HC observed that the issue of classification of income on the sale of shares as business income or as short-term capital gains is to be decided the facts of each case. The tests to be applied for such determination is provided in CBDT Circular No.4 of 2007. We note that the Tribunal kept in mind the tests as provided in the above Circular in the context of the facts and found is that these investments were out of its own funds and not borrowed funds, further it maintained a distinction between trading in shares and investments. Thus, two portfolios one for “Investment” and other for “Trading”. Besides for the earlier years, the Revenue accepted the claim of short-term capital gain. Thus, the income has to be taxed as short-term capital gain. We are of the view that respondent holding the shares for a short period, will not convert the capital gain into business income. This would be contrary to be legislative mandate which itself provides that when the investment is held for less than 12 months, it is to be termed as short-term capital gain,” the bench said.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department.
2. Counsel for the appellant has framed following substantial questions of law:-
“(i) Whether the Tribunal was legally justified in allowing the set off of brought forward losses of Rs. 1,99,95,292/- specifically when as per Section 72(1) the loss could be allowed only against profits and gains of business but the manufacturing activities the assessee were closed, the factory was locked and was taken over by RFC in July 1991?
(ii) Whether the tribunal was legally justified in allowing the set off of brought forward losses against the income earned from commission activities treating it to be the same business?
(iii) Whether the tribunal was legally justified in allowing set off of the carried forward business losses by holding that there is a common management, administration, organization, funds, employees and unity of control thus there is a interlacing, interdependence and interconnection between the manufacturing, trading and commission activity of the assessee, merely on the basis of written submissions specifically when the assessee failed to substantiate its claim by way of documentary evidences during the set aside assessment/Appellate proceedings?
(iv) Whether the tribunal was legally justified in allowing the set off of business loss when for the immediately preceding year i.e. AY 1993- 94 the Assessing Officer disallowed the set off of brought forward business loss which was confirmed by the CIT(A) and no appeal was preferred 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 of manufacturing goods and commission. In the A.Y. under consideration, the assessee could not carry out any activity of manufacturing and trading of manufactured goods. It had earned profit of Rs.70,63,640/- from commission and some other sources. The assessee claimed for set off against the losses brought forward from earlier years. The assessee also claimed for set off of unabsorbed depreciation of the earlier years against the income of the current assessment year. The lower authorities allowed the claim of set off of unabsorbed depreciation of earlier years against the income of the current assessment year but have not allowed the claim of set off of losses brought forward from earlier years against the same was the issue questioned by the assessee before the Hon’ble ITAT, Jaipur.
3.1 The ld. CIT(A) had denied the claim of the assessee that the business of manufacturing goods and the commission business carried on during this year was one and the same because both of them had common management, common administration, common funds that common place of business etc. on the basis that for manufacturing of goods the assessee needed the factory, which was closed in July, 1991, the workers of the factory and the management of it were different than the workers out sourced for the commission business, the places of two businesses were also not common because the manufacturing of goods was done in the factory, where as the commission business, was done in office, the funds may be overlapping to minor extent but the funds obtained through loans etc. for constructing and opearting the factory were certainly different from the funds used for the commission were not inter-connected or inter-dependent and therefore, they were not one business.
4. Counsel for the appellant has taken us to the order of the AO and contended that AO after taking into consideration has rightly observed as under:-
“The assessee had income only from commission and other income and could not carry out any manufacturing activity during the year under consideration and that it could not affect any sale out of the traded goods lying in the stock. Submitted that the assessee company continued to carry out the activity under the same organization i.e. in the name of M/s. Khaitan Chemicals Ltd.
To earn commission income, it had not employed any additional work force and no development of additional funds.
The balance sheet was signed in all the years by Sh. I.P. Khaitan and Smt. Kiran Khaitan in all the relevant years and that there is no change in share holding.
That funds of one activity were utilized for other activities.
That the manager and other staff of the company who were looking after the manufacturing and commission activity were same during the earlier assessment years.
To look into the set aside issue, the assessee’s AIR was asked to specifically produce minutes books of the company and loan agreements from the bank for loans taken and documents of the subsidy received.
The assessee’s AIR vide his reply dt. 16.11.06 submitted that the issues set aside do not require production of minutes book and he did not produce the same. The minutes book was required to see that regarding the various activities of the assessee, who took all the decisions. It would have also shown that who was entrusted the job of carrying out the various activities at the managerial level. This would have provided insight that whether the assessee had common form of organization and common management. Moreover, the unity of control in the organization would also have been verifiable from the minutes book. The non submission of Minutes book despite specifically having been asked to do the same shows assessee’s reluctance in getting the facts verified despite the Hon’ble ITAT directions for the same.
The assessee’s AIR also did not submit copies of the bank loan agreements. He submitted that the assessee had not obtain any fresh bank loan and that the entire loan was carried forward from earlier years and that were reflected in the balance sheet. The assessee’s A/R was specifically asked to produce the copies of bank loans taken and the documents of the subsidy received. The bank loans documents were needed to verify the claim of the assessee that the loans shown in the balance sheet in this year were common to the earlier years. The loan agreement documents would have clarified that whether the loans given were specifically for aprticular business activity of the company or in general. Normally the loan agreement specifies the purpose for which the l an is to be used in the business. The assessee’s AIR has stated that loans are shown in balance sheet. The position of balance sheet was available to the appellate authorities also, but they had set-aside the issue to verify the assessee’s claim that funds were common for all the activities of the assessee The position is that loans will have to be shown in balance sheet, but it does not give any clarify on the issue under consideration, in the absence of production of copies of loan agreements that whether these loans were common to all activities of the company or for specific business activities. The assessee has not discharged its onus of proving the same. Hence, the claim of the assessee that there were common funds in the company for its business can not be accepted.
The assessee did not produce any books of accounts, bills or vouchers to prove common management, unity of control and common form of organization for the two activities of the company. It was specifically asked to produce any books of a/cs or documents it wished to rely upon in support of its claim of common fund, common form of organization, common management and unity of control.
Assessee’s A/R has not produced any documentary evidence in support of the same.
On the basis of the above discussion, it can be deducted that the assessee’s A/R merely submitted written submission in support of his claim for common fund, common form of organization, common management and unity of control. No proof or evidence or details asked for by this office were produced in support of the claim of the assessee in the set-aside proceedings. These issues were discussed before the ld. CIT(A) and Hon’ble ITAT also. The Hon’ble ITAT set aside the matter to the file of the Assessing Officer to verify from records the substance in the claim of the assessee. As discussed above the assessee has failed to prove the same. Moreover, assessee did not prefer second appeal against the first appellate order denying the similar claim in the A.Y. 1993-94. Therefore, it is deduced that the assessee does not have common fund, common form of organization, common management and unity of control and hence, no inter- connection, inter-locking and inter-dependence between the two activities of the 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 much substance in regard to the “closure of the business” and the “closure of the unit”. The “Unit” and the “business” of the assessee are two separate and distincy entities. One business may have several units and the closure of one unit necessarily will not lead to the inference that there is a closure of the business. In the instant case, it is indisputable fact that the factory of the assessee company has been taken over by RFC in the month of July 1991. Since there is no sale or manufacturing activity during the year under consideration, it will not lead to the final conclusion that the business in respect of which the loss is computed has not been carried on particularly in view of the factual position narrated by the learned counsel and mentioned in para number 5.1 to 5.10 herein above, therefore, the closure or take over of the unit will not have any repercussion over the right to carry forward and set off of the carry forward of business losses so long as the other conditions are satisfied. The assessee company was maintaining one set of books of accounts for all its activities, where from it is deriving the profit or losses in a consolidated manner. It is a strong indication of the fact that there is common management, common fund and unity of control which leads to the interconnection, interlacing and interdependence between all the activities of the assessee company. The appellant is having the carried forward business losses as on 01.04.1993 of Rupees 2,17,36,471.00 spanning from assessment year 1988-89 to 1991-92, wherein it was also having the commission income also. It is not the case here that another activity have been started after the closure of earlier activity, on the contrary both the activities exist together, which is again establishes the factum of interconnection, interlacing and interdependence. It is also seen that the income earned from commission business was utilized in the meeting of the liability of the manufacturing activities as mentioned in para number 19 hereof, which again proves the factum of interlacing, interdependence and interconnection of the two activities. My attention was also drawn to the table reproduced in para number 17, wherein the issue of same funds, same management, no change in the shareholding, same place of business and common bankers were addressed by the appellant, but both the Assessing Officer have not given any finding thereto even information sought at the time of set-aside proceedings, the ld. AO has not examined the information available on record regarding common management, common funds and unity of control. The facts stated in para number 17 are very vital piece of information in order to determine the issue of unity of control and management, employment of same capital, common funds, common employees as laid down by the apex court in the case of Setab Gunj Sugar Mills v/s Commissioner of Income-Tax 41 ITR 72 (SC) as relied upon by the learned counsel. These information goes to establish in an unequivocal terms that there is a common management, unity of control, common funds, common place of business, common set of books of accunts, common organization and common administration and thus there is a interdependence, interlacing and interconnection between the activities carried on by the assessee company. The facts of the case of CIT v/s SM Ahmed Hussain’s case 164 ITR 525 (Mad) (para number 26.a supra) squarely applies to the case in hand, wherein distribution of cinema films and purchase and sale of national Defence Remittance Scheme certificate were being carried on by the assessee. After the closure of the sale and purchase of National Defence Remittance Scheme and the loss suffered therein, it was allowed by Tribunal and confirmed by Honourable madras High Court on the ground that transaction of both the business had been entered in a single set account books and the funds required for the two activities had also come from a common source, there was unity of control and management in respect of the two activities. While accepting the appeal of the appellant, I draw strength from the decision of apex court in the case of Produce Exchange Corporation v/s CIT, Calcutta 77 ITR 739 (SC), wherein it has been held that “the decisive test is the unit of control and not the nature of two line of business and that the tribunal was right in holding that the share business and other business carried on by the appellant company constituted the same business within the meaning of section 24(2)”. This decision was again followed by apex court in the case of the B.R. Ltd v/s CIT 113 ITR 647 court in produce exchange corporation 77 ITR 739 (Supreme Court) is unity of control and not the nature of the two lines of the business. It was expressly stated that it was true that there was a common control and common management of the same board of Directors of the business of import and export. Thus, the unity of control and he other circumstances adverted to above show that there was dovetailing or interlacing between the business of import and the business export carried on by the ‘a’ and that they constitute the same business.” In an another land mark decision of honourable Supreme Court in the case of CIT V/s Prithvi insurance Co Limited 63 ITR 632 (SC), it has been held that “the interconnection, inter-lacing, inter- dependence and unity of control are furnished in this case by the existence of common management, common funds and common place of business.” considering the above judicial pronouncements and facts of the case, I have no hesitation in reaching to a conclusion that the appellant is entitled to have the set off of the carried forward business losses of Rupees 1,99,95,292.00 against the profit of Rupees 78,80,315.00 for the year under consideration, on the ground that there is a common management, common administration, common organization, common funds, unity of control and common employee thus there is a interlacing, interdependence and interconnection between the manufacturing, trading and commission activity of the assessee company. Thus the appeal is allowed and the appellant will get the necessary relief.
6. While relying on the observations of CIT(A), the tribunal has held as under:-
“In light of above discussions and in the entirety of the facts and circumstances of the case, the assessee company is held eligible to claim set off of brought forward unabsorbed business losses of Rs.1,99,95,262/- against and to the extent of the profit of the year under consideration amounting to Rs. 78,80,315. The result, the grounds taken by Revenue are 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.