1998 (7) TMI 72 - HC - Income Tax

Summary

Issues Involved:

1. Deduction of interest on borrowed funds for construction of a new theatre.
2. Classification of interest payment as capital or revenue expenditure.
3. Determination of whether the new theatre constitutes a new business or an expansion of the existing business.
4. Applicability of principles laid down in previous Supreme Court judgments.

Detailed Analysis:

1. Deduction of Interest on Borrowed Funds for Construction of a New Theatre:

The assessee, a Hindu undivided family running a theatre, borrowed funds from Karnataka Bank Ltd. for constructing a new theatre, "Gurusree". For the assessment years 1982-83, 1983-84, and 1984-85, the assessee claimed deductions for interest payments on these borrowings as revenue expenditure. The Income-tax Officer disallowed these claims, arguing that the borrowed amount was used for constructing a new cinema building, which was still under construction and thus, the interest payments should be capitalized. The Commissioner of Income-tax (Appeals) and the Tribunal, however, allowed the deductions, treating the interest as revenue expenditure.

2. Classification of Interest Payment as Capital or Revenue Expenditure:

The Tribunal relied on the decision in the case of India Cements Ltd. v. CIT, where it was held that interest on borrowed funds used for business expansion is deductible as revenue expenditure. The Revenue argued that the interest should be treated as capital expenditure based on the principle laid down in Challapalli Sugars Ltd. v. CIT, where interest paid on borrowings for the acquisition and installation of plant and machinery was considered part of the actual cost of the asset.

3. Determination of Whether the New Theatre Constitutes a New Business or an Expansion of the Existing Business:

The Revenue contended that the new theatre constituted a new business and not an expansion of the existing business. The assessee argued that the new theatre was an expansion of the existing business, and thus, the interest paid on the borrowed funds should be treated as revenue expenditure. The Tribunal found that the new theatre was an expansion of the existing business, a finding not challenged by the Revenue.

4. Applicability of Principles Laid Down in Previous Supreme Court Judgments:

The judgment discussed several Supreme Court decisions to determine the nature of the expenditure:

- In L. M. Chhabda and Sons v. CIT, it was established that whether different ventures form parts of the same business depends on the facts and circumstances of each case.
- In CIT v. Prithvi Insurance Co. Ltd., the test for determining whether two lines of business constitute the same business was laid down, focusing on interconnection, interlacing, and interdependence.
- The principle in Challapalli Sugars Ltd. was distinguished as it involved a new business setup, whereas the present case involved an expansion of an existing business.
- The Gujarat High Court in CIT v. Alembic Glass Industries Ltd. held that interest on borrowed capital for a new unit, which is an expansion of an existing business, is revenue expenditure.
- The Karnataka High Court in Addl. CIT v. Southern Founders and other cases consistently held that interest on borrowed funds for business expansion is deductible as revenue expenditure.

Conclusion:

The High Court concluded that the new theatre was an expansion of the existing business, and the interest paid on borrowed funds for its construction should be treated as revenue expenditure. The question was answered in the affirmative, against the Revenue and in favor of the assessee, confirming the Tribunal's decision to allow the interest deduction as revenue expenditure.