Existing business expansion keeps new unit expenses revenue deductible, including interest on borrowings used for the same business.

A new factory unit will not be treated as a separate business where the units share common management, administration, organisation, funds and business integration; physical distance alone is insufficient. On that basis, the Bangalore Whitefield factory was treated as an expansion of the existing Baroda business. Interest on borrowings used for an existing business remained deductible as revenue expenditure, even if the borrowed funds were applied to a new unit forming part of the same business. Miscellaneous and travelling expenses linked to that expansion were also allowable on revenue account.

---

---

Issues: (i) whether the Whitefield Factory at Bangalore constituted a new and separate business or only a new unit of the existing business at Baroda; (ii) whether interest, miscellaneous expenses and travelling expenses referable to the Bangalore unit were allowable as revenue expenditure.

Issue (i): whether the Whitefield Factory at Bangalore constituted a new and separate business or only a new unit of the existing business at Baroda.

Analysis: The test for determining whether activities form one business is whether there is inter-connection, inter-lacing, inter-dependence and unity, having regard to common management, administration, organisation, fund and place of business. The Baroda and Bangalore units were controlled by the same company, shared management and administration, and the Bangalore unit was described in the assessee's own correspondence as an expansion of the existing business. The mere physical distance between the two units did not make them separate businesses.

Conclusion: The Bangalore factory was not a new and separate business, but only a new unit of the existing business; the finding was in favour of the assessee.

Issue (ii): whether interest, miscellaneous expenses and travelling expenses referable to the Bangalore unit were allowable as revenue expenditure.

Analysis: Interest on borrowings used for the purposes of a running business is allowable under section 36(1)(iii) of the Income-tax Act, 1961, even if the borrowed money is applied towards a capital asset, because borrowing and investment are distinct transactions. The principle applies where the borrowing is for an existing business and the new unit is only an expansion of that business. The rule in Challapalli Sugars applies where the borrowing is before commencement of business and the capital is used to bring a new asset into existence for a non-existent business; that situation was not present here. The miscellaneous and travelling expenses were likewise incurred in connection with the expansion of the existing business.

Conclusion: The interest, miscellaneous expenses and travelling expenses attributable to the Bangalore unit were allowable as revenue expenditure; the finding was in favour of the assessee.

Final Conclusion: The reference was answered in favour of the assessee on both issues, and the disputed amounts were held deductible on revenue account.

Ratio Decidendi: Where borrowings are made for the purposes of an existing business, interest on such borrowings is deductible even if the borrowed funds are applied to establish a new unit that forms part of the same business; only borrowings made before commencement of business for creating a new asset of an independent business are to be capitalised until production begins.

---