TMI Blog2000 (4) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... up in the grounds of appeal that the Assessing Officer erred on facts and in law in not allowing the set off of unabsorbed loss of earlier years against the short-term capital gain and income from that source. It is also stated that even if the interest held to be capital expenditure, the same should have been added to block of assets Brand the resultant capital gain would then be NIL. The assessee has also denied its liability to charge interest under section 234B of the Income-tax Act., 1961. 3. The assessee is a private limited company. The assessee has been engaged in the silk-textile business. It filed (lie return of income for A.Y. 1994-95 showing loss for the current year amounting to Rs. 3 lacs and carry forward loss of earlier years of Rs. 1,01,45,901. The return for A.Y. 1995.-96, was filed showing loss of Rs. 7,65,000 in the current year and also claiming carry forward of loss of earlier years. As per the Assessing Officer the assessee was running a textile mill long back and the same was closed with effect from 1-1-1982 because running of silk-textile mill at Bhavnagar ceased to be profitable because of the competition from similar mills from Surat. The Board of Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping the company alive. Similarly compensation for breach of contract had arisen because the assessee had agreed on 26-2-1988 for the sale of machinery of loom-shed and pressing department to its sister concern for Rs. 40 lakhs. Rs. 20 lakhs were payable before 1-3-1988 and balance Rs. 20 lakhs were payable on or before 1-9-1988. Therefore, the delivery was to be effected and in case of' default the buyer was to reimburse the amount together with incidental charges. The assessee had received the advance but could not deliver the machinery due to technical and other legal reasons. For breach of contract the assessee had to pay compensation. All these losses have been carried forward to be allowed in subsequent years by the assessee. 4. The Assessing Officer assessed the income of A.Y. 1994-95 at Rs. 11,73,000 under the head 'other than business' and held that the same cannot be set off against past losses because the assessee had closed down its business. The income arose to the assessee on account of short-term capital gain of Rs. 11,43,000 and miscellaneous income of Rs. 30,000. Short-term capital gains were in respect of sale proceeds of scrap of building demolished and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son whose interest is affected by the alteration and that the consent of the creditors had been obtained etc. Two shareholders filed petitions before the Gujarat High Court. Thus, according to the Assessing Officer the assessee has not followed the legal procedure laid down by the Company Law for change in its business activity and therefore, it is evident that the assessee in fact has not started any genuine business activity of development of land as claimed by it. Thus, it is concluded by the Assessing Officer that the assessee had not started the business of land development. 6. The ld. CIT(A) after considering the facts of this case and also going through the various court cases on this issue came to the conclusion that no composite business of silk mill and land development was ever in existence in the case of the assessee. According to him the silk mill was closed in 1982 and process of starting new business of land development started only in 1990 when the permission of the Bhavnagar Municipal Corporation for the conversion of land use was taken. Thus, the learned CIT(A) fully supported the findings of the Assessing Officer for not allowing the carry forward of loss and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that company has also carried forward huge losses. He contended that the company had closed down the silk textile mill but the trading in silk textile continued even during the years under appeal. He invited our attention to the profit and loss accounts for the A.Ys. under consideration. For the A.Y. 1994-95 the purchases have been shown at Rs. 7,800 whereas the sales are to the tune of Rs. 9,000. Similarly for the assessment year 1995-96 these figures have been shown at Rs. 8,200 and Rs. 9,400, respectively. The ld. counsel has further stated that the assessee has sold some of its appreciable business assets used in the silk mills during the years under consideration has shown profit of Rs. 11,43,000 and Rs. 9,00,000 respectively in the profit and loss accounts. According to him short term capital gain/loss arising from sale of depreciable assets constitutes the business income of the assessee. The ld. counsel referred to the decision of the ITAT Bombay in the case of J.K Chemicals [IT Appeal No. 8206 (Bom.) of 1989 dated 1-11-1993] wherein it has been laid down that the computation of short-term capital gains has to be computed in accordance with the provisions of section 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, the ld. authors have stated that the business commences as soon as the essential activity of that business is started. The ld. counsel also referred to the decision of ITAT, Chandigarh in the case of Goindwal Industrial Investment Corpn. of Punjab Ltd. v. ITO [1994] 49 ITD 149 wherein it has been held that in case of the assessee involved in development of land and Industrial Complex, business commences from date of acquisition of land. In the case of the assessee the land is already held, the end use has been connected to development of commercial complex permission for construction has been obtained from Bhavnagar Municipal Corporation. Thus, according to the ld. counsel the business has already commenced. 11. Regarding the interest on borrowing, the ld. counsel argued that the borrowings from the directors were mainly for clearing the dues of Bank and also payment of dues of Central Government, State Government, G.E.B. and Municipal Corporation. The major portion of the loan was utilised in settlement of outstanding dues from Union Bank of India since long. According to the ld. counsel, the assessee company had deposited original title deed of lease of land with the Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the loss incurred in a particular business would be allowed to carry forward and set off against the profit of that business only. Silk business was discontinued in the year 1982, therefore, the loss carried forward cannot be allowed against the income which has been earned from other sources. Regarding the interest the ld. DR contended that the borrowing were old and the same are not for the purpose of the business of the assessee which has been commenced after the closure of the old business. He also contended that even the new business has not yet started. He also fully relied on the orders of the authorities below. 15. We have heard both the parties. We have also gone through the written submissions filed by the ld. counsel and various other documents produced before us during the course of hearing. The first issue is regarding the setting aside of the assessments under consideration on the basis of the order passed by the ITAT for the A.Ys. 1992-93 and 1993-94. The ITAT set aside the order of the CIT(A) for the assessment years 1992-93 and 1993-94 on the basis of the new evidence produced them. It is stated that the CIT(A) called for a remand report for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors of the company had passed resolution to that effect. Later on the workers were also retrenched in 1983. The assessee also sold machineries to its sister concerns. All these instances clearly support the view that the business was finally closed in the year 1982. The assessee has also not produced any evidence before us regarding the planning to do trading in textile. The assessee has also not produced any material before us which would prove that the business of trading in textile was in existence along with the business of manufacturing business of textile before the closure of the textile mill. It appears from the materials produced before us that the assessee was trading in its own goods of textile which were manufactured in their ` and there was no trading of goods which were purchased from the open market. Therefore, the business of trading in textile goods by purchasing the goods from the open market has been started after the business of manufacturing of goods was discontinued. Therefore there was no continuity of the business which was in existence prior to the year 1982. Therefore, the business of the assessee was finally closed in the year 1982 and the assessee now c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee because the income has not arisen during the course of business. During the assessment years under consideration the assessee was not carrying on any business, therefore, the sale proceeds of the scrap of building demolished has to be considered as short-term capital gains under the provisions of section 50 of the Act. In the case of Assam Biscuits Mfg. Co. Ltd. v. CIT [1990] 185 ITR 535 (Gauhati), the High Court held that "Where the assessee sells its business and assets and sale proceeds are used to liquidate liabilities, the business is to be considered discontinued". In the case of CIT v. Lahore Electric Supply Co. [1966] 60 ITR 1, the Hon'ble Supreme Court has laid down that where income is earned by way of interest on debts Outstanding or profits on sale of stores after the business has been closed down, then such business cannot be considered to have been continued merely by virtue of such income having been earned, and no set off can be claimed in respect of such income against the losses of the discontinued business. Hon'ble Bombay High Court in the case of Hiralal Jeramdas v. CIT [1965] 58 ITR 1, held that the continuance of business should be without interruption in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee could get the permission for use of the land. Therefore, it cannot be said that the business activities for the land development commenced before 7-11-1990. In view of the above facts of this case there is hardly any link between the textile business which was closed on 1-1-1982 and the land development business which was only commenced after 7-11-1990. Therefore, the losses pertaining to the business of textile cannot be carried forward and set off against the future profits from land development business. All other steps for the land development business have been taken after 7-11-1990. The ld. counsel has relied on the case of Goindwal Industrial Investment Corpn. of Punjab Ltd. wherein the Tribunal, Chandigarh Bench held that in case of assessee involved in development of land and Industrial complex, business commenced from the date of acquisition of land. We fully agree with the ld. counsel but in the above case the land was acquired for the purpose of development but in the present case the assessee was holding the land and its use for land development business was known only after 7-11-1990, when the Municipal Corporation of Bhavnagar gave permission for such developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the profit from any other business and not necessarily from the same business in which the loss was sustained. However, this does not mean that the question whether or not different activities constitute the same business has become irrelevant. While section 72(1)(i) permits the set off of unabsorbed brought forward losses against the income of any business in subsequent years. The proviso thereto stipulates that the same business in which the loss was sustained should be continued to be carried on by the assessee. Now in the present case the business of textile mill and the business of land development and two different activities, therefore, they do not constitute the same business, moreover, the textile business was closed down on 1-1-1982 and the land development business has yet to commence its main activities. Therefore, these two business are separate business. Therefore, there was no interconnection, inter-linking between the old business of textile mill which was closed on 1-1-1982 and the new business which was commenced only after the year 1990. We are, therefore, of the considered opinion that the carry forward losses pertaining to the old business of textile mill ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee with the ld. CIT(A) that the interest paid to the directors is not allowable. 21. Regarding the sale proceeds of scrap of building demolished, the ld. counsel contended that the income is not from any independent source. Therefore, the same is to be adjusted against the income from land development business. In the alternative the ld. counsel has also stated that the short-term capital gains are relating to depreciable business assets and the same should have been set off against the business loss. As we have discussed in detail above, the brought forward losses are not allowable against the income of the A.Ys. under consideration. Therefore, the income arising out of the short-term capital gains cannot be allowed to be set off against the business losses. The scrap of building has been sold after the closure of the business of textile mill. This sale has been effected when the business was not in existence. Therefore, this income has to be assessed under the provisions of section 50 of the Act. The facts of the case in Bokaro Steel Ltd., are not applicable to the facts of the present case. The sale of scrap of the building is not connected with the business of the land develo ..... 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