M/S. Veecumsees,
Madras Vs. Commissioner of Income Tax, Madras [1996] INSC 619 (26 April 1996)
S.P.
Bharucha , G.B. Pattanaik
ACT:
HEAD NOTE:
O R D
E R
Leave
granted
We are
concerned with the following questions, which were answered, in the judgment and
order of the High Court at Madras which
is under appeal, in the negative and in favour of the Revenue.
"1.
Whether, on the facts and in the circumstances of the case, and having regard
to the provisions of Section 36(1)(iii) of the Income Tax Act. 1961, the
Appellate Tribunal was right in holding that the interest attributable to the
loans borrowed by the assessee firm for the purpose of construction of Safire
Theatre should be allowed under the head "business" especially when
the theatre complex was sold as a going concern on 31.7.1965 and the business
of exhibition of cinematographic films stopped on and from 31.7.1965?
2. whether
the conclusion of the Appellate Tribunal that the business carried on by the assessee
as jewellers and in the running of the cinema theatre, restuarant, etc., are
composite is based on valid materials and is a reasonable view to take on the
facts and in the circumstances of the case?' The assessment years with which we
are concerned are Assessment Years 1967-68, 1968-69 and 1969-70.
The assessee
ran a jewellery business. It then commenced business also in the exhibition of cinematogtraphic
films. In 1961 it obtained loans for building a cinema theatre. The said
theatre was built in 1962 and was run by the assessee until 31st July, 1965, when it was transferred to another
firm. For the Years during which the assessee exhibited films in the said
theatre the interest paid on the loan obtained for constructing it were allowed
by the Revenue as a deduction under the provisions of Section 36(1)(iii) of the
Income Tax Act, that is to say, as being the amount of interest paid in respect
of capital borrowed for the purpose of the assessee's business. For the Years
in question, however, the Income Tax Officer declined that deduction on the ground
that the business of exhibition of films in the said theatre was no longer in
existence;
Therefore,
the interest on borrowings attributable to this particular business could not
be allowed as a deduction in computing the profits of the other business of the
assessee.
In
appeal the Appellate Assistant Commissioner allowed the deduction as claimed by
the assessee.
The
Income Tax Appellate Tribunal noted the facts aforementioned and found that
there was no dispute that for the construction of the said theatre the assessee
had made heavy borrowings and the interest on such borrowings had been allowed
by the Revenue as a deduction as the assessee was running the said theatre as
its own business. The assessee had admittedly paid the interest in question for
the years under appeal in respect of the loans which had been obtained for the
purpose of investing in the business of exhibition of films. The Appellate
Assistant Commissioner had found that it was not disputed that the moneys were
borrowed for the purposes of the business of exhibition of films and for the
construction of the said theatre, the income form which had been assessed in
the earlier years. It was thus clear that at the time when the borrowing were
made they were made for business purposes. The Revenue, the Tribunal noted, did
not and could not challenge the correctness of this. The Tribunal also found
that there was force in the submission on behalf of the assessee that the
business carried on by the assessee as a jeweller and in the running of the
said theatre, restaurant etc., were composite. The composite. The assessee was
carrying on both the business in jewellery and in the exhibition of film till 31st July, 1965, and that only thereafter was to
activity of exhibition of film discontinued. The liability to pay interest had
arisen in respect of the business carried on by the assessee till 31st July, 1965. The Tribunal, accordingly, uphold
the decision of the Appellate Assistant Commissioner to permit the deduction
under Section 36(1)(iii) of the Income Tax Act.
The
High Court considered the second question referred to it first and came to the
conclusion that, since the closing of the cinema business had not affected in
the least the assessee's old business in jewellery, there was no inter connection,
inter lacing or inter dependence between the jewellery business and the cinema
business. Unless there was such inter connection, inter lacing or
inter-dependence, it was not possible to say that both businesses constituted a
composite or same business. It, therefore, answered the second question against
the assessee. In view of that answer, it hold that the borrowing made by the assessee
for the construction of the said therefore could not be allowed as a deduction
under the head of 'business' after the business of running the cinema theatre
had been closed as result of the sale of the said theatre on 31st July, 1965 as
going concern to a different firm. Once the assessee had ceased to carry on
that business for which the amount was borrowed. the interest payments could
not be deducted as a business expenditure as. admittedly, the business had
stopped and no income accrued therefrom. the High Court relied upon judgments
that related to the benefit of carry forward losses and carry forward
depreciation.
Learned
counsel for the assesses drew our attention to Commissioner of Income-tax,
Bombay, 113 ITR 647. this Court affirmed what had been held earlier in produce
Exchange Corporation Ltd. vs. CIT, (1970) 77 ITR 739. Both these related to the
meaning to be ascribed to the expression 'same business' for the purposes of
set off of carry forward loss. In the former case this Court said:
".......
The decisive test, as held by this court in produce Exchange
Corporation.........is unity of control and not the nature of the two lines of
business......The fact that one business cannot conveniently be carried on
after the closure of the other may furnish a strong indication that the tow
businesses constitute the same business. But the decision of this Court in Prithvi
Insurance Co. (1967)63 ITR 632 (SC) shows that no decisive inference can be
drawn form the fact that after the closure of one business, another may or may
not conveniently be carried on....Thus, the unity of control and the other
circumstances adverted to above show that there was dovetailing of interlacing
between the business of import and the business of export carried on by the assessee
and that they constitute the same business." The fact that the Revenue had
during the years when the assessee carried on the business of cinematographic
film permitted as a deduction under Section 36(1)(iii) the interest on loans
obtained by the assessee for the purpose of constructing the said theatre shows
that at the time when the loans were obtained the said theatre was part to the
business of the assessee. It was interest on these loans, borrowed for the
purpose of the business of the assessee, which was being paid in the years in
question and the Tribunal was, in our view, right in concluding that such
interest had to be treated as a deduction under Section 36(1)(iii). The loans
had been obtained for the purposes of the assessee's business. The loans had
been obtained had been transferred or closed down did not alter the fact that
the loans had, when obtained been for the purpose of the assessee's
business" appropriate for set off of carry forward losses is not
appropriate here.
Apart
form this, the Tribunal found as a fact that the business carried on by the assessee
as jeweller and in running the cinema theatre, etc., was composite. In view of
this finding also, the assessee was entitled to the deduction of the interest
paid on the loans aforementioned under Section 36(1)(iii) of the Income Tax
Act.
The
appeal is allowed. The judgment and order of the High Court under appeal is set
aside and the questions aforequoted are answered in the affirmative and in favour
of the assessee.
There
shall be no order as to costs.
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