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PETITIONER: M/S. VEECUMSEES, MADRAS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT:       26/04/1996

BENCH: S.P. BHARUCHA , G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:                          O R D E R      Leave granted      We are  concerned with  the following  questions, which were answered,  in the  judgment and order of the High Court at Madras  which is  under appeal,  in the  negative and  in favour of the Revenue.      "1. Whether,  on the  facts and  in      the circumstances  of the case, and      having regard  to the provisions of      Section 36(1)(iii)  of  the  Income      Tax  Act.   1961,   the   Appellate      Tribunal was  right in holding that      the interest  attributable  to  the      loans borrowed by the assessee firm      for the  purpose of construction of      Safire Theatre  should  be  allowed      under    the     head    "business"      especially when the theatre complex      was sold  as  a  going  concern  on      31.7.1965  and   the  business   of      exhibition of cinematographic films      stopped on and from 31.7.1965?      2. whether  the conclusion  of  the      Appellate   Tribunal    that    the      business carried on by the assessee      as jewellers  and in the running of      the  cinema   theatre,  restuarant,      etc., are  composite  is  based  on      valid materials and is a reasonable      view to  take on  the facts  and in      the circumstances of the case?’      The assessment  years with  which we  are concerned are Assessment Years 1967-68, 1968-69 and 1969-70.      The  assessee   ran  a   jewellery  business.  It  then commenced   business    also   in    the    exhibition    of cinematogtraphic  films.  In  1961  it  obtained  loans  for building a  cinema theatre.  The said  theatre was  built in 1962 and was run by the assessee until 31st July, 1965, when it was  transferred to  another firm.  For the  Years during which the  assessee exhibited  films in the said theatre the

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interest paid  on the loan obtained for constructing it were allowed by  the Revenue  as a deduction under the provisions of Section 36(1)(iii) of the Income Tax Act, that is to say, as being  the amount  of interest paid in respect of capital borrowed for the purpose of the assessee’s business. For the Years in  question, however, the Income Tax Officer declined that deduction on the ground that the business of exhibition of films  in the  said theatre  was no  longer in existence; therefore, the  interest on  borrowings attributable to this particular business  could not  be allowed as a deduction in computing the profits of the other business of the assessee. In appeal  the Appellate  Assistant Commissioner allowed the deduction as claimed by the assessee.      The Income  Tax  Appellate  Tribunal  noted  the  facts aforementioned and  found that there was no dispute that for the construction  of the  said theatre the assessee had made heavy borrowings  and the  interest on  such borrowings  had been allowed  by the  Revenue as a deduction as the assessee was running  the said  theatre  as  its  own  business.  The assessee had  admittedly paid  the interest  in question for the years  under appeal  in respect  of the  loans which had been obtained  for the  purpose of investing in the business of exhibition of films. The Appellate Assistant Commissioner had found  that it  was not  disputed that  the moneys  were borrowed for  the purposes  of the business of exhibition of films and  for the  construction of  the said  theatre,  the income form which had been assessed in the earlier years. It was thus clear that at the time when the borrowing were made they were  made for  business  purposes.  The  Revenue,  the Tribunal  noted,   did  not  and  could  not  challenge  the correctness of  this. The Tribunal also found that there was force in  the submission  on behalf of the assessee that the business carried on by the assessee as a jeweller and in the running  of   the  said   theatre,  restaurant   etc.,  were composite. The  composite. The assessee was carrying on both the business in jewellery and in the exhibition of film till 31st July, 1965, and that only thereafter was to activity of exhibition  of  film  discontinued.  The  liability  to  pay interest had arisen in respect of the business carried on by the  assessee   till  31st   July,   1965.   The   Tribunal, accordingly, uphold  the decision of the Appellate Assistant Commissioner  to   permit  the   deduction   under   Section 36(1)(iii) of the Income Tax Act.      The High  Court considered the second question referred to it  first and  came to  the conclusion  that,  since  the closing of the cinema business had not affected in the least the assessee’s old business in jewellery, there was no inter connection, inter  lacing or  inter dependence  between  the jewellery business and the cinema business. Unless there was such inter  connection, inter lacing or inter-dependence, it was not  possible to  say that both businesses constituted a composite or  same   business. It,  therefore, answered  the second question  against  the  assessee.  In  view  of  that answer, it  hold that the borrowing made by the assessee for the construction  of the said therefore could not be allowed as a  deduction under  the  head  of  ’business’  after  the business of  running the  cinema theatre  had been closed as result of the sale of the said theatre on 31st July, 1965 as going concern  to a  different firm.  Once the  assessee had ceased to  carry on  that business  for which the amount was borrowed. the  interest payments  could not be deducted as a business  expenditure   as.  admittedly,  the  business  had stopped and  no income  accrued therefrom.  the  High  Court relied upon  judgments that  related to the benefit of carry forward losses and carry forward depreciation.

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    Learned counsel  for the assesses drew our attention to the judgment  of this  Court in  B.R. Ltd.  Vs. V.P.  Gupta, Commissioner of  Income-tax, Bombay, 113 ITR 647. this Court affirmed what  had been  held earlier  in  produce  Exchange Corporation Ltd.  vs. CIT,  (1970) 77  ITR 739.  Both  these related to  the meaning  to be  ascribed to  the  expression ’same business’ for the purposes of set off of carry forward loss. In the former case this Court said:      "....... The decisive test, as held      by this  court in  produce Exchange      Corporation.........is   unity   of      control and  not the  nature of the      two  lines   of   business......The      fact  that   one  business   cannot      conveniently be  carried  on  after      the  closure   of  the   other  may      furnish a  strong  indication  that      the tow  businesses constitute  the      same business.  But the decision of      this Court in Prithvi Insurance Co.      (1967)63 ITR 632 (SC) shows that no      decisive  inference  can  be  drawn      form  the   fact  that   after  the      closure of  one  business,  another      may  or  may  not  conveniently  be      carried on....Thus,  the  unity  of      control and the other circumstances      adverted to  above show  that there      was  dovetailing   of   interlacing      between the  business of import and      the business  of export  carried on      by  the   assessee  and  that  they      constitute the same business."      The fact that the Revenue had during the years when the assessee carried  on the  business of  cinematographic  film permitted  as  a  deduction  under  Section  36(1)(iii)  the interest on  loans obtained  by the assessee for the purpose of constructing the said theatre shows that at the time when the loans  were obtained  the said  theatre was  part to the business of  the assessee.  It was  interest on these loans, borrowed for  the purpose  of the  business of the assessee, which was  being paid  in the  years  in  question  and  the Tribunal was,  in our  view, right  in concluding  that such interest had  to   be treated  as a  deduction under Section 36(1)(iii). The  loans had been obtained for the purposes of the assessee’s  business. The  loans had  been obtained  had been transferred  or closed down did not alter the fact that the loans  had, when  obtained been  for the  purpose of the assessee’s  business"  appropriate  for  set  off  of  carry forward losses is not appropriate here.      Apart form  this, the Tribunal found as a fact that the business carried  on by  the assessee  as  jeweller  and  in running the  cinema theatre, etc., was composite. In view of this  finding   also,  the  assessee  was  entitled  to  the deduction of  the interest  paid on the loans aforementioned under Section 36(1)(iii) of the Income Tax Act.      The appeal  is allowed.  The judgment  and order of the High Court  under appeal  is set  aside  and  the  questions aforequoted are answered in the affirmative and in favour of the assessee.      There shall be no order as to costs.