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L. Ve. Vairavan Chettiar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 161 of 1962 (Reference No. 86 of 1962)
Judge
Reported in[1969]72ITR114(Mad)
ActsIncome Tax Act, 1922 - Sections 24
AppellantL. Ve. Vairavan Chettiar
RespondentCommissioner of Income-tax
Appellant AdvocateK. Srinivasan and ;D. Meenakshisundaram, Advs.
Respondent AdvocateV. Balasubrahmanyan, Adv.
Cases ReferredFrench Textile Co. Ltd. v. Commissioner of Income
Excerpt:
.....(ito) after scrutinising accounts and evidence produced by assessee accepted assessee's claim of loss in arecanuts trade but for small disallowance of rs. 500 paid to staff for reason that there was no profits for concerned year - where person carries on two or more distinct business - profits or losses of all of them ought to be added together - aggregate sum would represent profits or gains in business of such person - in case net result of calculation shows loss - such loss may under section 24 be set off against profits or gains derived by assessee from other heads of income of that year - decision of ito correct. - - in support of its claim, the assessee filed a profit and loss account showing the details of the loss claimed by him and also produced the account books as well..........accounts and other evidence produced by the assessee, practically accepted the assessee's claim of loss in arecanuts trade, but for a small disallowance of rs. 500 paid to the staff, for the reason that there was no profits for the year. the income-tax officer allowed the loss of rs. 13,559 as against the assessee's claim of rs. 14,059.4. the assessee appealed to the appellate assistant commissioner of income-tax, inter alia, against the disallowance of the bonus of rs. 500. in the course of the appeal, the appellate assistant commissioner remanded the case to the income-tax officer and called for a report, among other things, in respect of the loss computed by the income-tax officer in arecanut trade. with regard to the admissibility of this loss, the income-tax officer reported that.....
Judgment:

Venkatadri, J.

1. This reference under Section 66(2) of the Income-tax Act arises out of the proceedings for the assessment year 1955-56 (accounting year ended March 31, 1955).

2. The assessee, L. VE. Vairavan Chettiar, was originally a partner in one M. VE. Firm which was carrying on business at Madurai, one in rice mill and the other in arecanuts. The said firm was dissolved on April 12, 1949. Thereafter, the assessee became the sole proprietor of the two businesses. For the sake of convenience, the assessee maintained separate sets of accounts for the two businesses connected through a current account but these two lines of the assessee's trading activities were inter-related and inter-connected with unity of control and common funds. In respect of the assessment year, the assessee claimed a net loss of Rs. 14,059 from his trade in arecanuts, which he had temporarily suspended in the year of account on account of unfavourable market conditions due to increase of import duty on arecanuts. In support of its claim, the assessee filed a profit and loss account showing the details of the loss claimed by him and also produced the account books as well as the unused import licence for arecanuts obtained by him.

3. The Income-tax Officer, after scrutinising the accounts and other evidence produced by the assessee, practically accepted the assessee's claim of loss in arecanuts trade, but for a small disallowance of Rs. 500 paid to the staff, for the reason that there was no profits for the year. The Income-tax Officer allowed the loss of Rs. 13,559 as against the assessee's claim of Rs. 14,059.

4. The assessee appealed to the Appellate Assistant Commissioner of Income-tax, inter alia, against the disallowance of the bonus of Rs. 500. In the course of the appeal, the Appellate Assistant Commissioner remanded the case to the Income-tax Officer and called for a report, among other things, in respect of the loss computed by the Income-tax Officer in arecanut trade. With regard to the admissibility of this loss, the Income-tax Officer reported that that order had already been considered by his predecessors, that he had no fresh remarks to offer, that, though no business in arecanuts was done due to adverse market conditions, it formed part of the main business, i.e., business in rice mill, and that the loss appeared to have been rightly considered in the assessment.

5. The Appellate Assistant Commissioner, however, held that the arecanuts business was not being carried on either during the accounting year relevant to the assessment year 1955-56 or the two succeeding years, and, consequently, there was no profit or loss to be computed in respect of the arecanut business, that on a perusal of the accounts it was seenthat Rs. 70,000 out of the borrowals in the arecanut business was invested in the rice mill business, that the interest attributable to that sum was admissible as a deduction against the income from rice mill business. The Appellate Assistant Commissioner accordingly disallowed the loss of Rs. 13,559 under trade in arecanuts and computed the loss in the rice mill business at Rs. 12,497.

6. The assessee carried the matter in further appeal to the Appellate Tribunal challenging the disallowance of loss in the arecanuts. The Appellate Tribunal held that the Appellate Assistant Commissioner in his recomputation considered that, though the two businesses were dealt with separately by the petitioner in two separate sets of books, in reality both of them constituted only an integral whole, that the acceptance of the integrity was the basis of his final order, though he had not stated so in so many words, and that they did not propose to interfere any further with the order of the Appellate Assistant Commissioner.

7. The assessee filed an application under Section 66(1) of the Act, requiring the Appellate Tribunal to state a case and refer some questions of law arising out of the Tribunal's order for the decision of the court. The Tribunal rejected the application, holding that the Tribunal's order could not give rise to a point of law. Thereupon, the assessee filed an application in this court under Section 66(2) of the Act praying that this court might be pleased to direct the Appellate Tribunal to state a case and, on the directions of this court, the Tribunal stated a case on the question of law :

'Whether the disallowance of the amount of Rs. 14,059 or any portion thereof, claimed by the assessee to have been incurred in his arecanut business during the year of account relevant for 1955-56, is validin law '

8. It is common case that, after the assessee became the sole proprietor of the two businesses, he was maintaining two separate sets of accounts, one for the rice mill and the other for the arecanut business. It is also common case that he obtained an import licence for doing arecanut business. He also borrowed large sums of money for doing arecanut business. But due to adverse conditions in the market, he temporarily suspended the arecanut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in arecanuts. There is nothing on record to show that he completely abandoned or closed the business for ever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of account. In such circumstances, is the Tribunal right in giving a finding that the assessee had closed his arecanut business and that the loss claimed by the assessee had not been proved ?

9. The question whether the business is being carried on must depend in each case on its own facts and not on any general theory of law. Jessel M. R. in Erichsen v. Last, [1881] 8 Q.B.D. 414, ; 4 T.C. 422 has observed :

' (I do not think) There is not, I think, any principle of law which lays down what carrying on a trade is. There are a multitude of things which together make up the carrying on of a trade, but I know of no one distinguishing incident...it is a compound fact made up of a variety of things. '

10. In Commissioners of Inland Revenue v. South Behar Railway Co. Ltd., [1925] 12 T C. 657, 712,Lord Sumner observed :

' Business is not confined to being busy; in many businesses long intervals of inactivity occur.........The concern is still a going concernthough a very quiet one. '

11. In Kirk and Randall Ltd. v. Dunn, [1924] 8 T.C. 663, a company was formed to take over contractors' business which was not in good circumstances. Though they did not get business all the time, the directors drew their fees and the secretary drew his fees and they also paid the typing bill and the bill for legal services. The question was whether the company was carrying on business or not. Justice Rowlatt observed :

' I do not think that could be said for a moment. Because in the middle of a great career a company, or still more an individual professional man, might have a year when he was holding himself out for business, or the company was holding itself out for business, but nothing came, yet that would not effect a break in the life of the company for income-tax purposes.'

12. In our own High Court, a similar question had to be considered in General Corporation Ltd. v. Commissioner of Income-tax : [1935]3ITR350(Mad) . The assessee in that case carried 'on business in motor accessories and also in mica mining. The mica business was stopped on account of a cyclone. With a view to resume the production, the company did some prospecting work in the year of account keeping a reduced staff and incurred some expenses. The question for decision was whether the assessee, in the circumstances of the case,, might be said to have been carrying on the business of mica mining, during the year in question. The learned judges observed :

' When production was stopped by a cyclone, the company started prospecting to find out whether the business can be carried on, and incurred the expenses in question, with a view to resume production. How can it then be said that the business had stopped ?......It appears to us that thefact that there was some period of inactivity in the carrying on of the business does not really affect the question, nor is the question affected by the consideration that the business was not resumed after the expenses had been incurred ......... the decision whether the business was being carriedon must depend in each case on its own facts and not on any general theory of law.'

13. The company may not obtain or be able to execute a single business contract for months and yet it may be deemed to carry on its business, if during the period of lull and inactivity it is kept alive and if it retains its registered office and holds meetings. It is not necessary that a business to be in existence should have work all the time. There may be long intervals of inactivity and a concern may still be a going concern, though it may for some time be quiet and dormant. The mere fact that a businessman has not been able to obtain a contract and the business has for some time been in that sense dormant would not mean that it has ceased to exist, if the assessee continues to maintain an establishment and incur expenses in the expectation that work would come and the business would be successful. How long he shall remain in the hope and in what manner he must carry on his work to gain success is primarily his own concern. The mere fact that for some time he is not able to secure a contract or do the work which he set out to do should not disqualify him from pleading that the expenditure that he had incurred was expended for the purpose of his business : see Inderchand Hari Ram v. Commissioner of Income-tax : [1953]23ITR437(All) .

14. Thus, on a review of these authorities, we think that the Income-tax Officer was right in allowing the loss of Rs. 13,559. But, still there is another question, viz., whether the assessee is entitled to ask the revenue authorities to set off the loss incurred in the arecanut business against the profits in the other business. It is an established principle that income-tax is only one tax, levied on the aggregate total of the income classified and chargeable under the various heads. It is not a collection of distinct taxes levied separately on each head of income. In other words, assessment to income-tax is one whole and not a group of assessment of different heads of items of income. The Tribunal would appear to think that because the assessee was doing two distinct businesses, rice mill business and arecanut business, and maintaining two separate sets of accounts, he was not entitled to claim a deduction of the loss incurred in the arecanut business from and out of the proceeds he derived in the other business. It is common case that he is the sole proprietor of these two concerns. He also borrowed large sums of money for doing the arecanut business. After he stopped the arecanut business for the time being, he transferred some of the moneys borrowed for arecanut business to the rice mill business. The Income-tax Officer allowed deduction of the interest paid on the borrowed moneys for the rice mill business. According to Justice Rowlatt in Scales v. George Thompson & Co. Ltd., [1927] 13 T.C. 83 there must be some sort of inter-relation between the two businesses, to constitute them branches of the same business. Similarly, in Hiralal Kalyanmal In re : [1943]11ITR128(Bom) , Beaumont C. J. observed :

' It is obvious that mere common ownership of the businesses does not mean that they are merely branches of the same business. It is also I think obvious that the mere fact that the two businesses are of a distinct nature does not necessarily mean that they are distinct businesses. You can have two branches of a multiple store, one selling drugs, and the other selling cloth. Nobody would suggest that these two departments constitute two different businesses. On the other hand, if you have a shop in Bombay selling cloth, and a shop in Ahmedabad selling drugs under different names and different management and under separate accounts, common ownership would hardly make them one business.'

15. In Commissioner of Income-tax v. Arunachalam Chettiar, A.I.R. 1924 Mad. 474, the assessee had several businesses, viz., money-lending, sugar, rice trade and bell-metal factory. He incurred losses in sugar and rice trade. The assessee claimed that the losses incurred in sugar and rice trade might be set off against the profits arising from money-lending and bell-metal factory. The question arose whether he was entitled to set off the losses in one against the profits made by him in the other. The learned judges observed :

' What is desired to tax is a man's total net income and it would be most unjust to tax him on a profit on one business, when, in fact, owing to losses on the other, he has a loss or even no income at all......... It followsthat an assessee is entitled to set off profits in one business, against losses in another.'

16. This principle has been affirmed by the Privy Council in Arunachalam Chettiar v. Commissioner of Income-tax, [1936] 4 I.T.R. 173. And the same principle has been followed by the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax : [1953]23ITR82(SC) . It may, therefore, be taken as settled law that, if a person carries on two or more distinct businesses, the profits or losses of all of them ought to be added together and the aggregate sum so arrived at would represent his profits or gains in the business. If the net result of this calculation shows a loss, such loss may under Section 24 of the Act be set off against the profits or gains derived by the assessee from other heads of income of that year. In the present case, we are inclined to hold that the Income-tax Officer reached the right decision in law.

17. In the result, we answer the reference in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 250.


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