Concept of business- sec 28

SECTION 28

BUSINESS – CONCEPTS OF Business - Connotation of ‘Business’ must be construed in broad sense - The word ‘business’ is one of wide import and in fiscal statutes, it must be construed in a broad rather than a restricted sense - Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 (SC).

Generally, single transaction is not treated as business - The expression ‘business’ in ordinary parlance means any trading activity accompanied by regularity of transactions intended for the purpose of making profit. In general, a single transaction is not taken as business - Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84 (Pat.). Activity must be real, substantial, systematic and organised - The expression ‘business’ is a well-known expression in income-tax law. It means some real, substantial and systematic or organised course of activity or conduct with a set purpose - CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC)/Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 (SC)/CIT v. Admiralty Flats Motel [1982] 133 ITR 895 (Mad.). Activity can sometimes be quiescent - Though ordinarily, ‘business’ implies continuous activity in carrying on particular trade or vocation, it may also include an activity which may be called ‘quiescent’ - CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC).

Essential requisites for a business - Business activity or transaction necessarily implies the activity with an object to earn profit. Larger the risk, greater the margin of the profit. Uncertainty about the return to be received from the investment made in business, also the facing of many imponderables and even the risk of losing the capital invested, are inherent in activity called ‘business’. Risk, uncertainty, foresightedness to visualise the imponderables and capacity to overcome the unforeseen hurdles are the essential requisites for business activity - CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507 (Guj.). Object of activity is to earn profit - The word ‘business’ is not defined exhaustively in the Income-tax Act, but it denotes an activity with the object of earning profit. To say that a business is being carried on means no more than that profit is to be earned by a process of production - Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC)/Mahammad Faruq In re. [1938] 6 ITR 1 (All.). Even any systematic and continuous activity involving labour and skill is ‘business’ - The expression ‘business’ does not necessarily mean trade or manufacture only: it is being used as including within its scope professions, vocations and callings for a fairly long time.

The word ‘business’ is one of wide import and it means an activity carried on continuously and systematically by a person by the application his labour and skill with a view to earn income - Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC). There must be a course of dealings with continuity - The expression ‘business’, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be course of dealings either actually carried or contemplated to be carried with a profit motive, and not for sport or pleasure.

Whether a person carried on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive - Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC). Motive to produce income is not necessary - It is well-established that it is not the motive of the person doing an act which decides whether the act done by him is the carrying on of a business, profession or vocation. If any business, profession or vocation in fact produces an income, that is taxable as income from business, irrespective of the fact that business was not carried on with any motive of producing any income - P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC). Profession Intellectual/manual skill must be involved - Profession involves occupation requiring purely intellectual or manual skill - CIT v. Manmohan Das [1966] 59 ITR 699 (SC). ‘Profession’ is associated with intellectual/technical exercises based on learning/service - A profession is normally associated with the exercise of intellectual or technical equipment result¬ing from learning or service - CIT v. Bhagwan Broker Agency [1993] 70 Taxman 453 (Raj.). Clearing and forwarding agency is not ‘profession’

- The activity of clearing, forwarding and shipping agents does not amount to a “profession” - CIT v. Jivanlal Lalloobhai & Co. [1994] 206 ITR 548 (Bom.). Illustrative activities which constitute ‘profession’ - The word ‘profession’ now has a broader and more comprehensive meaning that formerly accorded to it, and its signification now extends far beyond the well-known classical professions of earlier days as the applications of science and learning are extended to other departments of affairs, other vocations, etc. The various other activities which have also now come to be termed as profession are enumerated in Corpus Juris Secundum (Vol. 72, p. 1219). These include, accountants, architects, chemists, editors, engineers, etc. The above enumeration is followed by list of persons who have been held not to be engaged in the practice of a profession. This list includes beauty culturists, brokers, insurance agents, undertakers and embalmers and various others. ‘Profession’ has to be distinguished even from ‘occupation’ which tantamounts to ‘business’, viz., an occupation which substantially the arrangement for sale of commodities - CIT v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom.). Stock-broking is not a profession - A stock broker cannot be said to be engaged in the practice of a profession. The real job of a stock broker is to make arrangements for sale of the shares or securities of others. Such activity clearly falls within the expression ‘business’ and not ‘profession’ - CIT v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom.). Politics is a profession - Politics is a profession or occupation - CET v. P.V.G. Raju [1975] 101 ITR 465 (SC). Treasurership is not ‘profession’ - Occupation of a treasurer is not one of the recognised professions, nor can it be said that it partakes of the character of business or trade. Profession involves occupation requiring purely intellectual or manual skill - CIT v. Manmohan Das [1966] 59 ITR 699 (SC). Betting on horses is not a profession or vocation - Betting on horses cannot constitute a profession or vocation - Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad.). Vocation Calling in which a person passes his life is ‘vocation’ - A ‘vocation’, as normally understood, is a calling in which a person passes his life. It may even be stated to be a way of living or a sphere of activity for which one has a special fitness, though it is not necessary that the activity should be indulged in for purposes of livelihood - K. Ramaswami Gounder v. CIT [1987] 163 ITR 94 (Mad.).

Organised activity and profit motive are not necessary for a vocation - In order that an activity may be called a vocation for the purposes of the Act, it need not be shown that it is an indulged in with a motive of making profit. It is well known that a single act may amount to the carrying on of a business or profession - P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC)/ C. Rajagopalachariar v. CIT [1963] 50 ITR 96 (Mad.) - CIT v. Ramdeo Samadhi [1986] 160 ITR 179 (Raj.). Vocation need not be a source for livelihood - Vocation is sphere of activity for which one has special fitness. It is not necessary that such activity should be one indulged in for a livelihood before it can be called vocation.

A motive of making a profit is not an essential requisite of a vocation - CIT v. Ram Parshad [1978] 113 ITR 462 (Delhi). Teaching can be a vocation - Teaching is a vocation if not a profession, and teaching of Vedanta, even as a matter of religion, amounts to carrying on a vocation - P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC). Occupation ‘Occupation’ signifies something which engages one’s time and attention - Understood in the ordinary sense, ‘occupation’ is something which occupies or engages one’s time or attention. That has reference also to the state of being employed or engaged - K. Ramaswami Gounder v. CIT [1987] 163 ITR 94 (Mad.)/CIT v. K. Ramaiah, K. Ramakrishna Murthy [1986] 159 ITR 929 (AP). Trade/Commerce Idea of purchase and sale of goods for profit-making is common factor - In ordinary parlance, trade and commerce carry with them the idea of purchase and sale with a view to make profit.

If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume of business which would convert a trade into commerce. But everybody understands the distinction between the two with sufficient vagueness - Sri Gajalakshmi Ginning Factory Ltd. v. CIT [1952] 22 ITR 502 (Mad.). Illustrations of ‘business’ Real estate dealings and leasehold dealings come under ‘business’ - The definition of the word ‘business’ can embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market. The important question which arises in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls is in the course of investment or whether it is essentially a part of the business and trading operation of the assessee - S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC). Forest leasing is a business - Leasing out of forest to contractors and recovering royalty from them can be in the nature of business activity under section 28 - CIT v. Khairagarh Timber Traders [1982] 137 ITR 346 (MP). If shares are intended to be held as investment, dealing in such shares is not business - Normally shares in joint stock companies acquired and held by a trader in shares are the stock-in-trade of his business.

His business is to buy with a view to sell at a profit. Nonetheless the trader may, if he likes, acquire and hold the shares for investment and not for purposes of trade. But his intention to retain them and enjoy their dividends and not to circulate and part with them in course of business must be distinctly shown - Bikhamchand Bagri v. CIT [1962] 44 ITR 746 (Cal.). Betting on horses is not business - Prima facie at least, gambling by betting on horses cannot be viewed as business. Strong evidence would be needed to establish that racing and betting activities constitute a business or one of the lines of business of a person - Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad.). If know-how is employed in trade, as opposed to parting with it, supply of know-how is business - To consider whether the supply of know-how on a licence basis to others can be regarded as a method of carrying on business, the principle that is required to be applied is to consider whether, on the facts and in the circumstances of a given case, the licence granted to make use of the secret information is in the nature of parting of an asset or only in the nature of employing it in the trade - CIT v. Gilbert & Barker Mfg. Co. [1978] 111 ITR 529 (Bom.). Financing is integral part of commission agency business - The financial lending which is involved in the business of commission agency is not a separate and exclusive business but is an integral part of the commission agency business - CIT v. Abdul Razak & Co. [1982] 136 ITR 825 (Guj.).

Service and maintenance contracts - Service and maintenance contracts are a well-accepted concept of modern business activi¬ty. Contract of maintenance can itself be an occupation squarely covered by the expression ‘business’. It will have to be con¬strued as ‘business’ with all its consequential incidental repercussions. Once a finding of fact was recorded that the assessee was carrying on the business of maintenance and was receiving service charges as its regular activity, there was no reason why the normal consequences of this being treated as ‘business in-come’ should not flow - CIT v. Khosla Indair Ltd. [2005] 147 Taxman 602 (Delhi). Setting up/commencement of business All activities need not start simultaneously - Business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence - CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.). ‘Setting up’ means ready to commence, while actual commencement is when essential activity starts - There is a distinction between setting up of business and commencement of business.

A business is said to be set up when it is ready to commence. Where the business consists of continuous course of activities, for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. Mere inclusion of a business in the main object clause in the memorandum of association is not enough to conclude that the business has commenced; the business pursuant to the object clause should have been started to justify the claim - CIT v. Sponge Iron India Ltd. [1993] 67 ITR 437/201 ITR 770 (AP).

It is no doubt true that a business can be said to have been set up when it is established and it is ready to commence business. It does not mean necessarily that the business must be fully equipped in the sense that it could commence all its activities at a time immediately - Hotel Alankar v. CIT [1982] 133 ITR 866 (Guj.). Installation/erection of machinery will not by itself suffice - Mere installation and erection of machinery is not sufficient by itself and till some end-product, which is the business of the company to produce, is or can be obtained, it cannot be said that the assessee is ready to commence production - CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.)/K. Sampath Kumar v. CIT [1986] 158 ITR 25 (Mad.). Trial run of machinery will not suffice - A manufacturing concern cannot be said to have set up its business simply by installing the machinery and giving it a trial run with a hired generator set.

Only after it has secured power connection, got ready for production and started purchasing raw materials can it be held to have set up the business - CIT v. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom.). Saleability of the product is not relevant - Where the assessee had set up the manufacturing unit after installing the requisite plant and machinery, and had commenced the production, the mere fact that the assessee was not able to sell the product before the end of the relevant year due to deficiency in its quality would not disentitle the assessee from claiming that the business had commenced, though no profit was earned and only a loss was incurred in that year.

The assessee would be entitled to have its loss computed for that year - CIT v. Electron India [2000] 241 ITR 166 (Mad.). Carrying on of business Carrying on business is primary condition - The primary condition for the application of section 10 of the 1922 Act [corresponding to section 28 of the 1961 Act] is that the tax is payable by an assessee under the head ‘Profits and gains of business’ in respect of business carried on by him. When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business - New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC)/Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC). Tax liability arises only if business is carried on - Tax is payable under section 10(1) of the 1922 Act [corresponding to section 28 of the 1961 Act] by an assessee on its profits or gains earned in the business, profession or vocation carried on by him in the year of account. If no business at all is carried on in that year, liability to tax does not arise under section 10(1) - Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC). ‘Carrying on’ need not be throughout the year - There is nothing in the Act which supports the argument that for profits of the business to be taxable, the business must be actively carried on for whole of the previous year, or till the end of the previous year - CIT v. Bangalore Transport Co. Ltd. [1967] 66 ITR 373 (SC). There must be direction and control, having nexus to profits and losses - The word ‘business’ implies commercial transactions with a view to making profit and gain therefrom. Therefore, carrying on a business connotes some substantial, systematic and organised activity with the object of making gain or profit therefrom, with the inevitable control and direction qua such activity or business.

In the converse, it necessarily follows that if there is neither control or direction of the activity of business nor a direct nexus with its gain or profit then a person or an assessee cannot possibly be said to have carried on such a business - CIT v. H.D. Agarwala & Sons [1988] 169 ITR 617 (Pat.) (FB). Non-liquidation does not mean company is carrying on business - The mere fact that a company had not gone into liquidation would not establish that it had the intention to do business - CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC). Period of inactivity does not mean stoppage of business - A period of inactivity is not conclusive in deciding whether a person is or is not doing business. It is merely a circumstance which can and ought to be taken into account along with the other circumstance - Karsondas Ranchhoddass v. CIT [1972] 83 ITR 1 (Bom.). Payment/collection of outstandings does not amount to carrying on of business - It cannot be said, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred.

A business which is closed down cannot be deemed to be carried on only because its outstandings are being collected - CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC)/Indraprastha Steel Industries Ltd. v. ITAT [1973] 88 ITR 138 (Delhi). [See also P.V. Gajapathi Raju v. CIT [1989] 176 ITR 238 (Mad.)/S.P.V. Bank Ltd. v. CIT [1980] 126 ITR 773 (Ker.)]. Same business - Meaning of - In determining whether different ventures may be said to constitute the same business it has to be seen whether there was any interconnection, any interlacing, any interdependence, any unity embracing the ventures, and whether the different ventures were so interlaced and so dovetailed into each other as to make them into the same business - L.M. Chhabda & Sons v. CIT [1967] 65 ITR 638 (SC). It is for the assessee to establish that different ventures constitute parts of the same business - L.M. Chhabda & Sons v. CIT [1967] 65 ITR 638 (SC).

Whether two or more lines of business can be regarded as the same or as different businesses, does not depend upon the special methods prescribed by the income-tax authority for computation of taxable income. It depends upon the nature of the business, the nature of organisation, management, source of capital, fund utilised, method of book keeping and a host of other related circumstances. That a business can be carried on after the closure of the other is not the decisive factor. It is dependent on the inter-connection, inter-lacking, inter-dependence and unity apparent from the existence of common management, common business organization, common administration, common fund and common place of business. It is not necessary that all these ingredients must be present.

One or other of the ingredients may be absent, but it is the totality of the materials which will determine the factor. It is the overall approach by the company with regard to the different lines of business that would clinch the issue. But the fact remains that the majority of these ingre¬dients must be present in order to arrive at a conclusion of inter-connection, inter-lacing and inter-dependence. Keeping of separate accounts for each line of business would not be a deter¬mining factor.

Absence of one or two ingredients would not stand in the way. When there are sufficient materials to show that there is oneness and that the tax is being assessed for the assessee for a considerable period of time as one assessee com¬prising of several lines of business, then it would be an over-whelming evidence to hold in favour of the assessee about the oneness of the business. It is the unity of control and not the nature of the different lines of business, which is the conclud¬ing factor - Jayshree Tea & Industries Ltd. v. CIT [2005] 272 ITR 193/143 Taxman 143 (Cal.).