TMI Blog2006 (8) TMI 638X X X X Extracts X X X X X X X X Extracts X X X X ..... orepen Financial Investments Ltd. Later on the company amended its objects clause of the memorandum to include the business of hotel resorts, restaurants etc. Consequent to such amendment the name of the assessee was changed to Morepen Hotels Ltd. with effect from 21/10/1997. The name of the assesse has now been changed to Blue Coast Hotels and Resorts Ltd. with effect from 25/6/2002. For the assessment year 2000-01 the assessee filed a return of income declaring a total income of NIL. The book profits under section 115-JA of the Income-tax Act, 1961 [hereinafter referred to as the Act] was declared at ₹ 40,43,100/-. As already stated the assessee altered its objects clause of memorandum to do the business of running a hotel. It is not in dispute that during the previous year the assessee did not commence the business of running a hotel nor was such business set up. It was in the process of constructing a hotel at Goa. The assessee incurred a total expenditure of ₹ 265.34 lakhs in connection with the process of setting up of a hotel at Goa. The details of these expenses are as follows :- Sl. No. Expenses. [Rup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer also pointed out that the expenses as a deductible revenue expenditure. The assessing officer pointed out that the line of business was a different line of business un-connected with the existing line of business and, therefore, the pre-operative expenses of another new line of business. The assessee relied on certain case laws laying down the proposition that if two different ventures carried on by an assessee were so inter-laced and so dovetailed into each other they have to be considered as the same business. The assessing officer distinguished the case laws relied upon by the assessee and ultimately held that the pre-operative expenses incurred in connection with the hotel construction will not be allowed as a deduction. Consequently, the income of the assessee was determined at a figure higher than the book profits and, therefore, taxable income was determined in accordance with the normal provisions of the Act, which was much higher than the book profits computed by the assessee under section 115-JA of the Act. 4. Before the CIT (Appeals) the assessee relied on several case laws and put forth the proposition that the nature of the two lines of business is not relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was admitted that the hotel business which was a source of income newly coming into existence and since the same has not been set up during the previous year, the expenses cannot be allowed as a deduction. The learned Departmental Representative placed strong reliance on the decision of the Hon'ble Supreme Court in the case of Waterfall Estates Ltd. vs. CIT (1996) 219 ITR 563 (SC). The Hon'ble Supreme Court had laid down the aforesaid judgement that the question whether two businesses constitute same business or separate business must be decided on a consideration of all facts and that no single test can be devised as universal or conclusive. Relying on the aforesaid judgement, the learned Departmental Representative submitted that the business of financing and the business of running a hotel by no stretch of imagination can be said to be same line of business. He relied on the findings of the assessing officer and submitted that the expenditure in question was rightly disallowed by the assessing officer. 6. The learned counsel for the assessee, on the other hand, reiterated the submissions as were made before the CIT (Appeals). He relied on several case laws, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Hon'ble Supreme Court in the case of B.R. Ltd. vs. CIT (1978) 113 ITR 647 (SC). 9. The question has also come up for consideration in the context of provisions of section 36(1)(iii) of the Act, which provides for deduction in computing the income any amount of interest paid in respect of capital borrowed for the purpose of business or profession. A question had arisen for consideration as to when the assessee borrows to expand the existing line of business and when that expanded business has not started business whether the interest paid on such borrowings prior to setting up of the new business would be allowable as a deduction against the income of the existing business carried on by the assessee. The Hon'ble Bombay High Court has approved the following test as decisive in the matter in the case of CIT vs. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom.) :- (i) The nature of the two lines of business is not relevant. (ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate. But no decisive inference can be drawn from the fact. (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court in the case of India Cements Ltd. (supra). The above proposition would be, therefore, valid only in the case of interest on borrowed capital. In respect of other revenue expenditure incurred prior to set up of the business the ratio laid down by the Hon'ble Supreme Court in the case of Challapalli Sugar Ltd. vs. CIT (1975) 98 ITR 167 (SC) would be relevant. The Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (supra) after referring to the Rules of Accountancy has held that the interest paid on amount borrowed for acquiring or installing machinery or plant for a period prior to commencement of production should be capitalized and depreciation has to be allowed treating the same so capitalized as part of the actual cost of the plant and machinery. The above ruling of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (supra) is not a case where it was an expansion of existing business of an assessee. The question as to whether all revenue expenses [except interest on borrowed capital] should be allowed as a deduction has to be decided on the basis of the general principle, which we have already narrated, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, he cannot claim allowance under section 10 of the Income-tax Act, 1922, of an outgoing attributable to the business which is closed against the income of his other business in that year. 13. In our view the business of the assessee, namely, financing was entirely disconnected with the new business of running a hotel. The expenses prior to set up of the hotel business cannot be claimed as a deduction in respect of the business of financing. These expenses would stand on the same footing as the preliminary expenses, which a businessman may incur in order to start a business. Just as such preliminary expenses are not permissible deduction the amount spent by the assessee could also not be a permissible deduction against the income of the finance business. The only exception, which we can make is the case of finance charges paid by the assessee in respect of the borrowings effected by the assessee. This is because of the ruling of the Hon'ble Supreme Court in the case of India Cements Ltd. (supra) that irrespective of the borrowing whether to acquire a capital asset or to meet revenue expenditure interest paid on such borrowings was allowable as a deduction. We have already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital or a revenue expenditure, interest paid on such borrowing will be allowed as a deduction. The decision in the case of India Cements Ltd. vs. CIT (supra) lays down the above proposition. Finance charges would, therefore, be allowable as a deduction so long as there is inter-connection, inter-lacing and inter-dependence. The Hon'ble Madras High Court in the case of CIT vs. Blue Mountain Estates and Industries Ltd. 151 ITR 616 (Mad.) has explained the position after considering the decision of the Hon'ble Supreme Court in the case of CIT vs. Prithvi Insurances Co. Ltd. (supra) as follows :- The learned counsel for the assessee strongly relies on the decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647, and contends that the decisive test to be applied in this case is the unity of control and not the nature of the lines of business, and that as this case satisfies the test of unity of control, it should be held that the assessee is carrying on the same business though the lines of business carried on by it may be different. But we are of the view that the said decision of the Supreme Court cannot be taken as laying down that unity of c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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