TMI Blog1998 (7) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... same as revenue expenditure against its business income. The Income-tax Officer disallowed the assessee'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 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, 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 in 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : "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 Bangalor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
