The Pr. Commissioner Of Income Tax Alwar v. M/S Khaitan Chemicals Limited, B-522,, Industrial Area, Bhiwadi, Alwar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 282 / 2017 The Pr. Commissioner of Income Tax Alwar. ----Appellant Versus M/s Khaitan Chemicals Limited, B-522,, Industrial Area, Bhiwadi, Alwar. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 20/11/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has dismissedthe appeal of the department. 2.Counsel for the appellant has framed following substantialquestions of law:- “(i)Whether the Tribunal was legallyjustified in allowing the set off of broughtforward losses of Rs.1,99,95,292/- specificallywhen as per Section 72(1) the loss could beallowed only against profits and gains ofbusiness but the manufacturing activities theassessee were closed, the factory was lockedand was taken over by RFC in July 1991? (ii) Whether the tribunal was legally justified inallowing the set off of brought forward lossesagainst the income earned from commissionactivities treating it to be the same business? (iii) Whether the tribunal was legally justified inallowing set off of the carried forward businesslosses by holding that there is a commonmanagement, administration, organization,funds, employees and unity of control thusthere is a interlacing, interdependence andinterconnection between the manufacturing,trading and commission activity of theassessee, merely on the basis of writtensubmissions specifically when the assesseefailed to substantiate its claim by way ofdocumentary evidences during the set asideassessment/Appellate proceedings? (iv) Whether the tribunal was legally justified inallowing the set off of business loss when forthe immediately preceding year i.e. AY 1993-94 the Assessing Officer disallowed the set offof brought forward business loss which wasconfirmed by the CIT(A) and no appeal waspreferred by the assessee before the tribunal? 3.The facts of the case are that the assessee company was earlier carrying on three activities i.e. manufacturing, trading ofmanufacturing goods and commission. In the A.Y. underconsideration, the assessee could not carry out any activity ofmanufacturing and trading of manufactured goods. It had earnedprofit of Rs.70,63,640/- from commission and some other sources.The assessee claimed for set off against the losses broughtforward from earlier years. The assessee also claimed for set offof unabsorbed depreciation of the earlier years against the incomeof the current assessment year. The lower authorities allowed theclaim of set off of unabsorbed depreciation of earlier years againstthe income of the current assessment year but have not allowedthe claim of set off of losses brought forward from earlier years against the same was the issue questioned by the assessee beforethe Hon’ble ITAT, Jaipur. against the same was the issue questioned by the assessee beforethe Hon’ble ITAT, Jaipur. 3.1The ld. CIT(A) had denied the claim of the assessee that thebusiness of manufacturing goods and the commission businesscarried on during this year was one and the same because both ofthem had common management, common administration,common funds that common place of business etc. on the basisthat for manufacturing of goods the assessee needed the factory,which was closed in July, 1991, the workers of the factory and themanagement of it were different than the workers out sourced forthe commission business, the places of two businesses were alsonot common because the manufacturing of goods was done in thefactory, where as the commission business, was done in office, thefunds may be overlapping to minor extent but the funds obtainedthrough loans etc. for constructing and opearting the factory werecertainly different from the funds used for the commission werenot inter-connected or inter-dependent and therefore, they werenot one business. 4.Counsel for the appellant has taken us to the order of the AOand contended that AO after taking into consideration has rightlyobserved as under:- “The assessee had income only fromcommission and other income and couldnot carry out any manufacturing activityduring the year under consideration andthat it could not affect any sale out of thetraded goods lying in the stock. Submitted that the assessee companycontinued to carry out the activity underthe same organization i.e. in the name ofM/s. Khaitan Chemicals Ltd. To earn commission income, it had notemployed any additional work force andno development of additional funds. The balance sheet was signed in all theyears by Sh. I.P. Khaitan and Smt. KiranKhaitan in all the relevant years and thatthere is no change in share holding. That funds of one activity were utilized forother activities. That the manager and other staff of thecompany who were looking after themanufacturing and commission activitywere same during the earlier assessmentyears. To look into the set aside issue, theassessee’s AIR was asked to specificallyproduce minutes books of the companyand loan agreements from the bank forloans taken and documents of the subsidyreceived. The assessee’s AIR vide his reply dt.16.11.06 submitted that the issues setaside do not require production ofminutes book and he did not produce thesame. The minutes book was required tosee that regarding the various activitiesof the assessee, who took all thedecisions. It would have also shown thatwho was entrusted the job of carrying outthe various activities at the manageriallevel. This would have provided insightthat whether the assessee had commonform of organization and commonmanagement. Moreover, the unity ofcontrol in the organization would alsohave been verifiable from the minutesbook. The non submission of Minutesbook despite specifically having beenasked to do the same shows assessee’sreluctance in getting the facts verifieddespite the Hon’ble ITAT directions for thesame. The assessee’s AIR also did not submitcopies of the bank loan agreements. Hesubmitted that the assessee had notobtain any fresh bank loan and that theentire loan was carried forward fromearlier years and that were reflected inthe balance sheet. The assessee’s A/Rwas specifically asked to produce thecopies of bank loans taken and thedocuments of the subsidy received. Thebank loans documents were needed toverify the claim of the assessee that theloans shown in the balance sheet in thisyear were common to the earlier years.The loan agreement documents wouldhave clarified that whether the loansgiven were specifically for aprticularbusiness activity of the company or ingeneral. Normally the loan agreementspecifies the purpose for which the loan isto be used in the business. Theassessee’s AIR has stated that loans areshown in balance sheet. The position ofbalance sheet was available to theappellate authorities also, but they hadset-aside the issue to verify theassessee’s claim that funds were commonfor all the activities of the assessee Theposition is that loans will have to beshown in balance sheet, but it does notgive any clarify on the issue underconsideration, in the absence ofproduction of copies of loan agreementsthat whether these loans were commonto all activities of the company or forspecific business activities. The assesseehas not discharged its onus of proving thesame. Hence, the claim of the assesseethat there were common funds in thecompany for its business can not beaccepted. The assessee did not produce any booksof accounts, bills or vouchers to provecommon management, unity of controland common form of organization for thetwo activities of the company. It wasspecifically asked to produce any books ofa/cs or documents it wished to rely uponin support of its claim of common fund,common form of organization, commonmanagement and unity of control. Assessee’s A/R has not produced anydocumentary evidence in support of thesame. On the basis of the above discussion, itcan be deducted that the assessee’s A/Rmerely submitted written submission insupport of his claim for common fund,common form of organization, commonmanagement and unity of control. Noproof or evidence or details asked for bythis office were produced in support ofthe claim of the assessee in the set-asideproceedings. These issues were discussedbefore the ld. CIT(A) and Hon’ble ITATalso. The Hon’ble ITAT set aside thematter to the file of the Assessing Officerto verify from records the substance inthe claim of the assessee. As discussedabove the assessee has failed to provethe same. Moreover, assessee did notprefer second appeal against the firstappellate order denying the similar claimin the A.Y. 1993-94. Therefore, it isdeduced that the assessee does not havecommon fund, common form oforganization, common management andunity of control and hence, no inter-connection, inter-locking and inter-dependence between the two activities ofthe company.” 5.However, the CIT(A) has observed as under:- (c) Now coming on the merit of the case,the arguments of the counsel carries muchsubstance in regard to the “closure of thebusiness” and the “closure of the unit”. The“Unit” and the “business” of the assesseeare two separate and distincy entities. Onebusiness may have several units and theclosure of one unit necessarily will not leadto the inference that there is a closure ofthe business. In the instant case, it isindisputable fact that the factory of theassessee company has been taken over byRFC in the month of July 1991. Since thereis no sale or manufacturing activity duringthe year under consideration, it will not 5.However, the CIT(A) has observed as under:- (c) Now coming on the merit of the case,the arguments of the counsel carries muchsubstance in regard to the “closure of thebusiness” and the “closure of the unit”. The“Unit” and the “business” of the assesseeare two separate and distincy entities. Onebusiness may have several units and theclosure of one unit necessarily will not leadto the inference that there is a closure ofthe business. In the instant case, it isindisputable fact that the factory of theassessee company has been taken over byRFC in the month of July 1991. Since thereis no sale or manufacturing activity duringthe year under consideration, it will not lead to the final conclusion that thebusiness in respect of which the loss iscomputed has not been carried onparticularly in view of the factual positionnarrated by the learned counsel andmentioned in para number 5.1 to 5.10herein above, therefore, the closure ortake over of the unit will not have anyrepercussion over the right to carryforward and set off of the carry forward ofbusiness losses so long as the otherconditions are satisfied. The assesseecompany was maintaining one set of booksof accounts for all its activities, wherefromit is deriving the profit or losses in aconsolidated manner. It is a strongindication of the fact that there is commonmanagement, common fund and unity ofcontrol which leads to the interconnection,interlacing and interdependence betweenall the activities of the assessee company.The appellant is having the carried forwardbusiness losses as on 01.04.1993 ofRupees 2,17,36,471.00 spanning fromassessment year 1988-89 to 1991-92,wherein it was also having the commissionincome also. It is not the case here thatanother activity have been started afterthe closure of earlier activity, on thecontrary both the activities exist together,which is again establishes the factum ofinterconnection,interlacingandinterdependence. It is also seen that theincome earned from commission businesswas utilized in the meeting of the liabilityof the manufacturing activities asmentioned in para number 19 hereof,which again proves the factum ofinterlacing,interdependenceandinterconnection of the two activities. Myattention was also drawn to the tablereproduced in para number 17, whereinthe issue of same funds, samemanagement, no change in theshareholding, same place of business andcommon bankers were addressed by theappellant, but both the Assessing Officerhave not given any finding thereto eveninformation sought at the time of set-asideproceedings, the ld. AO has not examinedthe information available on recordregarding common management, common funds and unity of control. The facts statedin para number 17 are very vital piece ofinformation in order to determine the issueof unity of control and management,employment of same capital, commonfunds, common employees as laid down bythe apex court in the case of Setab GunjSugar Mills v/s Commissioner of Income-Tax 41 ITR 72 (SC) as relied upon by thelearned counsel. These information goes toestablish in an unequivocal terms thatthere is a common management, unity ofcontrol, common funds, common place ofbusiness, common set of books of accunts,common organization and commonadministration and thus there is ainterdependence,interlacingandinterconnection between the activitiescarried on by the assessee company. Thefacts of the case of CIT v/s SM AhmedHussain’s case 164 ITR 525 (Mad) (paranumber 26.a supra) squarely applies to thecase in hand, wherein distribution ofcinema films and purchase and sale ofnational Defence Remittance Schemecertificate were being carried on by theassessee. After the closure of the sale andpurchase of National Defence RemittanceScheme and the loss suffered therein, itwas allowed by Tribunal and confirmed byHonourable madras High Court on theground that transaction of both thebusiness had been entered in a single setaccount books and the funds required forthe two activities had also come from acommon source, there was unity of controland management in respect of the twoactivities. While accepting the appeal of theappellant, I draw strength from thedecision of apex court in the case ofProduce Exchange Corporation v/s CIT,Calcutta 77 ITR 739 (SC), wherein it hasbeen held that “the decisive test is the unitof control and not the nature of two line ofbusiness and that the tribunal was right inholding that the share business and otherbusiness carried on by the appellantcompany constituted the same businesswithin the meaning of section 24(2)”. Thisdecision was again followed by apex courtin the case of the B.R. Ltd v/s CIT 113 ITR647 (SC). “The decisive test as held by this court in produce exchange corporation 77ITR 739 (Supreme Court) is unity ofcontrol and not the nature of the two linesof the business. It was expressly statedthat it was true that there was a commoncontrol and common management of thesame board of Directors of the business ofimport and export. Thus, the unity ofcontrol and he other circumstancesadverted to above show that there wasdovetailing or interlacing between thebusiness of import and the business exportcarried on by the ‘a’ and that theyconstitute the same business.” In ananother land mark decision of honourableSupreme Court in the case of CIT V/sPrithvi insurance Co Limited 63 ITR 632(SC), it has been held that “theinterconnection,inter-lacing,inter-dependence and unity of control arefurnished in this case by the existence ofcommon management, common funds andcommon place of business.” consideringthe above judicial pronouncements andfacts of the case, I have no hesitation inreaching to a conclusion that the appellantis entitled to have the set off of the carriedforward business losses of Rupees1,99,95,292.00 against the profit ofRupees 78,80,315.00 for the year underconsideration, on the ground that there is acommonmanagement,commonadministration, common organization,common funds, unity of control andcommon employee thus there is ainterlacing,interdependenceandinterconnectionbetweenthemanufacturing, trading and commissionactivity of the assessee company. Thus theappeal is allowed and the appellant will getthe necessary relief. 6.While relying on the observations of CIT(A), the tribunal hasheld as under:- “In light of above discussions and in theentirety of the facts and circumstances ofthe case, the assessee company is held 6.While relying on the observations of CIT(A), the tribunal hasheld as under:- “In light of above discussions and in theentirety of the facts and circumstances ofthe case, the assessee company is held eligible to claim set off of brought forwardunabsorbedbusinesslossesofRs.1,99,95,262/- against and to theextent of the profit of the year underconsideration amounting to Rs.78,80,315.The result, the grounds taken by Revenueare dismissed.” 7.In view of the observations made by the tribunal, we are in complete agreement with the view taken by the tribunal. Hence,no substantial question of law arises. 8.The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 23.