TMI Blog1975 (11) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... The said unit did not go into production during the two assessment years in question. The assessee, however, incurred expenses for the purpose of the Bangalore unit during the accounting period in question to the tune of Rs. 77,53, 084 and Rs. 77,00,000 respectively. During the course of the assessment, the Income-tax Officer noticed that a part of these borrowings was used for the purpose of setting up the Bangalore unit and, therefore, he disallowed the payment of interest on such borrowings. According to the estimation of the Income-tax Officer the interest referable to the establishment of the Bangalore unit was to the tune of Rs. 50,000 for the assessment year 1965-66, and to the tune of Rs. 2,00,000 for the assessment year 1966-67. Since the Bangalore unit had not commenced the production, the Income-tax Officer disallowed this payment of interest as revenue expenditure. He further held that the Bangalore unit was not the branch of the assessee's factory at Baroda and was, therefore, a new business and since this new business had not started production during the accounting period in question, the payment of interest cannot be taken as revenue expenditure. The company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did not constitute a new business but was the new establishment of a new unit of an existing business at Baroda ? " The first question is whether the establishment of the new unit at Bangalore can be treated as a new or separate business of the assessee. This question does not present any difficulty in view of the decisions given by the Supreme Court in Commissioner of Income-tax v. Prithvi Insurance Co. Ltd. and Produce Exchange Corporation Ltd. v. Commissioner of Income-tax. In Prithvi Insurance Co. the test for determining whether two lines of businesses constitute the "same business" within the meaning of section 24(2), at the relevant time, is stated as under : " A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt J. said in Scales v. George Thompson Co. Ltd. : 'Was there any inter-connection, any inter-lacing, any inter-dependence, any unity at all embracing those two businesses ?' That inter-connection, inter-lacing, inter-dependence and unity are fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Baroda. This contention is not acceptable because the head office of the assessee-company is at Baroda and it is the head office which controls the affairs of both the units and, therefore, it is not possible to say that there is no common place of business of both the units. It was contended by the revenue that the real test for considering whether a particular unit is a separate business from the business of the other unit or not, is to see whether the closure of one unit would affect the other unit or not. Even applying this test we find that the closure of any of the two units would surely affect the working and the business of the remaining unit for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit. Reliance was placed by Shri Kaji on the decision of the Supreme Court given in L.M. Chhabda Sons v. Commissioner of Income-tax. The Supreme Court has therein observed that if the assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 10 of the Indian Income-tax Act o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the assessee is that the decision given by the Supreme Court in Chellapalli Sugar Ltd., has no application to the facts of the present case, because the borrowings were made by the assessee when this business was already going on and since according to section 36(1)(iii), amount of interest paid in respect of capital borrowed for the purpose of business is allowable deduction, the disputed amounts of interest should be treated as revenue expenditure. For this proposition, the assessee has placed reliance upon the decision given by the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax and the Bombay decision in Calico Dyeing and Printing Works v. Commissioner of Income-tax. We shall first analyse the facts of the Bombay case because these facts are found to be quite apposite to the facts of the present case. In the Bombay case the assessee-firm which carried on business of bleaching, dyeing and printing cloth, borrowed money in the year of account in order to expand its business, purchase land and erect additional plant and machinery and paid interest on borrowed capital. In its assessment to income-tax in the relevant assessment year the claim of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital ...... Unlike section 10(2)(xv) which expressly excludes an expense of a capital nature, the legislature has made no distinction in section 10(2)(iii) between capital borrowed for a revenue purpose and a capital purpose. An assessee is entitled to claim interest paid on borrowed capital provided it is for the purpose of the business irrespective of what may be the result of using the capital which he has borrowed. " These observations show that when for the purpose of a running business an assessee borrows some amount then it is immaterial for the purpose of section 10(2)(iii) of the Act of 1922 to consider whether the borrowed amount was invested for the purpose of obtaining an asset of enduring nature or was spent for revenue. The facts of the present case are exactly similar to the facts of the Bombay case, because here also the assessee's business was a going concern at Baroda and what the assessee has done is to expand its business by establishing a new separate unit at Bangalore. Thereafter, whatever borrowing was made by the assessee for the purpose of establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the case, we are of the opinion that : (a) the loan obtained is not an asset or an advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within the meaning of section 10(2)(xv). " This decision of the Supreme Court makes it clear that where for the purpose of a running business a borrowing is made, then the loan obtained by the said borrowing is not to be considered as an advantage of an enduring nature and that the consideration of the object with which the loan was obtained is irrelevant. If that be so, in this case also it can be said that even if the disputed borrowings were made by the respondent-assessee with the object of establishing a new industrial unit at Bangalore, the interest paid by it on those borrowings cannot be treated as the capital expenditure if it is found that the borrowings in question were for the purpose of its running business. Now, it cannot be disputed that the borrowings were for the purpose of business wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 fixed assets which have been created as a result of such expenditure. Relying upon this decision, Shri Kaji contended on behalf of the revenue that the new plant installed by the assessee in our case had not gone into production in the accounting period and hence the interest paid on the borrowings made for the purpose of the installation of that plant would go to augment the cost of the plant so installed, and should, therefore, be treated as capital expenditure. He also submitted that whatever be the previous position in law regarding the interest paid of borrowings, the said position is changed in view of the decision given by the Supreme Court in Challapalli Sugars Ltd.'s, case. It is no doubt true that in the case of Challapalli Sugars Ltd. the Supreme Court has unequivocally observed that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to be on the ground that a mere transaction of borrowing does not, by itself, bring any new asset of enduring nature into existence, and that it is the transaction of the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. Commissioner of Income-tax that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Calico Dyeing Printing Works and of the Supreme Court in India Cements Ltd. were given with reference to the borrowings made for the purposes of running businesses, while the decision of the Supreme Court in Challapalli Sugars Ltd. was given with reference to the borrowings which could not be treated as made for the purposes of business, as n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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