1988 (11) TMI 141 - AT - Income Tax

Assessment Year Borrowed Capital Carrying On Business Deduction In Respect Manufacture And Sale Same Business

Summary

Issues Involved:
1. Whether the cement unit should be treated as part of the same business of the assessee or as a separate unit.
2. Whether the interest of Rs. 18,67,715 and commitment charges of Rs. 9,30,318 pertaining to the cement unit are allowable expenditures.
3. Whether the interest paid on public deposits amounting to Rs. 21,96,646 is allowable as a deduction.

Detailed Analysis:

1. Treatment of Cement Unit as Part of the Same Business:
The primary issue is whether the cement unit should be considered part of the same business as the fertilizer unit. The assessee was initially incorporated for the manufacture and sale of fertilizers and later amended its object clause to include a cement plant. The Commissioner of Income-tax (Appeals) upheld the claim of the assessee, stating that the manufacture of fertilizers and cement constituted the same business. This decision was based on the Supreme Court's tests in CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 and Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739, which emphasize the unity of control, interconnection, interlacing, and interdependence of the ventures.

2. Allowability of Interest and Commitment Charges:
The second issue revolves around whether the interest and commitment charges related to the cement unit are allowable as expenditures. The assessee claimed these under sec. 36(1)(iii) even though they were not debited to the profit and loss account. The Inspecting Assistant Commissioner disallowed these deductions, arguing that the cement unit was under erection and had not commenced production. The Commissioner of Income-tax (Appeals) allowed the claim, asserting that the two activities (fertilizer and cement) constituted the same business. The Tribunal upheld this view, emphasizing that the existing fertilizer plant and the proposed cement plant constituted the same business due to common administration, common staff, and common control.

3. Interest on Public Deposits:
The next ground of appeal concerns the interest paid on public deposits amounting to Rs. 21,96,646. The Inspecting Assistant Commissioner disallowed this on the grounds that the funds were raised for the cement plant. However, the Commissioner of Income-tax (Appeals) found that the deposits were raised for the operational requirements of the existing fertilizer business, including working capital and capital expenditure for the fertilizer factory. The Tribunal upheld this decision, noting that the public deposits were raised for the operational needs of the fertilizer plant and not for the cement plant. The Tribunal also highlighted that there was one profit and loss account and one balance sheet covering the entire operations of the company.

Conclusion:
The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) on all issues. The cement unit was considered part of the same business as the fertilizer unit, allowing the interest and commitment charges as deductible expenditures. Additionally, the interest paid on public deposits was also allowed as a deduction, as the deposits were raised for the operational needs of the fertilizer plant. The Tribunal's decision was based on the principles of unity of control, interconnection, interlacing, and interdependence of the ventures, as established by the Supreme Court in various cases.