1. The main dispute in this appeal revolves round the question as to whether the assessee was carrying on business during the relevant accounting year so as to claim the benefits of bad debts, depreciation and set off of unabsorbed depreciation.
2. Originally the assessee was carrying on the business of generating and supplying electricity, but the same was acquired by the State Government. During the relevant accounting year, the assessee received interest on the recoverable suspense, i.e., ad-interim purchase consideration from West Bengal State Electricity Board which had taken over all the units from the assessee-company. In the original return the assessee treated this interest as 'income from other sources' but in the revised return it claimed the same as income from 'business'.
The ITO was of the opinion that the power supply business that was originally being conducted by the assessee had been entirely taken over by the State Electricity Board and the consideration therefor was nothing but a capital receipt. Therefore, any receipt received or receivable on interest receipt could not be treated as business income because there was no business (sic). For the same reasons, interest receipt from the bank could not be considered as business income because it was not a transaction in the nature of trade. Similarly, incomes from dividend and sundry receipts could not be treated to be a part of business income. He, therefore, disallowed the assessee's claim for depreciation, bad debts, set off of unabsorbed depreciation, etc.
Of course in case of bad debts, an additional reason given by the ITO was that they had not become bad during the relevant accounting period.
3. The assessee went in appeal to the Commissioner (Appeals) who was again of the opinion that except for recovery of some interest the assessee had no other business. Similarly, the disallowance of depreciation and carry forward of unabsorbed depreciation was confirmed. The assessee has come up in second appeal before us.
4. We have heard the representatives of the parties at length in this appeal. The main point argued on behalf of the assessee was that it was not necessary that in order to secure the benefits of bad debts and depreciation and carry forward of unabsorbed depreciation, the assessee should be carrying on the same business which it had originally started. All that was required was that some business should have been carried on by the assessee with the same management and control.
Reliance was placed upon a judgment of the Supreme Court in CIT v.Prithvi Insurance Co. Ltd.  63 ITR 632 wherein existence of common management, common business organisation, common administration, common fund and common place of business were held to be sufficient for allowing unabsorbed losses. Similarly, reference was made to another decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT  113 ITR 647, wherein a loss in the business of import and sale of fabrics was held to be an allowable deduction against a subsequent income in export of cotton textiles, in view of the common management and control of the business. Again, reference was made to a judgment of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd.  89 ITR 150 and Raj Narain Agarwala v. CIT  75 ITR 1 (Delhi) for the proposition that carry forward of unabsorbed depreciation could be availed of by an assessee in any subsequent year without satisfaction of the pre-conditions attached to Sub-section (1) of Section 32 of the Act and it was not necessary that in such subsequent year, the assessee actually carried on the business and the assets were used for the purpose of the assessee's business.
5. On behalf of the revenue reliance was mainly placed upon a judgment of the Supreme Court in CIT v. Lahore Electric Supply Co. Ltd.  60 ITR 1 wherein the business of electric supply had similarly been acquired by the Government but the company continued to hold the deposits made by consumers of electricity which had to be returned to them. It also retained its staff and establishment for certain purposes. In the accounting year relevant to the assessment years 1948-49 and 1949-50, the company claimed deduction of various amounts under Section 10(2)(xv) of the 1922 Act and the question arose whether it was carrying on the business in the accounting years to be entitled to these deductions. The majority of their Lordships held that it did not carry on the business because when the electricity supply undertaking was taken over by the Government, the assessee was not possessed of any commercial undertaking and had not started any other business, except for receiving the compensation, etc. The mere fact that it had the intention to do business was irrelevant.
6. On behalf of the assessee it was contended that long before the relevant accounting year, the memorandum and articles of association of the assessee had been altered and money-lending had also been included among the aims and objects of the assessee. A money-lending licence had also been obtained by the assessee and actually some money had been lent and interest was received thereon by the assessee as would be apparent from the statement of accounts for the various years ending 31-3-1973, 31-3-1974, 31-3-1975, 31-3-1976 and 31-3-1977 respectively.
Therefore, it could not be said that the assessee was not carrying on any business. Another important argument addressed on behalf of the assessee was that the authorities below had themselves accepted the assessee's statement of accounts as per the profit and loss account submitted by the assessee. They had not specifically held the assessee's income/loss as being income from other sources. They had discussed the question of provision for gratuity, expenses for inventory and valuation which could only be relevant, if the assessee's income loss was from the business. Similarly, a part of the motor car expenses was disallowed as being for personal use, which means that the remaining expenses were accepted as business expenses. It was argued that it was not open to the department now to turn round and to say that the assessee did not carry on any business at all.
7. We have carefully considered all the facts and circumstances of the case. So far as the question of holding as to whether money-lending can be considered to be the business of the assessee one would have to look into the resolution by which the same was included in the aims and objects of the assessee-company because it may be possible to gather it from there as to whether the assessee really intended to carry on the business or it was only an interim arrangement within the meaning of Lahore Electric Supply's case (supra). From the directors' report ending 31-3-1972, it is obvious that the Government had directed the assessee to sell electricity supply undertakings to the State Electricity Board and special resolution was passed adding the following Sub-clauses to Clause 3 of the memorandum of association : (e) i. To carry on the business of builders, contractors, dealers in or manufacturers of prefabricated and precast houses, buildings and erections and materials, tools, implements, machinery and metal ware in connection therewith or incidental thereto and to carry on any other business that is customarily, usually and conveniently carried on therewith.
(e) ii. To carry on the business of mill furnishers and of manufacturers, importers, dealers in and suppliers of all plant, machinery, stores, tools, implements and accessories.
(e) iii. To carry on the business of manufacturers and importers of and dealers in agricultural implements and other machinery, tool makers and sellers, metal workers, boiler makers, mill-wrights, machinists, iron and steel converters, smiths, wood workers, builders, painters, metallurgists, electrical engineers, water-supply engineers, gas makers, farmers, printers, carriers and merchants and to buy and sell manufacture, repair, convert, alter, let on hire and deal in machinery, implements, rolling stock, hardware and mill stores of every kind and to carry on any other business (manufacturing or otherwise) which may seem to the company capable of being conveniently carried on in connection with the above or otherwise calculated directly or indirectly to enhance the value of any of the company's property and rights for the time being.
No doubt, one can argue that money-lending cannot be strictly considered to be the business of the assessee more particularly receipt of interest from the State Electricity Board itself cannot be said to be business income. However, the other argument of the learned representative of the assessee was that the revenue had itself assessed the income and even noted loss on sale of assets and motor car expenses. It would be difficult to say that the assessee had closed the business altogether. The business may be dormant but the intention was still there to carry on some business. Therefore, the claim to depreciation and carry forward of depreciation cannot be disallowed.
8. Regarding bad debts also, the claim may be allowable, but the Commissioner (Appeals) has not examined it from this aspect and the ITO has summarily disallowed it on the ground that no steps were taken for recovery. Of course the ITO himself observed that it may be that each debtor could not be proceeded against but at least action be taken against some of them. It could not be said with certainty that the debts had become bad. That in our opinion should not be conclusive.
Each debt should have been examined on merits which could have been done either by the ITO or by the Commissioner (Appeals). We, therefore, direct that this claim shall be considered afresh in the light of our aforesaid discussion.
9. Before concluding, we may refer to the assessee's one other ground that a sum of Rs. 2,97,021 which related to interest for the previous years had been wrongly included in the income of the present year.
There is certainly force in this argument because according to the proviso to Sub-section (3) of Section 5 of the Indian Electricity Act, 1910, the purchaser has to pay to the licensee interest at the Reserve Bank rate ruling at the time of the delivery of the undertaking plus 1 per cent interest on the purchase price for the period from the date of delivery of the undertaking up to the date of payment of the purchase price and since the assessee's system of accounting is mercantile, the interest for the previous years could not be included in the income of the present year.