D. K. MAHAJAN J. - The Income-tax Appellate Tribunal Delhi Bench 'C' has referred the following question of law for our decision :
'Whether the Tribunal misdirected itself in coming to the conclusion that it was the same business on the facts stated in its order ?
The assessee is Messrs. Bankamal Naranjan Das of Kaithal, a Hindu undivided family. The assessee owns a ginning and pressing factory at Kaithal. This factory was running at a loss and, at the end of the assessment year 1953-54, there was a registered loss of Rs. 99,932. This loss was to be set off against the assessee future profits under section 24(2) of the Income-tax Act. For the assessment year 1954-55, accounting year ending 31st August, 1953, this factory was not solely run by the assessee Hindu undivided family, but was run as a joint concern. There was a large profit during this year. The assessee share came to Rs. 70,015. The assessee contended that the loss brought forward should be set off against this profit. The Income-tax Officer declined to do so. In the opinion of the Income-tax Officer, the profit arose an business different from the one in which the loss had occurred. An appeal by the assessee to the Appellate Assistant Commissioner of Income-tax met with no success. The assessee appealed to the Tribunal. The Tribunal allowed the assessee appeal and came to the conclusion that the previous loss could be set off against the profit for the accounting year, because the business was the same business in which the assessee had suffered the loss before. In coming to the conclusion that the business was the same business, the Tribunal has relied upon the following facts found by them :
'(i) The arrangement as depicted in the partnership deed dated September 6, 1952, was essentially a pooling arrangement and it was not a genuine partnership firm.
(ii) The profit arising from the running of the factory owned by the Bankamal Naranjan Das were to be shared between Shri Naranjan Das (representing the Hindu undivided family of M/s. Bankamal Naranjan Das) of the first part and Shri Amar Nath, Shri Madan Gopal and Shri Om Prakash being the owners and lessees of the factory known as Messrs. Rikhi Ram Kundan Lal Cotton Ginning and Pressing Factory, Kaithal of the second part.
(iii) The arrangement recited that the firm would run the factory of M/s. Bankamal Naranjan Das and it was agreed that the cotton ginning and pressing sections of the factory of M/s. Rikhi Kundan Lal belonging to the second group of persons was to remain closed.
(iv) It was a restrictive arrangement whereby one of the competitive factories was to remain closed so that higher profits could be charged from the consumers.
(v) The essential nature of the agreement as a restrictive pool in the opinion of the Tribunal was to be found in clause 5 of the partnership deed which is already made part of the case (annexure 'B').
(vi) The productive apparatus, viz., ginning and pressing factory, was the same and the nature of work done, viz., ginning and pressing was the same.
(vii) There was interweaving and interlacing between the old business and the new business.
(viii) It was no doubt true that the profit under the new arrangement were to be shared between number of persons and were not to be enjoyed by M/s. Bankamal Naranjan Das alone, but in the opinion of the Tribunal it did not alter the fundamental fact that it was the same business which continued and produced the profits.'
The Commissioner of Income-tax being dissatisfied with the order of the Tribunal moved the Tribunal under section 66(1) of the Income-tax Act for referring the question of law arising out of its order and it is in these circumstances that the aforesaid question of law has been referred for our opinion.
After hearing the learned counsel for the department we are clearly of the view that the Tribunal did not misdirect itself incoming to the conclusion that the business in which the assessee had suffered the registered loss. Prior to the accounting year, the assessee was carrying on the business of ginning and pressing cotton in his own premises and the same business was carried on by the assessee but in conjunction with other persons in the accounting year. The reason why the assessee had to carry on the same business in conjunction with the other persons was to avoid unhealthy competition. The other persons joined are the competitive owners of similar business by the so-called deed of partnership which is printed at page 17 of the paper-book. What in substance has come about is a pooling arrangement. The business under this deed had to be carried on in the assessees factory. The factory belonging to Messrs. Rikhi Ram Kundan Lal, who was a party to the agreement, was to remain closed. The assessee was to get a fixed amount of depreciation and there were incidental provisions made with regard to the damage to the were incidental provisions made with regard to the damage to the machinery of the assessee. The damage to machinery, over and above Rs. 500, was to be paid for by the assessee; but the damage below that amount was to be paid for by the partnership. The control of the working staff was that of the assessee. The salary of the staff working on the machinery as appointed by the assessee was be paid by the partnership. It is not necessary to refer to the remaining clauses of the agreement for they are incidental to the main purpose of the agreement namely carrying on of the cotton ginning and pressing business. The Tribunal, while dealing with the assessees appeal held as follows :
'We have carefully looked into the facts and the circumstances of the case and the partnership deed and are of the opinion that there is considerable substance in the assessee contention that it is the same business(as held by the Tribunal earlier). We have to look to the substance of the transactions to find its true nature. What is described as a partnership might not be partnership at all and, on the other hand, exists. The key to the precise nature of the contract will be found in paragraph 5 of the partnership deed which runs as under : the firm shall run the factory of M/s. Bankamal Naranjan Dass party of the first part, and the cotton ginning and pressing sections of the factory in the name of M/s. Rikhi Ram Kundan Lal, belonging to party 2 shall remain closed. However the engine of the said factory may be utilised by the second party for any other business. The firm shall pay to L. Niranjan Dass by way of depreciations sum of Rs. 6,000 for one year. Of this amount Rs. 3,000 shall be paid as the initial payment and the balance of Rs. 3,000 shall be paid on March 31, 1953.
It is clear that the main purpose of this contract was to form a restrictive pool, i.e., the different ginning and pressing factory owners of Kaithal agreed to control and restrict their business voluntarily so that the business now under consideration could run at a profit and the profits may be shared by all the participants of this restictive agreement. Whether it is ethical to form such a pool to compel the consumers to pay a high price is not for us to consider but the fact remains that it is essentially a pooling arrangement as contended by the assessee. It is also a fact that the restrictive arrangement was worked upon that prices were pushed up and that a large profit was made.
Having considered that it was not a separate firm but a pooling arrangement, we have to see whether it is the same business. There is hardly any doubt that this is the same business because there is interweaving and interlacing between the old business and the new business. In fact, the profit-making apparatus, viz., ginning and pressing factory is the same; the nature of the work continues to be identical, viz., ginning and pressing. The clientele must have been the same because the factory continues to be the same, though wee can visualize that, as a result of the fact that this was the only factory running, its business had expended. We have little hesitation in holding that it is the same business and that the facts now under contemplation are essentially distinctly and different from the circumstances envisaged in the assessees own case in Banka Mal Niranjandas v. Commissioner of Income-tax. In that case the profits arose from a different partnership concern and it was nowhere alleged of proved that the business was the same as in the present case. In the present case, for instance, if the profits arose from the running of any factory other then the assessee;s, then we would have unhesitatingly held that the ratio of the above judgment applied because it would have been a different business.'
In our opinion, the decision of the Tribunal is fully justified in the circumstances of the present case.
Mr. D. N. Awasthy, learned counsel for the department, placed his reliance on the decisions in Smt. Gandhi Bai v. Commissioner of Income-tax. This case is entirely distinguishable. It was founds as fact in this case that there were two separate business and that the business of the assessee was not the same business. So far as the present case is concerned, all the facts and circumstance lead to the only concluding that the assessee was carrying on the same business and the partnership deed has not brought about a change in that business nor has it brought into existence a new business or a different business. The mere fact that the assessee jointed another person in the business which he was carrying on would not after the nature of the business or make it a different business.
Mr. Awasthy, learned counsel for the department, also railed on the decision in Banka Mal Niranjandas v. Commissioner of Income-tax. This decision again has no application to the facts of the present case.
We are clearly of the view that, on the facts of the present case the Tribunal has come to a right decision and that the Tribunal has not misdirect itself in coming to the conclusion that it was the same business. The question referred to us is, therefore, answered in favour of the assessee. The assessee will have the cost, which are assessed at Rs. 200.
D. FALSHAW C.J. - I agree.
Question answered in favour of the assessee.