TMI Blog1999 (1) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest debited to Profit Loss Account. 49,62,16,000 (b)Interest paid on borrowings not debited to Profit and Loss Account but capitalised in books of account : (i)Fertilizer Division 35,13,55,815 (ii)Chemicals Division 1,66,83,137 36,80,38,952 86,42,54,952 (c)Gross Interest (a + b) 86,42,54,952 (d)Less : Interest and other income out of borrowed funds 5,18,34,091 (e)Net Interest claimed as 81,24,20,861 deduction In the assessment proceedings, the Assessing Officer noticed that during the year the assessee had put up a fertilizer plant at Babrala in Uttar Pradesh and that the plant was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;; (Rs. 35,13,55,815) and partly under the head Other Sources (Rs. 20,35,30,690). Thus what we would consider, for the purpose of ground No. 1 taken before us, is ₹ 35,13,55,815, which, according to the Assessing Officer, represents interest on capital borrowed and utilised for the purpose of the business operations of the fertilizer division, which had not started functioning during the year and which was only in the process of being put up. 4. The Assessing Officer has devoted about 68 pages to the issue and has considered the matter very elaborately. He has discussed the facts, the assessee';s contentions as well as the legal position elaborately in these pages. Briefly put, the assessee';s case before the Assessing Officer was that the fertilizer division was part of the assessee';s existing business and was not a distinct or separate business and therefore the interest on capital borrowed for the purpose of the fertilizer plant in Babrala constituted a valid deduction under section 36(1)(iii). The view of the Assessing Officer is that the fertilizer unit is a separate and distinct business and did not constitute part of the business carried on by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred to another firm. The deduction of the interest claimed against the income of the jewellery business was denied. The Tribunal held that the interest having been allowed inter alia on the ground that the theatre business and jewellery business were a composite business it was not open to the income-tax authorities to deny the deduction. The High Court reversed the decision of the Tribunal by holding that the closure of the theatre business had not affected the jewellery business and therefore there was no inter-connection, inter-lacing etc. On appeal by the assessee, the Supreme Court held that the fact that the income-tax authorities had earlier allowed the deduction in respect of the interest showed that they had viewed the theatre business as part of the assessee';s business and that the subsequent transfer/closure of that business did not alter the fact that at the time when the borrowings were made, they were for the purposes of the business of the assessee. It was therefore held, reversing the High Court';s judgment, that the test of same business, appropriate for set-off of carry-forward of losses is not appropriate here . In the very next paragraph, the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P.) Ltd. (1995) 216 ITR 607/ 83 Taxman 343(SC). His contention was that this judgment is authority for the proposition that wherever the legislature wanted to prescribe a condition that an allowance or deduction would be granted only against the profits of the same business, it specifically provided for the same, as in the proviso to section 72(1) and not having expressly stated so in section 36(1)(iii) it is not open to the income-tax authorities to read such a condition into the said provision. Heavy reliance was placed on the last paragraph of the judgment at page 617. We agree with Mr. Vyas to the limited extent that wherever the legislature wanted to prescribe such a condition in the case of carry-forward of a loss or allowance, they have so prescribed expressly. The Supreme Court was concerned with the provisions of section 32(2) which provided for carry-forward of unabsorbed depreciation allowance. The Supreme Court repelled the contention of the Revenue that the allowance can be set off only against the profits of the same business to which it pertained, by holding that such a condition should have been expressly prescribed by the Act and in this context referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal to the Supreme Court, heavy reliance was placed on behalf of the assessee on CIT v. Maharashtra Sugars Ltd. (1971) 82 ITR 452. Distinguishing the said decision, and certain other decisions of the Supreme Court, it was held by the Supreme Court that they were all rendered under the section 24(2) of the 1922 IT Act under which the question was whether the business carried on by the assessee in the relevant previous year was the same business as was carried on by him in the earlier year or years and that the question before the Supreme Court was different and that the object of enquiry in both the cases (earlier decisions and the case before the Supreme Court) was different. Relying on this distinction brought out by the Supreme Court, Mr. Vyas argued that section 72(1) and its proviso being identical with section 24(2) of the old Act, the tests applicable while interpreting section 72(1) and its proviso cannot be applied to the claim of interest made by the assessee before us under section 36(1)(iii). It is interesting to note that Waterfall Estates Ltd';s case (supra) was relied on by Mr. Tralshawala also, for the Department. His contention was that, this decision laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble as deduction under section 5(e) of the said Act as expenditure laid out wholly and exclusively for the purpose of the plantation. The claim was upheld by the Supreme Court by holding that in principle there was no difference between interest paid on monies borrowed for acquiring a plantation and on monies borrowed for the purpose of the existing plantation; both are for the purpose of the plantation. Mr. Vyas'; argument, shortly put, is that we should substitute the words plantation by the word business and so substituted, the judgment fully supports the claim for deduction of interest under section 36(1)(iii). It is noteworthy that though section 5(k) of the said Act provided for deduction of interest paid on monies borrowed and actually used in the plantation in the previous year, the assessee';s claim was not founded on this provision. The Supreme Court noted that section 5(e) was a word for word reproduction of section 10(2)(xv) of the Indian Income-tax Act 1922, the equivalent of which is section 37(1) of the present Act. The claim was allowed under section 5(e) of the Act. This decision cannot be applied to the present case for the reason that the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was being carried on by the assessee? To put it differently, the question to be asked is : Was the business for which the monies were borrowed being carried on by the assessee during the previous year? If more than one activity or business was being carried on by the assessee, were all the activities/businesses so interlaced, inter-connected or inter-dependent so as to enable one to conclude that all of them constituted one business, so that it can be said that that was the business that was being carried on by the assessee in the relevant previous year? We are convinced that the aforesaid enquiry is an inescapable concomitant of the section. 11. In India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), another decision on which much reliance was placed by Mr. Dinesh Vyas, expenditure in-curred by the assessee by way of stamp duty, registration fees and lawyers'; fees etc. in connection with a loan obtained from IFC was claimed as a deduction under section 10(2)(xv) of the old Act. It was disallowed as capital expenditure. This view was negatived by the Supreme Court which held that a loan obtained by the assessee was not an asset, that there was no enduring advantage, that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuted one single business or not is wholly irrelevant. 12. In Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT (1965) 56 ITR 52, it was held by the Supreme Court that borrowed capital referred to in section 10(2)(iii) of the old Act meant money and not any and every liability, such as unpaid purchase price of an asset. In this case the claim for deduction of the interest on the balance of the purchase price due by the assessee-company to another entity whose business the assessee-company took over was negatived under section 10(2)(iii) (Hon';ble Justice Subba Rao expressing no opinion on the point). The alternative claim of the assessee under section10(2)(xv) expenditure incurred wholly and exclusively for the purpose of the business was upheld by the Supreme Court on the ground that the interest claimed was so closely related to the business that the transaction that gave rise to the interest could be viewed as an integral part of the conduct of the business. This decision would be relevant only if the assessee';s claim is based on section 37(1) of the Act; but interest paid on capital borrowed would fall for consideration only under section 36(1)(iii) and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or in-built in the provisions of section 36(1)(iii). What the income tax authorities have been insisting upon is that the assessee has to show that the fertilizer business was part of the business that was being carried on in the previous year by pointing out to evidence that would show inter-connection, inter-lacing and inter-dependence between its existing business in Mithapur and the fertilizer plant in Babrala. Their view, in our opinion, is not in any manner inconsistent with the Indian Bank Ltd.';s case (supra). By taking this view, the income-tax authorities cannot be stated to be insisting upon a condition that is not present in the statutory provision. 14. In view of the foregoing discussion, we are of the view that the departmental authorities were right in law in their view that the burden is on the assessee to show that the fertilizer business is part of the other businesses carried on by the assessee in the previous year in order that the interest paid on capital borrowed for the purpose of the fertilizer business can qualify for deduction under section 36(1)(iii) of the Income-tax Act, 1961. We are unable to accept the contention of Mr. Dinesh Vyas that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the case related to a company which was newly started and which had not commenced any production or any business. The question which engaged the attention of the Supreme Court was whether the interest paid before the Commencement of production on the amount borrowed for the acquisition of plant and machinery can be considered to be part of the actual cost to the assessee for purposes of depreciation. The Supreme Court answered the question in the affirmative. The Supreme Court further pointed out the distinction between interest claimed for the period prior to the commencement of production and that claimed after the commencement at page 172 of the report and held that the interest paid after the commencement of production can be deducted under clause (iii) of sub-section (2) of section10 of the Act . The distinction was brought into focus at page 178 of the report where the earlier judgment of the court in India Cements Ltd.';s case (supra) was referred to and distinguished. It was held that India Cements Ltd.';s case (supra) did not assist the Revenue';s contention that such interest is to be allowed as revenue expenditure as per section 10(2)(xv) of the old Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he effect that the interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of the asset were made with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, and hence had not commenced any business when it borrowed the amount in question. Therefore, it was not possible to say in that case that the borrowing was made for the purposes of the business to bring the case within the ambit of section 10(2)(iii) of the Indian Income-tax Act, 1922 [which is equivalent to section 36(1)(iii) of the Act of 1961] . The High Court then proceeded to discuss India Cements Ltd.';s case (supra) and Calico Dyeing Printing Works v. CIT (1958) 34 ITR 265 (Bom.) a case on which heavy reliance was placed by Mr. Tralshawala on behalf of the Revenue before us and sought to reconcile the three decisions. Finally, the High Court held (at page 727) that Calico Dyeing Printing Works'; case (supra) and India Cements Ltd.';s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced on behalf of the Department based on Challapalli Sugars Ltd.';s case (supra) that the interest can only be capitalised. Rejecting the argument, the High Court held that the principle laid down in Challapalli Sugars Ltd';s. case (supra) cannot be extended to a running business . 20. In CIT v. Shah Theatres (1988) 169 ITR 499/ 36 Taxman 335 the Rajasthan High Court referred to Challapalli Sugars Ltd';s. case (supra) and held that in that case the Supreme Court itself had referred to its earlier decision in India Cements Ltd.';s case (supra) and observed that India Cements Ltd.';s case (supra) was a case of a running business or a running concern and distinguished the same. It was held (by the Rajasthan High Court) : The Supreme Court has made a distinction between a loan taken during the course of business when business had already commenced and a loan taken before the commencement of business, and in respect of a loan taken before the commencement of business, it has been held that the interest paid on the said loan could be treated as capital expenditure (page 503 of the report). In the above understanding of the ratio of Challapalli Sugars Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Hyderabad Bench of the Tribunal, on which strong reliance was placed by Mr. Tralshawala, the learned Senior D.R. In this case, the assessee-company was engaged in the manufacture of fertiliser. In 1979, it altered its memorandum of association to include the manufacture of cement. It borrowed capital from financial institutions and took deposits from public for the purpose of putting up the cement plant. The interest was claimed as deduction under section 36(1)(iii). It was disallowed on the ground that the cement unit had not commenced production during the relevant previous year. The CIT(A) allowed the interest. On appeal by the Department, the Tribunal noticed that as held by the Supreme Court in Setabganj Sugar Mills Ltd. v. CIT (1961) 41 ITR 272, one has to see whether there is any inter-connection, interlacing, inter-dependence or unity of control embracing the two ventures, fertilisers and cement and that such tests were satisfied in the case. It is interesting to note that in this case it was the Department which contended that the tests of inter-connection, interlacing etc. laid down in the context of carry-forward and set-off of business losses were not applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities or business pursued constitute one single or composite business, is satisfied. 25. We now proceed to the next step, viz., the consideration of the question whether, on the facts and circumstances of the case, the chemical business and the fertiliser business are a single or composite or same business, on an application of the principles laid down in the several authorities cited before us by both sides. Cases on the question are legion and it is impossible to start the discussion by referring to any authority other than Scales v. George Thompson 13 Tax Cases 83 (KB). Rowlatt J. posed the question thus : I think the real question is, was there any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses? If the answer to the question is in the affirmative, then the businesses are one and the same; if it is in the negative, they are not. 26. This test has been applied in India in a number of cases both by the Supreme Court and the High Courts. In Setabganj Sugar Mills Ltd.';s case (supra) it was pointed out that what one has to see was whether the different ventures were so interlaced and so dovetailed into each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing findings of fact : 1.That there is a single trading account and profit loss account and in this account the sales of spirit, sugar and molasses and stocks and shares appear. 2.The share transactions as well as the business have been dealt with by the same organisation, though the sale of shares was a single transaction and the purchase also was more or less of the same type. 3.The business of the company as well as the shares were attended to as part and parcel of the assessee-company. 4.A common fund was utilised both for business purposes and for the purchase of shares. A part of the overdraft taken from the bank was being discharged out of the income from the business. 5.The share transaction work as well as the other business were transacted from the same place of business. 27. After noticing the aforesaid findings of the Tribunal, the Supreme Court held (at page 592 of the report) that from the facts found by the Tribunal, it is clear that the share transaction as well as the other businesses of the company were dealt with by a common management, common business organisation, common administration, common fund and common place of business . It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities to support the conclusion reached by the income-tax authorities that both the businesses are distinct or separate. We shall refer to such of them which, in our opinion, are relevant for our purpose and that too very briefly, because primarily the conclusion to be reached in the case before us has to be based on its own facts which is possible only if the facts of the case before us are closely examined. 30. In Addl. CIT v. Aniline Dyestuffs Pharmaceuticals (P.) Ltd. (1982) 138 ITR 843/8 Taxman 89 (Bom.), the assessee which was manufacturing dyestuffs started a new unit for the manufacture of dyestuffs (intermediates). It borrowed monies for the purpose of the new unit on which interest was paid and claimed as deduction. The income-tax authorities held that the intermediate-manufacturing unit was a distinct and separate venture and since it had not started production in the previous year, the interest cannot be deducted from the profits of the existing unit. The Tribunal reversed their decision. The High Court affirmed the Tribunal';s view and held that the new unit cannot be stated to be a new or distinct venture unconnected with the dyestuff business and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts us to understand. If such an objection had been raised, the High Court would have had occasion to examine the validity of the same and pronounce upon it. And in that event, whatever decision had been rendered on that argument would have also constituted the ratio of that case. But that is not the case, as we have seen. But all this is not to say that the argument of +Mr. Tralshawala that only if the capital is borrowed for the expansion of the existing business, can the interest on the same be allowed as a deduction under section 36(1)(iii) cannot be accepted. What we have pointed out is only that Calico Dyeing Printing Works'; case (supra) is not the authority for that proposition. 31. In C.T. Desai v. CIT (1979) 120 ITR 240/(1980) 3 Taxman 57(Kar.), a judgment on which very strong reliance was placed by Mr. Vyas, the assessee was carrying on business of film distribution on his own and also exhibition of films on percentage basis under agreements entered into with theatre owners. The assessee borrowed monies for the purpose of securing a lease of a theatre for the purpose of doing the exhibition of films on his own. Actually, the money borrowed was given to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot commence production in the previous year. It was held on these facts that the assessee is one and the same and though it had set up a new factory, the assessment was not made unitwise but assessee-wise. There is no rule which compels the assessee under such circumstances to capitalise the interest or to include it in the capital expenditure (relating to the new unit). In Kanhiram Ramgopal v. CIT (1988) 170 ITR 41/ 36 Taxman 305 (MP), the assessee was carrying on a rice and dhall mill and borrowed monies for setting up a factory for the manufacture of straw-boards by using the waste from the rice and dhall mill. The M.P. High Court held that it was only a case of expansion of business and the interest paid on the monies borrowed was allowable as deduction under section 36(1)(iii). In CIT v. Shah Theatres (P.) Ltd. (1988) 169 ITR 499/ 36 Taxman 335 (Raj.) the assessee was engaged in the business of exhibition of motion pictures. During the year, it started the construction of a theatre of its own for the purpose of exhibiting films. The assessee had borrowed monies on interest for the purpose of the cons-truction. On these facts, the Rajasthan High Court held that it was a case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the manufacture of various items or things that would be only different manifestations of the same business, namely, manufacture and therefore the various activities would constitute the same business. The assessee in this case was a company manufacturing diverse items, such as sugar, vanaspati, soaps, paints and varnish, torch and lanterns. It started manufacture of a new item viz., special alloy wire and billets. Debentures were issued for raising funds for the new unit and expenditure was incurred in connection with the said issue. The question was whether the expenditure could be deducted when the new unit had not commenced any production. The High Court, affirming the decision of the Tribunal, held that all that the company did was to commence the manufacture of a new commodity and that in a larger sense the business remained the same, viz., the business of manufacture . Since the Tribunal had found that there was unity of control and a common fund, the tests were satisfied and the expenditure on the debenture issue could be deducted, it was held. In this judgment, the Delhi High Court referred to all the leading cases of the Supreme Court on the subject viz., Prithvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show whether the same staff were employed, whether the same person was in charge of the existing and the new business etc. The High Court further found that it was not the case of the assessee before the Tribunal that the same set of books of account were maintained for both the businesses nor was its case that the same staff was employed for both the projects. It was therefore held that the Tribunal cannot be faulted for not having taken into consideration something which was not even contended before the Tribunal . Thus it will be seen that the assessee in the Calcutta case had failed to place all the facts before the Tribunal in support of its claim that both the businesses were one and the same and had failed to substantiate its case that proper tests such as inter-connection, inter-dependence etc. had not been applied to those facts. The High Court therefore did not permit the assessee to go into those aspects which were essentially questions of fact to be proved by the assessee before the Tribunal. There are clear observations to this effect in the judgment. For instance, at page 636 the High Court observes : But the facts that were peculiarly within the knowledge of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of B.R. Ltd.';s case (supra) was referred to at page 637 and it was observed that the decision therein was that the question whether the assessee was carrying on the same business depended essentially on the facts of each particular case. Thus, reading the whole of the judgment of the Calcutta High Court in the proper perspective, it seems to our humble minds that no principle different from what has been laid down earlier by various authorities has been laid down and that the decision highlights the principle that the burden is on the assessee to prove that the various businesses carried on by it constitute one single or composite business by producing all the relevant facts and evidence before the income-tax authorities and further that if such burden is not discharged, the assessee should fail. The judgment is also authority for the proposition that on a reference under section 256(1) of the Act, the High Court will not interfere with the findings of fact rendered by the Tribunal except on grounds of perversity and that if the Tribunal had considered all that has been placed before it, no challenge to its findings based on grounds of perversity will be entertaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cited Hiralal Kalyanmal, In re (1943) 11 ITR 128, a decision of the Bombay High Court rendered in the context of section 10(2)(ix) of the 1922 Act. What was held in this case is that the question whether two or more businesses were separate or were really branches of the same business was one of fact and that all that the court had to consider is whether there was evidence before the income-tax authorities to come to the conclusion one way or the other. The Court further observed: We were referred to various cases which demonstrate that it is not always easy to determine whether businesses are independent businesses, or separate branches of the same business. But the difficulty of determining the question of fact does not make it a question of law...... I think it would be very difficult, if not impossible, to formulate any rules for determining questions of this nature...... At any rate, all these cases recognise the fact that this matter is a question of fact to be determined....... 39. In K. Govindan v. CIT (1955) 28 ITR 307, the Madras High Court held that this was essentially a question of fact to be decided by the Tribunal on the basis of the evidence placed before i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of Prakash talkies had not been carried on in the year of account relevant for the A.Y 55-56. The AAC confirmed the disallowance. In appeal to the Tribunal, it was held that since the assessee had not proved that it was carrying on an integrated cinematography business as claimed by them, the outgoing was in respect of a closed business and was not admissible as deduction. The Tribunal further held that the business of the assessee was to acquire various theatres from time to time either by lease or otherwise and run each of them independently of each other with separate identifiable books, that the proper test was to see if the closure of one theatre will not affect the working of the remaining ones and that applying this test the closure of Prakash talkies could not be stated to have affected the Bombay theatre and therefore the mesne profits were not allowable as deduction. The High Court confirmed the Tribunal';s view and the matter was carried to the Supreme Court by the assessee. It was held by the Supreme Court that under section 10 of the old Act (section 28 of the new Act) the business should have been carried on in the relevant year of account and that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has to be seen whether there was any inter-connection, inter-lacing or inter-dependence or dovetailing between the two or more businesses and that these principles have to be applied to the facts before a legal inference can be drawn that different business ventures constitute one business. In the determination of the question, findings of fact are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the business, the employment of the same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth (pages 641-2). Thus it will be seen that the Supreme Court did not, as a matter of law, lay down that wherever there is a possibility of a closure or an actual closure of one business without affecting the other business or businesses the businesses must be held to be distinct or separate. The Supreme Court have in fact reiterated the various tests laid down earlier in Setabganj Sugar Mills Ltd.';s case (supra), as their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) not being referred to was that the Supreme Court held in that case that (at page 642): It was for the appellants to establish that different businesses constitute parts of the same business. There is in this case no evidence about unity of control and management, or inter-relation of the business, of employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business. It will thus be seen that the view of the Delhi High Court is that L.M. Chhabada';s Sons case (supra) would apply where there is dearth of evidence on the other aspects of the case such as unity of control and management, interlacing etc. and the evidence shows that one of the businesses can be closed without affecting the other. We have not been referred to any authority wherein it has been held that notwithstanding that there is evidence to show that there is interlacing, inter-dependence, unity of control and dovetailing between the various businesses, since one of the businesses could be closed without affecting the other, the businesses must be taken to be separate or distinct. In other words, the test is not conclusive when there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the chairman of the company, Mr. J.R.D. Tata, for the accounting year 1966-67, reference was made to the fertilizer project. It was stated by him that the project lent itself ideally to location in the neighbourhood of Mithapur for both geographical and technical reasons . Reference to the same effect was also made in the Directors'; report to the shareholders. An application was duly submitted to the Government of India for industrial licence in 1967 and reference to this is found in the Directors'; report for the year 67-68. In the chairman';s statement for that year, reference was made to the various reasons for the delay in the Government granting approval. One of the objections raised, it appears, was that the plant, if put up at Mithapur, Gujarat, would result in over-concentration of fertilizer projects in one state. Referring to this objection, the chairman stated: Apart from the regional aspects of this objection, with which I naturally cannot deal, the fact is that, for technical reasons, our project can only be put up at or near Mithapur, and there can therefore be no question of it being set up anywhere else in India . These statements, made contemporaneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds realised from this issue not being utilised for the purpose for which this issue is being made, Tata Chemicals will refund such proceeds to the subscribers together with interest........ As security for the debenture-holders, an English mortgage of a portion of the property of the assessee-company located in the State of Gujarat was given with a condition that within a period of 12 months from the date of issue, the assets and properties of the fertilizer project would be mortgaged by way of deposit of title deeds. It was also provided that the company shall be at liberty to create any further mortgages or charges of all or any of its assets, including the aforesaid properties and assets, after consulting the debenture-trustees without any reference to the debenture-holders. It will thus be seen that though the debenture-issue was in connection with the fertilizer project at Babrala, UP, the assessee-company had offered the assets and properties of the Mithapur chemical plant at Gujarat as security by way of an English mortgage. The security of the assets of the Babrala fertilizer plant was to be given within a period of 12 months from the issue-date, in addition to the mort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unfortunate and unexpected prospect of having to abort the Fertiliser Project on which so much effort, time and money had already been expended and high hopes invested . It was therefore decided that the company could not go back on its commitment to the manufacture of fertilizers. So it sought ways and means of rescuing the fertiliser project, in the face of the new pricing parameters and, altering the course, decided to undertake and implement the Project as a Division of the Company, drastically altering the means of financing the Project in a manner so as to restore its viability even in the context of the new pricing parameters . These reasons, in our opinion, show that the initial proposal to start the fertilizer business as part of the company';s business, was given effect and the Babrala project was inducted into the company';s fold. It is no doubt true that the initial proposal to start the fertilizer project by the assessee-company was modified by forming a wholly-owned subsidiary company (TFL) and if TFL had continued as it is and had set up the project by itself, no question of the assessee professing to carry on the said business would have and could have ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise are deposited by company in its Cash Credit Account. As and when the funds are required for the purpose of capital expenditure or for revenue expenditure or for the investments, the same are paid from cash credit account. In Cash Credit Account, there are continuously receipts as well as payments, but this does not mean that borrowed money is utilised for other than capital expenditure or receipts from business operations are not utilised for business purposes (quoted at page 57 of the assessment order). Though this letter was written in the context of allocation of the interest and in response to the view of the Assessing Officer on this point which we will discuss later the letter has been accepted by the departmental authorities as depicting a factual position. When there is intermingling of funds in the cash credit accounts with the banks, both of the sale proceeds and the borrowings, it shows that there is a common fund and that one of the tests laid down as to whether there is a common fund for the various activities pursued by the assessee is answered in the affirmative. A few other aspects may also be noticed in this connection, which strengthen our view. In its le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is managed by a single board of directors, that the managing director works under the control and supervision of the board, that in the year 1990 Mr. Vadgama was appointed the joint managing director and Mr. Manu Seth was appointed the deputy managing director, that Mr. Vadgama was put in charge of the fertilizer division and Mr. Manu Seth was made in charge of the chemicals division, that they were either from the head office or from the existing chemical division, that Mr. Vadgama became the managing director from 15-7-1992 in the place of Mr. Durbari Seth, and the entire management team was controlled by the board of directors from Bombay House, Homi Modi Street, Bombay. In the organisation chart filed before the Assessing Officer vide letter dated 20th October, 1994, these facts have been brought out and the management team has been named, as it existed up to 31-3-1992. From this, we find that the team consists of the managing director, joint managing director, deputy managing director, company secretary, controller of finance and accounts, chief purchase executive, chief sales executive and an administration manager for the fertilizer division. This team functioned from Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requisitioned by another division, it is done at arm';s length inasmuch as they have to be paid for by the requisitioning division. He has also observed that a separate cell consisting of three persons was formed at the head office in Bombay for the purpose of contacting the suppliers, discussing and releasing advance payment and subsequently making final payment etc. A technical committee consisting of various managers such as costing, accounts, materials and the Vice-President, all stationed at the works, was also formed for taking decisions on capital purchases. This committee';s decisions are reviewed by another committee consisting of the managing director, chief purchase executive, controller of finance and accounts, the joint-managing director and the Vice-President. The Assessing Officer has found (page 44 of assessment order) that during the period of construction of the fertilizer project, decisions for the purchase of cement, steel, various machinery etc. were taken at the head office in Bombay by the joint managing director and the Vice-President of the fertilizer division in co-ordination with the chief purchase executive and controller of finance. From all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business context. The head office cannot be viewed, as was done by the Assessing Officer, as only a service centre (page 45) and not as exercising any control over the fertilizer division or any other division. 52. Thus, in respect of administration and management, the control is at Bombay head office, though the actual execution of the work is at the project site. The works are thus functionally independent , to use an expression coined by Mr. Dinesh Vyas, but dependent on Bombay head office for decisions. 53. Turning now to the accounting set-up, we find from the letter written by the assessee to the Assessing Officer on 25th October 1994 that the following books of account are maintained in the head office at Bombay House: Cash Bank book, journal, ledger, M.R. sales, loan debenture deposit register, pay-roll register and investment registers. At the works, the following are some of the books maintained: cash and bank book, general ledger, sales journal, debtors ledger, journal vouchers, contractors ledger and journal, purchase ledger and journal, bills register, petty cash book, sundry cash collection, railway freight register, imprest etc. All the accounts are main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at the year-end. In the very nature of his duties, he must have access to all divisional accounts and must be in a position to scrutinise them in an over-all perspective. Since one division of the company maintains an account of the other division or divisions for making inter-divisional charges/recoveries, control of all divisions is possible from one place, viz., the Bombay House. He also has the duty to see that there is periodical reconciliation between the various accounts of the divisions. Further, as regards purchases for the fertilizer unit, as per the note of the assessee dated 13th December, 1994, they are co-ordinated by the Bombay office. The major items of purchase are made through requisition sent to the Bombay office. 54. We have earlier noticed that the accounts are maintained division- wise and they are ultimately controlled at the head office by the Controller of Accounts Finance. In the note filed by the assessee before the Assessing Officer, a copy of which is placed at page 35 of the assessee';s paper book No. 3 (pink flat file), the books of account maintained by the HO and those maintained at the various divisions (chemicals, fertilizers, cement, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts also does a function similar to a fertilizer, which gives some kind of a nutrition to the plant. The object of both is the growth and well-being of the plant. At any rate, agrochemical has been defined to include fertilizer, fungicide, insecticide etc. in the dictionary. What the assessee did in the Babrala plant was to manufacture the fertilizers in a large scale and thus it was only an expansion of the business. The argument of the Departmental Representative Mr. Tralshawala was that the production of the aforesaid agro-chemicals constituted a negligible percentage of the production of the Mithapur factory. We need not enter into this controversy since it has been held in the decisions which we have earlier referred to that the nature of the two lines of activities is not relevant. However, it is a fact that the aforesaid agro-chemicals were produced in the Mithapur factory from 1973-74 to 1991-92 and the details of production are given at pages 30-32 of the Green file paper book filed by the assessee. Similarly, we are not also dealing with the controversy as to whether the process involved in the manufacture of soda ash, the main product in Mithapur plant, is technically si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the new unit at Babrala is an expansion of the existing business or a new business altogether. Accordingly the assessee has filed copies of the letter of the Govt. of India in No.LI:790 (1985) dated 28th June, 1985. The letter has been issued by the Ministry of Industry and Company Affairs, Dept. of Industrial Development, Secretariat for Indus-trial Approvals. The approval is for the manufacture of Ammonia and Urea in the Babrala unit. We have gone through the letter which imposes various terms and conditions for the issue of the industrial licence under the Industries (Development Regulation) Act, 1951. No light is thrown on the question whether the new unit has been considered as an expansion of the existing unit or as a new unit altogether. 60. Mr. Tralshawala referred to the 50th annual report of the company (1988-89). In the directors'; report [para 31 at page 131 of the paper-book filed on behalf of the Revenue (Vol. I)], the directors have referred to the Babrala unit as the single largest grass-root venture that the Tatas have undertaken till date and have said that It is the first step in the long standing commitment of your company to manufacture and supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that was dismantled and that the exclusivity and the separate identity of the fertilizer project was continued to be retained by transforming the same into a Division of the Company . As already observed by us, a company having various activities, for reasons which are predominantly functional and organisational, creates separate divisions for each such activity so that management becomes easy and integrated. Therefore the fact that the fertilizer project was made a separate division of the assessee-company does not ipso facto lead to the conclusion that it is a separate business. At the cost of repetition, we say that we have to apply only the tests laid down in the reported decisions to ascertain the fact. 63. While dealing with the aspect that the services of one division which were requisitioned by another division were notionally charged in the accounts of the divisions concerned, the Assessing Officer had observed, it may be recalled, that it showed that the dealings between the divisions were at arm';s length . While clarifying this, Mr. Tralshawala submitted that by arm';s length is meant commercial or near-commercial rates . Mr. Vyas had however pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66. It is difficult to sustain the disallowance. The investments have been made in the course of the business. The fact that they are tax-free bonds does not mean that the interest attributable to the capital borrowed for purchasing them has to be disallowed. In the course of the business, a company may have to park the funds in investments as a matter of prudence. It is essentially a business decision. So long as the investment in the tax-free bonds has been made in the course of the business, the interest is allowable notwithstanding that the income from the bonds is not taxable. The judgment of the Supreme Court in Indian Bank Ltd.';s case (supra) fully supports the assessee';s claim. The letter written by the assessee to the Assessing Officer, extracted fully at pages 56-58 of the assessment order has highlighted certain salient points. Firstly, it has been stated that the investment was out of own funds and not borrowed funds. In support of this claim, it has been pointed out that the capital expenditure incurred was more than the amount borrowed. Secondly, it has been pointed out that all the receipts, including sale proceeds and borrowings both for capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allocated in the manner done by the Assessing Officer. In our view, the amount has to be considered and allowed under the head Business . We direct accordingly and allow the ground. 69. Ground No. 3 is directed against the disallowance of the expenses of ₹ 16,99,497 incurred in connection with the issue of non-convertible and partly convertible debentures. This issue has been discussed at paragraphs 63 and 64 of the assessment order. The claim has been made in the revised return. The assessee relied on the judgment of the Supreme Court in the case of India Cements Ltd. (supra) in support of the claim for deduction. On the ground that the debenture issue was made for the purpose of raising capital for the fertilizer project which was a different and distinct business which was not carried on by the assessee during the previous year, the deduction was negatived. The disallowance was confirmed by the CIT(A). In our view, the action of the income-tax authorities is not justified. We have already held that the fertilizer division is part of the business that was being carried on by the assessee during the relevant previous year. Following our view, we hold that the debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with purchase of machinery ₹ 5,45,114 Ground No. 12 - disallowance of payment to Tata Sports Club ₹ 1,42,339 Ground No. 13 - disallowance of payments to Fort Medical Society ₹ 82,000 Ground No. 14 - disallowance of contribution to Sarva Dharma Maitri Pratisthan ₹ 10,000 Ground No. 15 - restricting the profits of the business for the purpose of section 80HHC by reducing 90% of the interest therefrom. 73. All the aforesaid grounds were not pressed in view of the smallness of the amounts involved and without prejudice to the assessee';s right to agitate such matters in the other years if so advised. Accordingly we dismiss the same, except that in respect of ground No. 11 the Assessing Officer may allow depreciation on the foreign travel expenses added to the cost of the machinery. 74. Before closing, we wish to place on record the very able assistance rendered by both sides before us. Very elaborate and well prepared arg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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