S.D.SHAH, J. - (1.) THE Income -tax Tribunal was referred the following question of law for our opinion under section 256(1) of the Income -tax Act, 1961 : Common questions for the assessment years 1971 -72 and 1972 -73 : '(1) Whether the Tribunal was right in holding that the question whether the assessee carried on business activities in the assessment year 1968 -69 had to be determined in the assessment order for that year only ? (2) If the answer to the 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 this point in a subsequent year ? (3) If the 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 the assessment year 1968 -69 and not 1967 -68 ?' Question relevant only for the assessment year 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 the assessment year 1972 -73 unless there was business income ?'
(2.) IT appears that two appeals being Income -tax Appeals Nos. 197 and 198/(Ahd.) of 1974 -75, were preferred before the Income -tax Tribunal by the Revenue against the order of the Appellate Assistant Commissioner for the assessment year 1971 -72 and 1972 -73. The said appeals were allowed by the Tribunal and thereupon the assessee had filed Reference Applications Nos. 465 and 466/(Ahd.) of 1976 -77, and on such reference applications the statement of case along with the questions of law are drawn up. The Tribunal has thus, in fact, referred the aforesaid questions by two references for assessment years 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 reference as Income -tax References Nos. 163 of 1977 and 163A of 1977. In order to answer the aforesaid questions, it would be necessary to set out a 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 August 30, 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 with effect from September 30, 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 October 1, 1966. Pursuant to such closing the mill, the Ahmedabad Electricity Company has discontinued electricity supply to the mill with effect from October 3, 1966. The board of directors also passed a resolution that the mill company was closed down from September 30, 1966. In the application under section 33C(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 with effect from October 1, 1966. The petition for winding up of the company was also filed in the High Court of Gujarat on March 24, 1967, and by an order dated September 26, 1967, the High Court ordered winding up of the said company. The said order of winding up was revoked and there was a scheme of compromise which also failed. By an order dated October 5, 1970, there was a second order for the winding up of the company. (II) On March 31, 1967, that is the last day of the accounting year for the assessment year 1967 -68, the assessee -company held finished stock of Rs. 23,70,000. The said stock was sold in the accounting year commencing from April 1, 1967, to March 31, 1968. For the assessment year 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 assessment year 1968 -69, the assessee claimed loss of Rs. 2,73,295. It may be mentioned that the profit and loss account of the company shows expenses like interest, stock maintenance expenses, cloth -selling expenses, office administration, salary to watch and ward staff, etc. (III) It was the contention of the assessee that its business was closed down in the accounting year relevant to the assessment year 1967 -68, but not in the accounting year relevant to the assessment year 1968 -69. The Income -tax Officer, 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 products in the subsequent year and, therefore, he took the closure of the business as effective in the assessment year 1968 -69. In reaching such a contention, the Income -tax Officer relied upon the provisions of section 41(2)/(5) of the Income -tax Act, 1961. (IV) Being aggrieved by the said order, the assessee preferred an appeal on the Appellate Assistant Commissioner who held that the business of the company was closed with effect from October 1, 1966, and that after March 31, 1967, that is the last day of the accounting year relevant to the assessment year 1967 -68, the assessee simply sold the stock and these transactions of sale were realisation transactions 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 March 31, 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 assessment year 1968 -69, the company filed a return of income 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 for the subsequent year pertaining to the assessment year 1968 -69, it had claimed business loss against the other income arising from interest from the Government securities as well as the profit on sale of machinery. The Tribunal thus regarded the return filed by the assessee for the assessment year 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 the benefit of set off of its income against the business loss and, therefore, relying upon the decision in the case of CIT v. Army and Navy Stores Ltd. : [1957]31ITR959(Bom) , the Tribunal held that the assessee cannot urge that the business was discontinued before 1968 -69. In that result, the Tribunal allowed the appeal.
(3.) IN the aforesaid fact situation, we are now required to answer the questions referred for our opinion. Questions Nos. 1 and 3 are inter -connected and the answer to one question is reflected in the answer to another question, and, therefore, the same are discussed together.;