This tax case appeal, at the instance of the Revenue, was admitted on the following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner was not justified in revising the assessment order under Section 263?
2. Whether in the facts and circumstances of the case, business expenditure and the business loss can be set off against the income returned by the assessee being only the income from the house property after the closure of the business in the earlier years?”
2. The respondent company, hereinafter referred to as “the assessee”, was engaged in the business of manufacturing and selling of aluminium conductors. On completion of the assessment under Section 143(3) of the Income Tax Act for the assessment year 2001-02, it was noticed that the assessee had taken land on sub lease and constructed godowns and getting rental income in which no manufacturing activity was carried on. The only income derived by the assessee was rental income and related charges. Hence, after a show cause notice, the benefit of the provisions of Section 71 was not made available to the assessee. The Commissioner of Income Tax, Chennai-III, in his order dated 27.1.2004 exercising jurisdiction under Section 263, found that the assessee had stopped the business of manufacturing and selling of aluminium conductors for the relevant assessment year once for all and the assessee started distributorship to market certain different items of a sister company. In view of the above, he found that it cannot be said that the assessee had revived the old business for the purpose of claiming the benefit under Section 71. The Commissioner also found that the interest expenditure of Rs.7,64,562/- for belated payment ought not to have been allowed, as the liability did not pertain to the relevant assessment year. In view of the above finding, the Commissioner was of the view that the order passed by the assessing officer is erroneous and prejudicial to the interest of the Revenue. Therefore, he passed a revised order under Section 263 rejecting the entire claim of the assessee with a direction to the assessing officer to disallow the same.
3. Aggrieved by that order, the assessee filed an appeal before the Income Tax Appellate Tribunal on the ground that the Commissioner has no jurisdiction to revise the order and therefore sought to set aside the revisionary order. The Income Tax Appellate Tribunal allowed the appeal of the assessee by holding that the Commissioner of Income Tax was not justified in passing a revisionary order under Section 263 of the Income Tax Act. Challenging the said order, the Revenue has preferred the present tax case appeal.
4. The learned counsel for the revenue vehemently contended that the order passed by the Tribunal is illegal, wrong, without any basis and therefore, the same should be set aside. It was further contended that the Tribunal is wrong in holding that the Commissioner of Income Tax was not justified in revising the assessment order. It was also contended that when the assessee had closed the business, the assessee is not entitled to claim the deduction of expenditure and set off of business loss against the income from house property. The Tribunal ought to have seen that there was no accrual of interest expenditure during the relevant accounting year. Therefore, the order passed by the Tribunal is erroneous and also prejudicial to the interest of the Revenue. Under these circumstances, the order passed by the Tribunal should be set aside.
5. The learned counsel for the assessee contended that the Tribunal had considered all the facts and circumstances of the case and ultimately came to the conclusion that the Commissioner of Income Tax has no jurisdiction to revise the order under Section 263 of the Income Tax Act. She has further contended that there was only a lull in the business and therefore the Tribunal may also give a finding that the assessee is carrying on distributorship of certain items of the sister concern. It was also further contended that there are enough materials available on the record to show that the assessee is entitled to the relief on merits.
6. We have heard the learned counsel for the parties and perused the documents available on record. The Commissioner of Income Tax on two grounds held that the order passed by the assessing officer was erroneous and against the interest of the revenue. In respect of the first ground, the Commissioner of Income Tax was of the view that the business of manufacturing and selling of aluminium conductors of the assessee had stopped once for all and also there is no manufacture and sale of the conductors. The assessee was only carrying on the distributorship of marketing certain different items of a sister company and therefore it cannot be said to be revival of the old business. So far as this issue is concerned, we may refer to the Division Bench judgment of this Court in Commissioner of Income Tax v. S.S.M.Ahmed Hussain, (1987) 164 ITR 525, wherein this Court, following the judgment of the Supreme Court in Standard Refinery and Distillery Ltd. v. CIT (1971) 79 ITR 9, observed that in the event there had been unity of control and management in respect of a composite business, the benefit of Section 71 would be available to the assessee. That was a case where the assessee was initially carrying on the business of distribution of cinema films and purchase and sale of National Defence Remittance Scheme Certificates. As there was a business loss for the assessment year 1967-68, the loss was sought to be carried forward and set off against the profits of the year 1968-69 at which point of time the assessee ceased to carry on the activity of purchase and sale of National Defence Remittance Scheme Certificates. While considering the said issue, the Division Bench found that there had been interconnection between the two business activities and merely because the purchase and sale of National Defence Remittance Scheme Certificates was ceased to be carried out, it cannot be held that the assessee had ceased to carry on the business which he was originally carrying on in the assessment year 1967-68.
7. A careful reading of the said judgment shows that to approach the issues like this, the test is to find out whether the two business activities have any interconnection, interdependence and unity to show the existence of common management, common business organisation, common administration, common fund and a common place of business. The facts of the present case disclose that though the assessee was doing the business of manufacturing and selling of conductors, from the assessment year 2003-04, the assessee started to purchase and sell aluminium foils and other materials as a distributor of a group concern. The distribution of aluminium foils has an interconnection with the manufacture and sale of conductors and both the business activities cannot be considered to be independent or separate. The Commissioner of Income Tax, having referred to the fact that the assessee had started the business of purchasing and selling of aluminium foils and other materials as a distributor from the year 2003-04, has gone wrong in holding that the said activity cannot be considered to be a revival of the old business. The Commissioner had not adverted to the judgment of the Division Bench of this Court, which we have referred to in the earlier portion of the order. Having noticed the above, the Tribunal has righty appreciated the law and issue and has found that even though there was a temporary break, the assessee continued the business in distributorship and also maintained the establishment, thereby incurred the expenditure which were wholly and exclusively for the purpose of the business. This finding of the Tribunal is in tune with the order of the Division Bench in the above case. Even though the Tribunal had recorded the facts and the principles of law, while concluding, the Tribunal has not considered the case on merits. In view of the same, the Commissioner of Income Tax is wrong to that extent and the order of the Commissioner is set aside.
8. In respect of the other ground viz., the assessee claimed interest expenditure of Rs.7,64,562/- is concerned, the assessee purchased aluminium from Nalco and was making regular payments to the purchaser and the Commissioner of Income Tax, in paragraph 11 of the order and also the annexure, held this issue as follows: “11. I am unable to agree with the learned submissions of the assessee for the following reasons: The assessee was purchasing aluminium from Nalco and was making regular payments towards purchases. The chart showing the date of invoice, the date of payment and the interest working is enclosed as Annexure I to this order. As per this chart the last payment towards the purchase amount was made on 14.3.1996. On this date amount of 8 invoices was paid. Corresponding purchases were made in the year 1994. As per the agreement with Nalco on any delayed payment the assessee had to pay 9% interest. Therefore, the liability to pay interest accrued in the respective years themselves. No liability towards interest has accrued after 14.03.1996. It is undisputed that the assessee has been following mercantile system of accounting and on this basis this liability does not pertain to the year under consideration and just because payment has been made it cannot be allowed as an expenditure of this year. Annexure-I
Madras Electrical Conductor:
Dt of payment
9. From a reading of the above, it is clear that there is a delayed payment. Therefore, the assessee had to pay 9 per cent interest. But the learned counsel appearing for the assessee was unable to produce any material to show that the liability to pay interest accrued during the accounting year. The only argument advanced by the counsel was that the assessee deducted TDS and the amount was also remitted into Government account. Therefore, the interest payment accrued during the accounting year. From the record, there is no material to show that the liability towards interest had accrued after 14.3.96 since the assessee is following mercantile system of accounting. There is also no material to show that there was any compromise between the assessee and Nalco as to the payment of interest and by virtue of the agreement, paid the interest during the accounting year. When we asked a specific question on the above to the learned counsel for the assesse, the counsel was unable to produce any evidence. Even though these facts were already recorded by the Tribunal in its order, no finding in respect of the same was given on merits. In view of the above factual position, to that extent the order of the Commissioner of Income Tax passed under Section 263 is valid in law and he has jurisdiction to revise the order. Under these circumstances, we answer the first substantial question of law in favour of the revenue and against the assessee.
10. In respect of the second substantial question of law, we partly allow the appeal in favour of the assessee i.e., the business loss is allowed to be set off against the income from house property. In respect of the interest expenditure of Rs.7,64,562/-, the assessing officer is wrong in allowing the same. Therefore, we hold against the assessee i.e., the total amount of business loss is Rs.17,45,392/-. Out of the same, Rs.7,64,562/- is disallowed against the assessee and the balance would be set off against the income from house property. Under these circumstances, the second substantial question of law is answered partly in favour of the assessee and partly in favour of the revenue. Even though the Tribunal has not given any finding on merits in spite of the materials available on record, instead of remanding the matter to the Tribunal, since the assessment year is relating to 2001-02, we have considered the case on merits and accordingly dispose of the tax case appeal on the above terms. There shall be no order as to costs.