Income-tax---

----Capital or revenue expenditure---Business---Tests to determine whether two units constitute same business ---Assessee exhibiting films in a theatre constructing a new cinema theatre---New cinema theatre did not constitute a new business---Interest on amount borrowed for construction of new theatre was revenue expenditure---Indian Income Tax Act, 1961, S. 37.

The test laid down for determining whether two lines of businesses constitute the same business are to find out if there was any interconnection, any interlacing, any interdependence, any unity at all embracing those two businesses. The question whether the different ventures carried on by the assessee form part of the same business would depend on the facts and circumstances of each case and it has to be established on the facts that the different ventures form part of the same business.

The assessee, an exhibitor of films, was running a cinema theatre. He purchased a site and commenced construction of another cinema theatre.

During the previous year relevant to the assessment year 1981-82, the assessee claimed deduction of interest of a sum of Rs.56,429 paid to the Karnataka Bank Limited. The said interest was claimed as the interest on the loan raised from the bank for the construction of the theatre. Similarly, for the assessment years 1982-83, 1983-84 and 1984-85, the assessment years under consideration, the assessee paid interest amounting to Rs.1,65,738, Rs.2;29,206 and 3,97,032 and claimed the same as revenue expenditure against its business income. The Income-tax Officer disallowed the assessee's claim on the ground that the borrowed amount on which interest had been paid was utilised for the construction of a new cinema building and as such, the payment of such interest had to be capitalised. The Income-tax Officer also noticed that the theatre building was still under construction and the construction was incomplete during the previous years relevant to the assessment years 1982-83, 1983-84 and 1984-85. Hence, according to the Income-tax Officer the payment of interest till construction of the theatre was completed had to be capitalised and the same was not admissible as revenue expenditure against the assessee's business income. The disallowance was deleted by the Commissioner of Income-tax (Appeals) and this was confirmed by the Tribunal. On a reference:

Held, that the finding of fact recorded by the Tribunal that the loan had been taken for expansion of business had not been challenged by the Revenue. There was an interconnection,, interlacing and interdependency between the existing business and the new unit. Setting up of the new cinema hall in Mandya did not constitute 'a new business, but was only an establishment of a new unit of an existing business which was already being carried on by the assessee. It constituted the same business. The assessee was entitled to deduct the interest as revenue expenditure, irrespective of the fact at the building in question was not actually put to use for carrying out a business during the accounting year by the assessee.

CIT v. Prithvi Insurance C. Ltd. (1967) 63 ITR 632 (SC) and Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC) applied.

Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC); CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj.); CIT v. Hindustan Machine Tools Ltd. (No. 1) (1989) 175 ITR 212 (Kar.); CIT v. Indian Telephone Industries Ltd. (1989) 175 ITR 215 (Kar.) (Appex.); CIT v. Insotex (Private) Ltd. (1984) 150 ITR 195 (Kar.); CIT (Addl.) v. Southern Founders (1979) 120 ITR 37 (Kar.); Desai (C. T.) v. CIT (1979) 120 ITR 240 (Kar.); India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC); L. M. Chhabda & Sons v. CIT (1967) 65 ITR 638 (SC); Ravi Machine Tools (P.) Ltd. v. CIT (1978) 114 ITR 459 (Kar.) and Scales v. George Thompson & Co. Ltd. (1927) 13 TC 83 ref.

E. R. Indra Kumar for the Commissioner.

?G. Sarangan and S. Parthasarathi for the Assessee.

JUDGMENT

ASHOK BHAN, J.---The assessee is an exhibitor of films and running a theatre called "Nanda Picture House" since 1972. The assessee is a Hindu undivided family which purchased a site at Mandya in the year 1972 and commenced construction of another theatre "Gurusree" on the said site. He borrowed funds from the Karnataka Bank Ltd., Mandya, for purposes of construction.

During the previous year relevant to the assessment year 198.1-82, the assessee claimed deduction of interest in a sum of Rs.56,429 paid to the Karnataka Bank Limited. The said interest was claimed as the interest on the loan raised from the bank for the construction of the theatre. Similarly, for the assessment years 1982-83, 1983-84 and 1984-85, the assessment years under consideration, the assessee paid interest amounting to Rs.1,65,738, Rs.2,29,206 and Rs.3,97,032 and claimed the same as revenue expenditure against its business income. The Income-tax Officer disallowed the assesee's claim for deduction of interest on the ground that borrowed amount on which interest had been paid was utilised for the construction of a new cinema building and, as such, the payment of such interest had to be capitalized. The Income-tax Officer also noticed that the theatre building was still under construction and the construction was incomplete during the previous years relevant to the assessment years, 1982-83, 1983-84 and 1984-85. Hence, as per the Income-tax Officer the payment of interest till construction of the theatre was complete had to be capitalised and the same was not admissible as revenue expenditure against the assessee's business income. On appeal by the assessee, the Commissioner of Income-tax (Appeals) by relying on the decision of the Tribunal m I.T.A. No. 776/Bang. of 1982, in the assessee's own case for the assessment year 1981-82, dated March 19, 1984, deleted the disallowance made by the Income-tax Officer and held that the interest claimed by the assessee is an allowable deduction against the assessee's business income.

On further appeal by the Department, the Tribunal dismissed the Department's appeals by relying upon its earlier decision for the assessment year 1981-82. It was held by the Tribunal that since the business of the assessee had not commenced and the loan had been taken and utilised by the assessee for the further expansion of the business the interest paid by the assessee on such loan was deductible as revenue expenditure. Reliance was placed upon a decision of the Supreme Court in the case of India-Cements Ltd. v. CIT (1966) 60 ITR 52.

The Department filed a petition under section 256(1) requesting the Tribunal to refer the question of law regarding the claim for deduction of the interest payment made on borrowers utilised for the acquisition of new theatre, the construction of which was not complete during the relevant previous years and which was not put into use in the assessee's business for the assessment years under consideration. The Tribunal, declined to refer the question on the ground that for the assessment year 1981-82 no question was claimed and, therefore, for the subsequent years the question did not arise.

The Department filed C. P. Nos. 339-341 of 1990 to this Court. The High Court was of the opinion that the question of law did arise from the order of the Tribunal and accordingly directed the Tribunal to refer the question of law claimed by the Revenue alongwith the statement of case. In pursuance of the direction issued by the High Court, the Tribunal has referred the following question of law with an appropriate statement of case:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the Commissioner of Income-tax (Appeals) was justified in allowing the assessee's claim for deduction of the interest payment of Rs.1,65,738, Rs.2,29,206 and Rs.3,97,032.made on borrowals utilised for the acquisition of new theatre the construction of which was not complete during the relevant previous years and which was not put into use in the assessee's business for the assessment years 1982-83, 1983-84 and 1984-85, respectively?."

The Revenue's case is that the new cinema at Mandya constituted a new business though under the same management and did not constitute an establishment of a new unit for exhibiting films. It was contended for the Revenue that since during the relevant assessment year the new unit did not start functioning, the payment of interest on the borrowings which were utilised for the purpose of establishment of the new unit should go towards cost of the new unit and, therefore, on the principle laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 the interest should be treated as capital expenditure and not as revenue expenditure. The contention of the assessee is that the Tribunal has rightly proceeded on the fact that the new establishment was the unit of existing business and the borrowings having been utilised for expanding the same and the existing business and the interest paid would be a revenue expenditure and allowable as such. The principle laid down by the Supreme Court in Challapalli Sugars Ltd.'s case (1975) 98 ITR 167 would not be applicable. Reliance was placed on certain decisions, a reference to which is made in the next few paragraphs.

In L. M. Chhabda & Sons v. CIT (1967) 65 ITR 638, the Supreme Court laid down that there is no general principle that where an assessee carries on business ventures of the same character at different places it must be held as a matter of law that the ventures are parts of a single business. Whether different ventures carried on by the assessee form parts of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the different ventures constitute parts of the same business.

In CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) and in Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC) the test is laid down by the Supreme Court for determining whether two lines of businesses constitute the same business within the meaning of section 24(2) of the Act at the relevant time. In CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC), it was held (page 637):

"A fairly adequate test for determining whether the two constitute the same business is furnished by what Rewlatt, J. said in Scales v. George Thompson & Co. Ltd. (1972) 13 TC 83, 89:

'Was there any interconnection, any interlacing, any interdependence, any unity at ' all embraching those two businesses'?"

This principle was reiterated by the Supreme Court in Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739.

In Challaplli Sugars Ltd.'s case (1975) 98 ITR 167, the Supreme Court was considering whether the interest paid on amounts borrowed for the acquisition and installation of plant and machinery forms part of the actual cost entitling the assessee to depreciation allowance and development rebate with reference to such interest also. The assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. The assessee company had borrowed considerable sums of money from the Industrial Finance Corporation of India for the installation of machinery and plant. During the relevant year and for the period to the commencement of its business the assessee paid Rs.2,38,614 'as interest. The case of the assessee was that the payment of interest be added to the cost of machinery and plant of the assessee and as such while calculating depreciation admissible to the assessee the interest paid should be considered as part of the cost of the machinery and plant to the assessee. Their Lordships of the Supreme Court accepted this contention of the assessee and held (headnote):

"As the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly, started company which is in the process .of constructing and erecting its plant, the, interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure."

The point canvassed before the Supreme Court was different from the point involved in the present case. There was no existing business with reference to which the capital was borrowed either for acquisition of a new asset or expansion of the already existing unit or business. There the capital was borrowed for installation of a new unit and interest paid on the borrowed capital was treated as capital expenditure adding to the capital cost of the asset entitling the assessee to depreciation allowance and development rebate with reference to such interest also.

In the present case, the assessee had taken the loan for the new unit which was taken to be the expansion of the already existing business of the assessee. The Tribunal has proceeded on the basis that the assessee had taken the loan for further expansion of his business and the interest paid by the assessee on such loan was deductible as revenue expenditure.

The finding of fact recorded by the Tribunal that the loan had been taken for expansion of business had not been challenged by the Revenue and no question regarding this finding has been claimed by it. As laid down by the Supreme Court in L. M. Chhabda & Sons' case (1967) 65 ITR 638, the question as to whether the different ventures carried on by the assessee form parts of the same business would depend on the facts and circumstances of each case and it had to be established on the facts that the different ventures form part of the same business. In this case, the assessee's contention was that the loan was taken for expansion of the already existing business and that finding has not been questioned. Therefore, we proceed on the basis that the loan was taken by the assessee for expansion of his already existing business and then examine whether the interest paid on the borrowed capital for the installation of the new unit would be allowable as revenue expenditure or capital. expenditure.

In CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715, the Gujarat High Court held that where there was interconnection and interdependence and unity between the existing business and the new unit, then the interest levied on the borrowed capital would be a revenue expenditure. In that case, the assessee was a company manufacturing glass at Baroda from 1947. During the accounting period relating to the assessment years 1965-66 and 1966-67, the company incurred expenditure of Rs.7,53,084 and Rs.77,00,000, respectively, for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment year in question, and, therefore, during the course of assessment, the Income-tax Officer disallowed the payment of interest of Rs.50,000, and Rs.2,00,000, respectively, in the two years on such borrowings. The Income-tax Officer further held that the Bangalore unit was not a branch of the assessee's factory and was, therefore, a new business, and, since the new business had not started production, the payment of interest could not be taken as revenue expenditure. Miscellaneous expenditure like travelling expenditure referable to the establishment of the Bangalore unit was also disallowed. The appeal was accepted by the First Appellate Authority which order was confirmed by the Tribunal. The Revenue went up in reference to the High Court, which was answered against the Revenue and in favour of the assessee holding (headnote):

"That it could not be disputed that the business organisation, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organisation of both the units. The production of both the units was considered the production of the assessee-company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on December 8, 1959, and in the application for licence submitted by the assessee to the Government, it was stated that the new unit at Bangalore was nothing but an expansion of the existing business. Thus, there was complete interconnection, interlacing and interdependence of both the units, which is the test laid down for determining whether two lines of businesses constitute the 'same business' within the meaning of section 24(2), by the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 and again approved by the Supreme Court in Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739. "

Similarly, this Court in Addl. CIT v. Sourthern Founders (1979) 120 ITR 37 held (page 38):

"It is not disputed that for the purpose of carrying on the business the assessee had constructed certain buildings and for the purpose of meeting the expenditure incurred for constructing such buildings, the assessee borrowed monies and on such borrowings paid interest We are of the view that the Tribunal was right in holding that the interest paid was deductible as revenue expenditure irrespective of the fact that the building in question had not been actually put to use for carrying on business during the accounting year by the assessee. This view accords with the view taken by a Division Bench of this Court of which one of us, was a member, in Ravi Machine Tools (P.) Ltd. v. CIT (1978) 114 ITR 459 (Kar.). The question referred to us is, therefore, answered in the affirmative and against the department. "

Similar view was taken by this Court in C. T. Desai v. CIT (1979) 120 ITR 240 and in CIT v. Insotex (Private) Ltd. (1984) 150 ITR 195. In CIT v. Insotex (Private) Ltd. (1984) 150 ITR 195 (Kar.), the Income-tax Officer for the assessment years 1974-75 and 1975-76 disallowed the benefit of deduction as business expenditure incurred by. the assessee on the borrowed capital utilised for importing machines to replace the old machines and for purchasing the land on the ground that the machinery purchased was not used for production in the. relevant accounting year. It was held that the assessee was entitled to adjust the payment of interest towards revenue expenditure holding that when once it was proved that the assessee has utilised the same for the purpose of business, then he was entitled to the adjustment of the interest on the money borrowed as revenue expenditure.

Similar view was expressed again by this Court in CIT v. Hindustan Machine Tools Ltd. (No. 1) (1989) 175 ITR 212 and in CIT v. Indian Telephone Industries Ltd. (1989) 175 ITR 215 (Appex).

??????????? As observed earlier in the present case, the Tribunal has proceeded on the assumption of facts that there was an interconnection, interlacing and interdependence and unity between the existing business and the new unit. Setting up of the new cinema hall at Mandya did not constitute a new business, but was only an establishment of a new unit of an existing business, which was already being carried on by the assessee. It constituted the same business. The assessee was entitled to deduct the interest as revenue expenditure irrespective of the fact that the building in question was not actually put to use for carrying on a business during the accounting year by the assessee. The assessee was entitled to adjust the payment of interest towards revenue expenditure as it was proved that the assessee had utilised the same for the purpose of business.

In view of the finding recorded by the Tribunal that the new unit was an expansion of the business of the assessee and the borrowed capital having been utilised for the expansion of the existing business by putting up a new unit of the assessee, the interest paid on the borrowed capital would a revenue expenditure. We answer the question in the affirmative, i.e., against the Revenue and in favour of the assessee.

M.B.A./3380/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly