Commissioner of Income Tax vs Cachar Native Joint Stock Ltd.

S.N. Phukan, J.—The following question has been referred for the opinion of this court u/s 256(1) of the Income Tax Act, 1961, on the prayer of the Revenue. The question runs as follows :

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner of Income Tax (Appeals) on the ground that, having regard to the totality of the facts and circumstances of the case and the ratio of the decisions cited by both the sides before the Tribunal, the claim of the assessees that the earlier years'' unabsorbed business losses and unabsorbed depreciation were adjustable against other income, was allowable, even though the condition in the proviso to Section 72(1) that the business in which the loss was originally computed was not satisfied in this case, as the growing and manufacturing of the tea was not in existence after 1973?"

The present reference relates to the assessment years 1976-77 to 1981-82. As the questions in all the assessment years are common, the appeal was disposed of by the Commissioner of Income Tax (Appeals) by a consolidated order dated July 19, 1983, allowing the appeal. The Commissioner held that the assessee is entitled to set off the loss incurred in the earlier years. The order of the Commissioner was affirmed by the Appellate Tribunal by a consolidated order dated February 21, 1985, vide annexure ''C'' to the paper book.

The assessee is a company incorporated in the year 1976 with various objects including acquiring of land for tea plantations, manufacturing of tea, etc., having three tea estates. The assessee-company suspended its manufacturing operations of tea due to unavoidable market conditions and also the financial condition of the company from the accounting year 1974, although it continued to maintain tea plantations and other assets including plant and machinery for manufacturing tea. Subsequently, in the annual general meeting of the company held on June 30, 1977, it was decided to resume manufacturing operations, but could not be done till the accounting year 1977. The assessee claimed for setting off of earlier years'' unabsorbed loss of tea manufacturing business which was disallowed by the Income Tax Officer. However, the Commissioner of Income Tax (Appeals) noted that the company had godowns for storing manufactured tea and garden stores, etc., and the company let out some of the commercial assets for having an additional source of business income and the company was also assessed to Income Tax on the aggregate income of different branches of business. According to the Commissioner, the income from letting of commercial assets, viz., godown, office, etc., was assessable as income from business and mere suspension of manufacturing of tea for various reasons did not mean that the company has discontinued its business. The Commissioner also noted that the plant and machinery of the company had to be maintained, so also the employees for starting manufacturing of finished tea in future. It was also noted that the company was running its tea gardens by selling green leaves and maintaining its plant and machinery. On these facts, the Commissioner held that the company had neither abandoned nor discontinued its business as recorded by the Income Tax Officer. Relying on the decision of the apex court, it was also held that mere substituted use of commercial assets does not change or alter the nature of those assets. According to the Commissioner, the assessee was entitled to get unabsorbed previous losses and depreciation determined as per the Act and the Rules.

The Appellate Tribunal accepted the views of the Commissioner and on the facts and materials on record was of the opinion that the Commissioner was justified in accepting the claim of the assessee. Hence, the present reference.

We have heard Mr. D. K. Talukdar, learned counsel for the Revenue, and Mr. N. M. Lahiri, the learned senior advocate, for the assessee.

According to Mr. Talukdar, to get the benefit of carry forward and set off of business losses u/s 72 of the Act, the assessee must establish, reconstruct or revive the business which the assessee had discontinued in terms of the said Section 72. On the other hand, Mr. Lahiri, learned counsel for the assessee, has urged that the assessee-company never stopped or suspended or discontinued its business, but only discontinued a part of the process of manufacturing tea, viz., the factory, and, as such, it cannot be held that there was discontinuance or suspension of the business of the assessee. According to Mr. Lahiri, whether there was suspension or discontinuance of the business of the assessee being a question of fact and as both the Commissioner and the Tribunal held that there was no discontinuance or suspension of business of the assessee, the said finding is binding on this court. We find considerable force in the submission of learned counsel for the assessee.

Incidentally, Mr. Lahiri has urged that the last portion of the question, viz., "even though the condition in the proviso to Section 72(1) that the business in which loss was originally computed was not satisfied in this case, as the growing and manufacturing of tea is not in existence after 1973" is not based on the order of the Appellate Tribunal and as such the above portion of the question does not arise and also is not legally framed. In this connection, learned counsel has drawn our attention to the commentaries at pages 1548-1549 of Kanga and Palkivala''s The Law and Practice of Income Tax, Eighth Edition, Vol. I, to bring home the above point. The learned author has stated that no question can be referred to the High Court u/s 256 unless it arises out of the order of the Tribunal. According to Mr. Lahiri, the question of the growing and manufacturing of tea by the company was never agitated before the Tribunal and the only question was suspension/discontinuance of manufacturing of tea. The point urged by Mr. Lahiri has substance.

According to Mr. Talukdar, learned counsel for the Revenue, the manufacturing of tea was stopped and as it was not started within a period of three years, the assessee cannot claim set off. Drawing our attention to Section 72, more particularly, the following words, viz.," under the head ''Profits and gains of business or profession'' is a loss to the assessee ", Mr. Talukdar has urged strenuously that the set off must be for a particular head. According to learned counsel, as there was no loss for three years under the head of manufacture of tea, the assessee cannot claim any benefit. We are unable to accept the contention of learned counsel as, in our opinion, the head "Profits and gains of business or profession" is in respect of the activities of the company and not for a particular branch of activity of a company. We may also state that the Commissioner as well as the Tribunal held that there was revenue income as well as expenditure for letting out the godown, etc., and maintaining the employees for manufacturing of tea. So, we are unable to accept the contention.

In support of the contention, learned counsel for the Revenue has drawn our attention to a decision of the Allahabad High Court in J.K. Woollen Manufacturers Private Ltd. Vs. Commissioner of Income Tax, wherein it was held that business loss can be carried forward and adjusted only if the business in which loss was suffered, continued to be in existence. On this point, there cannot be any dispute. But, in the case in hand, the company never stopped its business of growing tea and what was stopped or suspended was converting green leaves into black tea and instead the company sold the green leaves. In the case before the Allahabad High Court, we find that the company completely discontinued its manufacturing business and did not carry it on thereafter and what the company did was to sell raw materials and finished goods that were left with them. Another decision on which learned counsel for the Revenue has placed reliance was rendered by the Kerala High Court in S.P.V. Bank Ltd. Vs. Commissioner of Income Tax, . From the facts of that case, we find that the bank in question was carrying on business in banking till April, 1963, and thereafter, the said business was taken over by another bank. After the take-over, the assessee-bank did not make any fresh advances or receive deposits and the only activity performed by the assessee-bank was taking steps for realisation of the amounts outstanding by way of advances to various parties in order to reduce its liability to the bank which took over the banking business. On these facts, the High Court held that the Tribunal was right in holding that during the relevant assessment years, the assessee did not carry on any business activities and was not entitled to any deduction by way of business expenditure to carry forward the loss. The above ratio is also not applicable to the case in hand as the assessee in the present reference continued its activities as held by the Commissioner and also the Tribunal.

Learned counsel for the Revenue has placed reliance on a decision of the apex court in New Savan Sugar and Gur Refining Co., Ltd. Vs. Commissioner of Income Tax, Calcutta, In that case, the assessee-company, due to reasons stated in a letter of its managing agents held in an extraordinary general meeting in March, 1946, and on an authority given to the directors in the said meeting, executed a lease in favour of another company for running the concern on a payment of royalty per annum. The question that arose was whether the income which arose for the assessment year from the lease should be assessed u/s 10 or 12 of the Indian Income Tax Act, 1922, and the appellant should be allowed additional depreciation and development rebate. The apex court held that, on the terms of the lease deed, the intention of the appellant was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as commercial assets during the period of lease and further, as the intention of the appellant-company was to go out of the business altogether so far as the factory and machinery were concerned, the income from the lease could not be assessed u/s 10, but was liable to be assessed u/s 12 of the old Income Tax Act. This ratio is also not applicable to the case in hand as, from the facts, it is clear that there was absolutely no intention to completely discontinue manufacture of black tea and it was only suspended for a particular period in view of the facts stated above and on top of that, the assessee-company in the present case not only maintained its machinery but also kept the employees to restart the manufacturing process.

To bring home the point that the benefit of Section 72 of the Act shall not be available if a particular branch of the business is discontinued for more than three years, learned counsel for the Revenue has placed reliance on a decision of the Calcutta High Court in Tinsukia Development Corporation Ltd. Vs. Commissioner of Income Tax, According to learned counsel, as manufacturing of tea comes under a different head and as this part of the business was discontinued for more than three years, the assessee is not entitled to claim set off.

In Tinsukia Development Corporation Ltd. Vs. Commissioner of Income Tax, the Tribunal held that the assessee being the owner of the buildings on the leasehold, the income therefrom was assessable under the head " Property " even if the assessee was a company incorporated with the object of buying and developing of landed properties and promoting and developing market. This view of the Tribunal was affirmed by the Calcutta High Court.

In reply, Mr. Lahiri, learned counsel for the assessee, has placed reliance on a decision of the apex court in Commissioner of Income Tax, Andhra Pradesh Vs. Cocanada Radhaswami Bank Ltd., We find from the judgment that the assessee-company, which carried on banking business, held securities as part of the trading assets of its business and, for that particular assessment year, the company incurred a loss under the head " Business " and earned interest on securities and there was a net loss. Although the Income Tax Officer allowed this loss to be set off against income computed under the head " Business" he refused to set it off against the income computed under the head " Interest on securities". On these facts, the apex court held that the scheme of the Income Tax Act is that Income Tax is one tax and Section 6 of the 1922 Act classifies the taxable income under different heads for the purpose of computation of the net income of the assessee.

Although, for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of income from business if the securities are part of the trading assets. The above ratio laid down by the apex court covers the present reference and we hold that the ratio laid down by the Calcutta High Court is not applicable to the case in hand. We again reiterate that, according to the finding of the Tribunal, the business of growing tea was not discontinued by the present asses see-company and that apart, the company also derives some income from the assets meant for manufacturing of tea and this income were taken into account for the purpose of assessing Income Tax.

Mr. Lahiri, learned counsel, has placed reliance on a decision of the Madras High Court in L. Ve. Vairavan Chettiar Vs. Commissioner of Income Tax, . In that case, the assessee was having two businesses, one in arecanut, and the other, a rice mill. Separate accounts were maintained, but both the businesses were inter related and inter-connected with unity of control and common funds. The arecanut business was temporarily suspended and the assessee claimed a net loss of Rs. 1,400 odd which was allowed by the Income Tax Officer. But the Appellate Assistant Commissioner and the Tribunal held that the arecanut business was not carried on in the accounting year and the two succeeding years and, consequently, there was no profit or loss to be computed in respect of that business and disallowed the loss. On this fact, the High Court held that, as the assessee was maintaining the establishment and waiting for improvement of market conditions in arecanut and there was nothing to show that he had completely abandoned or closed the business forever, the business must be deemed to be continuing and, accordingly, held that the order of the Tribunal was not valid in law. We are, respectfully, in agreement with the above ratio laid down by the Madras High Court and, in our opinion, the said ratio squarely applies to the case in hand.

For the reasons stated above, we hold that the provisions of Section 72(1) were fully satisfied in the case in hand and that there was no discontinuance of business of the company. We, therefore, answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs.