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Issues Involved:
1. Allowability of pre-operative expenses as admissible deduction. 2. Whether pre-operative expenses of one line of business can be claimed as revenue expenses of another existing line of business. Issue-wise Detailed Analysis: 1. Allowability of Pre-operative Expenses as Admissible Deduction: The Revenue's appeal challenges the order allowing the deduction of pre-operative expenses amounting to Rs. 2,65,34,000/-. The assessee, a company initially engaged in finance, amended its memorandum to include the hotel business and incurred expenses for setting up a hotel in Goa. The expenses were capitalized in the books but claimed as revenue expenses in the return of income. The assessing officer disallowed the expenses, arguing that the hotel business had not commenced and thus the expenses were not deductible. The CIT (Appeals) allowed the deduction, finding that the finance and hotel businesses were under the same management, with common books of accounts, bank accounts, and office, thus constituting the same business. 2. Pre-operative Expenses of One Line of Business Claimed as Revenue Expenses of Another Existing Line of Business: The assessing officer contended that the hotel business was a different line of business, unconnected with the existing finance business, and thus pre-operative expenses of the hotel business could not be claimed as revenue expenses of the finance business. The CIT (Appeals) disagreed, concluding that the unity of control and common management indicated that both businesses were the same. The CIT (Appeals) further held that the nature of the expenses was revenue and allowable as a deduction, despite being capitalized in the books. Tribunal's Analysis: The Tribunal considered various judicial pronouncements to determine when two businesses constitute the same business. Key factors include unity of control, inter-dependence, and inter-connection between the businesses. The Tribunal noted that expenses are deductible only if incurred for the purpose of the business carried on by the assessee. In this case, the hotel business was not set up during the previous year, and thus the expenses related to it could not be deducted against the income of the finance business. The Tribunal also referred to the Hon'ble Supreme Court's decision in the case of Waterfall Estates Ltd. vs. CIT, emphasizing that the nature of the businesses and the date of setting up of the new source of income are crucial. The Tribunal found that the hotel business was distinct and separate from the finance business, lacking inter-connection and inter-dependence. Finance Charges: The Tribunal acknowledged that interest on borrowed capital is allowable as a deduction, irrespective of whether the borrowing is for capital or revenue purposes, as per the decision in India Cements Ltd. vs. CIT. However, it concluded that even the finance charges in this case were not allowable due to the lack of inter-connection and inter-dependence between the hotel and finance businesses. Conclusion: The Tribunal held that the business of financing was entirely disconnected from the new business of running a hotel. Consequently, expenses incurred prior to setting up the hotel business could not be claimed as a deduction against the income of the finance business. The Tribunal allowed the Revenue's appeal, disallowing the deduction of pre-operative expenses.
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