1996 (4) TMI 6 - SC - Income Tax

Whether Tribunal was right in holding that the interest attributable to the loans borrowed by the assessee for the purpose of construction of theatre should be allowed under the head Business when the theatre was sold & business of exhibition of cinematographic films stopped - Whether decision of Tribunal that the business carried on by the assessee as jewellers and in the running of the cinema theatre, restaurant, etc., are composite is based on valid materials

Summary

Issues:
1. Deductibility of interest on loans borrowed for construction of cinema theatre under section 36(1)(iii) of the Income-tax Act.
2. Determination of whether the businesses of jewellery and cinema exhibition were composite for the purpose of allowing deductions.

Analysis:

Issue 1:
The case involved the deductibility of interest on loans borrowed for constructing a cinema theatre under section 36(1)(iii) of the Income-tax Act. The Revenue denied the deduction for the years in question, arguing that since the cinema business had ceased to exist, the interest on borrowings attributable to that business could not be allowed as a deduction. However, the Appellate Tribunal and the Appellate Assistant Commissioner allowed the deduction, emphasizing that the borrowings were made for business purposes. The Supreme Court upheld this view, stating that the loans were initially obtained for the business of the assessee, even though the cinema business was later transferred. The court rejected the argument that the test of "same business" for set-off of carry forward losses applied, emphasizing that the loans were originally for the assessee's business, irrespective of subsequent changes.

Issue 2:
The second issue revolved around whether the businesses of jewellery and cinema exhibition were composite for the purpose of allowing deductions. The High Court had held that there was no interconnection between the two businesses after the cinema business ceased to exist, thereby denying the deduction. However, the Supreme Court disagreed, citing precedents emphasizing unity of control as the decisive test for determining whether businesses are composite. The court found that the businesses of jewellery and cinema exhibition were indeed composite, as they were carried on simultaneously until the cinema business was discontinued. Therefore, the court allowed the deduction of interest paid on the loans under section 36(1)(iii) of the Income-tax Act.

In conclusion, the Supreme Court allowed the appeal, setting aside the High Court's judgment, and ruled in favor of the assessee on both issues. The court affirmed the deductibility of interest on loans borrowed for the cinema theatre construction and recognized the composite nature of the businesses of jewellery and cinema exhibition, thereby permitting the deductions claimed by the assessee.