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TMI Blog2008 (11) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996-97. 2. The Revenue being aggrieved by the impugned judgment has preferred an appeal to this court. The ground taken in the appeal by the Revenue before the Tribunal was whether the Commissioner of Income Tax (Appeals) [hereinafter referred in short as the 'CIT(A)'] erred in allowing the claim of the assessee in the sum of Rs 5,66,79,270/- as revenue expenditure in connection with setting up of the sugar plant at Muzaffarnagar in the State of U.P. 2.1. In order to dispose of the appeal, the following facts require to be noted:- 2.2 In 1991, the respondent/assessee had set up a Ferro Alloys Manufacturing Plant, in Raipur, which was, engaged in both, the manufacture of Ferro Alloys, as also, trading of Ferro Alloys. 2.3. In the year 1994-95 and 1995-96, the respondent/assessee set up a sugar manufacturing plant at Muzaffarnagar in the State of U.P. The said sugar plant had an installed capacity of 2500 TCD. The respondent/assessee's trial run in respect of sugar plant commenced on 20.3.1996. The total project cost for setting up of the sugar plant was a sum of Rs 56.74 crores. This amount was raised, inter-alia, by way of term loans, rights and public issue. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different lines of business carried out by the respondent/assessee did not constitute the same business. 2.8 It is also important to note at this juncture that the Assessing Officer also disallowed the alternative claim of depreciation raised by the respondent/assessee even though the expenditure in issue was held to be capital in nature; on the ground that trial production did not amount to commencement of commercial production. 3. Aggrieved by the same, the respondent/assessee filed the appeal with the CIT(A). 3.1 The CIT(A), after a detailed examination of the issue, both on facts and law, came to the conclusion that the expenditure in issue was in the nature of revenue expenditure since the sugar plant project was in the same business fold. The CIT(A) held as follows:- ''In the light of these submissions and Delhi HC decision in 200 ITR 341 it is to be held that the sugar project was in the same business fold that of the business of manufacture as that of ferro chrome or the trading in it. Similarly it is to be held as per the submissions and case laws that it was a case of interlacing not in general terms but in specific terms''. 4. The Revenue, aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was funded by a rights cum public issue, loans and internal cash accruals of ferro chrome division, which were facts, not disputed by the Revenue. In these circumstances, the Tribunal concluded that the source of funds for both the divisions was common. 4.2 The Tribunal also applied the test of impact of closure of, one of the two lines of business, on the other to ascertain whether the two divisions were independent of each other. In applying this test, the Tribunal came to the conclusion that closure of any of the two plants would surely affect the working as also impact the remaining business, for the simple reason that a larger liability in respect of the entire business would have to be borne by the plant which remains functional. It thus concluded that the sugar plant was a mere extension of the existing business of ferro alloys. According to the Tribunal, the respondent/assessee was engaged in the same business as the decisive test is unity of control and not same line of business. 4.3 It is, however, important to note that while returning the aforesaid findings of fact, in respect of the respondent/assessee, the Tribunal allowed deduction of only that expenditure wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and management, the Supreme Court in the cases of Setabganj Sugar Mills Ltd v. Commissioner of Income Tax: (1961) 41 ITR 272 (SC) and L.M.Chhabda and Sons v. Commissioner of Income Tax, Gujarat: (1967) 65 ITR 638, laid down the tests that the following will have to be borne in mind, the inter-relation of the businesses, the employment of same capital, the maintenance of common books of account, employment of same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of other. 5.6 This test was further refined by the Supreme Court in the case of Commissioner of Income Tax v. Prithvi Insurance Co Ltd: (1967) 63 ITR 632. In this case, while holding that life insurance business and general insurance business were the 'same business', it observed that in determining whether two or more lines of businesses may be regarded as 'same business' or 'different business', what has to be looked at is, the nature of businesses, the nature of their organization, management, source of capital fund utilized, method of book keeping used and other related circumstances which stamp the businesses as the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court in Shree Ramesh Cotton Mills Ltd's case on which reliance was placed is correct, but we are unable to agree with the High Court that the decisive test for determining whether the two lines of businesses constitute the same business is the nature of the two businesses' 6. The aforesaid view taken by the Supreme Court was re-affirmed by it, in the case of B.R.Ltd v. V.P.Gupta, Commissioner of Income Tax, Bombay: (1978) 113 ITR 647. In B.R.Ltd (supra), the Supreme Court was called upon to decide whether unabsorbed losses suffered in the business of import of woolen fabrics could be set off from the profits earned in respect of export of cotton textiles . The Supreme Court in the said case, approved the ratio of the judgments of its own court in the case Prithvi Insurance (supra), and Produce Exchange (supra). In doing so it also noted the observations made in the decision of the Supreme Court in the case of Standard Refinery and Distillery Ltd v. Commissioner of Income Tax: (1971) 79 ITR 589 and finally concluded that, tests for ascertaining whether the two lines of businesses were the same business was not dependent on determination of the nature of goods dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n within the same business fold. In the case of Commissioner of Income Tax v. Alembic Glass Ltd: 103 ITR 715, the Gujarat High Court dealt with the similar situation wherein the assessee company had an existing unit for manufacture of glass at Baroda since 1947. During the relevant assessment years 1965-66 and 1966-67, the assessee-company incurred expenditure for establishing a new glass unit at Bangalore. The unit at Bangalore did not go into production during the aforesaid two assessment years in question and, therefore, during the course of assessment, the Income Tax Officer disallowed the payment of interest on borrowings in respect of the aforesaid two assessment years. The Income Tax Officer was also of the view that the Bangalore unit was not a branch of the assessee factory at Baroda and was, therefore, a new business and since, this new business had not started production, the payment of interest could not be taken as revenue expenditure. The Gujarat High Court was called upon to answer the following questions:- '(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant is constructed out of borrowed money, the interest on loan upto the date of commencement of the business could not be capitalized or treated as part of the actual cost of the plant. The Supreme Court rejected this view of the High Court on consideration of the question as to what was the 'actual cost' for the purpose of determining 'written down value' of a plant. The Supreme Court considered the principles of accountancy and held that the cost of fixed assets should include all expenditure necessary to bring such assets into existence and to put them in working condition and, therefore, in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed assets which have been created as a result of such expenditure.' 6.4 The Gujarat High Court, after analyzing the decision of the Bombay High Court in Calico Dyeing and Printing Works v. Commissioner of Income Tax: (1958) 34 ITR 265 and of the Supreme Court in India Cements Ltd v. Commissioner of Income Tax: (1966) 60 ITR 52 and in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ico Dyeing and Printing Works that in order to attract the provisions of Section 10(2)(iii) it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the Section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan an actual application thereof in the purchase of a capital asset, seems to be on the ground that a mere transaction of borrowing does not, by itself, bring any new asset of enduring nature into existence, and that it is the transaction of the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd vs Commissioner of Income Tax that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Callico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd were given with reference to the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business which is in the same business fold for the purposes of ascertaining income under Section 28 of the Act, it can be claimed as a deduction under Section 36(1)(iii) of the Act. 8. In the instant case, the Tribunal has returned the finding that there is a unity of control and management, in respect of the ferro alloys plant as well as the sugar plant and there is also intermingling of funds and dove-tailing of businesses. In these circumstances it cannot be said that the respondent/assessee had not commenced its business and hence, interest would have to be capitalized in terms of the ratio of the judgment in the case of Challapalli Sugars Ltd (supra). If that is not so then, the only other conclusion that is possible on these facts, is that, the interest was paid by the respondent/assessee on borrowed capital for the purposes of business. That being the case, in our view, the Tribunal correctly allowed the financial charges i.e., interest paid to the extent of Rs 3,50,83,472/- as deduction under Section 36(1)(iii) of the Act. 9. These being the findings of fact, we do not consider it fit to interfere with the impugned judgment of the Tribunal. Accordingly, we hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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