However, from the tax planning point of view, it makes eminent sense to diversify by setting up a division in the existing company rather than incorporating a new entity. The advantage of having a division in an existing company is that the expenses, losses and depreciation of the new division can be set-off against the profits of the existing unit.The reason is that the existing and the new activities would constitute the same business, though the new activity may involve manufacturing a totally different product.

One test which has been frequently invoked by Courts in order to determine whether two or more activities are separate businesses or constitute the same business, is that laid down by Rowlatt, J., in Scales v.George Thompson & Co. Ltd. (13 T.C. 83). The test has been enunciated in the following words:

``Is there an inter-connection, an inter-lacing, an inter-dependence between, and a unity embracing, the businesses? The inter-dependence may be financial, the unity may be unity of management and control.''This test has been applied by the Supreme Court of India in the following cases:-

Setabgani Sugar Mills Ltd. v. C.I.T. (411. I.T.R. 272 (S.C.)) C.I.T. v.

Prithvi Ins. Co. Ltd. (63 I.T.R. 632 (S.C.))

Hooghly Trust Ltd. v. C.I.T. (73 I.T.R. 685 (S.C.))

Produce Exchange Corpn. Ltd. v. C.I.T. (77 I.T.R. 739 (S.C.))

On the basis of the aforesaid test, it has been held that the following business constitute one and the same business:-

(a) Boiler-making and shell making;

Howden Boiler & Armaments Co. Ltd. v. Stewar (9 T.C. 205)

(b) Money-lending and cloth business;

Arunachalam Chetty (A.L.A.R. Bros.) v. C.I.T. (3 I.T.C. 209 (S.B.))

(c) Cloth business and general business; Hooghly Trust Ltd. v.C.I.T. (73 I.T.R. 685 (S.C.))

(d) Banking and financing in general; C.I.T. v. Bharat Nidhi Ltd. (60 I.T.R. 520)

(e) Life insurance and general insurance; C.I.T. v. Prithvi Ins. Co. Ltd. (63 I.TR. 632 (S.C.))

(f) Trading in cashew-nuts and manufacture of tin; Mohammed Haneet v. C.I.T. (64 I.T.R. 32)

(g) Manufacturing of trading in various commodities and dealing in shares; Produce Exchange Corpn. Ltd. v. C.I.T. (77 I.T.R. 739 (S.C.));

Standard Refinery & Distillery Ltd. v. C.I.T.(79 I.T.R. 589 (S.C.))

(h) Dealing in sewing machines and dealing in shares; C.I.T. v. Praff Sewing Machines Co. (India) Ltd. (30 I.T.R. 518)

(i) Dealing in auto parts and manufacturing them; C.I.T. v. Kothari Auto Parts Manufacturers (P.) Ltd. (109 I.T.R. 333)

In C.I.T. v. Dhadka Colliery Co. Ltd. (117 I.T.R. 874), the assessee-company carried on business in raising coal from mines taken on lease and also derived income by acting as agent for purchase and sale of coal.The purchase of coal was regulated by permits andthe permits were issued only to actual users. Since the assessee was a dealer and not a user of coal and could not effect any purchase, the assessee entered into commission agency transactions from which it earned commission.

The assessee suffered losses in its mining business and the Income-tax Officer did not allow the assessee's claim to set-off the carried forward losses from the mining business against the profits earned as commission on the ground that the assessee had earlier discontinued its coal raising activity which was a different business from the commission agency business.The Tribunal allowed the appeal of the assessee on the grounds that there was common financing, common staff and common accounting in the two lines of activities. Hence, there was dominating nexus between the two lines of activities and the lines of activities of a single business should be taken as a whole.

The Calcutta High Court agreed with this decision of the Tribunal in the light of the principles laid down by theSupreme Court in the cases cited above. Therefore, it was held that the loss from the mining business could be set-off against the commission earned from the agency business.The test of inter-connection, inter-unity and inter-dependence in respect of finance and management has been elaborated by the Supreme Court in B.R. Limited v. C.I.T. (113 I.T.R. 647).

In this case, the company had incurred a loss in the business of import and sale of fabrics. This business was closed during the relevant accounting year and subsequently the company started the business of exporting cotton textiles and earned profits in the new business.

The Income-tax Officer did not allow the set-off of the loss of earlier years in the import business against the profits of the new export business.The Supreme Court held that for the purposes of ascertaining whether the two lines of business constitute the same business, the decisive test was unity of control and not the nature of the two lines of business.

The Court furtherelucidated that a common management, a common administration, a common business organisation, a common fund and a common place of business would clearly indicate the inter-lacing and inter-dependence of two or more businesses carried on by an assessee.One of the important cases on this point is that of the Supreme Court in Standard Refinery & Distillery Limited v. C.I.T. (79 I.T.R. 589). In this case, the company owned a distillery and had acquired a sugar factory. It also obtained on lease a sugar and gur refining company. The shares of this company were purchased in 1946 and sold at a loss in the subsequent year.After setting-off this loss against the income of the relevant assessment year, the balance amount of the unabsorbed loss was carried forward to future years and set-off against the income from sugar manufacturing and distillery.

The Supreme Court pointed out, rejecting the argument of the Department, that the decisive test was unity of control and not the nature of the two lines of business. Inthe instant case, the Tribunal's finding that there was unity of control could not be departed from in the absence of compelling reasons, and the fact that the two businesses were of a different nature and did not dovetail into one business, was immaterial.

Hence, the two activities of dealing in shares and manufacturing sugar, etc., were held to be one indivisible business and the Court held that the loss from the share business could be set-off in future years against the profits of the assessee's other business.

This point was recently considered by the Calcutta High Court in C.I.T. v. Western Bengal Coal Fields Ltd. (233 I.T.R. 139). The facts in this case were that the assessee carried on mining business till the nationalisation of coal mines under the Coal Mines (Nationalisation) Act, 1973. During the assessment years 1975-76, 1977-78 and 1978-79, the assessee claimed before the Assessing Officer that it had incurred expenditure by way of interest to the bank amounting to Rs.2,91,980 Rs.7,71,851 andRs.7,71851, respectively.The assessee also brought to the notice of the Assessing Officer that it was not only carrying on the activity of coal mining but also carried on boring business and both constituted one and the same business. Therefore, if a loan had been taken for one line of business which was subsequently closed, and if after the closure of that business, the assessee's other business was continued, the assessee would be entitled to deduct the interest against the profits of the existing business. The Assessing Officer rejected this claim of the assessee.

On a reference, the Calcutta High Court held, affirming the decision of the Tribunal, that the coal mining business and the boring business constituted the same business and that the assessee was entitled to deduction of interest on the loan obtained from the bank.

In view of the aforesaid decisions of Courts, it is clear beyond doubt that a diversification can be made tax efficient only if it is undertaken as a division of an existingcompany. Incorporating a new company for this purpose would result in expenses and allowances being deductible only after the business of the new company is set up.