Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the unabsorbed depreciation could not be set off against income under the head `other sources’ derived during the accounting year relevant to asst. yr. 1972-73 unless there was business income?

High Court Of Gujarat

Anant Mills Ltd. (In Liquidation) vs. CIT

Sections 2(13), 32(1), 256

Asst. Year 1971-72, 1972-73

S.B. Majmudar & S.D. Shah, JJ.

IT Ref. Nos. 163 & 163-A of 1977

2/7th September, 1992

Counsel Appeared

B.R. Shah, for the Applicant : M.J. Thakore for M.R. Bhatt for M/s R.P. Bhatt & Co., for the Respondent

S.D. SHAH, J.:

The Tribunal has referred the following questions of law for our opinion under s. 256(1)of IT Act, 1961:

Common questions for the asst. yrs. 1971-72 and 1972-73 :

“(1) Whether the Tribunal was right in holding that the question whther the assessee carried business activities in asst. yr. 1968-69 had to be determined in assessment order for that year only?

(2) If the answer to above question is in the negative, whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to reagitate on this point in a subsequent year?

(3) If answer to question No. 2 is in the negative, whether, on the facts and in the circumstances of the case, the Tribunal was right in concluding that the assessee discontinued the business in the accounting year relevant to asst. yr. 1968-69 and not 1967-68?” Question relevant only for asst. yr. 1972-73 :

“(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the unabsorbed depreciation could not be set off against income under the head `other sources’ derived during the accounting year relevant to asst. yr. 1972-73 unless there was business income?”

It appears that two appeals being ITA Nos. 197 & 198/Ahd/1974-75 were preferred before the Tribunal by the Revenue against the order of the AAC for the asst. yrs. 1971-72 and 1972-73. The said appeals were allowed by the Tribunal and thereupon the assessee had filed Reference Application Nos. 465 and 466 (Ahd/1976-77 and on such reference applications statement of case along with questions of law are drawn out. The Tribunal has thus, in fact, referred the aforesaid questions by two references for asst. yrs. 1971-72 and 1972-73. However, the Registry of this Court has numbered the said references as one reference but in view of the fact that there were two reference applications arising from the consolidated judgment and order in two appeals before the Tribunal two references should have been registered, and we, accordingly, direct the Registry of this Court to renumber the References as IT Ref. Nos. 163/77 and 163/A/77.

In order to answer the aforesaid questions, it would be necessary to set out few relevant facts herein : (I) The assessee was a textile mill which was manufacturing and selling cloth. The accounting year of the assessee was the financial year. On 30th Aug., 1966, the Board of Directors resolved that the work of the mill should be closed down permanently. On that very day, the Secretary of the company affixed notice on the notice board notifying the closure of the mill w.e.f. 30th Sept., 1966 and further stating that all workers, clerks, officers, supervisors, etc. of the mill will be considered as discharged from that date and that the mill will not work from the 1st Oct., 1966. Pursuant to such closing of the mill, Ahmedabad Electricity Company has discontinued electricity supply of the mill w.e.f. 3rd Oct., 1966. The Board of Directors also passed a resolution that the mill company was closed down from 30th Sept., 1966. In the application under s. 33(c)(2) of the Industrial Disputes Act, 1947 filed before the Labour Court by the Textile Labour Association, the Labour Court also recorded that the mill company is closed down w.e.f. 1st Oct., 1966. The petition for winding up of the company was also filed in the High Court of Gujarat on 24th March, 1967, and by an order, dt. 26th Sept., 1967, the High Court ordered winding up of the said company. Said order of winding up was revoked and there was scheme of compromise which also failed. By an order dt. 5th Oct., 1970 there was second order for winding up of the company. (II) On 31st March, 1967, that is the last day of the accounting year for the asst. yr. 1967-68, the assessee company held finished stock of Rs. 23,70,000. Said stock was sold in the accounting year commencing from 1st April, 1967 to 31st March, 1968. For the asst. yr. 1967-68 the assessee filed the return through the official liquidator claiming loss of Rs. 18,63,676 under the head “Business” while for the asst. yr. 1968-69 the assessee claimed loss of Rs. 2,73,295. It may be mentioned that the Profit & Loss Account of the company shows the expenses like interest, stock maintenance expenses, cloth selling expenses, office administration, salary to ward staff, etc. (III) It was the contention of the assessee that its business was closed down in the accounting year relevant to the asst. yr. 1967-68 but not in the accounting year relevant to the asst. yr. 1968-69. The ITO, however, did not accept the contention of the assessee company because in his view, the assessee continued the business of selling the stock of finished product in the subsequent year and, therefore, he took closure of the business effective in the asst. yr. 1968-69. In reaching such a contention, the ITO relied upon the provisions of s. 41(2)/(5) of the IT Act,1961. (IV) Being aggrieved by the said order, the assessee preferred appeal to the AAC who held that the business of the company was closed w.e.f. 1st Oct., 1966 and that after 31st March, 1967 that is the last day of the account year relevant to the asst. yr. 1967-68, the assessee simply sold the stock and these transactions of sale were realisation transaction and the receipt thereof was applied towards the payment of the dues of the State Bank of India. He, therefore, allowed the appeal of the assessee. (V) Being aggrieved by the said order, the Revenue approached the Tribunal in appeal and the Tribunal found that on 31st March, 1967, the company had closing stock of Rs. 23,70,000 consisting of textile goods manufactured by it and that such stock was sold in the subsequent accounting year. The Tribunal found that for the asst. yr. 1968-69, the company filed return of income-tax claiming loss under the head “Business”. The Tribunal, therefore, took the view that the assessee carried on the business activity even after closure and in fact in the return of the subsequent year pertaining to the asst. yr. 1968-69, it had claimed business loss against the other income arising from the interest from the Government securities as well as the profit of sale of machinery. The Tribunal thus regarded return filed by the assessee for the asst. yr. 1968-69 claiming business loss as admission by the assessee of the fact that the business of the company was continued and that the assessee had obtained benefit of set off of their income against the business loss and, therefore, relying upon the decision in the case of CIT vs. Army & Navy Stores reported in (1957) 31 ITR 959 (Bom) the Tribunal held that the assessee cannot urge that the business was discontinued before 1968-69. In the result, the Tribunal allowed the appeal.

In the aforesaid fact situation, we are now required to answer the questions referred for our opinion. The question Nos.1 to 3 are inter-connected and answer of one question reflects in the answer of another question and, therefore, same are discussed together.

In our opinion, answer to question Nos. 1 and 3 mainly depend upon the answer to question as to when did the assessee actually close its business and secondly as to whether the submissions made by the assessee in his return of income-tax for the asst. yr. 1968-69 would estop or preclude the assessee from contending that it has actually stopped the business w.e.f. 30th Sept., 1966 and that various sales of finished stock were only the realisation sales with a view to winding up the business. Before we proceed to decide the question as to whether the assessee is estopped from contending that it actually stopped the business in the asst. yr. 1967-68 in view of the fact that it has filed return of income for the asst. yr. 1968-69 and has claimed business loss and set off of income, we may proceed to discuss the facts on record. We may also proceed to mention cogent facts relied upon by the assessee to establish that in fact the business activities of the assessee had come to an end w.e.f. 1st Oct., 1966.

Mr. Shah, learned counsel for the assessee has invited our attention to the resolution of the Board of Directors dt. 30th Aug., 1966 resolving to close down the mill company permanently. Pursuant to such resolution the notice was affixed on the notice board of the company informing all concerned that the mill shall be closed w.e.f. 30th Sept., 1966 and that it will not work from 1st Oct., 1966. It is also not disputed that pursuant to such closure the electricity supplyswhich was granted to the mill company was also discontinued from 3rd Oct., 1966 by the Ahmedabad Electricity Company. It is also an admitted fact that a petition for winding up the said company was filed in March, 1967 and by an order, dt. 26th Sept., 1967, the company was ordered to be wound up. In the proceedings which were initiated under s. 33(c)(2) of the Industrial Disputes Act by the Textile Labour Association against the company, the Labour Court has also as early as on 10th April, 1967, recorded the fact that the mill company is closed w.e.f. 1st Oct., 1966. It is also pertinent to note that in the books of accounts of the company, no transactions of purchase and sale of cloth were noticed excepting the transactions of sale of the finished goods or the manufactured cloth. In the Profit & Loss Account prepared by the official liquidator for the period from 1st April, 1967 to 31st March, 1968, the opening stock of the finished goods is stated to be that of the value of Rs. 23,70,255. From the said statement of account, it becomes clear that the company had effected sales of finished goods. From the assessment order passed by the ITO for the asst. yr. 1967-68 it becomes clear that it was the return filed by the assessee company through the official liquidator and it is also clear that the business was carried on by the company only for a part of the year. The business loss was stated to be Rs. 18,63,676 in the assessment year. For the subsequent assessment year that is asst. yr. 1968-69 the return would also show that according to the assessee, no manufacturing operations have been carried on and no depreciation has been claimed by the assessee. However, the official liquidator has on behalf of the company claimed the “business loss” of the amount of Rs. 2,72,595.

From the aforesaid findings of facts recorded by the ITO, in our opinion, it becomes clear that in fact the manufacturing activities of the company has come to an end w.e.f. 1st Oct., 1966. The assessee mill company was a composite unit manufacturing and selling the ready cloth. The question, therefore, which would assume importance would be as to whether on closing of the said company w.e.f. 1st Oct., 1966, if the company has sold stock-in-trade subsequent to that date, can it be said that the company in fact carried on the business activities at least by selling balance stock-in-trade or was such sale of balance stock consistent with realisation sale to facilitate the winding up or effective closure of the mill company.

In this connection, reference can be made to the decision of the Supreme Court of India in the case of CIT vs. West Coast Chemicals & Industries Ltd. reported in (1962) 46 ITR135 (SC). In the said decision, the assessee company entered into an agreement for sale of the lands, buildings, plant and machinery of the match factory belonging to it for Rs. 5,75,000 with a view to close down the business. Purchaser made default in payment and on 9th Aug., 1953, fresh agreement was entered into between the parties for the sale of the properties mentioned in the agreement and also chemicals and papers used for the manufacture which had not been included in the first agreement. As the memorandum of association of the assessee company allowed the assessee to manufacture and to sell the chemicals, and even after the sale, the company carried on manufacture on behalf of the purchaser, Revenue sought to assess profit derived from the sale of the chemicals and papers as profits from the business.

The assessee contended that it was the realisation sale and the amount was therefore not liable to tax. In the aforesaid fact situation, the Supreme Court of India held that the question whether the realisation sale or sale in the course of business is not easy to decide and depends upon the facts of the case. The Court also cautioned that the question is not easy to decide with the assistance of the rulings in which the facts were different. There is great danger of extracting the principles from the reported cases, diverse from the facts.

The Supreme Court of India referred to Halsbury’s Laws of England, Third Edition, Volume 20 pages 115-117. In para 211 of Halsbury’s Laws of England, it is stated as under : “211. The cases illustrating the questions arising in such circumstances can be divided into two categories, first, those where the sales formed part of trading activities, and second, those where the realisation was not an act of trading.” Having so extracted the principles, the Supreme Court further observed that the distinction made between the sales forming part of the trading activities and those where the realisation was not forming part of the trading was a sound distinction. Having so stated, the Court extensively referred to the decision of the Privy Council in Doughty vs. CIT 1927 AC 327 and also to the Australian case and the case arising from New Zealand.

10. Having discussed the said case, the Supreme Court held that the Court shall have to decide as to whether the sale was realisation sale or whether the activity in question was part and parcel of trading or business activity so as to attract the tax on the profits made. In other words, the Court held that it shall have to be decided as to whether the transaction was in the course of regular business or trading activity of the assessee. If the answer to question was in the affirmative, it can be said that the transaction was a business or trading transaction. However, when the transaction was entered into for the purpose of effectively winding up the business, it is not necessarily a part of trading activity, if the object is to close business. Incidentally, the selling of raw material or finished goods may fall within the broad spectrum of trading activity, but if the object is not to continue the trading activity, but is to realise the price of the assets by disposing of the same, and if selling activity is resorted to with that objective, the sale was realisation sale or winding up sale with a view to realise the capital assets of the assessee.

11. Applying the aforesaid principles to the facts of the case before us, we shall have to decide firstly as to whether the manufacturing activity of the assessee continued after 1st Oct., 1966 and as discussed hereinabove, we have found that w.e.f. 1st Oct., 1966 the manufacturing activity of the assessee has come to a grinding halt. Secondly, we shall have to decide as to whether the assessee was carrying on trading activity of selling finished goods by purchasing the same from the open market and selling it, in other words, whether the assessee was undertaking selling activity. There is no foundation or suggestion from the Revenue that the assessee was undertaking such activity, and the selling of finished goods manufactured by someone else was not part and parcel of business activity of the assessee. Thirdly, it is required to be examined as to whether the sale of already manufactured goods and remaining balance stock of finished product by the assessee subsequent to closure of manufacturing activity can be said to be part and parcel of trading activity or whether it was merely a realisation sale only with a view to winding up the business of the assessee. As stated hereinabove, the assessee was a composite unit manufacturing and trading in cloth. Cloth which was manufactured by the company was being sold by it. It was not the case of the Revenue that there was also purchasing and selling of cloth independent of manufactured cloth by the assessee company. Therefore, once the manufacturing activity has come to an end w.e.f. 1st Oct., 1966, there was, in our opinion, little scope for any business activity being continued by the assessee-company. The manufactured goods constituted stock-in-trade on or after 1st Oct., 1966 which was disposed of by the sales in question and therefore, sales in question were in the nature of realisation sale effected solely with a view to realise the price of stock-in-trade with a view to facilitate the process of winding up of the company. In fact, once the manufacturing activity came to an end w.e.f. 1st Oct., 1966, there was no possibility of replenishing the existing stock-in-trade. The transaction of sale, therefore, shall have to be treated as realisation sale with a view to realise the price of the assets and to effectively close down the business. Therefore, the Tribunal was not right in holding that the sales of stock-in-trade after 1st Oct., 1966 were part and parcel of business activity. They were, in substance, realisation sales with a view to facilitate the winding up of the assessee company and, therefore, same were not liable to tax as business profit.

The Tribunal has answered this question against the assessee and in favour of the Revenue by another process of reasoning. The Tribunal has come to the conclusion that when the assessee filed income tax return for the asst. yr. 1968-69, as well as for the relevant year 1967-68, the assessee has shown business loss. From this entry in the return of the assessee claiming business loss for the particular year, it is inferred by the Tribunal that in fact the business was continued by the assessee and that the assessee now cannot be permitted to take stand contrary to what it had taken while filing return. In substance, the Tribunal applied the doctrine of estoppel by conduct so as to preclude the assessee from taking position contrary to one taken up by it by filing its return. For such course of reasoning, the Tribunal has derived support from the decision of the Bombay High Court in the case of CIT vs. Army & Navy Stores Ltd. (supra). Before the Bombay High Court, under s. 10 of the Indian Finance Act, 1942, an option was given to the assessee who become liable to pay excess profit tax to make deposit of 1/5th of the amount of the excess profit tax and if he did so, he became entitled to be refunded 1/10th of the amount of the excess profit tax or 1/2nd of the said deposit whichever is less. There was proviso to this section that in respect of any profits which were also liable to assessment to the excess profit tax under the law in force, in the UK it was unnecessary to make the deposit. The assessee company incorporated in the United Kingdom carrying on business in India, when called upon to make the deposit, represented to the income-tax authorities that its profits were liable to be assessed to excess profit tax in the UK and accordingly did not make the deposit. In August, 1952, the company received refund under s. 10 of the Finance Act, 1942 and in respect of the chargeable accounting periods, it contended that as it had in fact no profits assessable to excess profit tax in the United Kingdom, its case fell within the main portion of s. 11(11) of the Finance Act of 1946. It was in this fact situation that the Bombay High Court held that even the assessee has obtained a benefit by making certain representations to the taxing authorities, he cannot be permitted to deny the truth for the representation before the authorities at a later stage.

The following observations made by the Division Bench of the Bombay High Court are pertinent : “Now the most significant and oustanding fact in this reference is that the assessee company obtained a particular benefit and escaped a particular obligation by reason of a representation made by it to the Taxing Department. The representation that the company made on the 24th Nov., 1946, was that it was liable to excess profits tax in the UK. It was by reason of this representation that it succeeded in inducing the Department to attract to its case the proviso to s. 10, sub-s. (1), to which reference has been made. But for this representation and but for the statement that it was liable to pay excess profits tax in the UK, the company would have been liable to make a compulsory deposit. It was only if it had made a deposit that it would have been entitled to the refund provided in that section. It could escape obligation to make compulsory deposit only if its profits were liable to excess profits tax in the UK and it escaped that liability because it represented to the Department that its profits were liable to excess profits tax in the U.K. Now, when the question arose under s. 11(11) of the Finance Act, 1946, as to how the refund should be brought to tax, the assessee company completely changed its front and took up the attitude that its profits were not liable to excess profits tax in the UK and therefore the case did not fall under the proviso to s. 11(11). It is difficult to understand how the assessee can be permitted to deny the truth of the representation made by it in its letter of 24th of Nov., 1946, when on the strength of it it obtained a certain benefit and when on the strength of it the Taxing Department relieved it of a certain obligation. The Taxing Department having changed its position to its prejudice by reason of this representation, the assessee company cannot be permitted to deny the truth of that representation when the question arises of assessing its refund to tax under the proviso to s. 11(11)”.

In our opinion, the aforesaid principles cannot be applied to the fact situation prevailing in the present case. Firstly, because the equivocal statements made in the return filed by the assessee company through the official liquidator claiming the business loss cannot be regarded as an intentional deliberate admission by the assessee of the fact that the assessee was actually carrying on the business in the asst. yr. 1967-68. Secondly, it shall have to be mentioned that in the return itself, there is evidence of the fact that the business of the assessee has been closed w.e.f. 1st Oct., 1966. Clear assertion to that effect is made in the return itself and also it is pertinent to note that no depreciation is claimed which would be suggestive of the fact that in fact no business was carried on by the assessee company. Thirdly, based on such equivocal statement made by the official liquidator on behalf of the company while filing the return, it cannot be stated that the Revenue has changed its position to its detriment or its prejudice. In fact, in view of the positive stand taken up by the assessee company in return that its business has been closed from 1st Oct., 1966 and from the fact of non-claiming of any depreciation for the aforesaid period, coupled with the other voluminous evidence produced before the ITO showing the closure of the business, in our opinion, it would not be just and proper in the facts and circumstances of the case to apply the principle of estoppel so as to preclude the assessee company from contending that in fact it had closed its business w.e.f. 1st Oct., 1966.

12. We may at this stage refer to the decision of the Bombay High Court in the case of K.C. Shah vs. CIT reported in (1954) 26 ITR 303 (Bom). In the said case, the question of application of doctrine of estoppel in the case of successive assessment was considered by the Division Bench of the Bombay High Court. It was observed by the Bombay High Court as under : “The doctrine of estoppel does not apply in the case of successive assessments. An assessment is complete in itself and the taxing (d) department is not bound by any contention that it took up in one assessment when the question arises with regard to a different assessment.

The assessee, who was maintaining his accounts in the mercantile system, carried forward a debt as an asset bearing interest and paid tax on the interest credited in the accounts. In a subsequent year the assessee wrote off the debt as a bad debt and claimed to deduct it from his assessable income. The Department held that the debt had become bad in a previous year. Held that no question of estoppel arose and it would be open to the Department to hold that the debt had become bad in a previous year.”

In the case of CIT vs. Manmohan Das reported in (1966) 59 ITR 699 (SC), the Supreme Court was called upon to decide more or less identical question. The question was as to whether the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year under s. 24(2) has to be determined by the ITO who deals with the assessment of the subsequent year. It was in that context that the Supreme Court held that the decision recorded by the ITO who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee. Applying the aforesaid analogy to the facts of the case before hand, even if it is assumed that the business of the assessee was treated as continued business for the asst. yr. 1967-68, for the subsequent year, that is, 1968-69 the finding reached by the assessing authority would not be binding because for the purposes of the income tax, preceding year shall have to be taken as a unit and the finding reached in one year shall not necessarily operate as a binding of the subsequent year. Similarly, in the case of CIT vs. V.MR. P. Firm reported in (1965) 56 ITR 67 (SC), Justice K. Subba Rao speaking for the Supreme Court has observed that the doctrine of “approbate and reprobate” is only a specie of estoppel, it applies only to the conduct of parties. As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable under the IT Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the ITO has no power to impose tax on the said income.

In the case of M.K. Mohammad vs. CIT reported in (1973) 92 ITR 341 (Ker), the Division Bench of Kerala High Court was also required to consider the applicability of the rule of estoppel to the cases of successive assessment. After referring to three decisions of the Bombay High Court and one decision of the Supreme Court, it observed as under : “Estoppel relates to the conduct of parties and cannot operate against the provisions of a statute or the law. If the Tribunal expresses an opinion on a proposition of law and also remands the case and if that proposition happens to be wrong, at a later stage, the Tribunal is not precluded from applying the correct law. Similarly, if the assessee made a representation or a concession on a point of law, the Revenue accepted the same and the Tribunal also approved of it, even then if that position was wrong in law, nothing precludes the Tribunal from applying the correct law in another appeal against the order passed after the remand. On the other hand, if the representation was one of fact, the truth of which was accepted by the Revenue and on that basis suffered some prejudice too, the assessee will not, at a subsequent stage of the same assessment, be allowed to go back on his earlierrepresentation; he is estopped from doing that. We may however make it clear that this application of estoppel does not apply to cases of successive assessment; it applies only to the same assessment; in other words, the assessee will be bound by his earlier representation of fact and will not be allowed to go back on it at a subsequent stage of the same assessment. Similarly, even on a wrong decision of point of law if the Tribunal passed an order of remand and that order has become final since no reference was obtained to question its correctness, then the decision is binding between the parties in the said assessment and neither of the parties in the said assessment will be allowed to question it nor reopen it in another appeal before the Tribunal”. Thus, it becomes clear that the doctrine of estoppel does not apply to the case of successive assessment. It applies only to same assessment. In other words, the assessee will be bound by his earlier representation of fact and will not be allowed to go back on it at a subsequent stage of the same assessment. However, the representation made by him or the stand taken by him in earlier assessment would not necessarily bind him in the subsequent assessment. The assessment is complete in itself and neither the assessee nor Revenue should be directly bound to the stand taken by them in earlier assessment more particularly when the Revenue as in the facts before us, has not acted to its prejudice or detriment.

From the discussion of law on the aforesaid principles, it becomes clear that the Tribunal was not justified in applying the doctrine of estoppel so as to preclude the assessee from taking up the contention that it has in fact closed its business w.e.f. 1st Oct., 1966 nor was the Tribunal justified in reading (1957) 31 ITR 959 (Bom) as laying down the absolute proposition that even the inadvertent admission made in the return shall be binding on the assessee and the assessee was not permitted to explain his position more particularly that in the case before us, from the averments contained in the return as well as from the documentary evidence, the assessee was in a position to establish that in fact, it has closed its business w.e.f. 1st Oct., 1966 and that it has in fact sold stock-in- trade by way of realisation sale with a view to facilitate the process of winding up. In our opinion, therefore, the Tribunal was not justified in reaching the finding that it had reached. At this stage, we may also mention that Mr. Thakore, learned counsel appearing for the Revenue has urged before us that the questions Nos. 1 to 3 referred to us by the Tribunal are pure questions of fact and this Court should decline to answer such questions when its opinion on any question of law is not called for. He has in this connection invited our attention to the recent decision of the Supreme Court in the case of CIT vs. Cellulose Products of India Ltd. (1991) 98 CTR (SC) 225 : (1991) 192 ITR 155 (SC), and has submitted that when the findings reached by the Tribunal are supported by the evidence on record and are such which cannot be regarded as perverse or patently unreasonable, it would not be permissible for us to reach the findings inconsistent with those which are reached by the Tribunal. No exception can be made to the aforesaid proposition of law. However, when the Tribunal ignores material evidence on record or inferential finding is reached based on one fact alone and in disregard of voluminous documentary evidence to the contrary, it can be said that the finding reached by the Tribunal is patently unreasonable. We have also referred to, in detail, the documentary evidence on record which would establish the fact that from 1st Oct., 1966, the business of the assessee company was closed. This documentary evidence is not considered by the ITO and the Tribunal and inferential finding is reached by drawing inference from the filing of return wherein business loss is claimed. Since the business loss is claimed inference is drawn that business must have continued. As discussed hereinabove, the return was not filed by the company itself or its directors who were in charge of the business. It was filed after 1st Oct., 1966, i.e., the date of its closure by the official liquidator. It cannot, therefore, be regarded as conscious, intelligible and deliberate admission of the company of continuance of business. The Tribunal was, in our opinion, therefore, not justified in ignoring various facts which were consistent with the question of closure of business. The Tribunal has failed to take into account various relevant facts while holding that the assessee has, in fact, continued his business activity after 1st Oct., 1966. Such a finding having been rendered in disregard of the evidence on record cannot and should not debar us in answering the questions referred to us for our opinion in favour of the assessee and against the Revenue. The Tribunal has also referred to the decision of the Supreme Court in the case of West Coast (supra) but has failed to consider the question as to whether the sales in the present case were either realisation sales or sales in the course of trading activities. In fact, applying the principles laid down by the Supreme Court in the aforesaid case, it was necessary for the Tribunal to decide as to whether the sales of finished product by the assessee were realisation sales or not and more particularly by keeping in mind the fact that the assessee was not dealing in purchase and sale of ready made cloth as such. Therefore, we are of the opinion that the Tribunal was not justified in reaching the findings it has reached. Therefore, we answer the question Nos. 1 to 3 in the negative i.e., in favour of the assessee and against the Revenue.

Question No. 4: The Tribunal has held that when there was no business the unabsorbed depreciation could not be set off in the subsequent year against the income under the head “other sources”. On this question the matter is no longer res integra so far as this Court is concerned. In the case of CIT vs. Deepak Textile Industries Ltd. (1987) 66 CTR (Guj) 34 : (1987) 168 ITR 773 (Guj) the Division Bench of this High Court speaking through Justice B.S. Kapadia held categorically that : “On reading s. 32(2) of the Act, it is clear that the purpose of the Legislature in introducing the legal fiction is to give the benefit of the unabsorbed depreciation in the following previous year or in the succeeding previous years and when that is the purpose of legal fiction, all the facts necessary for the purpose of earning depreciation under s. 32(1) of the Act must be secured and, therefore, for the following previous year, the ownership of machinery, user of machinery and user of machinery for the purpose of business and existence of business also will be required to be assumed for giving effect to the legal fiction. Hence, unabsorbed depreciation should be allowed to be carried forward and set off against assessable income of a subsequent year notwithstanding the fact that the business in respect of which it arose ceased to exist in the year of such set off. Moreover, receipt of income during the relevant previous year is not a sine qua non for the deduction of allowance like depreciation”.

The Division Bench has also in the aforesaid decision noted the fact that there does exist diversion of judicial opinion on the question but it has after considering various decisions recorded the finding as aforesaid.

We do not think in the facts and circumstances of the case before us and even otherwise to take view different from the one which is taken by the Division Bench of this Court. Accordingly, question No. 4 shall have to be answered in the negative that is in favour of the assessee and against the Revenue. We, accordingly answer this question. There shall be no order as to costs.

[Citation : 206 ITR 582]

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