1. The following four questions of law have been referred to this court under s. 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal for our opinion :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 30,000 paid to Mrs. Sarada Rajam is not an allowable deduction in computing the income of the assessee
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing only a portion of the finance commission paid to Smt. Sujatha Ramakrishnan
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs. 7,500 paid as retrenchment compensation to the employees of the service department
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the rebates and allowances relating to the service department ?'
2. The facts and circumstances which gave rise to this reference may briefly be stated : The assessee is a private limited company carrying on business as distributors of the products of M/s. Rayala Corporation. In the course of the assessment for the year 1971-72, the assessee claimed a sum of Rs. 30,000 being the agency commission paid to Smt. Sarada Rajam for the alleged use of the rights accrued to her under an agreement dated March 11, 1966, with M/s. Rayala Corporation Private Limited. The ITO, following his own order for the assessment year 1967-68, disallowed the claim and that was confirmed in appeal by the AAC. The identical issue in respect of the very same assessee came up for consideration before this court in T.C. Nos. 1082 to 1085 of 1977 and by a judgment dated February 22, 1983-India . v. CIT : 155ITR770(Mad) , this court has held that the payments made to Smt. Sarada Rajam by way of commission at the rate of Rs. 2,500 per month cannot be said to have been made for business purposes and that the mode of giving such an agency commission was only a devise adopted for dividing the assessee's profits and that as the payments having been made for extra business considerations, the disallowance of the agency commission of Rs. 30,000 paid to Smt. Sarada Rajam was to be upheld. Following the said decision of this court, question No. 1 is to be answered in the affirmative and against the assessee.
3. In the course of the assessment, the assessee has claimed deduction for the amount of Rs. 24,000 paid to Smt. Sujatha Ramakrishnan at 3 per cent. of its sales turnover. This finance commission is said to have been paid in respect of a loan of Rs. 75,000 said to have been taken by the assessee from the said Sujatha Ramakrishnan. In the course of the assessment, the assessee claimed the entire finance commission so paid as an expenditure incurred in connection with the borrowing for the business and as such an allowable one. The ITO allowed interest on the said sum of Rs. 75,000 borrowed at 12 per cent. per annum which came to Rs. 9,000 and disallowed the balance of Rs. 15,000 as an amount spent for extra-commercial considerations. The disallowance by the ITO of the sum of Rs. 15,000 was upheld by the AAC as also the Tribunal. The assessee contends before us that the entire sum of Rs. 24,000 paid as finance commission for the borrowing made by the assessee in a sum of Rs. 75,000 should have been allowed and it is not open to the ITO to restrict the allowance to 12 per cent. interest on Rs. 75,000 and to treat the balance as an amount spent for non-business considerations. As against a similar disallowance in the year 1970-71, the Tribunal has sustained the disallowance and the assessee filed T.C.P. No. 454 of 1977 to this court seeking a reference on the question of the allowability of the entire amount paid by the assessee to Sujatha Ramakrishnan. This court dismissed the said petition taking the view that it is purely a question of fact as to whether any portion of the amount paid to Sujatha Ramakrishnan was in relation to the business and the Tribunal having held that the payment of part of the amount having been made for non-business consideration, no question of law arose out of the order of the Tribunal. Even here, the Tribunal has held that the sum of Rs. 15,000 out of the sum of Rs. 24,000 paid to Sujatha Ramakrishnan was on account of extra-commercial considerations and, therefore, the ITO was justified in disallowing the same. Once the Tribunal finds that the expenditure has been incurred for extra-commercial considerations, the disallowance of the same should be upheld. Therefore, we find that as a result of the findings given by the Tribunal, that part of the alleged finance commission was paid for non-business considerations, which is factual, we have to answer the second question in the affirmative and against the assessee. It is accordingly answered.
4. In the course of the assessment, the assessee claimed a sum of Rs. 7,500 being the retrenchment compensation paid to the employees of the service department as an allowable deduction since the business of service department was closed down though the other business, distributors of the products of Rayala Corporation, is being carried on. The ITO, however, held that the retrenchment compensation has been paid after the closure of the business of service organisation and, as such, the retrenchment compensation paid cannot be allowed as an expenditure incurred in carrying on the business. When the matter was taken up before the Tribunal, the Tribunal sustained the disallowance holding that the retrenchment compensation paid to the staff of the service department was made not for running the business, but for closing down the business.
5. The learned counsel for the assessee contends that the service department which was closed down is not a separate and independent business of the assessee but is a part of the main business as distributors for the products of Rayala Corporation and, therefore, the retrenchment compensation paid on closure of a portion of the business which is beneficial to the main business that was being carried on by the assessee should be taken to be an allowable expenditure as the closure of a portion of the business was undertaken for reducing the losses and for effective carrying on of the main business. The learned counsel in support of the said submission relies on the decision of the Gujarat High Court in Bansidhar Pvt. Ltd. v. CIT : 127ITR65(Guj) . In that case, a private limited company was carrying on different business activities at different points of time. Upon the closure of one of the businesses in the relevant year of account, the assessee in that case had to pay a sum of Rs. 9,603 as retrenchment compensation. The assessee claimed deduction under s. 37 of the I.T. Act, 1961, of the said sum. The claim having been rejected by the ITO as well as the AAC, the matter was taken to the Tribunal which held that the deduction could not be allowed because the several businesses were widely different in nature and they covered both manufacturing and trading activities, and the closure of one business was not shown to have affected the other businesses. When the matter was taken to the Gujarat High Court, on a reference, the court took note of the various circumstances and the way in which all the businesses were carried on and held that there was, at the apex, a common management and administration with an overall control of the various businesses vesting in the board of directors of the assessee company and, therefore, the business that was closed was not a separate and independent business. On those facts, the court held that there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities carried on by the assessee constituted one and the same business and, therefore, the deduction on account of the retrenchment compensation paid by the assessee upon the closure of one of its businesses and the write-off of its outstanding dues as bad debts in the other were allowable deductions under ss. 37 and 36(1)(vii), respectively. The question is whether the principle laid down in that decision will apply to the facts of this case. For the said decision to apply to the facts of this case, it has to be established by the assessee that the business that was closed was not an independent business but an integral part of the main business carried on by the assessee. Whether two or more lines of business may be regarded as the same business or different businesses depends not upon the special methods prescribed by the I.T. Act for computation of the taxable income, but upon the nature of the business, the nature of their organisation, management, source of capital and fund utilised, the method of book-keeping used and other related circumstances which stamp them as same or distinct. Thus, the test is whether one of the businesses can be closed without affecting the conduct of the other business. In this case, though an attempt was made by the assessee before the AAC to show that the business of servicing typewriters and the trading activities in typewriters is one and the same and, therefore, the retrenchment compensation paid on the closure of the servicing part of the business should be taken to be allowable deduction, the assessee has not adduced any evidence in support of the said assertion or claim. The assessee has not even attempted to prove before the Tribunal that the business of servicing typewriters is part of the business of trading in typewriters. The mere fact that the assessee called the servicing organisation carried on by it as a department is not conclusive one way or the other. Unless the assessee establishes that the service organisation was part of the main organisation of carrying on the business of dealing in typewriters, the assessee's assertion that it is part of the main business cannot straightaway be accepted. In the absence of materials to show that the business that was closed was only an integral part of the business that is being carried on by the assessee, the assessee cannot claim the retrenchment compensation paid after the closure of the said business as an expenditure incurred for carrying on the other business.
6. Apart from the fact that the assessee has failed to produce evidence to show that the business that was closed was part of the other business carried on by the assessee, it cannot be disputed that the profits of each distinct business must be computed separately though the tax is chargeable under s. 26 not on the separate income or other distinct business, but on the aggregate of the profits of the businesses carried on by the assessee. In L. M. Chhabda and Sons v. CIT : 65ITR638(SC) , the assessee was carrying on business of exhibiting cinematograph films in Ahmedabad and in Bombay. It had taken a lease of one cinema theatre in each of these two places. The landlord of one of the theatres filed a suit in rejectment against the assessee and obtained a decree for possession as also a decree for mesne profits of Rs. 92,240. The said sum of Rs. 92,240 was claimed as a deduction by the assessee as a business expenditure. The ITO disallowed the claim on the ground that the business of Prakash Talkies in respect of which mesne profits had been paid was not carried on by the assessee during the relevant year and, therefore, it has to be disallowed. When the matter went before the Tribunal, the Tribunal confirmed the disallowance holding that the cinema theatres acquired by the assessee from time to time on lease or otherwise were run independently of one another and with separate identifiable books and that the opening of a new theatre or closure of another did not affect the working of the remaining theatre. When the matter came before the Supreme Court, the Supreme Court also took the view that the venture of Prakash Talkies which was closed was not a part of the general business of exhibiting films carried on by the assessee and, therefore, the sum of Rs. 92,240 was not an allowable deduction in computing the assessee's business income and that from the mere circumstance that the result of the accounts of the different ventures was entered in the accounts maintained at the head office, no inference is possible that the exhibition of films in different theatres constituted the same business. The following extract from the judgment of the Supreme Court contains the reasons for their decision (p. 642) :
'It is true that the appellants were conducting cinema theatres in Ahmedabad and Bombay, and the result of the accounts of the different ventures was entered in the accounts maintained at the head office, but from that circumstance, no inference necessarily arises that the exhibition of films in different theatres constituted the same business. It was for the appellants to establish that different ventures constitute parts of the same business. There is in this case no evidence about unity of control and management, or inter-relation of the business, or employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business.'
7. In that case, though the assessee has carried on business ventures of the same character at different places, it was not held as a matter of law that the ventures formed part of a single business. Whether the different ventures carried on by the assessee form part of the said business must depend on the facts and circumstances of each case and it is for the assessee to establish that the different ventures constituted part of the same business.
8. The Supreme Court has again reiterated the same principle in CIT v. Gemini Cashew Sales Corporation : 65ITR643(SC) . In that case, upon the dissolution of a firm constituted of two partners, by the death of one of them, the business was taken over and continued by the surviving partner on his own account, without any interruption in the services of the employees or alteration in the terms of their employment. While settling the accounts of the firm, the retrenchment compensation payable to the employees under s. 25FF of the Industrial Disputes Act, 1947, which would arise on a transfer of ownership was determined at Rs. 1,41,506 and the same was claimed as an allowable expenditure. The Supreme Court held that the said sum of Rs. 1,41,506 was not properly admissible either under s. 10(1) or s. 10(2)(xv) of the Indian I.T. Act, 1922, since the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before, that it arose not in the carrying on of the business but on account of the transfer of the business, that the liability which arose on transfer of the business was not of a revenue nature and it could not be deducted under s. 10(1) and that similarly since the liability was wholly contingent and did not raise any definite obligation during the whole of the period that the business was carried on, it could not be deducted under 10(2)(xv). The said decisions of the Supreme Court have categorically ruled that where there are two separate and independent businesses carried on by the same assessee, if the assessee, if the assessee chose to close one business and carried on the other business, the retrenchment compensation paid as a result of the closure of one business cannot be claimed as an allowable deduction as against income from the other business which is being carried on by the assessee. Such a claim for deduction can be upheld only if it is shown by the assessee that both the business are interconnected and interdependent and not independent. In this view of the matter, in the absence of material to indicate that the business that was closed was part of the business that was being carried on, question No. 3 has to be answered in the affirmative and against the assessee.
9. Coming to the fourth question relating to the disallowance of a sum of Rs. 13,703 said to be the rebate and allowances pertaining to the service department, it in seen from the order of the Tribunal that there is absolutely no evidence or material to show that the said sum of Rs. 13,703 represented a portion of the service charges withheld by the various customers of the assessee for the unsatisfactory services rendered to them as claimed by the assessee. If the assessee failed to adduce the necessary evidence to show that the sum of Rs. 13,703 represented rebate and allowances pertaining to the service department, we do not see how the assessee can claim the said amount as an allowable expenditure. In the absence of evidence, the Tribunal appears to be justified in sustaining the disallowance of Rs. 13,703 made by the ITO. We have to, therefore, answer question No. 4 also in the affirmative and against the assessee.
10. Thus, all the four questions referred in this tax case are answered in the affirmative and against the assessee. The Revenue will have its costs from the assessee. Counsel's fee Rs. 500.