MANOJ SHIVYAG SINGH,MUMBAI vs. DCIT CENT. CIR. 5(1), MUMBAI

Being aggrieved by the Order u/s.250 of the Income-tax Act, 1961 ("Act") dated 30.06.2016 passed by the Ld. Commissioner of Income-Tax (Appeals)-53, Mumbai ["CIT(A)"], the appellant prefers this appeal petition, among others, on the following grounds of appeal, each of which is independent of, and without prejudice to, the others: l. Disallowance of Expenses claimed in M/s. Raunak Agency: l.1 On the facts and in the circumstances of the case, and in law, the Ld CIT(A) erred in sustaining the disallowance of all expenses aggregating to Rs.83,72,085/- (inclusive of bad debts written off of Rs.76,11,276/-) debited to the profit & loss account of M/s. Raunak Agency ('RA'), a proprietary concern of the appellant, made by the Ld. AO on the ground that the business of RA was closed.

Brief facts of the case are that the assessee is proprietor of two concerns namely (i) M/s Raunak Agency (RA) and (ii) M/s Amber Agency (AA) and also Director in a Private Limited Company namely M/s Mainstar Lotteries Pvt Ltd (MLPL), all three concerns were dealing in lottery business. The assessee filed its return of income for Assessment Year 2012-13 on 29.09.2012 declaring total income at Rs. 8,58,781/-. The assessee claimed business expenses and bed debts in Raunak Agency (RA) of Rs.83,72,085/-. The assessing officer after issuing show cause and considering the reply of the assessee, disallowed business expenses and bed debts by taking view that RA stopped its business activity in financial year 2010-11 and that in absence of business activity the assessee is not entitled of deduction under Chapter IV of Income tax Act. Hence, entire expenses and the bed debts aggregating of Rs. 83,72,085/- was disallowed. The assessee also claimed bed debts in Amber Agency (AA) of Rs. 1,32,41,948/- out of which a sum of Rs. 1,10,42,315/- was in respect of MLPL, a company wherein the assessee hold 95% of shares. The assessing officer after issuing show cause and considering the reply of the assessee also disallowed the entire claim in Amber Agency by taking view that the assessee has substantial interest in MLPL and the assessee developed camouflage device. The assessing officer while disallowing the claim of assessee relied on the decision of Hon’ble Supreme Court in McDowell (154 ITR 148 SC). On appeal before first 3 Mum 2016-Manoj Shivyag Singh appellate authority / learned CIT(A), the action of the assessing officer on both the claims was confirmed. Thus, further aggrieved by the order of ld CIT(A) the assessee has filed present appeal before this Tribunal.

We have heard the submissions of the learned authorised representative (ld. AR) for the assessee and the learned Senior Departmental Representative (ld. DR) for the revenue and with their assistance gone through the order of lower authorities. Ground No. 1 relates to disallowances of expenses claimed in Raunak Agency (RA). The ld. AR for the assessee submits that Raunak agency and Amber agency constitutes one single and composite business carried on by the assessee and thus, it was the same business in both the entities. The closure of one limb of business in Raunak Agency cannot be construed a cessation of business itself, so far as other limb of business in Amber agency is continued by the assessee. The assessee being an individual was in total control of both these proprietary concern. There was a complete unity of control in common management having interlinking, interlacing and interconnection embracing these two concerns to constitute the same business. The learned AR for the assessee further submits that the case laws relied by learned CIT (A) in C.L. Mehra versus ITO (59 ITD 99 Delhi), is not applicable on the facts of the present case. The facts of that case are quite different. In the said case the assessee started another proprietary concern at different place after closing of its proprietary concern at different place, whose license was transferred to new concern. 4 Mum 2016-Manoj Shivyag Singh Thus, both these concerned did not co-existed and carry on the activities simultaneously. However, in the assessee’s case both the entities were carrying its business the business until one was closed. The ld AR for the assessee also filed the following documents on record;  Copy of ITR acknowledgement and statement of total income for AY 2012-13  Tax audit report of Amber agency for AY 2012-13 with Audited balance sheet and profit and loss account,  Copy of tax audit report of Raunak Agency with consolidated balance sheet and profit and loss account of Amber agency and Raunak agency with Schedules for FY 2011-12.  Copy of ITR of MLPL with statement of Income for FY 2011-12 with audited balance sheet and profit and loss account and  Copy of ledger account of Amber agency in the books of MLPL for FY 2011-12,  Copy of ledger account of MLPL (sales account) in the books of Amber agency for FY 2011-12,  Copy of ledger account of MLPL (loan account) in the books of Amber agency for FY 2011-12,  Copy of revised Ledger account of MLPL(sales account) in the books of Amber agency for FY 2011-12,  Copy of revised ledger account of MLPL (loan account) in the books of Amber agency for FY 2011-12,  Copy of purchase account of MLPL for FY 2010-11 and 2011-12 reflecting purchased made from Amber agency,  Copy of sales register of Amber agency for FY 2010-11 and 2011-12 reflecting sales made from MLPL.  Copy of ledger account of MLPL in the books of Amber agency for FY 2010-11, ITA No. 5375 Mum 2016-Manoj Shivyag Singh  Copy of ledger account of MLPL in the books of Raunak agency for FY 2010-11 and  Copy of various written submissions furnished before assessing officer and ld CIT(A).

To buttress his submission, the learned AR of the assessee relied upon the decision of following decisions;  Shreyas S Morakhia Vs DCIT (ITA No. 198/Mum/2009) dated 27.11.2011,  Gujarat High Court in Bansidhar (P)Ltd versus CIT (1981 5 Taxman 158 Gujarat),  DCIT Vs Patidars Ginning and Pressing Company (2000) 108 Taxman 476(Guj),  Madras High Court in CIT versus Ranji Investment. Ltd 319 ITR 433 (Madras),  CIT versus late TS Srinivasa Iyer 192 ITR 50 (Madras) and  CIT versus Western Bengal Coal Fields Ltd 233 ITR 139 (Calcutta).

The learned AR for the assessee submits keeping in view the aforesaid decisions of various High Courts the assessee is entitled for all expenses including bad debts written off in the books of Raunak agency while computing business income.

On the other hand the learned DR for the revenue submits that the assessee closed its business in one the concern in respect of which the bad debts was claimed in another concern. The assessee failed to prove that he was running common business in both the concerns. The assessee failed to substantiate its claim before the lower authorities. In absence of any business activities the assessee is not entitled to claim expenses of ne concern in other concern as claimed by the assessee. In support of her submissions the ld. DR for the 6 Mum 2016-Manoj Shivyag Singh revenue relied on the decision of Bangalore Tribunal in Karnataka Instrade Corporation Limited Vs ACIT 127 ITD 74 (Bang).

We have considered the rival submissions of both the representative and deliberated on the various case law relied by the ld. AR for the assessee.

The Coordinate bench of Mumbai Tribunal in Shreyas S Morakhia Vs DCIT (supra) while considering the allowability of bed debts and in alternative as business loss with regard to the one limb of business which was closed, under the second limb of his business, held as under; “10. Rival contentions heard. On careful consideration of the facts and circumstances of the case and on perusal of the papers on record, orders of Mum 2016-Manoj Shivyag Singh the authorities below as well as the case laws cited before us, we hold as follows:- 11. The business of the assessee is that a share trader and was trading both in his own behalf as well as on behalf of third parties. In earlier year, the assessee sold Stock Exchange Membership Card and discontinued trading in shares on behalf of third parties. Trading in shares on own account was continued. On these facts, we have to see as to whether it can be said that the assessee is continuing with his business. We examined the case laws relied upon both the parties.

In B.R. Limited (supra), the Hon’ble Supreme Court was considering the case where import business was closed down and export business of cotton textile commenced in the next year and the assessee sought set-off of laws of import business as against profit from export business. In such a situation, the Hon'ble Supreme Court held that the decisive test for determining "same business" within the meaning of 24(2) of 1922 Act is unity of control and not the nature of two lines of business. The fact that one business cannot conveniently be carried on after the closure of other may furnish a strong indication that the two businesses construed a same business. When there is common management and common control in business, it was held that the assessee was entitled to carry forward the loss in import business and set it off against the profits of export business in the subsequent year.

The Hon'ble Jurisdictional High Court in Principal Officer, Laxmi Surgical Pvt. Ltd. (supra), was considering the case of an assessee which manufactures a surgical cotton. The manufacturer, on own account, was discontinued by the assessee but the production of surgical cotton was continued on job basis from an another manufacturer. The Hon’ble Court held that the same business continues and loss and depreciation of the earlier year can be carry forward and set-off.

The Hon’ble Kerala High Court in V.P. John, Janatha Medicals (supra), held that the assessee was having a composite business and mere discontinuance of one activity will not disentitle the assessee to the benefit of set-off of carry forward loss.

Now, coming to the judgment of Hon'ble Supreme Court in L.M. Chabda & Sons (supra) relied upon by the Learned Departmental Representative, wherein the Court held that for the purpose of ascertaining of profit, if an assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year he cannot claim allowance under s. 10, of an outgoing attributable to the business which is closed, against the income of his other businesses in that year. It is held that the head of income may be one i.e., “business”, whereas the components are different. It held that that the expenditure is a component inherent in the process of ascertaining the profits referable to a particular independent activity of business. The Hon’ble Madras High Court in I.S. & C. Machado (supra) was considering a case where the assessee had two different businesses and when one business was closed, it held that expenditure of discontinued business cannot be set- off against profits of another business.

The judgment relied upon by the learned Departmental Representative, does not apply to the facts of the case, as the finding of the Tribunal was that two different business was carried on by the assessee and the one which was discontinued in the year 1947 had nothing to do with each other and there was no inter-dependence between them. Applying to the proposition laid down in the other cases discussed above, we are of the considered opinion that the assessee’s business of trading in shares is a composite business which had two limbs, (i) trading on own account and (ii) trading on account of third parties. Discontinuing of trading in shares on behalf of third parties, in our opinion, cannot be considered discontinuance of business of share trading. The test of unity of 10 ITA No. 5375 Mum 2016-Manoj Shivyag Singh control and common management are fulfilled in this case, as this is a case of an individual. The test to determine whether two different ventures can be considered to constitute the same business are not is to see whether there was any interconnection, inter-lacing, inter-dependence, embracing the ventures and whether different ventures were so inter-laced and so dovetailed into each other as to make them into the same business.

Further, Hon’ble Gujarat High Court in CIT Vs Patidar Ginning & Pressing Co.(supra), while considering the facts that the assessee-company had a ginning mill. Due to financial difficulties the assessee stopped its activities of ginning and pressing and before commencement of the year engaged itself in purchasing and selling of cotton. However, the selling of cotton was not different from the activity of selling cotton after ginning and pressing.

Before us, the ld. AR for the assessee vehemently submitted that Raunak agency and Amber Agency constituted one and single and composite business carried out by the assessee. Both the concerns were engaged in the business of lottery. The assessee was having complete control over both the proprietary concern. The lower authorities disallowed the claim of deduction under chapter IV of the Act only on the ground that no business activity was Raunak Agency. The ld CIT(A) affirmed the action of assessing officer by taking view that the assessee carried two distinct business. We have noted that the status of both the concerns being proprietary concern of assessee and business their activities is not disputed by the lower authorities. Both the entity was engaged in the lottery business.

Considering the test of unity of control and common management as held by coordinate bench in Shreyas S. Morakhia (supra), by following the decision of Hon’ble Supreme Court in Standard Refinery & Distillery Ltd Vs CIT (1971) 79 ITR 589(SC), the assessee is entitled for the deduction expenses in Raunak agency. The case law relied by ld CIT(A) in CL Mehra Vs ITO 59 ITD 99 (Delhi) is not applicable on the facts of the present case. In the said case the business in two entities was not carried by assessee simultaneously, moreover two separate accounts were maintained by assessee in the said case. The case law relied by ld. DR for the revenue in Karnataka Instrade Corporation Ltd. vs. ACIT (supra) is also not helpful to the revenue. In the said case it was held that in order to allow business loss under section 72(1)(i) condition is that assessee should carry on business in year under appeal and it is only against profits of such business that brought forward loss can be set off. Where assessee’s profits were assessed under section 41(1) as business income, said profits did not represent profits and gains of any business carried on by assessee and therefore, brought forward business loss was not allowable against profits assessed under section 41(1). However, in the case in hand the assessee throughout the proceedings is claiming that he is carrying his lottery business under two limbs and is 15 ITA No. 5375 Mum 2016-Manoj Shivyag Singh entitled for the deductions of bed debts and other expenses. In the result the Ground No. 1 of the appeal is allowed.

With regard to alternative claim for business losses, the learned AR of the assessee submits that there was a close business connection between the assessee’s business and MLPL business and therefore where the assessee had advanced loan it was clearly incidental for carrying out of his business. The assessee has deep interest in the business of MLPL and thus the amount 17 Mum 2016-Manoj Shivyag Singh advanced by way of business experiences was allowable on account of business advances. In support of his submission the learned AR of the assessee relied upon the decision of Hon’ble Apex Court in case of SA Builders Ltd versus CIT (2007) 288 ITR1 (SC).

We have considered the submissions of both the representative and deliberated on the various case law relied by the ld. AR for the assessee. The assessing officer disallowed the assessee’s claim by taking view that assessee write off of debts is claimed to reduce the taxable income by taking reliance on the decision of case law in McDowell (supra). The learned CIT (A) affirmed the action of assessing officer by taking view that amount written off of ₹ 1.10 Crore did not represent debts towards the sales effected, but actually, it represents the loan advanced by the assessee to MLPL. It was also held that the same did not represent money lent in ordinary course of business of money lending and therefore deduction under section 36(1)(vii) could not be allowed. It was further held that, though MLPL written back this sum as advance in its books, it did not pay any tax thereon because he did not claim similar deduction in written off in the sundry balances to the tune of about Rs. 2.00 crore and thereby has suffered losses thus the assessing officer was rightly invoked the case law in McDowell (supra).

The alternative claim of assessee was also not accepted by the learned CIT(A) by taking view that no cogent evidence was furnished by the assessee to substantiate his claim. The assessee has not proved that the loss has occurred in the course of business carried out by him or incidental to 19 Mum 2016-Manoj Shivyag Singh such business or that it was a trading loss and not a capital loss. Further there is nothing on record to show that loan advanced was utilised by MLPL for the purpose of business and that assessee has not explain how the said loan was to be treated as business loss incurred during the current year. The learned CIT(A) also held that assessee ought to have ascertained the fair market value of the fixed assets which consist of mainly Computer and Printer of MLPL directly transferred to his capital account.

Before us, the ld AR for the assessee vehemently submitted that the there was a close business connection between the assessee’s business and MLPL business and therefore where the assessee had advanced loan it was clearly incidental for carrying out of his business, and the assessee has deep interest in the business of MLPL and thus the amount advanced by way of business experiences was allowable on account of business advances and relied upon the decision of Hon’ble Apex Court in case of SA Builders Ltd versus CIT (supra). We have noted that the alternative plea of the assessee was not accepted by ld CIT(A) by taking view that no cogent evidence is furnished by the assessee, the assessee not proved that loss occurred in the course of business or it was a trading loss and not capital. It was also held that there is no evidence that advance given to MLPL was utilised for the purpose of business. The assessee has also filed various documentary evidences, which we have recorded in para -3 supra. The assessee has certified that all these evidences were furnished before the lower authorities. We have noted the 20 Mum 2016-Manoj Shivyag Singh alternative plea of business loss was raised for the first time before ld CIT(A) and it was rejected summarily without reference to the aforesaid evidence. Therefore, we deem it appropriate to restore the alternative claim of business loss to the file of assessing officer to consider it afresh. Needless to direct that before passing the order afresh the assessing officer shall grant reasonable opportunity of hearing to the assessee and will pass the order in accordance with law. In the result the ground No. 2 of the appeal is allowed for statistical purpose.

Ground No. 3 relates to disallowance of various debit written off and to treat the same as business loss. As we have restored the ground No. 2 to the file of assessing officer, therefore, the ground No.3 is also restore to the assessing officer for fresh adjudication.

In the result, appeal of the assessee is partly allowed.