1985 (7) TMI 166 - AT - Income Tax

Summary

Issues:
1. Whether the assessee is an industrial company.
2. Whether the assessee is entitled to set off a loss from a firm in which the company was a partner.

Analysis:

Issue 1:
The primary contention was whether the assessee qualifies as an industrial company. The company was formed with the main object of engaging in construction business, with an ancillary objective of dealing in cotton and kapas. The company later became a partner in a firm, which was dissolved, and the company took over the business. The assessee claimed to be an industrial company due to its involvement in the conversion of cotton into lint. The Income Tax Officer (ITO) rejected this claim, deeming it not amounting to processing by the assessee. The Commissioner (Appeals) disagreed, considering ginning of cotton as processing, thus classifying the assessee as an industrial company. The Appellate Tribunal noted that more than half of the income was from processing, meeting the criteria under the Explanation to section 2(8)(c) of the Finance Act. The Tribunal emphasized the need for the assessee's continuous association with the processing, which was not proven. Therefore, the Tribunal directed further investigation to ascertain the level of control and supervision by the assessee over the processing activities.

Issue 2:
Regarding the set off of the loss from the firm, the ITO contended that the expenditure was capital in nature as the company became a partner with the intention of acquiring the firm's business. However, the Tribunal differentiated between motive and purpose of expenditure, emphasizing that the purpose of the loss allocation was crucial. Citing legal precedents, the Tribunal upheld the Commissioner (Appeals) decision that the loss incurred as a partner in the firm was allowable as a business loss. Consequently, the appeal was partly allowed, affirming the entitlement of the assessee to set off the loss from the firm.

In conclusion, the Tribunal ruled in favor of the assessee regarding the set off of the loss from the firm but directed further investigation to determine the assessee's status as an industrial company based on its involvement in processing activities.