1. ASHOK BHAN, J.---The assessee is an exhibitor of films and running a theatre called "Nanda Picture House" since 1972. The assessee is a Hindu undivided family which purchased a site at Mandya in the year 1972 and commenced construction of another theatre "Gurusree" on the said site. He borrowed funds from the Karnataka Bank Ltd., Mandya, for purposes of construction.
2. During the previous year relevant to the assessment year 198.1-82, the assessee claimed deduction of interest in a sum of Rs.56,429 paid to the Karnataka Bank Limited. The said interest was claimed as the interest on the loan raised from the bank for the construction of the theatre. Similarly, for the assessm ent years 1982-83, 1983-84 and 1984-85, the assessment years under consideration, the assessee paid interest amounting to Rs.1,65,738, Rs.2,29,206 and Rs.3,97,032 and claimed the same as revenue expenditure against its business income. The Income-tax Officer disallowed the assessee's claim for deduction of interest on the ground that borrowed amount on which interest had been paid was utilised for the construction of a new cinema building and, as such, the payment of such interest had to be capitalized. The Income-tax Officer also noticed that the theatre building was still under construction and the construction was incomplete during the previous years relevant to the assessment years, 1982-83, 1983-84 and 1984-85. Hence, as per the Income-tax Officer the payment of interest till construction of the theatre was complete had to be capitalised and the same was not admissible as revenue expenditure against the assessee's business income. On appeal by the assessee, the Commissioner of Income-tax (Appeals) by relying on the decision of the Tribunal m I.T.A. No. 776/Bang. Of 1982, in the assessee's own case for the assessm ent year 1981-82, dated March 19, 1984, deleted the disallowance made by the Income- tax Officer and held that the interest claimed by the assessee is an allowable deduction against the assessee's business income.
3. On further appeal by the Department, the Tribunal dismissed the Department's appeals by relying upon its earlier decision for the assessment year 1981-82. It was held by the Tribunal that since the business of the assessee had not commenced and the loan had been taken and utilised by the assessee for the further expansion of the business the interest paid by the assessee on such loan was deductible as revenue expenditure. Reliance was placed upon a decision of the Supreme Court in the case of India-Cements Ltd. v. CIT (1966) 60 ITR 52.
4. The Department filed a petition under section 256(1) requesting the Tribunal to refer the question of law regarding the claim for deduction of the interest payment made on borrowers utilised for the acquisition of new theatre, the construction of which was not complete during the relevant previous years and which was not put into use in the assessee's business for the assessment years under consideration. The Tribunal, declined to refer the question on the ground that for the assessm ent year 1981-82 no question was claimed and, therefore, for the subsequent years the question did not arise.
5. The Department filed C. P. Nos. 339-341 of 1990 to this Court. The High Court was of the opinion that the question of law did arise from the order of the Tribunal and accordingly directed the Tribunal to refer the question of law claimed by the Revenue alongwith the statement of case. In pursuance of the direction issued by the High Court, the Tribunal has referred the following question of law with an appropriate statement of case: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the Commissioner of Income-tax (Appeals) was justified in allowing the assessee's claim for deduction of the interest payment of Rs.1,65,738, Rs.2,29,206 and Rs.3,97,032.Made on borrowals utilised for the acquisition of new theatre the construction of which was not complete during the relevant previous years and which was not put into use in the assessee's business for the assessm ent years 1982-83, 1983-84 and 1984-85, respectively?."
6. The Revenue's case is that the new cinema at Mandya constituted a new business though under the same management and did not constitute an establishment of a new unit for exhibiting films. It was contended for the Revenue that since during the relevant assessment year the new unit did not start functioning, the payment of interest on the borrowings which were utilised for the purpose of establishment of the new unit should go towards cost of the new unit and, therefore, on the principle laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 the interest should be treated as capital expenditure and not as revenue expenditure. The contention of the assessee is that the Tribunal has rightly proceeded on the fact that the new establishment was the unit of existing business and the borrowings having been utilised for expanding the same and the existing business and the interest paid would be a revenue expenditure and allowable as such. The principle laid down by the Supreme Court in Challapalli Sugars Ltd.'s case (1975) 98 ITR 167 would not be applicable. Reliance was placed on certain decisions, a reference to which is made in the next few paragraphs.
7. "A fairly adequate test for determining whether the two constitute the same business is furnished by what Rewlatt, J. Said in Scales v. George Thompson & Co. Ltd. (1972) 13 TC 83, 89: 'Was there any interconnection, any interlacing, any interdependence, any unity at ' all embraching those two businesses'?"
8. This principle was reiterated by the Supreme Court in Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739.
9. "As the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly, started company which is in the process .Of constructing and erecting its plant, the, interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure."
10. The point canvassed before the Supreme Court was different from the point involved in the present case. There was no existing business with reference to which the capital was borrowed either for acquisition of a new asset or expansion of the already existing unit or business. There the capital was borrowed for installation of a new unit and interest paid on the borrowed capital was treated as capital expenditure adding to the capital cost of the asset entitling the assessee to depreciation allowance and development rebate with reference to such interest also.
11. The finding of fact recorded by the Tribunal that the loan had been taken for expansion of business had not been challenged by the Revenue and no question regarding this finding has been claimed by it. As laid down by the Supreme Court in L. M. Chhabda & Sons' case (1967) 65 ITR 638, the question as to whether the different ventures carried on by the assessee form parts of the same business would depend on the facts and circumstances of each case and it had to be established on the facts that the different ventures form part of the same business. In this case, the assessee's contention was that the loan was taken for expansion of the already existing business and that finding has not been questioned. Therefore, we proceed on the basis that the loan was taken by the assessee for expansion of his already existing business and then examine whether the interest paid on the borrowed capital for the installation of the new unit would be allowable as revenue expenditure or capital. Expenditure.
12. "That it could not be disputed that the business organisation, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organisation of both the units. The production of both the units was considered the production of the assessee-company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on December 8, 1959, and in the application for licence submitted by the assessee to the Government, it was stated that the new unit at Bangalore was nothing but an expansion of the existing business. Thus, there was complete interconnection, interlacing and interdependence of both the units, which is the test laid down for determining whether two lines of businesses constitute the 'same business' within the meaning of section 24(2), by the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 and again approved by the Supreme Court in Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739. "
13. Similarly, this Court in Addl. CIT v. Sourthern Founders (1979) 120 ITR 37 held (page 38): "It is not disputed that for the purpose of carrying on the 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 We are of the view that the Tribunal was right in holding that the interest paid was deductible as revenue expenditure irrespective of the fact that the building in question had not been actually put to use for carrying on business during the accounting year by the assessee. This view accords with the view taken by a Division Bench of this Court of which one of us, was a member, in Ravi Machine Tools (P.) Ltd. v.
14. CIT (1978) 114 ITR 459 (Kar.). The question referred to us is, therefore, answered in the affirmative and against the department. "
15. Similar view was taken by this Court in C. T. Desai v. CIT (1979) 120 ITR 240 and in CIT v. Insotex (Private) Ltd. (1984) 150 ITR 195. In CIT v. Insotex (Private) Ltd. (1984) 150 ITR 195 (Kar.), the Income-tax Officer for the assessm ent years 1974-75 and 1975-76 disallowed the benefit of deduction as business expenditure incurred by. The assessee on the borrowed capital utilised for importing machines to replace the old machines and for purchasing the land on the ground that the machinery purchased was not used for production in the. Relevant accounting year. It was held that the assessee was entitled to adjust the payment of interest towards revenue expenditure holding that when once it was proved that the assessee has utilised the same for the purpose of business, then he was entitled to the adjustment of the interest on the money borrowed as revenue expenditure.
16. Similar view was expressed again by this Court in CIT v. Hindustan Machine Tools Ltd. (No. 1) (1989)
17. 175 ITR 212 and in CIT v. Indian Telephone Industries Ltd. (1989) 175 ITR 215 (Appex).
18. As observed earlier in the present case, the Tribunal has proceeded on the assumption of facts that there was an interconnection, interlacing and interdependence and unity between the existing business and the new unit. Setting up of the new cinema hall at Mandya did not constitute a new business, but was only an establishment of a new unit of an existing business, which was already being carried on by the assessee. It constituted the same business. The assessee was entitled to deduct the interest as revenue expenditure irrespective of the fact that the building in question was not actually put to use for carrying on a business during the accounting year by the assessee. The assessee was entitled to adjust the payment of interest towards revenue expenditure as it was proved that the assessee had utilised the same for the purpose of business.