1975 (11) TMI 42 - HC - Income Tax

Tax Court Upholds Deductions for Bangalore Unit Expenses

Commissioner Of Income-Tax, Gujarat II Versus Alembic Glass Industries Limited

The court determined that the establishment of a new unit in Bangalore was not a new business but an extension of the existing business in Baroda, based ... Capital Expenditure, Capital Or Revenue Expenditure, Same Business Issues Involved:1. Whether the establishment of the new unit at Bangalore constitutes a new business or an extension of the existing business at Baroda.2. Whether the interest, miscellaneous expenses, and travelling expenses incurred by the assessee for the Bangalore unit are deductible as revenue expenses.Issue-wise Detailed Analysis:1. Establishment of the New Unit at Bangalore:The first issue concerns whether the new unit at Bangalore should be considered a new business or an extension of the existing business at Baroda. The court referred to the Supreme Court decisions in Commissioner of Income-tax v. Prithvi Insurance Co. Ltd. and Produce Exchange Corporation Ltd. v. Commissioner of Income-tax, which provide a test for determining whether two lines of business constitute the 'same business.' The test involves examining inter-connection, inter-lacing, inter-dependence, and unity between the businesses.Applying this test, the court found that both units shared common management, business organization, administration, fund, and the head office at Baroda controlled both units. The application for the establishment of the Bangalore unit explicitly mentioned it as an expansion of the existing business. The court concluded that the new factory at Bangalore did not constitute a new business but was an extension of the existing business at Baroda. Therefore, the Tribunal was justified in its decision.2. Deductibility of Interest, Miscellaneous Expenses, and Travelling Expenses:The second issue pertains to whether the expenses incurred for the Bangalore unit are deductible as revenue expenses. The court examined the contention of the revenue that since the Bangalore unit had not started production, the interest on borrowings should be considered capital expenditure. The assessee argued that the borrowings were for the purpose of an ongoing business, and therefore, the interest should be treated as revenue expenditure under section 36(1)(iii) of the Income-tax Act, 1961.The court referred to the Bombay High Court decision in Calico Dyeing and Printing Works v. Commissioner of Income-tax, which held that interest on borrowed capital is deductible even if the capital is used to acquire a capital asset, as long as it is for the purpose of the business. The Supreme Court decision in India Cements Ltd. v. Commissioner of Income-tax also supported this view, stating that the purpose of borrowing is irrelevant and that a loan is a liability, not an asset of enduring benefit.The court distinguished the Supreme Court decision in Challapalli Sugars Ltd. v. Commissioner of Income-tax, which dealt with a newly started company that had not commenced business. In such cases, interest on borrowings for acquiring a fixed asset before production starts is capitalized. However, in the present case, the assessee's business was already ongoing, and the borrowing was for expanding the existing business.The court summarized the legal principles as follows:1. Interest on borrowings for business purposes is deductible under section 36(1)(iii).2. This applies even if the borrowed capital is used to acquire a capital asset.3. The business for which the capital asset is purchased should not be separate from the business for which the capital is borrowed.4. If there is no existing business, interest paid on borrowings for acquiring a new asset before production starts is capitalized.Based on these principles, the court concluded that the interest, miscellaneous expenses, and travelling expenses incurred for the Bangalore unit are deductible as revenue expenses. Therefore, the Tribunal was justified in allowing these deductions.