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TMI Blog1999 (1) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... as below : (a)Interest debited to Profit & Loss Account. 49,62,16,000 (b)Interest paid on borrowings not debited to Profit and Loss Account but capitalised in books of account : (i)Fertilizer Division 35,13,55,815 (ii)Chemicals Division 1,66,83,137 36,80,38,952 86,42,54,952 (c)Gross Interest (a + b) 86,42,54,952 (d)Less : Interest and other income out of borrowed funds 5,18,34,091 (e)Net Interest claimed as 81,24,20,861 deduction In the assessment proceedings, the Assessing Officer noticed that during the year the assessee had put up a fertilizer plant at Babrala in Uttar Pradesh and that the plant was in the process of being commissioned. He was of the view that the business of the fertilizer unit cannot be stated to have been carried on by the assessee during the relevant previous year and therefore whatever interest that was referable to the borrowings made for the purpose of putting up the fertilizer plant, cannot be allowed as a deduction under section 36(1)(iii) against the business income of the assessee. He allowed only the interest which was referable to the borrowings made for the purpose of the existing business of the assessee. The total claim of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Assessing Officer was that the fertilizer division was part of the assessee';s existing business and was not a distinct or separate business and therefore the interest on capital borrowed for the purpose of the fertilizer plant in Babrala constituted a valid deduction under section 36(1)(iii). The view of the Assessing Officer is that the fertilizer unit is a separate and distinct business and did not constitute part of the business carried on by the assessee during the relevant previous year and therefore the assessee was not entitled to the allowance of the interest. This in short is the dispute between the parties and which has given rise to the first ground. 5. It is customary to discuss the facts of the case first before entering into the legal contentions based on several reported decisions. However, in the present case we would first like to discuss the legal principles which have been laid down by the courts for the purpose of ascertaining whether two or more business activities carried on by an assessee constitute a single or composite or same business or whether they are distinct and separate business, and then discuss the facts of the present case, apply the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had viewed the theatre business as part of the assessee';s business and that the subsequent transfer/closure of that business did not alter the fact that at the time when the borrowings were made, they were for the purposes of the business of the assessee. It was therefore held, reversing the High Court';s judgment, that the "test of same business, appropriate for set-off of carry-forward of losses is not appropriate here". In the very next paragraph, the Supreme Court observed that apart from the fact that the test of same business was not appropriate here, the Tribunal had also recorded a finding of fact that the jewellery business and theatre business run by the assessee were a composite business and therefore the assessee was entitled to the deduction of the interest under section 36(1)(iii). Reading the judgment as a whole and in the background of the finding of fact recorded by the Tribunal, on which the Supreme Court had relied upon, it is not possible to accept the contention of Mr. Vyas that this decision is authority for the proposition canvassed by him, viz., that the test of "same business" is not relevant for the purpose of section 36(1)(iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of carry-forward of a loss or allowance, they have so prescribed expressly. The Supreme Court was concerned with the provisions of section 32(2) which provided for carry-forward of unabsorbed depreciation allowance. The Supreme Court repelled the contention of the Revenue that the allowance can be set off only against the profits of the same business to which it pertained, by holding that such a condition should have been expressly prescribed by the Act and in this context referred to the proviso to section 72(1) as an instance where the legislature has expressly prescribed such a condition. But in the case before us, we are concerned with an allowance for the same year and not with any carried-forward or unabsorbed allowance. The provisions of section 36(1)(iii ) say that the interest paid on capital borrowed for the purposes of the business will be allowed as a deduction and the business referred to in the section is the business that is being carried on by the assessee in the relevant previous year, having regard to the provisions of section 28 of the Act which provides for computation of the profits and gains of a business that is being carried on in the previous year. Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Relying on this distinction brought out by the Supreme Court, Mr. Vyas argued that section 72(1) and its proviso being identical with section 24(2) of the old Act, the tests applicable while interpreting section 72(1) and its proviso cannot be applied to the claim of interest made by the assessee before us under section 36(1)(iii). It is interesting to note that Waterfall Estates Ltd';s case (supra) was relied on by Mr. Tralshawala also, for the Department. His contention was that, this decision laid down that an allowance can be granted only if it related to the business carried on by the assessee in the previous year. On a careful consideration of the argument of Mr. Vyas, we are of the view that the test of same business had not been abandoned by the Supreme Court in Waterfall Estates Ltd.';s case (supra). The ground on which they distinguished the judgments rendered under section 24(2) of the old Act was that section 24(2) raised the question whether the business carried on by the assessee in the relevant previous year was the same business as was carried on by him in the earlier years, whereas in the case before them the question was whether the different activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh section 5(k) of the said Act provided for deduction of interest paid on monies borrowed and actually used in the plantation in the previous year, the assessee';s claim was not founded on this provision. The Supreme Court noted that section 5(e) was a "word for word" reproduction of section 10(2)(xv) of the Indian Income-tax Act 1922, the equivalent of which is section 37(1) of the present Act. The claim was allowed under section 5(e) of the Act. This decision cannot be applied to the present case for the reason that the assessee before us does not claim the interest under section 37(1) but claims it under section 36(1)(iii). When there is a specific provision for claiming interest, it is not open to rely on section 37(1) which in terms says that only expenditure not covered by the provisions of section 30 to 36 would be governed by it. In Madhav Prasad Jatia v. CIT (1979) 118 ITR 200/ 1 Taxman 477 (SC), it was held that the words "for the purpose of the business" appearing in section 10(2)(iii) of the old Act [section 36(1)(iii) of the present Act] and in section 10(2)(xv) of the old Act (section 37 of the present Act) are wider in scope than the words & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomitant of the section. 11. In India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), another decision on which much reliance was placed by Mr. Dinesh Vyas, expenditure in-curred by the assessee by way of stamp duty, registration fees and lawyers'; fees etc. in connection with a loan obtained from IFC was claimed as a deduction under section 10(2)(xv) of the old Act. It was disallowed as capital expenditure. This view was negatived by the Supreme Court which held that a loan obtained by the assessee was not an asset, that there was no enduring advantage, that the expenditure had been incurred for securing the use of money for a limited period and that it was irrelevant to consider the object or purpose for which the loan was obtained. In this case also, the Supreme Court was not concerned with section 10(2)(iii) of the old Act which provided for deduction of interest claimed on capital borrowed. There was no dispute that the business for which the loan was obtained was being carried on by the assessee in the relevant previous year. The dispute was whether by obtaining the loan the assessee obtained an advantage of enduring benefit so that the expenditure claimed could also be disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he alternative claim of the assessee under section10(2)(xv) expenditure incurred wholly and exclusively for the purpose of the business was upheld by the Supreme Court on the ground that the interest claimed was so closely related to the business that the transaction that gave rise to the interest could be viewed as an integral part of the conduct of the business. This decision would be relevant only if the assessee';s claim is based on section 37(1) of the Act; but interest paid on capital borrowed would fall for consideration only under section 36(1)(iii) and therefore cannot be considered under section 37(1). The interest would be allowable as deduction upon the terms of section 36(1)(iii) or not at all. In Bombay Steam Navigation Co. (1953) (P.) Ltd.';s case (supra) the interest claimed by the assessee did not and could not fall under section 10(2)(iii) because there was no money borrowed for interest. The interest was claimed on the unpaid purchase price. Section 10(2)(iii) in terms did not apply; and that is why the claim was considered under section 10(2)(xv). The ratio is that only if a claim for an allowance or deduction does not fall under any of the sections 30 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsisting upon a condition that is not present in the statutory provision. 14. In view of the foregoing discussion, we are of the view that the departmental authorities were right in law in their view that the burden is on the assessee to show that the fertilizer business is part of the other businesses carried on by the assessee in the previous year in order that the interest paid on capital borrowed for the purpose of the fertilizer business can qualify for deduction under section 36(1)(iii) of the Income-tax Act, 1961. We are unable to accept the contention of Mr. Dinesh Vyas that such a condition is alien to the said provision. We are also unable to subscribe to his contention that the test of "same business" applicable to section 72 of the Act are inapplicable to section 36(1)(iii). 15. In the above view of the matter, we do not consider it necessary to discuss the decisions cited by Mr. Vyas which lay down guiding principles regarding `ratio decidendi'; obiter dicta'; etc. and other principles as to how to understand an authority. For the same reason, we do not also think it necessary to examine in detail his contention that any judgment of any High Court o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmencement of production and that claimed after the commencement at page 172 of the report and held that the interest paid after the commencement of production "can be deducted under clause (iii) of sub-section (2) of section10 of the Act". The distinction was brought into focus at page 178 of the report where the earlier judgment of the court in India Cements Ltd.';s case (supra) was referred to and distinguished. It was held that India Cements Ltd.';s case (supra) did not assist the Revenue';s contention that such interest is to be allowed as revenue expenditure as per section 10(2)(xv) of the old Act. It was pointed out that in India Cements Ltd.';s case (supra), at the time it raised money by way of borrowings, the company was a "running concern" and "unlike in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case." (emphasis supplied). These observations clearly bring out the distinction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say in that case that the borrowing was made "for the purposes of the business" to bring the case within the ambit of section 10(2)(iii) of the Indian Income-tax Act, 1922 [which is equivalent to section 36(1)(iii) of the Act of 1961]". The High Court then proceeded to discuss India Cements Ltd.';s case (supra) and Calico Dyeing & Printing Works v. CIT (1958) 34 ITR 265 (Bom.) a case on which heavy reliance was placed by Mr. Tralshawala on behalf of the Revenue before us and sought to reconcile the three decisions. Finally, the High Court held (at page 727) that Calico Dyeing & Printing Works'; case (supra) and India Cements Ltd.';s case (supra) both hold the field with equal force, ever after the decision of the Supreme Court in Challapalli Sugars Ltd';s. case (supra). Their Lordships then proceeded to summarise the ratio of all these cases as under and we quote : "In view of this, we conclude that the decisions of the Bombay High Court in Calico Dyeing & Printing Works and of the Supreme Court in India Cements Ltd., hold the field with equal force, even after the decision in Challapalli Sugars Ltd. We can state the ratio of all these three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier decision in India Cements Ltd.';s case (supra) and observed that India Cements Ltd.';s case (supra) was a case of a running business or a running concern and distinguished the same. It was held (by the Rajasthan High Court) : "The Supreme Court has made a distinction between a loan taken during the course of business when business had already commenced and a loan taken before the commencement of business, and in respect of a loan taken before the commencement of business, it has been held that the interest paid on the said loan could be treated as capital expenditure" (page 503 of the report). In the above understanding of the ratio of Challapalli Sugars Ltd. (supra), we are convinced that it cannot be made applicable to a case of a "running concern" where the borrowings are effected for the purpose of the business already being carried on. 21. It would be appropriate now to refer to the decision of the Bombay High Court in Calico Dyeing & Printing Works'; case (supra) at this juncture. Great reliance was placed by Mr. Tralshawala on this case. He contended that the interest can be allowed under section 36(1)(iii) only if the borrowings hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed on the ground that the cement unit had not commenced production during the relevant previous year. The CIT(A) allowed the interest. On appeal by the Department, the Tribunal noticed that as held by the Supreme Court in Setabganj Sugar Mills Ltd. v. CIT (1961) 41 ITR 272, one has to see whether there is any inter-connection, interlacing, inter-dependence or unity of control embracing the two ventures, fertilisers and cement and that such tests were satisfied in the case. It is interesting to note that in this case it was the Department which contended that the tests of inter-connection, interlacing etc. laid down in the context of carry-forward and set-off of business losses were not applicable to the facts of the case before the Tribunal. We are supported in our conclusion by the order of the Hyderabad Bench of the Tribunal wherein, rejecting the argument of the Department before them, it was held that the ratio of the leading cases laying down the tests of interconnection, interlacing, dovetailing etc. between the various businesses "is equally valid" in the case before them. 23. In answer to Mr. Dinesh Vyas'; contention that the tests applicable for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion by referring to any authority other than Scales v. George Thompson 13 Tax Cases 83 (KB). Rowlatt J. posed the question thus : "I think the real question is, was there any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses?" If the answer to the question is in the affirmative, then the businesses are one and the same; if it is in the negative, they are not. 26. This test has been applied in India in a number of cases both by the Supreme Court and the High Courts. In Setabganj Sugar Mills Ltd.';s case (supra) it was pointed out that what one has to see was whether the different ventures were so interlaced and so dovetailed into each other as to make them into the same business. In CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) it was held that the question whether the life assurance business and general insurance business carried on by the company may be regarded as the "same business" or different businesses depended on the nature of the businesses, the nature of their organisation, management, source of the capital fund utilised, method of `book-keeping and other related circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttended to as part and parcel of the assessee-company. 4.A common fund was utilised both for business purposes and for the purchase of shares. A part of the overdraft taken from the bank was being discharged out of the income from the business. 5.The share transaction work as well as the other business were transacted from the same place of business. 27. After noticing the aforesaid findings of the Tribunal, the Supreme Court held (at page 592 of the report) that "from the facts found by the Tribunal, it is clear that the share transaction as well as the other businesses of the company were dealt with by a common management, common business organisation, common administration, common fund and common place of business". It is noteworthy that in Prithvi Insurance Co. Ltd.';s case (supra) also the Supreme Court had observed that the inter-connection, interlacing and inter-dependence and unity of control were furnished in the case by the existence of common management, common business organisation, common administration, common fund and a common place of business (at page 638 of 63 ITR). In Hooghly Trust (P.) Ltd. v. CIT (1969) 73 ITR 685, the Supreme Court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pharmaceuticals (P.) Ltd. (1982) 138 ITR 843/8 Taxman 89 (Bom.), the assessee which was manufacturing dyestuffs started a new unit for the manufacture of dyestuffs (intermediates). It borrowed monies for the purpose of the new unit on which interest was paid and claimed as deduction. The income-tax authorities held that the intermediate-manufacturing unit was a distinct and separate venture and since it had not started production in the previous year, the interest cannot be deducted from the profits of the existing unit. The Tribunal reversed their decision. The High Court affirmed the Tribunal';s view and held that the new unit cannot be stated to be a new or distinct venture unconnected with the dyestuff business and therefore held that the interest was allowable. In Calico Dyeing & Printing Works case (supra) it was held that interest paid on capital borrowed for the purpose of the expansion of the existing business was deductible under section 10(2)(iii). There, the company was engaged in the business of bleaching, dyeing and the printing cloth at Tardeo, Bombay and borrowed monies for putting up a unit at Lalbaug for carrying out screen printing. The company borrowed moni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting business, can the interest on the same be allowed as a deduction under section 36(1)(iii) cannot be accepted. What we have pointed out is only that Calico Dyeing & Printing Works'; case (supra) is not the authority for that proposition. 31. In C.T. Desai v. CIT (1979) 120 ITR 240/(1980) 3 Taxman 57(Kar.), a judgment on which very strong reliance was placed by Mr. Vyas, the assessee was carrying on business of film distribution on his own and also exhibition of films on percentage basis under agreements entered into with theatre owners. The assessee borrowed monies for the purpose of securing a lease of a theatre for the purpose of doing the exhibition of films on his own. Actually, the money borrowed was given to the assessee';s wife who was to construct the theatre and equip the same. The income-tax authorities disallowed the claim for deduction of the interest on the borrowings on the ground that the borrowing was not for the purpose of the assessee';s business. Negativing the view of the Department, the High Court held that it lacked "both legal and factual basis". Mr. Vyas placed very heavy reliance on the quoted words. We have already seen, on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 305 (MP), the assessee was carrying on a rice and dhall mill and borrowed monies for setting up a factory for the manufacture of straw-boards by using the waste from the rice and dhall mill. The M.P. High Court held that it was only a case of expansion of business and the interest paid on the monies borrowed was allowable as deduction under section 36(1)(iii). In CIT v. Shah Theatres (P.) Ltd. (1988) 169 ITR 499/ 36 Taxman 335 (Raj.) the assessee was engaged in the business of exhibition of motion pictures. During the year, it started the construction of a theatre of its own for the purpose of exhibiting films. The assessee had borrowed monies on interest for the purpose of the cons-truction. On these facts, the Rajasthan High Court held that it was a case of an extension of an existing business and not one of setting up a new business. The interest was directed to be allowed. In CIT v. Malwa Vanaspati & Chemicals Co. Ltd. (1997) 226 ITR 253/ 92 Taxman 262(MP), the company was engaged in the manufacture, processing and sale of vegetable oils and chemicals. It put up a new unit for the manufacture of H.J. and tobias acid. For purchase of machinery for the new unit, the assessee too ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illets. Debentures were issued for raising funds for the new unit and expenditure was incurred in connection with the said issue. The question was whether the expenditure could be deducted when the new unit had not commenced any production. The High Court, affirming the decision of the Tribunal, held that all that the company did was to commence the manufacture of a new commodity and that in a larger sense the business remained the same, viz., the "business of manufacture". Since the Tribunal had found that there was unity of control and a common fund, the tests were satisfied and the expenditure on the debenture issue could be deducted, it was held. In this judgment, the Delhi High Court referred to all the leading cases of the Supreme Court on the subject viz., Prithvi Insurance Co. Ltd.';s case (supra), Hooghly Trust (P.) Ltd.';s case (supra), Produce Exchange Corpn. Ltd.';s case (supra), Standard Refinery & Distillery Ltd.';s case (supra) and B.R. Ltd.';s case (supra) and the tests laid down in these decisions were applied to the case before them. This decision was relied upon by Mr. Vyas also for the purpose of contending that the "closure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal cannot be faulted for not having taken into consideration "something which was not even contended before the Tribunal". Thus it will be seen that the assessee in the Calcutta case had failed to place all the facts before the Tribunal in support of its claim that both the businesses were one and the same and had failed to substantiate its case that proper tests such as inter-connection, inter-dependence etc. had not been applied to those facts. The High Court therefore did not permit the assessee to go into those aspects which were essentially questions of fact to be proved by the assessee before the Tribunal. There are clear observations to this effect in the judgment. For instance, at page 636 the High Court observes : "But the facts that were peculiarly within the knowledge of the assessee should have been brought out and placed before the Tribunal. That not having been done, it cannot be said that the Tribunal';s approach was vitiated in any way". It is noteworthy that except B.R. Ltd.';s case (supra), the other decisions of the Supreme Court laying down the tests for ascertaining whether two or more businesses are one and the same or a single b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds that no principle different from what has been laid down earlier by various authorities has been laid down and that the decision highlights the principle that the burden is on the assessee to prove that the various businesses carried on by it constitute one single or composite business by producing all the relevant facts and evidence before the income-tax authorities and further that if such burden is not discharged, the assessee should fail. The judgment is also authority for the proposition that on a reference under section 256(1) of the Act, the High Court will not interfere with the findings of fact rendered by the Tribunal except on grounds of perversity and that if the Tribunal had considered all that has been placed before it, no challenge to its findings based on grounds of perversity will be entertained by the High Court. The judgment also focuses the point that the finding of the Tribunal cannot be challenged on the ground that it has not considered some material or evidence which was never placed before it. 36. Thus, on a close reading of the judgment in the case of Dey';s Medical Stores Mfg. (P.) Ltd. (supra), we are of the view that the same does not advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether there was evidence before the income-tax authorities to come to the conclusion one way or the other. The Court further observed: "We were referred to various cases which demonstrate that it is not always easy to determine whether businesses are independent businesses, or separate branches of the same business. But the difficulty of determining the question of fact does not make it a question of law...... I think it would be very difficult, if not impossible, to formulate any rules for determining questions of this nature...... At any rate, all these cases recognise the fact that this matter is a question of fact to be determined......." 39. In K. Govindan v. CIT (1955) 28 ITR 307, the Madras High Court held that this was "essentially a question of fact" to be decided by the Tribunal on the basis of the evidence placed before it. In Gupta Bros. (P.) Ltd. v. CIT (1966) 57 ITR 640, the Allahabad High Court held that it is the cumulative effect of all the facts and circumstances of the particular case which have to be taken into consideration in coming to a finding whether two businesses are one or separate and distinct. In CIT v. T.S. Srinivasa Iyer (199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of a closed business and was not admissible as deduction. The Tribunal further held that the business of the assessee was to acquire various theatres from time to time either by lease or otherwise and run each of them independently of each other with separate identifiable books, that the proper test was to see if the closure of one theatre will not affect the working of the remaining ones and that applying this test the closure of Prakash talkies could not be stated to have affected the Bombay theatre and therefore the mesne profits were not allowable as deduction. The High Court confirmed the Tribunal';s view and the matter was carried to the Supreme Court by the assessee. It was held by the Supreme Court that under section 10 of the old Act (section 28 of the new Act) the business should have been carried on in the relevant year of account and that the assessee can "obviously not seek to debit the expenditure incurred for carrying on that business, against his other income, for the outgoings are chargeable only against the income of a business which was carried on in the previous year. It follows that if an assessee carries on several distinct and independent bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. In the determination of the question, findings of fact are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the business, the employment of the same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth" (pages 641-2). Thus it will be seen that the Supreme Court did not, as a matter of law, lay down that wherever there is a possibility of a closure or an actual closure of one business without affecting the other business or businesses the businesses must be held to be distinct or separate. The Supreme Court have in fact reiterated the various tests laid down earlier in Setabganj Sugar Mills Ltd.';s case (supra), as their observations quoted above would show. Such reaffirmation of the tests laid down by them in an earlier judgment would not have been necessary if their Lordships had meant to lay down as a ratio that wherever one business could be closed down without affecting the other the businesses sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol and management, or inter-relation of the business, of employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business." It will thus be seen that the view of the Delhi High Court is that L.M. Chhabada';s Sons case (supra) would apply where there is dearth of evidence on the other aspects of the case such as unity of control and management, interlacing etc. and the evidence shows that one of the businesses can be closed without affecting the other. We have not been referred to any authority wherein it has been held that notwithstanding that there is evidence to show that there is interlacing, inter-dependence, unity of control and dovetailing between the various businesses, since one of the businesses could be closed without affecting the other, the businesses must be taken to be separate or distinct. In other words, the test is not conclusive when there is evidence on the other aspects of the matter such as interlacing, inter-dependence, dovetailing etc. It also follows that if one business could not be closed without considerably affecting the other, that again would not be conclusive. In B.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "for both geographical and technical reasons". Reference to the same effect was also made in the Directors'; report to the shareholders. An application was duly submitted to the Government of India for industrial licence in 1967 and reference to this is found in the Directors'; report for the year 67-68. In the chairman';s statement for that year, reference was made to the various reasons for the delay in the Government granting approval. One of the objections raised, it appears, was that the plant, if put up at Mithapur, Gujarat, would result in over-concentration of fertilizer projects in one state. Referring to this objection, the chairman stated: "Apart from the regional aspects of this objection, with which I naturally cannot deal, the fact is that, for technical reasons, our project can only be put up at or near Mithapur, and there can therefore be no question of it being set up anywhere else in India". These statements, made contemporaneously, do show an intention on the part of the assessee-company to commence the fertilizer project as part of its business. The observation that it would be ideal to have the project at Mithapur itself "f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest........" As security for the debenture-holders, an English mortgage of a portion of the property of the assessee-company located in the State of Gujarat was given with a condition that within a period of 12 months from the date of issue, the assets and properties of the fertilizer project would be mortgaged by way of deposit of title deeds. It was also provided that the company shall be at liberty to create any further mortgages or charges of all or any of its assets, including the aforesaid properties and assets, after consulting the debenture-trustees without any reference to the debenture-holders. It will thus be seen that though the debenture-issue was in connection with the fertilizer project at Babrala, UP, the assessee-company had offered the assets and properties of the Mithapur chemical plant at Gujarat as security by way of an English mortgage. The security of the assets of the Babrala fertilizer plant was to be given within a period of 12 months from the issue-date, in addition to the mortgage of the chemical plant';s assets and not in lieu thereof. 46. An important aspect has to be now noticed. This has been described in sufficient detail in the prospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested". It was therefore decided that the company could not go back on its commitment to the manufacture of fertilizers. So it "sought ways and means of rescuing the fertiliser project, in the face of the new pricing parameters and, altering the course, decided to undertake and implement the Project as a Division of the Company, drastically altering the means of financing the Project in a manner so as to restore its viability even in the context of the new pricing parameters". These reasons, in our opinion, show that the initial proposal to start the fertilizer business as part of the company';s business, was given effect and the Babrala project was inducted into the company';s fold. It is no doubt true that the initial proposal to start the fertilizer project by the assessee-company was modified by forming a wholly-owned subsidiary company (TFL) and if TFL had continued as it is and had set up the project by itself, no question of the assessee professing to carry on the said business would have and could have arisen. The fact that TFL had to be amalgamated with the assessee-company for reasons of financial viability is a fact in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f capital expenditure or for revenue expenditure or for the investments, the same are paid from cash credit account. In Cash Credit Account, there are continuously receipts as well as payments, but this does not mean that borrowed money is utilised for other than capital expenditure or receipts from business operations are not utilised for business purposes" (quoted at page 57 of the assessment order). Though this letter was written in the context of allocation of the interest and in response to the view of the Assessing Officer on this point which we will discuss later the letter has been accepted by the departmental authorities as depicting a factual position. When there is intermingling of funds in the cash credit accounts with the banks, both of the sale proceeds and the borrowings, it shows that there is a common fund and that one of the tests laid down as to whether there is a common fund for the various activities pursued by the assessee is answered in the affirmative. A few other aspects may also be noticed in this connection, which strengthen our view. In its letter to the Assessing Officer in the course of the assessment proceedings (quoted at pages 35 to 37 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing director works under the control and supervision of the board, that in the year 1990 Mr. Vadgama was appointed the joint managing director and Mr. Manu Seth was appointed the deputy managing director, that Mr. Vadgama was put in charge of the fertilizer division and Mr. Manu Seth was made in charge of the chemicals division, that they were either from the head office or from the existing chemical division, that Mr. Vadgama became the managing director from 15-7-1992 in the place of Mr. Durbari Seth, and the entire management team was controlled by the board of directors from Bombay House, Homi Modi Street, Bombay. In the organisation chart filed before the Assessing Officer vide letter dated 20th October, 1994, these facts have been brought out and the management team has been named, as it existed up to 31-3-1992. From this, we find that the team consists of the managing director, joint managing director, deputy managing director, company secretary, controller of finance and accounts, chief purchase executive, chief sales executive and an administration manager for the fertilizer division. This team functioned from "Bombay House" at Bombay. In the works, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, it is done at arm';s length inasmuch as they have to be paid for by the requisitioning division. He has also observed that a separate cell consisting of three persons was formed at the head office in Bombay for the purpose of contacting the suppliers, discussing and releasing advance payment and subsequently making final payment etc. A technical committee consisting of various managers such as costing, accounts, materials and the Vice-President, all stationed at the works, was also formed for taking decisions on capital purchases. This committee';s decisions are reviewed by another committee consisting of the managing director, chief purchase executive, controller of finance and accounts, the joint-managing director and the Vice-President. The Assessing Officer has found (page 44 of assessment order) that during the period of construction of the fertilizer project, decisions for the purchase of cement, steel, various machinery etc. were taken at the head office in Bombay by the joint managing director and the Vice-President of the fertilizer division in co-ordination with the chief purchase executive and controller of finance. From all these, he has drawn the inference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e head office cannot be viewed, as was done by the Assessing Officer, as "only a service centre" (page 45) and not as exercising any control over the fertilizer division or any other division. 52. Thus, in respect of administration and management, the control is at Bombay head office, though the actual execution of the work is at the project site. The works are thus "functionally independent", to use an expression coined by Mr. Dinesh Vyas, but dependent on Bombay head office for decisions. 53. Turning now to the accounting set-up, we find from the letter written by the assessee to the Assessing Officer on 25th October 1994 that the following books of account are maintained in the head office at Bombay House: Cash & Bank book, journal, ledger, M.R. sales, loan debenture & deposit register, pay-roll register and investment registers. At the works, the following are some of the books maintained: cash and bank book, general ledger, sales journal, debtors ledger, journal vouchers, contractors ledger and journal, purchase ledger and journal, bills register, petty cash book, sundry cash collection, railway freight register, imprest etc. All the accounts are maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial position as at the year-end. In the very nature of his duties, he must have access to all divisional accounts and must be in a position to scrutinise them in an over-all perspective. Since one division of the company maintains an account of the other division or divisions for making inter-divisional charges/recoveries, control of all divisions is possible from one place, viz., the Bombay House. He also has the duty to see that there is periodical reconciliation between the various accounts of the divisions. Further, as regards purchases for the fertilizer unit, as per the note of the assessee dated 13th December, 1994, they are co-ordinated by the Bombay office. The major items of purchase are made through requisition sent to the Bombay office. 54. We have earlier noticed that the accounts are maintained division- wise and they are ultimately controlled at the head office by the Controller of Accounts & Finance. In the note filed by the assessee before the Assessing Officer, a copy of which is placed at page 35 of the assessee';s paper book No. 3 (pink flat file), the books of account maintained by the HO and those maintained at the various divisions (chemicals, fer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e soil which protects the plants by destroying the pests also does a function similar to a fertilizer, which gives some kind of a nutrition to the plant. The object of both is the growth and well-being of the plant. At any rate, agrochemical has been defined to include fertilizer, fungicide, insecticide etc. in the dictionary. What the assessee did in the Babrala plant was to manufacture the fertilizers in a large scale and thus it was only an expansion of the business. The argument of the Departmental Representative Mr. Tralshawala was that the production of the aforesaid agro-chemicals constituted a negligible percentage of the production of the Mithapur factory. We need not enter into this controversy since it has been held in the decisions which we have earlier referred to that the nature of the two lines of activities is not relevant. However, it is a fact that the aforesaid agro-chemicals were produced in the Mithapur factory from 1973-74 to 1991-92 and the details of production are given at pages 30-32 of the Green file paper book filed by the assessee. Similarly, we are not also dealing with the controversy as to whether the process involved in the manufacture of soda ash, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether it throws any light on the question whether the new unit at Babrala is an expansion of the existing business or a new business altogether. Accordingly the assessee has filed copies of the letter of the Govt. of India in No.LI:790 (1985) dated 28th June, 1985. The letter has been issued by the Ministry of Industry and Company Affairs, Dept. of Industrial Development, Secretariat for Indus-trial Approvals. The approval is for the manufacture of Ammonia and Urea in the Babrala unit. We have gone through the letter which imposes various terms and conditions for the issue of the industrial licence under the Industries (Development & Regulation) Act, 1951. No light is thrown on the question whether the new unit has been considered as an expansion of the existing unit or as a new unit altogether. 60. Mr. Tralshawala referred to the 50th annual report of the company (1988-89). In the directors'; report [para 31 at page 131 of the paper-book filed on behalf of the Revenue (Vol. I)], the directors have referred to the Babrala unit as the single largest grass-root venture that the Tatas have undertaken till date and have said that "It is the first step in the long standing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the amalgamation of TFL with the assessee-company, it was only the corporate structure of the fertilizer project that was dismantled and that the "exclusivity and the separate identity of the fertilizer project was continued to be retained by transforming the same into a Division of the Company". As already observed by us, a company having various activities, for reasons which are predominantly functional and organisational, creates separate divisions for each such activity so that management becomes easy and integrated. Therefore the fact that the fertilizer project was made a separate division of the assessee-company does not ipso facto lead to the conclusion that it is a separate business. At the cost of repetition, we say that we have to apply only the tests laid down in the reported decisions to ascertain the fact. 63. While dealing with the aspect that the services of one division which were requisitioned by another division were notionally charged in the accounts of the divisions concerned, the Assessing Officer had observed, it may be recalled, that it showed that the dealings between the divisions were at "arm';s length". While clarifying this, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer disallowed ₹ 20,35,30,690. This, according to the Assessing Officer, represents interest on capital borrowed and utilised for the purpose of investment in "tax-free bonds". 66. It is difficult to sustain the disallowance. The investments have been made in the course of the business. The fact that they are tax-free bonds does not mean that the interest attributable to the capital borrowed for purchasing them has to be disallowed. In the course of the business, a company may have to park the funds in investments as a matter of prudence. It is essentially a business decision. So long as the investment in the tax-free bonds has been made in the course of the business, the interest is allowable notwithstanding that the income from the bonds is not taxable. The judgment of the Supreme Court in Indian Bank Ltd.';s case (supra) fully supports the assessee';s claim. The letter written by the assessee to the Assessing Officer, extracted fully at pages 56-58 of the assessment order has highlighted certain salient points. Firstly, it has been stated that the investment was out of own funds and not borrowed funds. In support of this claim, it has been pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the tax-free bonds as representing a utilisation of the borrowed capital for non-business purposes. We therefore delete the disallowance of ₹ 20,35,30,690. The interest claimed cannot be allocated in the manner done by the Assessing Officer. In our view, the amount has to be considered and allowed under the head "Business". We direct accordingly and allow the ground. 69. Ground No. 3 is directed against the disallowance of the expenses of ₹ 16,99,497 incurred in connection with the issue of non-convertible and partly convertible debentures. This issue has been discussed at paragraphs 63 and 64 of the assessment order. The claim has been made in the revised return. The assessee relied on the judgment of the Supreme Court in the case of India Cements Ltd. (supra) in support of the claim for deduction. On the ground that the debenture issue was made for the purpose of raising capital for the fertilizer project which was a different and distinct business which was not carried on by the assessee during the previous year, the deduction was negatived. The disallowance was confirmed by the CIT(A). In our view, the action of the income-tax authorities is not justi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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