TaxTMI 
TaxTMI 
2006 (8) TMI 638
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....the assessee was known as 'Morepen Financial Investments Ltd. Later on the company amended its objects clause of the memorandum to include the business of hotel resorts, restaurants etc. Consequent to such amendment the name of the assessee was changed to Morepen Hotels Ltd. with effect from 21/10/1997. The name of the assesse has now been changed to Blue Coast Hotels and Resorts Ltd. with effect from 25/6/2002. For the assessment year 2000-01 the assessee filed a return of income declaring a total income of NIL. The book profits under section 115-JA of the Income-tax Act, 1961 [hereinafter referred to as the Act] was declared at ₹ 40,43,100/-. As already stated the assessee altered its objects clause of memorandum to do the business of running a hotel. It is not in dispute that during the previous year the assessee did not commence the business of running a hotel nor was such business set up. It was in the process of constructing a hotel at Goa. The assessee incurred a total expenditure of ₹ 265.34 lakhs in connection with the process of setting up of a hotel at Goa. The details of these expenses are as follows :- "Sl. No. Expenses. [Rupees in lacs]Amount. ....
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....sidered as the same business. The assessing officer distinguished the case laws relied upon by the assessee and ultimately held that the pre-operative expenses incurred in connection with the hotel construction will not be allowed as a deduction. Consequently, the income of the assessee was determined at a figure higher than the book profits and, therefore, taxable income was determined in accordance with the normal provisions of the Act, which was much higher than the book profits computed by the assessee under section 115-JA of the Act. 4. Before the CIT (Appeals) the assessee relied on several case laws and put forth the proposition that the nature of the two lines of business is not relevant and that the decisive test is the unity of control, which is indicated by inter-dependence and inter-connection between the businesses and the dovetailing of one into the other. That such inter-lacing, inter-dependence or inter-connection can be shown to exist by reason of a common management, common administration, common fund and a common place of business. The CIT (Appeals) found that the finance business as well as the hotel business were under the same management and that the books of....
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....sses constitute same business or separate business must be decided on a consideration of all facts and that no single test can be devised as universal or conclusive. Relying on the aforesaid judgement, the learned Departmental Representative submitted that the business of financing and the business of running a hotel by no stretch of imagination can be said to be same line of business. He relied on the findings of the assessing officer and submitted that the expenditure in question was rightly disallowed by the assessing officer. 6. The learned counsel for the assessee, on the other hand, reiterated the submissions as were made before the CIT (Appeals). He relied on several case laws, which will be discussed in the following paras. 7. We have considered the rival submissions. As a matter of general principle it can be said that any deduction of expenditure would be allowed only in those cases where the expenditure is incurred for the purpose of the assessee's business and not otherwise. In the present case the business of the assessee during the previous year was only that of financing and the hotel business admittedly had not been set up during the previous year. The questio....
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....siness has not started business whether the interest paid on such borrowings prior to setting up of the new business would be allowable as a deduction against the income of the existing business carried on by the assessee. The Hon'ble Bombay High Court has approved the following test as decisive in the matter in the case of CIT vs. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom.) :- "(i) The nature of the two lines of business is not relevant. (ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate. But no decisive inference can be drawn from the fact. (iii) The decisive test is the unity of control which is indicated by inter-lacing, inter-dependence and inter-connection between the businesses and the dovetailing of one into the other, such inter-lacing, inter-dependence or inter-connection can be shown to exist by reason of a common management, common administration, common fund and a common place of business." 10. The Hon'ble Gujarat High Court has explained the reason as to why interest on borrowed capital is allowable in such a situation as ....
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....ntancy has held that the interest paid on amount borrowed for acquiring or installing machinery or plant for a period prior to commencement of production should be capitalized and depreciation has to be allowed treating the same so capitalized as part of the actual cost of the plant and machinery. The above ruling of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (supra) is not a case where it was an expansion of existing business of an assessee. The question as to whether all revenue expenses [except interest on borrowed capital] should be allowed as a deduction has to be decided on the basis of the general principle, which we have already narrated, namely, any revenue expenses would be allowable only as a deduction if such business is carried on by the assessee. Any expenses prior to set up of the business of an assessee cannot be said to be expenditure incurred with reference to a business carried on by an assessee. The learned counsel for the assessee placed reliance on the decision of the Hon'ble Allahabad High Court in the case of Prem Spinning and Weaving Mills Co. Ltd. (1975) 98 ITR 20 (All). It was again a case where a spinning and weaving....
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....eliminary expenses, which a businessman may incur in order to start a business. Just as such preliminary expenses are not permissible deduction the amount spent by the assessee could also not be a permissible deduction against the income of the finance business. The only exception, which we can make is the case of finance charges paid by the assessee in respect of the borrowings effected by the assessee. This is because of the ruling of the Hon'ble Supreme Court in the case of India Cements Ltd. (supra) that irrespective of the borrowing whether to acquire a capital asset or to meet revenue expenditure interest paid on such borrowings was allowable as a deduction. We have already referred to the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd. (supra) in this regard. 14. The following proposition emerges from the above discussion : The charging section viz., section 4(1) of the Act levies the charge in respect of the total income of the previous year. The previous year has been defined to mean in relation to a business newly set up in the financial year, the period from the date of 'setting up' of the said business en....
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....n'ble Supreme Court in the case of CIT vs. Prithvi Insurances Co. Ltd. (supra) as follows :- "The learned counsel for the assessee strongly relies on the decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647, and contends that the decisive test to be applied in this case is the unity of control and not the nature of the lines of business, and that as this case satisfies the test of unity of control, it should be held that the assessee is carrying on the same business though the lines of business carried on by it may be different. But we are of the view that the said decision of the Supreme Court cannot be taken as laying down that unity of control is the only and sole test to be adopted as contended by the assessee. On the facts of that case, the Supreme Court had to consider the efficacy of the two tests, one, unity of control and, the other, the different lines of business, and as between the two tests, the Supreme Court expressed the view that the test of unity of control should prevail over the other test relating to nature and the lines of business. The said decision of the Supreme Court cannot be taken to have overruled its earlier decisio....