1966 (10) TMI 4 - HC - Income Tax

Tribunal is not justified in law in holding that the purchase and sale of cashew and the manufacture of tin containers constituted two different businesses because venture on tin cans was, the start with, ancillary or subsidiary to that of cashew-nuts until by a gradual shifting of emphasis, the former developed and the latter ended

Summary

Issues:
1. Whether the purchase and sale of cashew and the manufacture of tin containers constituted two different businesses.
2. Whether the disallowance of interest paid on capital borrowed for business purposes is lawful.

Analysis:
1. The case involved a reference under section 66(2) of the Indian Income-tax Act, 1922, regarding assessment years 1950-51 to 1954-55. The primary issue was whether the purchase and sale of cashew and the manufacture of tin containers by the assessee constituted two different businesses. The assessee initially engaged in the business of cashew-nuts, later adding the manufacture of tin cans for canning cashew-nuts. Subsequently, the assessee also ventured into the manufacture of oil. The Appellate Tribunal questioned whether the ventures were separate businesses, emphasizing that cashew-nuts and tin cans are distinct commodities. The court applied legal principles to determine the unity of the businesses, considering factors like unity of control, management, common capital, staff, and inter-relation of activities. The court concluded that the ventures were parts of the same business due to common ownership, management, employees, and capital, answering the first issue against the department.

2. The second issue pertained to the disallowance of interest paid on capital borrowed for business purposes. The Tribunal noted that part of the borrowing from the bank included personal drawings, which was not specified. The court held that only interest related to business borrowings could be deducted. Therefore, the court ruled that the disallowance of interest attributable to the borrowings concerning the cashew-nut venture was not lawful. The court clarified that only interest accrued during the years on the borrowing related to the cashew-nut venture should be deducted. Consequently, the second issue was answered in favor of the assessee. The judgment highlighted the importance of distinguishing between personal and business borrowings to determine the admissibility of interest deductions.