Section 72(1)(i) of the Income-tax Act, 1961, stipulates that for any assessment year, if the net result of the computation under the head "Profits and Gains of business or profession" is a loss, the whole loss (subject to other provisions of Chapter VI) can be carried forward to the following assessment year and shall be set off against the profits and gains of any business carried on by the assessee and assessable for the subsequent year.
The proviso thereafter imposes a further condition to the effect that the business for which the loss was originally computed continues to be carried on by the assessee in the previous year relevant for the following assessment year. In determining whether the business is the same a fairly adequate test would be whether there was inter-connection, interlacing, interdependence and unity by the existence of common management, common business organisation, common administration, common fund and a common place of business.
It is impossible to formulate any infallible general rule or test applicable to all cases for determining whether two businesses are separate or whether they constitute one and the same business. The determination of that question depends upon the facts and circumstances of each case.
The fact that the concerns are carried on in different names, or in different premises or localities, or even in different countries, or that each place of business has its separate capital, or that the accounts are maintained separately, or that there are separate agents or staff to run each business, or that the nature of the business operations of the character of the commodities dealt in is widely different e.g. in case of multiple stores and speculation in various commodities, does not necessarily make them separate and distinct businesses.
The test of inter-connection, inter-unity and inter-dependence, in respect of finance and management, have been elaborated by the Supreme Court in BR Limited v CIT (113 ITR 647).
In this case, the company had incurred a loss in the business of import and sale of fabrics. This business was closed during the relevant accounting year and subsequently the company started the business of exporting cotton textiles and earned profits in the new business.
The Supreme Court held that for the purposes of ascertaining whether the two lines of business constitute the same business, the decisive test was unity of control and not the nature of the two lines of business. The court held that it was elementary that in law the two words 'same' and 'similar' connote different concepts and, therefore, the carrying on of a similar business would not meet the requirements of the section. The business had to be the same as before.
The court reiterated that the only objective tests for determining whether two businesses were the same was to find out the existence of inter-connection, inter-lacing, inter-dependence and unity between two or more businesses. In other words, if there was complete unity of control and management and there was financial inter-dependence, two lines of business would be treated as being the same. The court further elucidated that a common management, a common administration, a common business organisation, a common fund and a common place of business would clearly indicate the inter-lacing and inter-dependence of two more businesses carried on by an assessee.
In Veecumsees v CIT (220 ITR 185), the facts were that the assessee ran a jewellery business. It then commenced business also in the exhibition of cinematographic films. In 1961, it obtained loans for building a cinema theatre. The theatre was built in 1962 and was run by the assessee until July 31, 1965, when it was transferred to another firm. The assessing officer declined the deduction for the assessment years 1967-68, 1968-69 and 1969-70, on the ground that the business of exhibition of films in the said theatre was no longer in existence.
The Supreme Court held that the tribunal was right in concluding that such interest had to be treated as a deduction under section 36(1)(iii) of the act. The loans had been obtained for the purposes of the assessee's business. The fact that the particular part of the business, for which the loans had been obtained, had been transferred or closed did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business.
In CIT v Amarsinghji Mills Ltd (286 ITR 129), the company was manufacturing cloth from yarn and then selling the same in the market. During the year under consideration the entire textile unit was sold to K. It was the case of the revenue that the assessee started a new business of purchasing grey cloth from the market, sending it for processing and after having it processed selling it in the open market. On a reference, the Gujarat High Court held that the tribunal had recorded that the assessee had common management and common control of business, that there was no difference in the business carried on by the assessee in the two different accounting periods considering the unity of control.
In view of the ratio of the aforesaid legal decisions, every businessman who wants to change his business activities would need to ensure that there is connectivity and linkages in the form of common management and financial inter-dependence. Most importantly, the new activity must be commenced before the old business is finally closed. In other words, the common thread of continuance must flow between the new activity and the old one so that the losses incurred in the business, which has been discontinued can be set-off against the profits of the new business, which has commenced.
The author is advocate, Supreme Court