These two appeals are based on identical facts and common grounds of appeal. Hence, both these appeals are being decided by a common consolidated order for the sake of convenience.
ITA No. 1154/Jp/1996 is against the order passed by the Commissioner under section 263 modifying the assessment order passed by the assessing officer and IT No. 341/Jp/1997 is against the consequential order passed by the assessing officer giving effect to the order of the Commissioner under section 263.
The facts of these appeals are that the assessee claimed interest amounting to Rs. 18,56;32,417 as revenue expenditure on funds borrowed specifically for Chanderia unit, which was yet to be commissioned. This claim of the assessee was allowed by the assessing officer without making due enquiries in law. This action of the assessing officer was considered erroneous and prejudicial to the interest of revenue and hence a proposal was sent by the Commissioner for taking action under section 263 of the Income Tax Act. The Commissioner, after receipt of this proposal, issued a show-cause notice to the assessee giving a reasonable opportunity of being heard. In this connection, the learned Commissioner, while passing the order under section 263, also observed that the assessee in its audited balance sheet had capitalised this amount of interest and this amount of interest was not claimed as an expenditure in the Profit & loss account relating to the year under consideration. In response to the show-cause notice issued by the Commissioner, assessee submitted that for financing the new project of the company on 6-9-1990, issued fully secured bonds of Rs. 1,000 each bearing interest @ 13 per cent redeemable after seven years of the value of Rs. 220 crores. This plant, was completed in the month of March 1991, and thereafter it commenced its trial runs. It was also submitted that the company had three other zinc lead smelter units and hence setting up additional lead/zinc smelter at Chanderia was in the nature of expansion in the line of business of the company. It was submitted that the entries in the books of accounts are not conclusive in the matter and, therefore, the treatment given by the company as capital expenditure is of no consequence. The amount of the bonds was received at head office and got mixed with other company's funds and hence no separate transfer details are available. The funds were transferred from head office to the projects as and when required. The borrowings were only for expanding its existing units. Hence, the claim of interest under section 36(1)(iii) of the Income Tax Act in respect of capital borrowed was rightly claimed and allowed by the assessing officer. While doing so, assessee relies upon the decision of Gujarat High Court in the case of Commissioner v. Alembic Glass Industries Ltd. (1976) 103 ITR 716 (Guj). The Commissioner, however, did not accept the arguments of the assessee and held that since the assessing officer has not carried out investigations on this account the order passed by him was erroneous and prejudicial to the interest of revenue.
The assessee has challenged this action of the Commissioner on the ground that Commissioner acted without jurisdiction and against the facts in deciding the issue against the assessee and that the payment of interest has wrongly been considered as capital expenditure.
The learned departmental Representative on the other hand, strongly relied upon the order of the Commissioner and contended that the first assessing officer has not carried out any examination and/or investigation in regard to allowability of the claim of interest which has been capitalised by the assessee and hence the order so passed by him was erroneous and prejudicial to the interest of revenue.
We have heard the rival parties and have perused the material available on record. In this connection, the undisputed fact emerges from the discussion is that while passing the assessment order, assessing officer has not carried out any examination on this account. We, therefore, feel that the action of the Commissioner on this account was reasonable and justified. We, therefore, held that under the peculiar circumstances of this case the Commissioner had jurisdiction to revise the orders of the assessing officer under section 263 on the question of disallowance of interest. Our views on this ground get strength from the order of the Madhya Pradesh High Court in the case of Kanhiram Ramgopal v. CIT (1988) 170 ITR 41 (MP). We, accordingly, uphold the order of the Commissioner and hence this appeal filed by the assessee is dismissed.
Coming to the Appeal in ITA No. 341/Jp/1997 on the ground that the Commissioner (Appeals) erred in holding that the interest payment on bonds was not a revenue expenditure without considering the merits of the case. As the company was not setting up a new business but was only expanding its existing line of business, as was allowed in the case of CIT v. Alembic Glass Industries Ltd. (supra) wherein the facts of the case were identical to the present case of the company. This appeal is consequential of the order passed by the Commissioner under section 263. While passing this order, the assessing officer has fully relied upon the order passed by the Commissioner and the assessing officer has further relied on the decision of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC). The Commissioner (Appeals) has upheld this decision of the assessing officer following his own order in appeal for the assessment year 1992-93. The Commissioner (Appeals), while upholding the order of the assessing officer passed by him for assessment year 1992-93, has mainly relied upon the fact that the funds were specifically raised for Chanderia lead and zinc smelter unit which has not gone into production during the accounting period and that the assessee itself has capitalised the amount of interest so claimed. He also observed that since the funds raised for the new industrial undertaking the decision of the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (supra) is not applicable. He accordingly upheld the order passed by the assessing officer.
The learned authorised representative of the assessee, on the other hand, strongly argued against the decision of the assessing officer and the Commissioner (Appeals). It was submitted that assessee, a Government of India Undertaking, is in the line of zinc/lead smelter unit and already running three such units at different places. Starting a new unit at Chanderia as zinc/lead smelter plant is not a new business activity of the assessee but actually an expansion of the existing business of activities. In regard to the facts of raising of loan and use of the funds it was submitted that assessee floated secured bonds of Rs. 1,000 each bearing interest @ 13 per cent redeemable after seven years. It is a matter of common knowledge that company borrowed funds against particular unit/plant but all such borrowals were received at the head office and got mixed with other funds of the company and hence no separate transfer details are available. The funds were transferred from head office to the projects as and when required. This clearly establishes that the borrowings were only for expanding its existing business activities. The accounting methods applied by the assessee by capitalising the interest would not settle the issue as the assessee has claimed the payment of interest under section 36(1)(iii) of the Income Tax Act and the claim is within the four corners of the law and is held as allowable by various decisions of the Supreme Court and the High Courts. In this connection, he relied upon the decision of the Apex Court where the Gujarat High Court allowed the claim of the assessee in regard to payment of interest on amounts borrowed for establishing new unit capitalised but still claimed as revenue expenditure. The High Court, in this case, dismissed the reference application and the Special Leave Petition filed by the revenue was also rejected by the Apex Court in the case of CIT v. National Peroxide Ltd. (1990) 182 ITR (St) 411 {SLP (Civil) No.781).
As against this, the learned departmental Representative strongly relied upon the orders passed by the authorities below. It was also submitted that the purpose of borrowing was for bringing a new asset in existence and also relied upon the decision of Bombay High Court cited at CIT v. J.K Chemicals Ltd. (1994) 207 ITR 985 (Bom) and Manoj Dyeing Co. v. CIT (1995) 212 ITR 299 (Raj). He also fully relies upon the decision cited by the assessing officer and the Commissioner (Appeals).
We have heard the rival parties and have perused the material placed on record as well as the case laws relied by them. The prerequisite for allowing the deductions of interest paid on borrowings for the purpose of business are: So far as these three prerequisites are concerned, there is no dispute amongst the rival parties. The amount has been borrowed and this was borrowed for the business activities of the assessee and the interest is payable. The expression 'for the purpose of business' occurring in section 36(1)(iii) is wider in scope than the expression 'for the purpose of making or earning income' (section 57(iii)). Therefore, the scope for allowing a deduction under section 36(1)(iii) would be much wider than the one available under section 57(iii). The purpose may be to acquire a capital asset or stock-in-trade, as also to pay off a trading debt or loss. Capital borrowed to pay off such a debt is, capital borrowed for the purpose of the business Seth Banarsi Das Gupta v. CIT (1977) 106 ITR 559 (All). It is further observed that where an assessee borrows money for expansion of his existing business, the case squarely falls within the phraseology of section 36(1)(iii) and interest on such borrowings is allowable. Where, however, besides the existing business, money is borrowed for setting up a new activity or unit, it has first to be examined, on facts, whether the new activity or unit and the existing business constitute the same business' or they are entirely separate and distinct business altogether. In the case of former, interest is allowable and in the latter, it is not allowable unless the unit goes into production CIT v. Alembic Glass Industries Ltd. (supra). In CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj), the jurisdictional High Court held that where the assessee having business of exhibition of motion picture started construction of a cinema theatre and for that purpose borrowed money, interest paid on such borrowings was held as allowable as the same was incurred in connection with the extension of an existing business and not for setting up a new business. Reliance is also placed on the decision of Delhi High Court cited at CIT v. Triveni Engg. Works Ltd. (1990) 183 ITR 437 (Del). Where for the purpose of carrying on its business the assessee had constructed certain buildings and for the purpose of meeting the expenditure incurred for constructing such buildings the assessee borrowed monies and on such borrowings paid interest, the interest paid was deductible as revenue expenditure irrespective of the fact that the buildings had not been actually put to use for carrying on the business during the relevant accounting year of the assesseeKarnataka High Court in the case of Addl. CIT v. Southern Founders (1979) 120 ITR 37 (Kar). In another case, the Gauhati High Court in CIT v. Abhoyjan Tea Estates (P) Ltd. (1977) 110 ITR 251 (Gau) has upheld the allowability of interest in a case where the assessee purchased in an auction sale a tea estate by borrowed money. The sale was ultimately set aside. Still, the amount of interest paid was held as deductible as revenue expenditure under section 36(1)(iii), it is not necessary that the assessee must have used the acquired asset for doing business in the relevant accounting year itself. Mere acquisition for the purpose of the business in the relevant accounting year is sufficient to claim deduction for the amount of interest paid (C. T.Desai v. CIT (1979) 120 ITR 240 (Karn)). In another case, the Madhya Pradesh High Court in the case of CIT v. Bhilai Iron Foundry (P) Ltd. (1998) 100 Taxman 193 (MP) has held : "The deduction permissible under section 36(1)(iii) is of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. In the instant case, the finding had been given by the Tribunal that the department did not dispute that the project was an expansion of the old business. In view of this categorical finding that the said capital was borrowed for expansion of the old business, the assessee was entitled to deduction. But the assessing officer has gone wrong by holding that the extended unit had not gone into operation. That was not the decisive of the matter. The decisive feature of the matter is whether the present business was an expansion of the old business or not. Once, it was found by the Tribunal and not disputed by the department that the new unit was nothing but an expansion of the old business, then in that case the assessee would be entitled to deduction of the interest on the capital borrowed for business. Whether the unit has gone into production or not was not the decisive feature of the matter." In CIT v. K.L. Rajput (1987) 164 ITR 197 (MP)(FB), the Madhya Pradesh High Court (Full Bench) followed : "that the setting up of the stray-heard factory was only an expansion of the existing business and it was not a case of starting an altogether new business. Therefore, the assessee was entitled to deduction of interest paid under section 36(1)(iii). "CIT v. Tarai Development Corpn.
Ltd. "That in the instant case, the finding recorded was that the assessee was setting up a new factory in the previous year and it was an extension of its existing business and the moneys borrowed were utilised for that purpose. Interest thereon was deductible under section 36(1) (iii) of the Income Tax Act, 1961." The Gujarat High Court in the case of Arivind Polycot Ltd. v. Assistant Commissioner (1996) 222 ITR 280 (Guj) held: "that the assessee was engaged in the manufacturing of cloth. The new machinery had been purchased for manufacturing fabrics with greater width. It was clear that the business was the same, the administration was the same, funds were common, the staff was the same, persons in the management were the same and the output would be textile fabrics. Thus, it was clear that it would not be a new business." The Calcutta High Court in the case of CIT v. Western Bengal Coal Fields Ltd. (1998) 233 ITR 139 (Cal) held : "The assessee carried on mining business till the nationalisation of coal mines under the Coal Mines (Nationalisation) Act, 1973. During the assessment years 1975-76 and 1978-79, the assessee claimed before the assessing officer that it had incurred expenditure by way of interest to the bank amounting to Rs. 2,91,980, Rs. 7,71,851 and Rs. 7,71,851, respectively. The assessee also brought to the notice of the assessing officer that it was not only carrying on the activity of coal mining but also carried on boring business and both constituted one and the same business and that, therefore, whatever loan had been obtained though for one line of business and if that was closed, even after the closure of that business, the assessee's business continued and it carried on some other activities, the assessee was entitled to deduction of interest on the loans obtained for the purpose of carrying on the business. The assessing officer rejected the claim of the assessee. On appeal, the Commissioner (Appeals) found that the assessee was carrying on the boring business along with its mining business and the activity of boring business continued even after the nationalisation of the mines. The Commissioner (Appeals) also found that there was common management, common accounts, and interlacing of the various activities of the assessee and the receipts from the different activities were deposited in the name bank account and were also utilised without any reservation for the other activities of the assessee. The Commissioner (Appeals) also verified the cash book produced before him which showed the commonness of the funds and also intermingling of funds among the activities of the assessee. The Commissioner (Appeals), therefore, directed the assessing officer to allow the interest claimed by the assessee. The Tribunal affirmed the order of the Commissioner (Appeals), inter alia, on the ground that there was no organisational change in the management after the nationalisation of the coal mines. On a reference : Held, affirming the decision of the Tribunal, that the coal mining business and the boring business constituted the same business and that the assessee was entitled to deduction of interest on the loan obtained from the bank." Having examined the above decisions, we are of the opinion that the decision of the Hon'ble Supreme Court relied upon by the learned assessing officer in the case of Challapalli Sugars Ltd. (supra) is on altogether different facts and circumstances. The case of Challapalli Sugars Ltd. is in regard to a new business undertaking and the case of the assessee is of a running business. We are, therefore, of the opinion that the ratio of decision of the Hon'ble Supreme Court is not applicable to the facts of this case. Besides the above case laws, we have an occasion to go through the decision of Tribunal Bombay Bench in the case of Tata Chemicals Ltd. v. Dy. CIT, whereunder similar facts interest paid on monies borrowed for an independent unit was held as allowable deduction as the same was held as expansion of the same business of the assessee-company. Our views were strengthened by the decision of the Hon'ble Supreme Court in the case of Veecumsee v. CIT (1996) 220 ITR 185 (SC). Undisputedly, the case of the appellant before us is payment of interest on borrowings of an existing business or an expansion of the existing business. It is also worth observing here that the principles set by the Hon'ble Supreme Court in the case of Setabganj Sugar Mills v. CIT (1961) 41 M 272 (SC) that there is interconnection, interlacing, interdependence or unity of control embracing the two ventures are fully applied to the case of the appellant.
After having gone through all the relevant material, we have no hesitation in holding that the interest in respect of capital borrowed for the purpose of business is rightly claimed under section 36(1)(iii) of the Act. Interest claimed was on capital borrowed for the purpose of business, which is being carried on in the previous year by the assessee and the business carried on by the assessee in the previous year constitutes a single composite business so that the interest claimed in respect of the capital borrowed can be allowed against the profits of the other business and that the decision of the Hon'ble Supreme Court in the case of Challapalli (supra), is not an impediment where interest is claimed as deduction under section 36(1)(iii). The various activities or business pursued constitute one single or composite business fully satisfied. The decisive test in the case of the assessee is the unity of control which is indicated by interlacing, interdependence, interconnection between the business of the various units of the assessee. Interlacing, interdependence or interconnection is proved by the fact that there was common management, common administration, common fund and common place of business. It is also worth observing here that assessment is not framed on the basis of unitwise but assesseewise and there is no rule which can compel the assessee under such circumstances to capitalise the interest or to include it in the capital expenditure. On the basis of these findings the business of the appellant should be treated as a single business.
We, accordingly, hold the disallowance of interest as unjustified and delete the same.