah J., speaking for a Bench of the Bombay High Court, notwithstanding the fact that there was only one set of accounts, that both the businesses were carried on in the same premises with the help of the same staff, that the employment of capital was the same, and that overhead and other expenses were common, held, that these factors did not necessarily lead to the inference that the business was one and the same business for the purpose of section 24(2) of the Act. It stressed that the important, though not conclusive, test was whether any one of the two businesses conducted by the assessee could be stopped without affecting the business of the other.
In Standard Refinery and Distillery Ltd. v. Commissioner of Income-tax, the Calcutta High Court held, in a case where the assessee was manufacturing sugar in U.P. and had also purchased the entire block of shares in another sugar company which resulted in a loss, that the two businesses, i.e., of sugar manufacturing and purchase and sale of shares of a company, were separate businesses. In this case also stress was laid, as in the earlier Bombay case, on the test as to whether the discontinuance of one business would affect the other or the existence of one must depend upon the continuance of the other. Here again, it was stressed that common ownership or common management of the business or employment of common staff and the same capital, would not be the true test to find out whether the two businesses constituted the same business.
In Gupta Brothers (Private) Ltd. v. Commissioner of Income-tax, a Bench of this court, of which one of us was a party, held that, 'no single factor or circumstance can be said to be decisive in determining the question whether it was the same business or two separate businesses. It is the cumulative effect of all the circumstances of the particular case which will have to be considered. It is not possible nor is it desirable to attempt to lay down categorically the circumstances under which the conclusion that the two businesses were the same would necessarily follow.'
A cursory chronological review of the authorities shows once again that no infallible test can be laid down for determining whether the two businesses are the same or separate within the meaning of section 24(2) of the Act. Each case must depend on its own facts and circumstances. The burden of proving that the businesses are the same must initially rest on the assessee where the very nature of the two businesses is, prima facie, not the same. In the present case, prima facie, the manufacture of textiles and dealing in shares cannot be said to be the same business. After the assessee had led evidence and placed all material on the record, then it was for the final fact-finding body to arrive at a decision as to whether those facts and circumstances do constitute any inter-lacing, inter-connection or dovetailing. The question in the ultimate analysis would be a mixed question of fact and law, as laid down by the Supreme Court in Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax. In the present case, the Tribunal, taking into consideration the cumulative effect of all the facts and circumstances, concluded that the business was not the same business. In so doing, I am satisfied that the principles applicable were clearly kept in mind and it did not misdirect itself in any manner nor did it rely on any assumptions or conjectures. In these circumstances, it must be held that the proper legal inference from the proved facts was drawn by the Tribunal.
For the reasons given above, the question is answered in the affirmative and against the assessee. The assessee will pay the costs of the Commissioner, which we assess at Rs. 200. Counsels fee is also assessed at Rs. 200.
M. H. BEG J. - I respectfully agree with all that has been said by my learned brother Manchanda J. in answering the question before us. I would, however, like to add some observations without repeating the facts which have already been dealt with fully by my learned brother.
There appear to be quite a number of authorities dealing with the question, whether the two activities carried on by the same assessee would fall within the ambit of the term 'same business' as used in section 24(2) of the Income-tax Act, as a question of fact. The preponderating weight of the authorities examined by us on the question before us leads to the conclusion that it is generally a question of fact whether two or more business activities carried on by the same assessee are organically one or separate.
Mr. Brij Lal Gupta, on behalf of the assessee, has relied upon the decision of their Lordships of the Supreme Court in Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax where it was held :
'No doubt, findings of fact are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the businesses, the employment of same capital, the maintenance of common books of account, employment of same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth. When, however, the true facts have been determined, the ultimate conclusion is a legal inference from proved facts, and it is one of mixed law and fact, on which depends the application of section 24(2) of the Act. In our opinion, a question of law did arise in the case, on which the High Court should have asked for a statement of the case. That question of law is :
Whether, on the facts and circumstances of the case, the business activities of the company to wit, manufacture and sale of sugar and sale and purchase of gunnies, jute, mustard seeds constituted the same business within the meaning of section 24(2) of the Indian Income-tax Act, 1922 ?'
In that case, their Lordships of the Supreme Court had adopted the tests laid down by Rowlatt J. in Scales v. George Thompson & Co. Ltd : '... the real question is, was there any inter-connection, any inter-lacing, any inter-dependence, any unity at all embracing those two businesses'. The Supreme Court pointed out that 'these principles have to be applied to the facts, before a legal inference can be drawn that a particular business is composed of seperate businesses and is not the same one.' It hel : 'The question whether, on the application of the settled tests, different ventures carried on by an individual or a company form the same business is a mixed question of law and fact. Certain principles are applied to determine whether on the facts found, a legal inference can be drawn that the different ventures constitute separate businesses or viewed together, can be said to constitute the same business.'
In that case, it was noted by the Supreme Court that the Appellate Tribunal and the Appellate Assistant Commissioner had drawn contrary conclusions from the facts found. All that we learn about the facts actually found by the income-tax authorities there is that the same assessee carried on the manufacture and sale of sugar and purchase of gunnies, jute and mustard seeds. It is evident that mere difference in the type or character of business carried on is not enough to constitute separate businesses although they may be an important consideration in determining what the final conclusion should be. It is evident from the view of Rowlatt J. in Scale v. George Thompson & Co. Ltd. which their Lordships of the Supreme Court seem to have adopted, that the apparent difference between the two types of business - which were those of under writing and shipping in that case - weighed considerably with the learned judge although it was not conclusive. The judgment of their Lordships of the Supreme Court indicates the correct method of arriving at the conclusion. This method is that the taxing authorities should place the correct tests before themselves and then arrive at the final conclusion by taking into account the whole set of proved and relevant facts and considerations. It can be inferred from the judgment of the Supreme Court that the income-tax authorities had not done that in that case. If either the whole set of relevant facts and considerations present in the case are not employed by the income-tax authorities for arriving at the conclusion on the question whether the business is the same as contemplated by section 24(2) of the Indian Income-tax Act or, to put it in another way, if the correct tests are not placed before themselves and properly applied by the income-tax authorities, an error of law is made in arriving at what may superficially appear to be only a finding of fact. This is how I understand the decision of the Supreme Court relied upon by Mr. Gupta.
In the case before us I find that all the three income-tax authorities - the Income-tax Officer, the Appellate Assistant Commissioner, and the Appellate Tribunal - had kept the correct tests before themselves and then proceeded to determine whether all the evidence led by the assessee about the unity or identity of business, in spite of the apparent difference between the business of running a cotton spinning and weaving mill and the business of buying and selling shares had discharged the onus which, in such a case, lies upon the assessee to prove that the apparent difference in the two businesses conceals what can be described as an organic unity. Where there is such an organic unity, one type of business really dovetails into or is complementary of another type of business. In Setabganj Sugar Mills case their Lordships of the Supreme Court were not dealing with the question of onus of proof. But, I find that this question was dealt with by Mitra J. in Standard Refinery and Distillery Ltd. v. Commissioner of Income-tax. There a Division Bench of the Calcutta High Court, considering a case of an assessee who carried on the business of manufacturing sugar as well as the business of buying and selling shares, just as in the case before us, held that in such cases the onus of proof lies upon the assessee to show that apparently different businesses really constituted one organically whole unit. In that case, the capital with which the business in shares was conducted was supplied by the business of manufacture and sale of sugar. The learned judges kept in view and discussed the Supreme Court decision in Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax, but they came to the conclusion that the assessee had not discharged the onus of proving that inter-dependence, inter-lacing or dovetailing which could constitute the two separate businesses into a single organically whole unit. It was held that mere unity of control and management for the use of capital of one business for carrying on the other was not enough to constitute the inter-dependence or dovetailing required to be proved. It may be observed that a similar financial inter-connection was present between the businesses of shipping and under-writing in the case of Scales v. George Thompson & Co. Ltd., where Rowlatt J. laid down the tests adopted by the Supreme Court. We may also observe That the Supreme Court did not in Setabganj Sugar Mills case indicate that the view of Rowlatt J., which had been guided largely by the apparent dissimilarity in the two kinds of businesses, was erroneous in any respect whatsoever.
Mr. Gulati, learned counsel for the income-tax department, cited Manilal Dahyabhai v. Commissioner of Income-tax, which had been relied upon by the income-tax authorities. That case also shows that the manner maintaining of one set of accounts, the same staff, the employment of a common capital, and the incurring of common overhead and other expenses, did not constitute the two businesses, such as wholesale dealing in cloth and speculation business in shares, cotton, gold, silver and other commodities, into an organically whole unit which requires proof of inter-connection, inter-lacing, inter-dependence, or dovetailing.
Our view, therefore, is that the Supreme Court decision in Setabganj Sugar Mills case does not help the assessee in the present case. The kind of dovetailing or inter-connection which constitutes two apparently separate business into an organically whole unit could exist where it is shown that one cannot be carried on without the other. This has undoubtedly not been shown by the assessee in the case before us. Another type of organic unity which one can conceive of is that existing between what may be various types of business activity apparently so disconnected as confectionery, tailoring, selling of sports goods and photography, when these constitute component parts of the business of a huge organisation such as that of Selfridges of Oxford Street or Harrods of Knights-bridge in London, the very aim and object of which is to provide for a whole host of the needs of its customers and to run an all-embracing giant general stores. It could not be contended that this was the pattern of the assessees business activities in the case before us. It is difficult to lay down an absolutely infallible test, although the 4 application of the tests laid down by Rowlatt J. can be illustrated in the way indicated above.
Our view is that the ratio decidendi of Standard Refinery and Distillery Ltd. v. Commissioner of Income-tax fully applies to the case before us, and we respectfully, adopt it. Hence, our answer to the question referred is in the affirmative and against the assessee.
Question answered in the affirmative.