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I.T.As. Nos. 786-A/KB, 787/KB, 788/KB and 789/KB of 1983-84, decided on 7th January, 1987.

(a) Income-tax Ordinance (XXXI of 1979)--

---Ss. 35 & 34--Carrying forward of business loss--Income from business or profession--When an assessee sustains a loss in any assessment year under head "income from business or profession" and the loss cannot be wholly .set off under S. 34, so much of the loss as has not been set off, or the whole loss where the assessee has no income under any other head shall be carried forward to the following assessment year to tie set off against profits and gains, if any of such business or profession 'assessable for that year if such business or profession continues to be carried on by the assessee for that assessment year and if the loss cannot be wholly set off in such manner the amount of loss not so ,Set off shall be carried forward to the following assessment year and so forth but not going beyond six assessment years--Where the assessee carried on "same business or profession" which he carried on earlier and in which he suffered losses which were carried forward, provisions of S. 35 would apply with full force.

Commissioner of Income-tax, Lahore Zone, Lahore v. Muhammad Allah Bux 1977 P T D 13 ref.

(b) Income-tax Ordinance (XXXI of 1979)--

---Ss. 35 & 34--Loss--Set off--Carrying forward of business loss- Activities which constituted carrying on business--Nature and scope.

The activities, which constituted carrying on business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of profession or vacation. They may even consist of rendering services to others, which services may be of a variegated nature. It is the nature and scope of these activities and not the extent of operation, which are relevant for the purposes of determining as to whether the income was from business or from property or from any other source.

Where a company acquired properties which it sold or leased out with a view to acquire other properties to be dealt with in the same manner, the company was not treating them as properties to be enjoyed in the shape of rents which they yielded but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation. [

A. K. Nomani, I.T.P. for Appellant.

Abdul Ghaffar Bhurgari, D.R. for Respondent.

Date of hearing: 11th January, 1987.

.--These four appeals are directed against the consolidated order of learned Commissioner of Income-tax (Appeals) recorded by him on 1st September, 1983, relating to assessment years 1977-78, 1980-81, 1981-82 and 1982-83.

2. The brief facts giving rise to it are that the appellant, a company, derived its income from manufacturing and selling of cigarettes. However in assessment years 1980-81, it appears that the appellant gave its factory to Messrs P.T.C. on lease and declared its income of Rs. 3 , 69 , 69 ; , Rs.3,42,245 and Rs.4,17,540 in assessment years 1980-81, 1981-82 and 1982-83 as income from lease. It further appears that the appellant carrying a forward loss to the tune of Rs.8,64,835 which they wanted to be set off against the income of assessment year 1980-81 and the Income-tax Officer obliged them. However, in assessment year 1981-82 the Income-tax Officer came to the conclusion that the income from property was assessable under section 30 of the Income-tax Ordinanc 1979, hereinafter referred to as "the Ordinance". Hence the losses brought forward from the business of the appellant could not be set off against it. Having been aggrieved and dissatisfied the appellant moved an application under section 156 of the Ordinance with the prayer that the same treatment of setting off the business loss from the lease Income be meted out in the assessment year 1981-82 also which was given by the previous Income-tax Officer in assessment year 1980-81. The Income-tax officer instead of rectifying the alleged mistake occurring in assessment year 1981-82 issued notice to the appellant regarding assessment year 1980-81 and called upon it to show cause as to why the set off allowed in that assessment year be not cancelled. Finally, he rectified the alleged mistake of allowing set off of the carried forward business loss against the lease income. In assessment year 1982-83 the appellant again claimed "set off" of the brought forward losses of business against the lease income but the Income-tax Officer did not oblige him. Having been aggrieved and dissatisfied the appellant went up in appeal but the learned Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer and -rejected all the three appeals. Before proceeding further let us point out that the appellant did not press his appeal regarding assessment years 1977-78. It, therefore, should not detain us any more.

3. Now arguing his appeal for assessment years 1980-81, 1981-82 and 1982-83 Mr. A.K. Nomani, the learned Authorised Representative of the appellant submitted before us that the appellant was still carrying on business of manufacturing and selling cigarettes but with a difference. According to the learned Authorised Representative of the appellant the difference was that previously the appellant was manufacturing its own brand of cigarettes by employing its own working capital. But since the assessment year 1980-81 its business dwindled and it was left with no alternative but to give the factory to Medsrs P.T.C. on lease with the condition that the lease money would be calculated on the basis of production. The learned Authorised Representative of the appellant further submitted that the payment of Excise Duty and general supervision of the manufacturing process remained under the control of the appellant. In other words the submission of Mr. Nomani, the learned Authorised Representative of the appellant was that the appellant was still carrying on the same business in the relevant assessment years. Mr. Abdul Ghaffar Bhurgari, the learned Departmental Representative, on the other hand, submitted that the appellants sold Duplex in assessment year 1977-78 and tobacco dust in 1980-81 onward. In other words the contention of Mr. Bhurgari was that the appellant did not carry on same business. Exercising his right of reply Mr. Nomani submitted that the appellant sold D in assessment year 1977-78 and the appeal relating to that period was not pressed by the appellant. Regarding the sale of tobacco dust he submitted that it was also sold in the same assessment year and not in assessment year 1980-81 onward. Mr. Nomani submitted before us that the income derived by him was net income from leased property but from same business and, as such, the appellant was -entitled to set off the business loss of the earlier years. In this connection he put reliance on a decision of Lahore High Court reported as Commissioner of Income-tax, Lahore Zone, Lahore v. Muhammad Allah Bux 1977 P T D 13. In this case the assessee owned two cotton factories and one ice factory, which were in the beginning run by itself. However, subsequently, it leased out some of them for five years to its allied concerns. The question which arose before the High Court was as to whether on the facts and circumstances of the case the Tribunal was justified in holding that the income arising from leased out factory was assessable under section 12 and not under section 10 of the Income-tax Act The learned Division Bench after going through various decisions of Indian Supreme Court came to the conclusion that it was the nature of the property and the intention of the owner that spelt out the nature of the income in any given case. Their Lordships further held that if the owner made any immovable property to be used as a commercial asset the subsequent letting out would not bring it under section 9 unless it was cleared that the assessee had abandoned his intention to use it as a commercial asset. But it cannot be said, added their Lordships, that an asset which was acquired and used for the purposes of the business ceased to be a commercial asset of the business, as soon as it was temporarily put out of use or let out to another person for use in his business or trade. Their Lordships further observed that the actual income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by th owner of the business. Their Lordships, therefore, reversed the decision of the Tribunal, and held that under the facts and circumstances of that case the income of the appellant was income from business. Mr. Nomani submitted before us that his case was well supported by 'M. A. B's. case, as discussed above. According to the learned Authorised Representative his case stood even on stronger footing for the simple reason that here the appellant was itself running the same business of manufacturing and selling the cigarettes with the only difference that it was now manufacturing the brand of P.T.C. and with their working capital but his business was same.

4. We think that the submission of Mr. Nomani carries much force. However, let us first read section 35 which deals with carry forward of business losses. It reads:-

"35. Carry forward of business losses.--Where an assessee sustains a loss in any assessment year under the head 'income, from business or profession' (not being a loss to which section 36 applies) and the loss cannot be wholly set off under section 34 so much of the loss as has not been set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following assessment year and set off against the profits and gains, if any, of such business or profession assessable for that year if such business or profession continues to be carried on by the assessee for that assessment year; and if the loss cannot be wholly set off in this manner, the amount of the loss not so set off shall be carried forward to the following assessment year, an( so .on, but no loss shall be carried forward to more than six assessment years immediately succeeding tile assessment year for which the loss was first computed:

Provided that, where the said loss relates to an assessment year commencing on or after the first day of July, 1976 and is sustained by any such assessee, being the owner of an industrial unit which is declared sick and is being rehabilitated under a scheme approved by the Federal Government, as may be notified by the Central Board of Revenue in the official Gazette, this section shall have effect as if for the words 'six assessment years' the words 'ten assessment years' were substituted."

From its perusal it is clear that if an assessee sustains a toss in any', assessment year under the head "income from business or profession" and the loss cannot be wholly set off under section 34, so much of tile loss as has not been set off, or the whole loss where the assessee has, no income under any other head shall be carried forward to the following, assessment year to be set off against the profits and gains, if not of such business or profession assessable for that year if such business or profession continues to be carried on by the assessee for that assessment year. Here it is well-established in view of M.A.B.'s case that the appellant derived income from business in the relevant assessment year. We are further of the view that the appellant carried on "same business or profession" which he carried on earlier and in which he suffered losses, which were carried forward. As such, section 35 of the Ordinance applied with full force in his case. In our judgment both the officers below 'have not fully appreciated the facts of the case and the law applicable. Before parting with this case let us point out that according to their Lordships of Indian Supreme Court the activities which constituted carrying on business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of profession or vocation. They may even consist of rendering services to others, which services may be of a variegated nature. It is the nature and scope of these activities and not the extent of operation, which are relevant for the purposes of determining as to whether the income was from business or from property or from any other source. (Please see Luxminarayn Ram Gopal & Sons Limited v. Government of Hyderabad (1954) 25 ITR 449. Let us also mention here that in another case reported as Karanpure Development Co. Ltd. v. Commissioner of Income-tax (1962) 44 ITR 36,2. The Indian Supreme Court further held that where a company acquired properties which it sold or leased out with a view to acquire other properties to be dealt with in the same manner, the company was not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation. Thus, it is clear that the case of the appellant is very much fortified by these decisions. We, therefore, allow these appeals for assessment years 1980-81, 1981-82 and 1982-83 and direct the Income-tax Officer to allow set off of the brought forward losses in each assessment year against the income declared by the appellant derived from leasing of their factory etc. The appeal for assessment year 1977-78 stands dismissed as withdrawn.

M.B.A. /385/ Order accordingly.

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