L. Ve. Vairavan Chettiar vs Commissioner of Income Tax

Venkatadri, J.—This reference u/s 66(2) of the Income Tax Act arises out of the proceedings for the assessment year 1955-56 (accounting

year ended March 31, 1955).

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.

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.

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.

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 seen that 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.

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.

The assessee filed an application u/s 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 u/s 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 valid in law ?

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 ?

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.

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 concern though a very

quiet one.

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.

In our own High Court, a similar question had to be considered in GENERAL CORPORATIONS LTD. Vs. COMMISSIONER OF

INCOME TAX, MADRAS., . 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 the

fact 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 carried

on must depend in each case on its own facts and not on any general theory of law.

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 Vs. Commr. of Income Tax, .

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 MESSRS. HIRALAL KALYANMAL AND ANOTHER Vs. RE., , 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.

In Commissioner of Income Tax v. Arunachalam Chettiar, AIR 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 follows that an assessee is entitled to set off profits in one business, against

losses in another.

This principle has been affirmed by the Privy Council in Arunachalam Chettiar v. Commissioner of Income Tax, [1936] 4 ITR 173. And the

same principle has been followed by the Supreme Court in ANGLO-FRENCH TEXTILE COMPANY, LTD. Vs. COMMISSIONER OF

Income Tax, MADRAS., . 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 u/s 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.

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.