1999-VIL-119-ITAT-MUM

Equivalent Citation: [2000] 72 ITD 1 (ITAT [Mum])

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 4604 (MUM.) OF 1996

Date: 14.01.1999

TATA CHEMICALS LTD.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX

Dinesh Vyas, P. C. Tripathi, for the Appellant.
D. J. Tralshawala, for the Respondent.

BENCH

R. V. EASWAR (JUDICIAL MEMBER) and M. V. R. PRASAD (ACCOUNTANT MEMBER)

JUDGMENT

1. This is an appeal by the assessee, M/s. Tata Chemicals Ltd., for the assessment year 1992-93, for which the relevant previous year ended on 31-3-1992. The assessee is a public limited company engaged in the manufacture of chemicals, salt and detergents in its factories. This appeal arises out of the assessment order passed by the Dy. Commissioner of Income-tax, Special Range I, Bombay, on 24-3-1995, under section 143(3) of the Act, determining the total income at Rs. 76,84,31,176.

2. The first ground is directed against the disallowance of interest under section 36(1)(iii) of the Income-tax Act, while computing the profits and gains of the business. The total claim of interest was Rs. 81,24,20,861, which was made in the revised return. The break-up of the claim is as below :

(a)Interest debited to Profit & Loss Account.			49,62,16,000
(b)Interest paid on borrowings not debited to Profit and Loss Account but capitalised in books of account :
(i)Fertilizer Division	35,13,55,815
(ii)Chemicals Division	1,66,83,137		36,80,38,952
			86,42,54,952
(c)Gross Interest (a + b)			86,42,54,952
(d)Less : Interest and other income out of borrowed funds		5,18,34,091
(e)Net Interest claimed as			81,24,20,861
deduction

In the assessment proceedings, the Assessing Officer noticed that during the year the assessee had put up a fertilizer plant at Babrala in Uttar Pradesh and that the plant was in the process of being commissioned. He was of the view that the business of the fertilizer unit cannot be stated to have been carried on by the assessee during the relevant previous year and therefore whatever interest that was referable to the borrowings made for the purpose of putting up the fertilizer plant, cannot be allowed as a deduction under section 36(1)(iii) against the business income of the assessee. He allowed only the interest which was referable to the borrowings made for the purpose of the existing business of the assessee. The total claim of the interest of Rs. 86,54,952 was considered in the following manner :

Interest referable to the existing plant (chemical unit at Mithapur, Gujarat)	Rs. 19,98,67,137
Interest referable to the fertilizer plant in Babrala, U.P.	Rs. 35,13,55,815
	Rs. 55,12,22,952
Interest referable to investments made by the assessee	Rs. 31,30,32,000
Total	Rs. 86,42,54,952

The Assessing Officer considered the interest of Rs. 55,12,22,952 for allowance under the head `Business'; and the balance of Rs. 31,30,32,000 under the head "Other Sources". The interest of Rs. 19,98,67,137, which, according to him, was referable to the existing business of the assessee, was allowed as a deduction while computing the profits of the business carried on by the assessee and the interest of Rs. 35,13,55,815 was considered as referable to the fertilizer unit which was in the process of being commissioned and since the fertilizer division did not start functioning during the year the interest attributable to it was disallowed. Under the head "Other Sources" the Assessing Officer allowed interest of Rs. 10,95,01,310 under section 57(iii) and the balance of Rs. 20,35,30,690 was disallowed. The reason for the disallowance was that this interest was attributable to the investment in the tax-free bonds.

3. Thus out of the total claim of the interest of Rs. 86,42,54,952, interest of Rs. 30,93,68,447 was allowed partly under the head `Business'; and partly under the head "Other Sources" and the balance of Rs. 55,48,86,505 was disallowed, again partly under the head `Business'; (Rs. 35,13,55,815) and partly under the head "Other Sources" (Rs. 20,35,30,690). Thus what we would consider, for the purpose of ground No. 1 taken before us, is Rs. 35,13,55,815, which, according to the Assessing Officer, represents interest on capital borrowed and utilised for the purpose of the business operations of the fertilizer division, which had not started functioning during the year and which was only in the process of being put up.

4. The Assessing Officer has devoted about 68 pages to the issue and has considered the matter very elaborately. He has discussed the facts, the assessee';s contentions as well as the legal position elaborately in these pages. Briefly put, the assessee';s case before the Assessing Officer was that the fertilizer division was part of the assessee';s existing business and was not a distinct or separate business and therefore the interest on capital borrowed for the purpose of the fertilizer plant in Babrala constituted a valid deduction under section 36(1)(iii). The view of the Assessing Officer is that the fertilizer unit is a separate and distinct business and did not constitute part of the business carried on by the assessee during the relevant previous year and therefore the assessee was not entitled to the allowance of the interest. This in short is the dispute between the parties and which has given rise to the first ground.

5. It is customary to discuss the facts of the case first before entering into the legal contentions based on several reported decisions. However, in the present case we would first like to discuss the legal principles which have been laid down by the courts for the purpose of ascertaining whether two or more business activities carried on by an assessee constitute a single or composite or same business or whether they are distinct and separate business, and then discuss the facts of the present case, apply the principles of law to those facts and examine whether the tests laid down are satisfied in the present case, so that the chemicals business which was undoubtedly carried on during the relevant previous year by the assessee and the fertilizer business constituted the same or a single business or they constituted distinct or separate businesses. The reason for this reversal of the order of discussion is that the Assessing Officer has proceeded to deal with the issue in this fashion. He has first discussed the legal principles and has thereafter proceeded to examine whether those principles apply to the facts of the case. Before us also, both the learned counsel for the assessee, Mr. Dinesh Vyas, as well as the learned Senior Departmental Representative, Mr. Tralshawala, argued the ground in the same fashion, namely, the legal principles were argued first on the basis of several decided cases and thereafter the focus shifted to the facts of the case. We therefore proceed to discuss the issue in the same order.

6. The main contention of Mr. Dinesh Vyas was that the "same business" test applicable for the purpose of section 72 of the Act was not applicable for the purpose of section 36(1)(iii). He relied on three judgments of the Supreme Court in support of this contention. The first is Veecumsees v. CIT (1996) 220 ITR 185/ 86 Taxman 243. In this case, the assessee was running a jewellery business. It subsequently started a theatre and for this purpose borrowed monies on interest. The interest claimed on the borrowings was allowed by the income-tax authorities as a deduction. Later, the business of exhibition of films in the theatre was transferred to another firm. The deduction of the interest claimed against the income of the jewellery business was denied. The Tribunal held that the interest having been allowed inter alia on the ground that the theatre business and jewellery business were a composite business it was not open to the income-tax authorities to deny the deduction. The High Court reversed the decision of the Tribunal by holding that the closure of the theatre business had not affected the jewellery business and therefore there was no inter-connection, inter-lacing etc. On appeal by the assessee, the Supreme Court held that the fact that the income-tax authorities had earlier allowed the deduction in respect of the interest showed that they had viewed the theatre business as part of the assessee';s business and that the subsequent transfer/closure of that business did not alter the fact that at the time when the borrowings were made, they were for the purposes of the business of the assessee. It was therefore held, reversing the High Court';s judgment, that the "test of same business, appropriate for set-off of carry-forward of losses is not appropriate here". In the very next paragraph, the Supreme Court observed that apart from the fact that the test of same business was not appropriate here, the Tribunal had also recorded a finding of fact that the jewellery business and theatre business run by the assessee were a composite business and therefore the assessee was entitled to the deduction of the interest under section 36(1)(iii). Reading the judgment as a whole and in the background of the finding of fact recorded by the Tribunal, on which the Supreme Court had relied upon, it is not possible to accept the contention of Mr. Vyas that this decision is authority for the proposition canvassed by him, viz., that the test of "same business" is not relevant for the purpose of section 36(1)(iii). When the Supreme Court said that the test is not appropriate "here", what they meant, in our humble understanding, was that the income-tax authorities themselves having viewed the borrowings as having been effected for the purposes of the assessee';s business by earlier allowing the claim for deduction of interest on the borrowings, it was not possible for the High Court to disallow the interest claimed in the later years notwith-standing the fact that the theatre business was closed or transferred. The effect of this observation is that the borrowings which were treated by the income-tax authorities as having been effected for the purposes of the business when they were effected, did not cease to be so merely because the business for which they were borrowed ceased to be in existence in the later years in which the interest was continued to be claimed as a deduction. If the Supreme Court had meant to lay down as a proposition that the test of same business is not relevant for the purposes of section 36(1)(iii) they would have expressly said so. Further, the fact that in the very next paragraph (at page 190) they have expressly relied on the finding of fact recorded by the Tribunal to the effect that the jewellery business and the theatre business were a composite business, clearly shows that far from laying down the proposition sought to be canvassed by Mr. Vyas, the Supreme Court have in fact reiterated the test for the purposes of section 36(1)(iii). We are therefore unable to understand the judgment as either laying down or as even supporting the proposition canvassed by Mr. Vyas.

7. The next decision relied on by Mr. Vyas is CIT v. Virmani Industries (P.) Ltd. (1995) 216 ITR 607/ 83 Taxman 343(SC). His contention was that this judgment is authority for the proposition that wherever the legislature wanted to prescribe a condition that an allowance or deduction would be granted only against the profits of the same business, it specifically provided for the same, as in the proviso to section 72(1) and not having expressly stated so in section 36(1)(iii) it is not open to the income-tax authorities to read such a condition into the said provision. Heavy reliance was placed on the last paragraph of the judgment at page 617. We agree with Mr. Vyas to the limited extent that wherever the legislature wanted to prescribe such a condition in the case of carry-forward of a loss or allowance, they have so prescribed expressly. The Supreme Court was concerned with the provisions of section 32(2) which provided for carry-forward of unabsorbed depreciation allowance. The Supreme Court repelled the contention of the Revenue that the allowance can be set off only against the profits of the same business to which it pertained, by holding that such a condition should have been expressly prescribed by the Act and in this context referred to the proviso to section 72(1) as an instance where the legislature has expressly prescribed such a condition. But in the case before us, we are concerned with an allowance for the same year and not with any carried-forward or unabsorbed allowance. The provisions of section 36(1)(iii ) say that the interest paid on capital borrowed for the purposes of the business will be allowed as a deduction and the business referred to in the section is the business that is being carried on by the assessee in the relevant previous year, having regard to the provisions of section 28 of the Act which provides for computation of the profits and gains of a business that is being carried on in the previous year. Each business is a separate source of income under the head "Business" and an allowance or expenditure relating to a business cannot be adjusted or deducted against the profits of another business. This, we think, constitutes a basic principles of section 28. The condition that the expenditure or allowance should relate to the very business that is being carried on in the previous year is implicit in section 36(1)(iii) itself and therefore it is not necessary, nor is it open, to look for an express statutory prescription to that effect. In other words, the interest claimed on borrowings effected for the business can be allowed as a deduction only if the business was being carried on by the assessee in the previous year. The question to be decided, on the facts and circumstances, would always be whether the business carried on by the assessee is the business for the purposes of which the borrowings were effected. This would be, in our opinion, a question of fact to be decided on the evidence and the surrounding circumstances and by applying the various tests propounded by decided cases.

8. Waterfall Estates Ltd. v. CIT (1996) 219 ITR 563/ 85 Taxman 689 (SC), relied on by Mr. Vyas, is a case where the assessee derived income from coffee and tea estates and coffee curing works. The coffee income was exempt from income-tax; the tea income was exempt to the extent of 60% and the coffee curing income was fully taxable. The managing agency commission paid by the company was claimed as a deduction against the taxable income on the ground that all the activities constituted a single composite activity or business. The claim was negatived by the Tribunal and the High Court. On appeal to the Supreme Court, heavy reliance was placed on behalf of the assessee on CIT v. Maharashtra Sugars Ltd. (1971) 82 ITR 452. Distinguishing the said decision, and certain other decisions of the Supreme Court, it was held by the Supreme Court that they were all rendered under the section 24(2) of the 1922 IT Act under which the question was whether the business carried on by the assessee in the relevant previous year was the "same business" as was carried on by him in the earlier year or years and that the question before the Supreme Court was different and that the object of enquiry in both the cases (earlier decisions and the case before the Supreme Court) was different. Relying on this distinction brought out by the Supreme Court, Mr. Vyas argued that section 72(1) and its proviso being identical with section 24(2) of the old Act, the tests applicable while interpreting section 72(1) and its proviso cannot be applied to the claim of interest made by the assessee before us under section 36(1)(iii). It is interesting to note that Waterfall Estates Ltd';s case (supra) was relied on by Mr. Tralshawala also, for the Department. His contention was that, this decision laid down that an allowance can be granted only if it related to the business carried on by the assessee in the previous year. On a careful consideration of the argument of Mr. Vyas, we are of the view that the test of same business had not been abandoned by the Supreme Court in Waterfall Estates Ltd.';s case (supra). The ground on which they distinguished the judgments rendered under section 24(2) of the old Act was that section 24(2) raised the question whether the business carried on by the assessee in the relevant previous year was the same business as was carried on by him in the earlier years, whereas in the case before them the question was whether the different activities pursued in the same year by the assessee such as coffee, tea and coffee curing works, all constituted one single business or activity so that the managing agency commission can be claimed fully against the taxable income from the aforesaid activities. This decision, far from supporting the assessee before us, assists the Department to the extent that it says that in order that an allowance may be obtained by the assessee in respect of an expenditure or loss, the facts should disclose that it relates to the business that is being carried on by the assessee in the relevant previous year and that if there are several activities the burden is upon the assessee to show that all of them constitute a single or composite or same business. In fact, the Supreme court relied on the finding of the Tribunal in the case before them to the effect that all the activities such as coffee, tea and coffee curing works, did not constitute one and the same business and that there was no interlacing, interdependence or inter-connection between them.

9. The above triology of judgments of the Supreme Court, in our under-standing and with respect to Mr. Vyas, do not lay down the proposition that the test of "same business" applicable for section 72(1) is not applicable to section 36(1)(iii), as contended by him.

10. A few other judgments of the Supreme Court were heavily relied upon by Mr. Vyas which we shall notice now. He first cited State of Madras v. G.J. Coelho (1964) 53 ITR 186(SC). In this case the provisions of section 5(e) of the Madras Agricultural Income-tax Act were considered. The assessee claimed that interest paid by him on monies borrowed for the purpose of purchasing plantations was allowable as deduction under section 5(e) of the said Act as expenditure laid out wholly and exclusively for the purpose of the plantation. The claim was upheld by the Supreme Court by holding that in principle there was no difference between interest paid on monies borrowed for acquiring a plantation and on monies borrowed for the purpose of the existing plantation; both are for the purpose of the plantation. Mr. Vyas'; argument, shortly put, is that we should substitute the words "plantation" by the word "business" and so substituted, the judgment fully supports the claim for deduction of interest under section 36(1)(iii). It is noteworthy that though section 5(k) of the said Act provided for deduction of interest paid on monies borrowed and actually used in the plantation in the previous year, the assessee';s claim was not founded on this provision. The Supreme Court noted that section 5(e) was a "word for word" reproduction of section 10(2)(xv) of the Indian Income-tax Act 1922, the equivalent of which is section 37(1) of the present Act. The claim was allowed under section 5(e) of the Act. This decision cannot be applied to the present case for the reason that the assessee before us does not claim the interest under section 37(1) but claims it under section 36(1)(iii). When there is a specific provision for claiming interest, it is not open to rely on section 37(1) which in terms says that only expenditure not covered by the provisions of section 30 to 36 would be governed by it. In Madhav Prasad Jatia v. CIT (1979) 118 ITR 200/ 1 Taxman 477 (SC), it was held that the words "for the purpose of the business" appearing in section 10(2)(iii) of the old Act [section 36(1)(iii) of the present Act] and in section 10(2)(xv) of the old Act (section 37 of the present Act) are wider in scope than the words "for the purpose of earning income" appearing in section 12(2) of the old Act [section 57(iii) of the present Act]. The Supreme Court pointed out that three conditions were required to be satisfied under section 10(2)(iii); (i) that monies must have been borrowed by the assessee; (ii) interest must have been paid and (iii) the monies should have been borrowed for the purpose of business. It was further pointed out that monies borrowed for meeting a personal obligation and not for meeting the obligations of the business cannot be stated to be for the purpose of business and the interest paid on such borrowings cannot be allowed as business expenditure. What Mr. Vyas wants to say is that this decision lays down that any interest on monies borrowed for purposes other than personal purposes must perforce be treated as having been borrowed for business purposes and hence allowed as deduction. But from that, what Mr. Vyas wants to further say does not follow, which is that the enquiry must be limited to the purpose for which the monies were borrowed and cannot be extended to finding out whether the different business activities carried on by the assessee constitute one single business. It is no doubt true that in this judgment and in various earlier and subsequent judgments the Supreme Court as well as High Courts have held that the aforesaid three tests alone have to be satisfied and none else for obtaining a deduction in respect of interest under section 36(1)(iii). At the same time, it is also true that the monies must have been borrowed for the purpose of the business, that is to say, the business that is being carried on by the assessee in the relevant previous year. That necessarily involves the enquiry as to what was the business that was being carried on by the assessee? To put it differently, the question to be asked is : Was the business for which the monies were borrowed being carried on by the assessee during the previous year? If more than one activity or business was being carried on by the assessee, were all the activities/businesses so interlaced, inter-connected or inter-dependent so as to enable one to conclude that all of them constituted one business, so that it can be said that that was the business that was being carried on by the assessee in the relevant previous year? We are convinced that the aforesaid enquiry is an inescapable concomitant of the section.

11. In India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), another decision on which much reliance was placed by Mr. Dinesh Vyas, expenditure in-curred by the assessee by way of stamp duty, registration fees and lawyers'; fees etc. in connection with a loan obtained from IFC was claimed as a deduction under section 10(2)(xv) of the old Act. It was disallowed as capital expenditure. This view was negatived by the Supreme Court which held that a loan obtained by the assessee was not an asset, that there was no enduring advantage, that the expenditure had been incurred for securing the use of money for a limited period and that it was irrelevant to consider the object or purpose for which the loan was obtained. In this case also, the Supreme Court was not concerned with section 10(2)(iii) of the old Act which provided for deduction of interest claimed on capital borrowed. There was no dispute that the business for which the loan was obtained was being carried on by the assessee in the relevant previous year. The dispute was whether by obtaining the loan the assessee obtained an advantage of enduring benefit so that the expenditure claimed could also be disallowed as capital expenditure. Mr. Vyas laid emphasis on the fact that the Supreme Court had held that it was irrelevant to consider the object of the borrowing and contended that so long as the borrowing is for the purpose of the business, whether business A or Business B, the interest should be allowed as deduction and no further enquiry as to whether business A and business B constituted the same business was permissible. We are afraid that we cannot accept the argument. In the case before the Supreme Court, the argument of the Revenue was that the loan obtained was an enduring asset and so the expenditure should also take the same colour and be disallowed as capital expenditure. The argument was repelled (pages 62 & 63 of the judgment) and it was held that it was erroneous to think that the loan confers an enduring advantage to the assessee. It was pointed out that a loan is a liability. Rejecting the argument of the Revenue that the nature of the expenditure must take its colour from the nature and the purpose of the loan, it was held that a company effecting a borrowing with a view to purchase a capital asset may change its mind and use it for purchase of raw material which is revenue expenditure and conversely a company may take a loan for purchasing raw material but due to changed circumstances it may use the money for purchasing machinery and in such cases it cannot be said that the money was not used for the purpose of the business. It was therefore held that it is irrelevant to consider the object or purpose for which the loan was obtained. This decision does not support the theory sought to be canvassed by Mr. Dinesh Vyas that the enquiry as to whether the different activities carried on by the assessee in the previous year constituted one single business or not is wholly irrelevant.

12. In Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT (1965) 56 ITR 52, it was held by the Supreme Court that borrowed capital referred to in section 10(2)(iii) of the old Act meant "money" and not any and every liability, such as unpaid purchase price of an asset. In this case the claim for deduction of the interest on the balance of the purchase price due by the assessee-company to another entity whose business the assessee-company took over was negatived under section 10(2)(iii) (Hon';ble Justice Subba Rao expressing no opinion on the point). The alternative claim of the assessee under section10(2)(xv) expenditure incurred wholly and exclusively for the purpose of the business was upheld by the Supreme Court on the ground that the interest claimed was so closely related to the business that the transaction that gave rise to the interest could be viewed as an integral part of the conduct of the business. This decision would be relevant only if the assessee';s claim is based on section 37(1) of the Act; but interest paid on capital borrowed would fall for consideration only under section 36(1)(iii) and therefore cannot be considered under section 37(1). The interest would be allowable as deduction upon the terms of section 36(1)(iii) or not at all. In Bombay Steam Navigation Co. (1953) (P.) Ltd.';s case (supra) the interest claimed by the assessee did not and could not fall under section 10(2)(iii) because there was no money borrowed for interest. The interest was claimed on the unpaid purchase price. Section 10(2)(iii) in terms did not apply; and that is why the claim was considered under section 10(2)(xv). The ratio is that only if a claim for an allowance or deduction does not fall under any of the sections 30 to 36, could it be considered under section 37(1). In the case before us the interest is claimed in respect of capital borrowed and so it has to satisfy the test of section 36(1)(iii) if it is to be allowed and if it fails, it has to be disallowed; it cannot be considered under section 37(1). Bombay Steam Navigation Co. (1953) (P.) Ltd.';s case (supra) is thus distinguishable on facts. Mr. Vyas cannot, in our humble opinion, and with respect, derive any assistance from the judgment.

13. Mr. Vyas also referred to CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC). This case was mainly referred to in connection with the arguments against the allocation of the interest against the business income and the income from "other sources"; however, Mr. Vyas also pointed out that in this decision the Supreme Court has opined that for the purpose of section 10 of the old Act it is not permissible to hold that the expenditure or allowance mentioned in the various clauses of the section must fulfil "some other condition" some condition not prescribed by the section before it can be allowed as a deduction. This principle was relied upon to argue that so long as the assessee had borrowed capital for the purpose of the business, it is not open to the income-tax authorities to insist upon the condition, not prescribed by the section 36(1)(iii), that the business should also have been carried on in the relevant previous year. We do not think that the objection of the income-tax authorities in the present case is anything other than that the fertilizer business at Babrala is not part of the assessee';s business that was being carried on in the previous year. The condition that the business must be carried on in the previous year, as we have already seen, is implicit or in-built in the provisions of section 36(1)(iii). What the income tax authorities have been insisting upon is that the assessee has to show that the fertilizer business was part of the business that was being carried on in the previous year by pointing out to evidence that would show inter-connection, inter-lacing and inter-dependence between its existing business in Mithapur and the fertilizer plant in Babrala. Their view, in our opinion, is not in any manner inconsistent with the Indian Bank Ltd.';s case (supra). By taking this view, the income-tax authorities cannot be stated to be insisting upon a condition that is not present in the statutory provision.

14. In view of the foregoing discussion, we are of the view that the departmental authorities were right in law in their view that the burden is on the assessee to show that the fertilizer business is part of the other businesses carried on by the assessee in the previous year in order that the interest paid on capital borrowed for the purpose of the fertilizer business can qualify for deduction under section 36(1)(iii) of the Income-tax Act, 1961. We are unable to accept the contention of Mr. Dinesh Vyas that such a condition is alien to the said provision. We are also unable to subscribe to his contention that the test of "same business" applicable to section 72 of the Act are inapplicable to section 36(1)(iii).

15. In the above view of the matter, we do not consider it necessary to discuss the decisions cited by Mr. Vyas which lay down guiding principles regarding `ratio decidendi'; obiter dicta'; etc. and other principles as to how to understand an authority. For the same reason, we do not also think it necessary to examine in detail his contention that any judgment of any High Court or any order of the Tribunal which is inconsistent with the principle enunciated in the triology of the Supreme Court in the cases of Veecumsee (supra), Virmany Industries (P.) Ltd. (supra) and Waterfall Estates Ltd. (supra) cannot be said to have laid down the correct position in law with regard to section 36(1)(iii).

16. We shall now proceed to a consideration of the impact of the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 on the case before us. That was a case where the assessee-company went into production on 22nd January 1958. It had borrowed considerable amounts of money from the IFC for the purpose of installation of plant and machinery in its factory (sugar). During the period prior to the commencement of the business it paid huge amount of interest which it sought to capitalise and add to the cost of the plant and machinery for the purpose of claiming depreciation. The claim was negatived by the ITO but on appeal both the AAC and the Tribunal agreed with the assessee. The High Court reversed the Tribunal';s view and held as under : (i) As the expression "actual cost" has not been defined in the Indian Income-tax Act, 1922, it has to be understood in the sense in which no commercial man would misunderstand. For this purpose, it is necessary to follow and apply the accepted accountancy rule, viz., to include all expenditure necessary to bring such assets into existence and to put them in working condition. (ii) If money is borrowed by a newly started company which is in the process of constructing or erecting its plant, the interest incurred before the commencement of production on the borrowed money can be capitalised and added to the cost of the fixed assets created as a result of the expenditure. Thus it will be seen that the case related to a company which was newly started and which had not commenced any production or any business. The question which engaged the attention of the Supreme Court was whether the interest paid before the Commencement of production on the amount borrowed for the acquisition of plant and machinery can be considered to be part of the "actual cost" to the assessee for purposes of depreciation. The Supreme Court answered the question in the affirmative. The Supreme Court further pointed out the distinction between interest claimed for the period prior to the commencement of production and that claimed after the commencement at page 172 of the report and held that the interest paid after the commencement of production "can be deducted under clause (iii) of sub-section (2) of section10 of the Act". The distinction was brought into focus at page 178 of the report where the earlier judgment of the court in India Cements Ltd.';s case (supra) was referred to and distinguished. It was held that India Cements Ltd.';s case (supra) did not assist the Revenue';s contention that such interest is to be allowed as revenue expenditure as per section 10(2)(xv) of the old Act. It was pointed out that in India Cements Ltd.';s case (supra), at the time it raised money by way of borrowings, the company was a "running concern" and "unlike in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case." (emphasis supplied). These observations clearly bring out the distinction between a case where interest is paid before the commencement of business or production by a newly started company and is sought to be added to the cost of the fixed assets for the purpose of claiming depreciation and a case where interest paid by a company already carrying on some business and is thus a running concern is claimed as a revenue deduction under section 36(1)(iii) of the Act. The case of Challapalli Sugars Ltd. (supra) is therefore not an impediment to the assessee.

17. In Sivakami Mills Ltd. v. CIT (1979) 120 ITR 211 the Madras High Court referred to Challapalli Sugars Ltd.';s case (supra) and distinguished the same on the ground that it related to a case of a newly started company which had not commenced any business and claimed the interest relating to the period prior to the commencement of production or business as part of the actual cost and that the principle would not apply to a case of a "running concern" an expression coined before us by Mr. Vyas already in business which seeks to obtain an allowance of the interest as a revenue deduction, notwithstanding that the capital was borrowed for the purpose of putting up a new plant or unit. In such a case, the only question to be considered, in our view, is whether the plant or unit is part of the business already being carried on by the assessee. The Madras High Court (supra) held that in such a case an option would be available to the assessee either to capitalise the interest as part of the actual cost of the fixed assets installed or to seek an allowance of the interest, obviously under section 36(1)(iii).

18. In CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 the Gujarat High Court distinguished Challapalli Sugars Ltd.';s case (supra) (page 726). It was held that the observation in Challapalli Sugars Ltd.';s case (supra) to the effect that the interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of the asset were made "with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, and hence had not commenced any business when it borrowed the amount in question.

Therefore, it was not possible to say in that case that the borrowing was made "for the purposes of the business" to bring the case within the ambit of section 10(2)(iii) of the Indian Income-tax Act, 1922 [which is equivalent to section 36(1)(iii) of the Act of 1961]". The High Court then proceeded to discuss India Cements Ltd.';s case (supra) and Calico Dyeing & Printing Works v. CIT (1958) 34 ITR 265 (Bom.) a case on which heavy reliance was placed by Mr. Tralshawala on behalf of the Revenue before us and sought to reconcile the three decisions. Finally, the High Court held (at page 727) that Calico Dyeing & Printing Works'; case (supra) and India Cements Ltd.';s case (supra) both hold the field with equal force, ever after the decision of the Supreme Court in Challapalli Sugars Ltd';s. case (supra). Their Lordships then proceeded to summarise the ratio of all these cases as under and we quote :

"In view of this, we conclude that the decisions of the Bombay High Court in Calico Dyeing & Printing Works and of the Supreme Court in India Cements Ltd., hold the field with equal force, even after the decision in Challapalli Sugars Ltd. We can state the ratio of all these three decisions as under :

(1) Where a borrowing is made for the purposes of a business, the interest paid on such a borrowing becomes eligible to deduction contemplated by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961.

(2)This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset.

(3)However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under section 10(2)(iii) is to be allowed.

(4)If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961."

19. In CIT v. Insotex (P.) Ltd. (1984) 150 ITR 195/ 16 Taxman 353, the Karnataka High Court distinguished Challapalli in a case where the assessee was carrying manufacturing operations with old machinery. It imported new machinery and also purchased land. The new machinery was not put to use in the year. For importing the machinery, the assessee had borrowed monies on which it paid interest and claimed the same as deduction. The claim was denied. The Tribunal held that the assessee was a running concern and since the capital borrowed was used for the purpose of importing machinery in the year, the interest had to be allowed. Before the High Court, an argument was advanced on behalf of the Department based on Challapalli Sugars Ltd.';s case (supra) that the interest can only be capitalised. Rejecting the argument, the High Court held that the principle laid down in Challapalli Sugars Ltd';s. case (supra) cannot be extended to a "running business".

20. In CIT v. Shah Theatres (1988) 169 ITR 499/ 36 Taxman 335 the Rajasthan High Court referred to Challapalli Sugars Ltd';s. case (supra) and held that in that case the Supreme Court itself had referred to its earlier decision in India Cements Ltd.';s case (supra) and observed that India Cements Ltd.';s case (supra) was a case of a running business or a running concern and distinguished the same. It was held (by the Rajasthan High Court) : "The Supreme Court has made a distinction between a loan taken during the course of business when business had already commenced and a loan taken before the commencement of business, and in respect of a loan taken before the commencement of business, it has been held that the interest paid on the said loan could be treated as capital expenditure" (page 503 of the report). In the above understanding of the ratio of Challapalli Sugars Ltd. (supra), we are convinced that it cannot be made applicable to a case of a "running concern" where the borrowings are effected for the purpose of the business already being carried on.

21. It would be appropriate now to refer to the decision of the Bombay High Court in Calico Dyeing & Printing Works'; case (supra) at this juncture. Great reliance was placed by Mr. Tralshawala on this case. He contended that the interest can be allowed under section 36(1)(iii) only if the borrowings have been made for the purpose of the business. It was submitted that the use of the definite article "The" shows that the limitations on the allowance are in-built, the most important and crucial limitation being that the borrowings should be for the existing business or an expansion of the existing business and that if the borrowings are for the purpose of a new unit or a diversification of the activities or business of the assessee, the interest cannot be allowed. We have no hesitation in accepting the contention. As we have held earlier, under section 28 the profits of a business that is being carried on in the relevant previous year alone can be brought to tax and as a corrollary only an expenditure that relates to or is incidental to such business can be considered for allowance. An expenditure or allowance relating to a business that was not carried on during any part of the previous year cannot be considered for deduction. Section 29 says that the profits of the business referred to in section 28 must be computed in accordance with the provisions of sections 30 to 43C. The profits of the business referred to in section 28 are the profits of the business that is being carried on in the previous year. It therefore follows that the interest on capital borrowed must relate to business that was being carried on by the assessee in the previous year, if it is to be allowed under section 36(1)(iii). The question whether the business was actually being carried on the previous year, or, in other words, whether the business for the purpose of which the borrowings were made is the same as the business against whose profits the interest is claimed is, however, a pure question of fact to be decided on the facts and circumstances of the case and on the basis of the evidence led by the assessee.

22. We will now refer to IAC v. Coromandal Fertilisers Ltd. (1989) 29 ITD 455, an order of the Hyderabad Bench of the Tribunal, on which strong reliance was placed by Mr. Tralshawala, the learned Senior D.R. In this case, the assessee-company was engaged in the manufacture of fertiliser. In 1979, it altered its memorandum of association to include the manufacture of cement. It borrowed capital from financial institutions and took deposits from public for the purpose of putting up the cement plant. The interest was claimed as deduction under section 36(1)(iii). It was disallowed on the ground that the cement unit had not commenced production during the relevant previous year. The CIT(A) allowed the interest. On appeal by the Department, the Tribunal noticed that as held by the Supreme Court in Setabganj Sugar Mills Ltd. v. CIT (1961) 41 ITR 272, one has to see whether there is any inter-connection, interlacing, inter-dependence or unity of control embracing the two ventures, fertilisers and cement and that such tests were satisfied in the case. It is interesting to note that in this case it was the Department which contended that the tests of inter-connection, interlacing etc. laid down in the context of carry-forward and set-off of business losses were not applicable to the facts of the case before the Tribunal. We are supported in our conclusion by the order of the Hyderabad Bench of the Tribunal wherein, rejecting the argument of the Department before them, it was held that the ratio of the leading cases laying down the tests of interconnection, interlacing, dovetailing etc. between the various businesses "is equally valid" in the case before them.

23. In answer to Mr. Dinesh Vyas'; contention that the tests applicable for the purpose of section 72 are not applicable to section 36(1)(iii), Mr. Tralshawala drew our attention to several other authorities wherein the said contention has been negatived and the same tests have been applied while examining the claim for deduction of the interest under section 36(1)(iii). We are not discussing them for the reason that we have rejected the contention of Mr. Vyas and held that the tests are applicable to section 36(1)(iii) also.

24. As a result of the foregoing discussion, the following conclusions follow :

(i)The interest in respect of capital borrowed for the purpose of the business can be claimed only under section 36(1)(iii);

(ii)The interest claimed should be in respect of capital borrowed for the purpose of the business that is being carried on in the previous year;

(iii)The tests applicable for the purpose of finding out whether two or more activities or businesses carried on by the assessee in the previous year constitute a single or composite business so that the interest claimed in respect of capital borrowed for the purpose of one of them can be allowed against the profits of the other business or businesses are the same, whether it is for the purpose of section 72(1) or section 36(1)(iii) of the Act;

(iv)The question whether two or more businesses are activities pursued by the assessee in the previous year constitute a single or composite business is a question of fact to be decided on the facts of each case and on the basis of the evidence led by the assessee;

(v)The decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) is not an impediment where interest is claimed as deduction under section 36(1)(iii) in the case of an assessee who is already carrying on business, or, in other words, in the case of a running concern, where the interest is claimed in respect of a new unit, provided the other test, viz., the various activities or business pursued constitute one single or composite business, is satisfied.

25. We now proceed to the next step, viz., the consideration of the question whether, on the facts and circumstances of the case, the chemical business and the fertiliser business are a single or composite or same business, on an application of the principles laid down in the several authorities cited before us by both sides. Cases on the question are legion and it is impossible to start the discussion by referring to any authority other than Scales v. George Thompson 13 Tax Cases 83 (KB). Rowlatt J. posed the question thus : "I think the real question is, was there any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses?" If the answer to the question is in the affirmative, then the businesses are one and the same; if it is in the negative, they are not.

26. This test has been applied in India in a number of cases both by the Supreme Court and the High Courts. In Setabganj Sugar Mills Ltd.';s case (supra) it was pointed out that what one has to see was whether the different ventures were so interlaced and so dovetailed into each other as to make them into the same business. In CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) it was held that the question whether the life assurance business and general insurance business carried on by the company may be regarded as the "same business" or different businesses depended on the nature of the businesses, the nature of their organisation, management, source of the capital fund utilised, method of `book-keeping and other related circumstances that stamp the business as the same or distinct. The other indicia pointed out by the Supreme Court (at page 637) were : that the company was entitled under its memorandum of association to carry on both life insurance and general insurance business, that the businesses were attended to by agents and branch managers without any distinction, that there was one common administrative organisation and the expenses incurred in connection with the business, both for administration and for heads of expenditure such as salary of the staff, postage, staff welfare fund and general charges, were common. It was further held (at the same page of the report) and this is a very important observation that the test whether one business can be conveniently closed down without affecting the conduct of the other business is not a decisive test in determining whether the two businesses constitute the same business. If one business could not be carried on conveniently after the closure of the other business, it would be a strong indication that the two businesses constitute "same business", but no decisive inference may be drawn from this test. In Produce Exchange Corpn. Ltd. v. CIT (1970) 77 ITR 739, a larger bench of the Supreme Court held, applying the principle laid down in Prithvi Insurance Co. Ltd.';s case (supra) that the decisive test was "unity of control" and not the nature of the two lines of business. In that case, the assessee was carrying on business in diverse commodities and also in stocks and shares. In Standard Refinery & Distillery Ltd. v. CIT (1971) 79 ITR 589, the Supreme Court held that the share transactions as well as the business of manufacturing sugar and other commodities constituted the same business following the principles laid down in Prithvi Insurance Co. Ltd.';s case (supra) and Produce Exchange Corpn. Ltd.';s case (supra). In this case, the Tribunal had recorded the following findings of fact :

1.That there is a single trading account and profit & loss account and in this account the sales of spirit, sugar and molasses and stocks and shares appear.

2.The share transactions as well as the business have been dealt with by the same organisation, though the sale of shares was a single transaction and the purchase also was more or less of the same type.

3.The business of the company as well as the shares were attended to as part and parcel of the assessee-company.

4.A common fund was utilised both for business purposes and for the purchase of shares. A part of the overdraft taken from the bank was being discharged out of the income from the business.

5.The share transaction work as well as the other business were transacted from the same place of business.

27. After noticing the aforesaid findings of the Tribunal, the Supreme Court held (at page 592 of the report) that "from the facts found by the Tribunal, it is clear that the share transaction as well as the other businesses of the company were dealt with by a common management, common business organisation, common administration, common fund and common place of business". It is noteworthy that in Prithvi Insurance Co. Ltd.';s case (supra) also the Supreme Court had observed that the inter-connection, interlacing and inter-dependence and unity of control were furnished in the case by the existence of common management, common business organisation, common administration, common fund and a common place of business (at page 638 of 63 ITR). In Hooghly Trust (P.) Ltd. v. CIT (1969) 73 ITR 685, the Supreme Court held that since the cloth business never assumed the proportion or stature of a distinct and separate business and since there was sufficient evidence to show that the cloth business and the general business were dovetailed into each other, both businesses constituted a single composite business. In B.R. Ltd. v. V.P. Gupta, CIT (1978) 113 ITR 647the Supreme Court held that in such cases the decisive test was unity of control and not the nature of the two lines of business and the fact that one business can be conveniently carried on even after the closure of the other business may furnish a strong indication that both the businesses did not constitute a composite or single business but no decisive inference can be drawn from this fact.

28. The tests laid down in the above leading cases may be now summarised thus :

(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.

29. Mr. Dinesh Vyas, the learned counsel for the assessee, relied on a plethora of authorities for the purpose of showing that on the facts and in the circumstances of the case and on the evidence led before the income-tax authorities, the proper conclusion to be reached is that the chemical business and the fertilizer business are one and the same or a composite business. Mr. Tralshawala, not to be out-done, drew our attention to an equal number of authorities to support the conclusion reached by the income-tax authorities that both the businesses are distinct or separate. We shall refer to such of them which, in our opinion, are relevant for our purpose and that too very briefly, because primarily the conclusion to be reached in the case before us has to be based on its own facts which is possible only if the facts of the case before us are closely examined.

30. In Addl. CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. (1982) 138 ITR 843/8 Taxman 89 (Bom.), the assessee which was manufacturing dyestuffs started a new unit for the manufacture of dyestuffs (intermediates). It borrowed monies for the purpose of the new unit on which interest was paid and claimed as deduction. The income-tax authorities held that the intermediate-manufacturing unit was a distinct and separate venture and since it had not started production in the previous year, the interest cannot be deducted from the profits of the existing unit. The Tribunal reversed their decision. The High Court affirmed the Tribunal';s view and held that the new unit cannot be stated to be a new or distinct venture unconnected with the dyestuff business and therefore held that the interest was allowable. In Calico Dyeing & Printing Works case (supra) it was held that interest paid on capital borrowed for the purpose of the expansion of the existing business was deductible under section 10(2)(iii). There, the company was engaged in the business of bleaching, dyeing and the printing cloth at Tardeo, Bombay and borrowed monies for putting up a unit at Lalbaug for carrying out screen printing. The company borrowed monies for this new unit and claimed the interest against the profits of the existing unit at Tardeo. The objection of the Revenue before the High Court firstly was that the capital was borrowed for the purpose of incurring capital expenditure and secondly that the capital assets purchased with the borrowed capital was not put to use in the relevant previous year and therefore the interest cannot be allowed. In this case, the objection of the Revenue was not that the Lalbaug unit was not part of the existing business. That was an undisputed fact. The High Court negatived both the objections. This decision is not directly relevant, in our opinion, to the present case where the more serious objection of the Revenue is that the fertilizer business is not part of the existing business but is a separate and distinct business. It is not necessary, as held in the decision, that the assets purchased out of the capital borrowed (in this case, the new fertilizer unit) should have been used in the relevant previous year. It is sufficient if the capital borrowed has been put to use. Further, it is no ground for denying the deduction of the interest that the capital borrowed was used for the purpose of incurring capital expenditure. There is no quarrel with these propositions. But Mr. Tralshawala, with his customary ingenuity, sought to contend that the ratio of the decision the true ratio is that in that case the new unit at Lalbaug was only an expansion of the existing business. That is rather difficult to accept. If we have to understand that as the true ratio of the decision, the revenue authorities in that case should have taken objection to the claim on the ground that the new unit at Lalbaug is an altogether separate and distinct business or venture unconnected with the existing business at Tardeo. Only if that had been the objection, we can under- stand the ratio of the judgment in the manner in which Mr. Tralshawala wants us to understand. If such an objection had been raised, the High Court would have had occasion to examine the validity of the same and pronounce upon it. And in that event, whatever decision had been rendered on that argument would have also constituted the ratio of that case. But that is not the case, as we have seen. But all this is not to say that the argument of +Mr. Tralshawala that only if the capital is borrowed for the expansion of the existing business, can the interest on the same be allowed as a deduction under section 36(1)(iii) cannot be accepted. What we have pointed out is only that Calico Dyeing & Printing Works'; case (supra) is not the authority for that proposition.

31. In C.T. Desai v. CIT (1979) 120 ITR 240/(1980) 3 Taxman 57(Kar.), a judgment on which very strong reliance was placed by Mr. Vyas, the assessee was carrying on business of film distribution on his own and also exhibition of films on percentage basis under agreements entered into with theatre owners. The assessee borrowed monies for the purpose of securing a lease of a theatre for the purpose of doing the exhibition of films on his own. Actually, the money borrowed was given to the assessee';s wife who was to construct the theatre and equip the same. The income-tax authorities disallowed the claim for deduction of the interest on the borrowings on the ground that the borrowing was not for the purpose of the assessee';s business. Negativing the view of the Department, the High Court held that it lacked "both legal and factual basis". Mr. Vyas placed very heavy reliance on the quoted words. We have already seen, on the basis of certain judgments of the Supreme Court, that the condition that the borrowing must have been for the purpose of the business that is being carried on by the assessee in the previous year is implicit or in-built in section 36(1)(iii) itself. Coming to the facts before the Karnataka High Court, it was observed that whereas earlier the assessee had been carrying on the exhibition of film business on percentage basis in the theatres belonging to others, later in the year he took a lease of a theatre, for the purpose of which he borrowed monies, and carried on the business of exhibiting films on his own. Thus the assessee throughout was engaged in the business of exhibition of films and therefore the interest should be allowed as deduction. It was further held that even assuming that the assessee earlier did only film distribution business and only later did he commence business of exhibition of films in the theatre taken by him on lease from his wife, still it must be considered as an extension of his business (see page 246 of the report). It was held that there can be no distinction between interest paid on monies borrowed for film distribution business and that paid on monies borrowed for business of exhibition of films, because both are for the purposes of the "film business". Thus it would be seen that the High Court was inclined to view the distribution of films and exhibition of films as species of the same genus viz., "film business".

32. In CIT v. Tarai Development Corpn. Ltd. (1994) 205 ITR 421/ 72 Taxman 153 (All.) it was held that interest paid on capital borrowed for the expansion of the existing business is allowable under section 36(1)(iii). In CIT v. Expanded Metal Mfrs. (1991) 189 ITR 317/ 55 Taxman 429(All.), the assessee was engaged in the business of expansion of iron metal. It started a new unit for the manufacture of rubber products. It raised a loan for the purpose. The rubber factory did not commence production in the previous year. It was held on these facts that the assessee is one and the same and though it had set up a new factory, the assessment was not made unitwise but assessee-wise. There is no rule which compels the assessee under such circumstances to capitalise the interest or to include it in the capital expenditure (relating to the new unit). In Kanhiram Ramgopal v. CIT (1988) 170 ITR 41/ 36 Taxman 305 (MP), the assessee was carrying on a rice and dhall mill and borrowed monies for setting up a factory for the manufacture of straw-boards by using the waste from the rice and dhall mill. The M.P. High Court held that it was only a case of expansion of business and the interest paid on the monies borrowed was allowable as deduction under section 36(1)(iii). In CIT v. Shah Theatres (P.) Ltd. (1988) 169 ITR 499/ 36 Taxman 335 (Raj.) the assessee was engaged in the business of exhibition of motion pictures. During the year, it started the construction of a theatre of its own for the purpose of exhibiting films. The assessee had borrowed monies on interest for the purpose of the cons-truction. On these facts, the Rajasthan High Court held that it was a case of an extension of an existing business and not one of setting up a new business. The interest was directed to be allowed. In CIT v. Malwa Vanaspati & Chemicals Co. Ltd. (1997) 226 ITR 253/ 92 Taxman 262(MP), the company was engaged in the manufacture, processing and sale of vegetable oils and chemicals. It put up a new unit for the manufacture of H.J. and tobias acid. For purchase of machinery for the new unit, the assessee took loan from M.P. Financial Corporation and paid interest on the same. The claim was negatived by the ITO. The CIT(A) held it was a case of expansion of existing business. The Tribunal concurred and found that : (i) the new unit was put up in accordance with the objects-clause of the company; (ii) the loan was taken for expansion of the business; (iii) the assessee manufactured chemicals and the new unit was to manufacture H.J. and tobias acid used in the dye and intermediate industries; and (iv) the funds were common, the board of directors was the same, the loan was borrowed in the name of the assessee; existing funds were also utilised for the new unit; expenditure incurred were reflected in the profit and loss account and balance sheet of the assessee-company. According to the Tribunal, the above facts showed that the business were one and the same. The High Court upheld the finding of the Tribunal.

33. Mr. Dinesh Vyas had also relied on the following judgments of the Karnataka High Court :

1.CIT v. Hindustan Machine Tools Ltd. (No. 1) (1989) 175 ITR 212 /(1990) 49 Taxman 233.

2.CIT v. Indian Telephone Industries Ltd. (1989) 175 ITR 215 (Kar.).

3.CIT v. Hindustan Machine Tools (No. 2) (1989) 175 ITR 216/ 43 Taxman 153 (Kar.).

In these judgments, the High Court noticed the findings of the AAC, which were upheld by the Tribunal, to the effect that between the various businesses or units of the respective assessee-companies there was unity of management, unity of finances, unity of administration and unity of production, and upheld the view of the Tribunal that on these findings the business must be treated as a single business.

34. The judgment of the Delhi High Court in CIT v. Modi Industries (No. 3) Ltd. (1993) 200 ITR 341was cited and considerable reliance was placed on this decision for contending that in this case "manufacture" itself has been held to be a business activity and if an assessee is found to be engaged in the manufacture of various items or things that would be only different manifestations of the same business, namely, "manufacture" and therefore the various activities would constitute the same business. The assessee in this case was a company manufacturing diverse items, such as sugar, vanaspati, soaps, paints and varnish, torch and lanterns. It started manufacture of a new item viz., special alloy wire and billets. Debentures were issued for raising funds for the new unit and expenditure was incurred in connection with the said issue. The question was whether the expenditure could be deducted when the new unit had not commenced any production. The High Court, affirming the decision of the Tribunal, held that all that the company did was to commence the manufacture of a new commodity and that in a larger sense the business remained the same, viz., the "business of manufacture". Since the Tribunal had found that there was unity of control and a common fund, the tests were satisfied and the expenditure on the debenture issue could be deducted, it was held. In this judgment, the Delhi High Court referred to all the leading cases of the Supreme Court on the subject viz., Prithvi Insurance Co. Ltd.';s case (supra), Hooghly Trust (P.) Ltd.';s case (supra), Produce Exchange Corpn. Ltd.';s case (supra), Standard Refinery & Distillery Ltd.';s case (supra) and B.R. Ltd.';s case (supra) and the tests laid down in these decisions were applied to the case before them. This decision was relied upon by Mr. Vyas also for the purpose of contending that the "closure of one business without affecting the other" test has never been looked upon in the decided cases as conclusive. We will examine this contention a little later at the appropriate stage.

35. As against the above authorities cited by Mr. Dinesh Vyas, Mr. Tralshawala, the learned Sr. Departmental Representative, cited certain decisions which we shall notice now. Apart from Calico Dyeing & Printing Works'; case (supra), he heavily relied on Dey';s Medical Stores Mfg. (P.) Ltd. v. CIT (1986) 162 ITR 630/ 26 Taxman 390, a decision of the Calcutta High Court. There, the assessee-company had made large borrowings on overdraft account from the bank for the purpose of investment in a new project for the manufacture of chlorophenicol, a basic raw material and a broad spectrum antibiotic, which was extensively used for the treatment of typhoid and skin diseases and was a component of the assessee-company';s formulations appearing in the name of `enteromycitin'; branch of preparations. The interest on the overdraft was claimed as a deduction. The ITO disallowed the proportionate interest attributable to the investment in the new project on the ground that it was not part of the existing business of the assessee. The Tribunal upheld the disallowance. Before the High Court, it was contended on behalf of the assessee that the Tribunal had not applied the well-known tests viz., whether there was inter-lacing, inter-dependence or dovetailing between the two businesses and that they had not gone into the question whether there was a common fund, a common staff, whether the results of both the businesses were included in the same balance-sheet of the company etc., all well-known tests laid down in decided cases. The High Court rejected the argument and held that the assessee had not placed the relevant facts and had not made out a case of dovetailing of the business before the Tribunal, nor had the assessee produced the accounts before the Tribunal or placed facts to show whether the same staff were employed, whether the same person was in charge of the existing and the new business etc. The High Court further found that it was not the case of the assessee before the Tribunal that the same set of books of account were maintained for both the businesses nor was its case that the same staff was employed for both the projects. It was therefore held that the Tribunal cannot be faulted for not having taken into consideration "something which was not even contended before the Tribunal". Thus it will be seen that the assessee in the Calcutta case had failed to place all the facts before the Tribunal in support of its claim that both the businesses were one and the same and had failed to substantiate its case that proper tests such as inter-connection, inter-dependence etc. had not been applied to those facts. The High Court therefore did not permit the assessee to go into those aspects which were essentially questions of fact to be proved by the assessee before the Tribunal. There are clear observations to this effect in the judgment. For instance, at page 636 the High Court observes : "But the facts that were peculiarly within the knowledge of the assessee should have been brought out and placed before the Tribunal. That not having been done, it cannot be said that the Tribunal';s approach was vitiated in any way". It is noteworthy that except B.R. Ltd.';s case (supra), the other decisions of the Supreme Court laying down the tests for ascertaining whether two or more businesses are one and the same or a single business have not been referred to by the High Court obviously because the occasion for referring to those decisions and applying those tests would arise only if the assessee had placed all the facts which were within its knowledge before the Tribunal and the Tribunal had recorded its findings on them. Only if the Tribunal had been apprised of the facts but had still applied the wrong tests, can its conclusion be disputed on grounds of perversity. And an occasion to refer to the proper tests as laid down by the various judgments of the Supreme Court, which we have noticed in the earlier part of our order, would have arisen only then. But the assessee before the Calcutta High Court, having failed to discharge its burden to place all the facts which were within its knowledge before the Tribunal, could not challenge the factual finding of the Tribunal on the ground that proper tests laid down by the Supreme Court were not applied and that had such tests been applied, the Tribunal';s conclusion would be wrong. In fact, the High Court, at page 635 of the report, has noted that the conclusion of the Tribunal cannot be questioned on a ground which was not pressed before the Tribunal at all, that a case of dovetailing and interlacing of the two businesses was not made out before the Tribunal at all, that it was for the assessee to produce the books of account and other documents before the Tribunal to establish its case, that the case before the Tribunal was only that since the assessee was in the business of manufacture of "medical products" the new project must be considered as an extension of the existing business and that it was not the case of the assessee that the same set of books of account were maintained for the new project as well as the existing business nor was its case that the same staff was employed for both the projects.

The High Court finally observed that the Tribunal cannot be faulted for not considering something which was not even contended before it. That apart, the judgment of B.R. Ltd.';s case (supra) was referred to at page 637 and it was observed that the decision therein was that the question whether the assessee was carrying on the same business depended essentially on the facts of each particular case. Thus, reading the whole of the judgment of the Calcutta High Court in the proper perspective, it seems to our humble minds that no principle different from what has been laid down earlier by various authorities has been laid down and that the decision highlights the principle that the burden is on the assessee to prove that the various businesses carried on by it constitute one single or composite business by producing all the relevant facts and evidence before the income-tax authorities and further that if such burden is not discharged, the assessee should fail. The judgment is also authority for the proposition that on a reference under section 256(1) of the Act, the High Court will not interfere with the findings of fact rendered by the Tribunal except on grounds of perversity and that if the Tribunal had considered all that has been placed before it, no challenge to its findings based on grounds of perversity will be entertained by the High Court. The judgment also focuses the point that the finding of the Tribunal cannot be challenged on the ground that it has not considered some material or evidence which was never placed before it.

36. Thus, on a close reading of the judgment in the case of Dey';s Medical Stores Mfg. (P.) Ltd. (supra), we are of the view that the same does not advance the case of the Revenue.

37. Manilal Dayabhai v. CIT (1959) 37 ITR 398 (Bom.) is another decision on which strong reliance was placed by Mr. Tralshawala. In this case, the assessee was carrying on business in cloth and also speculation business. The question was whether both the businesses constituted a single business for the purpose of section 24(2) of the Income-tax Act, 1922. A number of circumstances were relied upon by the Tribunal in support of the finding that both the businesses were distinct and separate. The High Court basically held that there can be no single decisive test, among the various tests propounded for ascertaining whether two businesses were composite, which can be decisive, and that the conclusion must depend on the facts of each case. It was further held that the "court must in each case ascertain whether, in view of the existence of these circumstances, unity between the two lines of the business is established" (page 405). Hon';ble Justice S.T. Desai, who delivered a separate concurring judgment, held: "No specific criterion, no infallible rule, inclusive or exclusive, no test of universal application is to be expected in respect of a question which is largely one of fact........... But, as I have already stated, it is impossible to expect any general test which can be applied in all circumstances and to all facts" (at page 408). Again at page 410, His Lordship held: "I agree that these are all relevant factors to be taken into consideration, though I do not regard them as tests; it is their cumulative effect that should weigh in the ultimate determination of the question. Of course, it would not be a correct approach to put them in a series of separate compartments and see whether each of them by itself cannot pass the test of inter-connection and unity of business". These observations have to be borne in mind by us while examining the fact of the present case and to this extent the decision cited by Mr. Tralshawala is relevant.

38. Mr. Tralshawala then cited Hiralal Kalyanmal, In re (1943) 11 ITR 128, a decision of the Bombay High Court rendered in the context of section 10(2)(ix) of the 1922 Act. What was held in this case is that the question whether two or more businesses were separate or were really branches of the same business was one of fact and that all that the court had to consider is whether there was evidence before the income-tax authorities to come to the conclusion one way or the other. The Court further observed: "We were referred to various cases which demonstrate that it is not always easy to determine whether businesses are independent businesses, or separate branches of the same business. But the difficulty of determining the question of fact does not make it a question of law...... I think it would be very difficult, if not impossible, to formulate any rules for determining questions of this nature...... At any rate, all these cases recognise the fact that this matter is a question of fact to be determined......."

39. In K. Govindan v. CIT (1955) 28 ITR 307, the Madras High Court held that this was "essentially a question of fact" to be decided by the Tribunal on the basis of the evidence placed before it. In Gupta Bros. (P.) Ltd. v. CIT (1966) 57 ITR 640, the Allahabad High Court held that it is the cumulative effect of all the facts and circumstances of the particular case which have to be taken into consideration in coming to a finding whether two businesses are one or separate and distinct. In CIT v. T.S. Srinivasa Iyer (1991) 192 ITR 50, the Madras High Court reiterated the tests of interlacing, inter-connection and inter-dependence and dovetailing between the businesses in order that they constitute one and the same business.

40. Rainbow Dyestuff Ltd. v. CIT (1995) 213 ITR 560/ 79 Taxman 31, was strongly relied upon by Mr. Tralshawala. This is a decision of the Gujarat High Court. The assessee was a dealer in dyes. It set up a factory for manufacturing dyes. For the installation of assets, if borrowed monies for interest. The income-tax authorities disallowed the interest on the ground that the two businesses, viz., dealings in dyes and manufacture of dyes in the factory, were distinct and separate. The High Court held that the facts of each case have got to be appreciated in the proper perspective and that in the case before us the finding of fact arrived at by the Tribunal "appears to be consistent with the material on record. The same is neither contrary to nor inconsistent with the principle of law as found by the Supreme Court and other several High Courts, as discussed above. We do not find anything wrong with the judgment of the Tribunal". The judgments of the Supreme Court in Prithvi Insurance Co. Ltd.';s case (supra), Produce Exchange Corpn. Ltd.';s case (supra) and B.R. Ltd.';s case (supra) were referred to.

41. On the legal aspect of the case before us, there is one more important judgment which was strongly relied upon by Mr. Tralshawala and that is the judgment of the Supreme Court in L.M. Chhabda & Sons v. CIT (1967) 65 ITR 638 . In this case, the assessee was carrying on business in exhibiting films in Ahmedabad and Bombay. The lease of the theatre (Prakash Talkies) in Ahmedabad expired and the landlord filed a suit for eviction against the assessee. He obtained a decree for possession and mesne profits. In the assessment for the A.Y. 55-56 the assessee claimed a part of the liability to pay mesne profits as admissible deduction in the computation of its income. The ITO disallowed the claim on the ground that the business of Prakash talkies had not been carried on in the year of account relevant for the A.Y 55-56. The AAC confirmed the disallowance. In appeal to the Tribunal, it was held that since the assessee had not proved that it was carrying on an "integrated cinematography business" as claimed by them, the outgoing was in respect of a closed business and was not admissible as deduction. The Tribunal further held that the business of the assessee was to acquire various theatres from time to time either by lease or otherwise and run each of them independently of each other with separate identifiable books, that the proper test was to see if the closure of one theatre will not affect the working of the remaining ones and that applying this test the closure of Prakash talkies could not be stated to have affected the Bombay theatre and therefore the mesne profits were not allowable as deduction. The High Court confirmed the Tribunal';s view and the matter was carried to the Supreme Court by the assessee. It was held by the Supreme Court that under section 10 of the old Act (section 28 of the new Act) the business should have been carried on in the relevant year of account and that the assessee can "obviously not seek to debit the expenditure incurred for carrying on that business, against his other income, for the outgoings are chargeable only against the income of a business which was carried on in the previous year. It follows that if an assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 10 of the Act of an outgoing attributable to the business which is closed against the income of his other business in that year" (pages 640-1 of the report). It may be recalled that we had earlier referred to this principle while rejecting the argument of Mr. Dinesh Vyas to the effect that under section 36(1)(iii) it was not a condition that the business in respect of which the allowance is claimed must have been also carried on in the relevant previous year. Mr. Vyas, it may be remembered, had sought to contend that by insisting upon such a condition in the provision the departmental authorities were prescribing a condition not present in the section and had cited the judgments of the Supreme Court in Veeramani Industries (P.) Ltd.';s case (supra) and Veecumsee';s case (supra). We had expressed our inability, with respect, to accede to this proposition. L.M. Chhabda & Sons'; case (supra) clearly supports our view. Now reverting to L.M. Chhabda & Sons'; case (supra), Mr. Tralshawala relied on the following observations of the Supreme Court in that case (page 641) :

". . . Counsel submitted that where an assessee is carrying on business ventures of the same character at different places it must be held as a matter of law that the ventures are parts of a single business. In our view, no such broad proposition of law can be accepted. Whether different ventures carried on by an assessee form parts of the same business must depend on the facts and circumstances of each case". We had earlier referred to various judgments, including the judgments of the Supreme Court, where a similar principle had been laid down. It follows that each case has to be examined with respect to the facts obtaining therein to ascertain whether the different ventures pursued by the assessee constitute one single business. In fact, the Supreme Court (page 641) referred to its earlier decision in Setabganj Sugar Mills Ltd.';s case (supra) and held that it has to be seen whether there was any inter-connection, inter-lacing or inter-dependence or dovetailing between the two or more businesses and that these "principles have to be applied to the facts before a legal inference can be drawn that different business ventures constitute one business. In the determination of the question, findings of fact are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the business, the employment of the same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth" (pages 641-2). Thus it will be seen that the Supreme Court did not, as a matter of law, lay down that wherever there is a possibility of a closure or an actual closure of one business without affecting the other business or businesses the businesses must be held to be distinct or separate. The Supreme Court have in fact reiterated the various tests laid down earlier in Setabganj Sugar Mills Ltd.';s case (supra), as their observations quoted above would show. Such reaffirmation of the tests laid down by them in an earlier judgment would not have been necessary if their Lordships had meant to lay down as a ratio that wherever one business could be closed down without affecting the other the businesses should be taken to be distinct or separate. In fact, the later observations at page 642 of the report make the position clear beyond doubt: "It was for the appellants to establish that different ventures constitute parts of the same business. There is in this case no evidence about the unity of control and management, or inter-relation of the business, or employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business". (underling ours). These observations positively show that the assessee before the Supreme Court had failed to lead evidence to show unity of control etc., the well-settled tests laid down by the Supreme Court earlier. The "closure of one business without affecting the other" test is only one of the various tests evolved. In the absence of any evidence satisfying the other tests, the Supreme Court had affirmed the Tribunal';s view that the two theatres did not constitute the same business, because one of the theatres could be closed without affecting the other theatre. From this it does not follow, as has been sought to be contended by Mr. Tralshawala, that the most crucial test is the "closure of one business without affecting the other" test and if it is answered in the affirmative, then the businesses must be held to be separate or distinct.

42. In Modi Industries Ltd.';s case (supra) the Delhi High Court noticed L.M. Chhabda & Co';s case (supra) and observed: "At the outset we would like to point out that the Supreme Court in Chhabda';s case (1967) 65 ITR 638 did not consider or refer to its earlier decision in Prithvi Insurance Co. Ltd. (1967) 63 ITR 632(SC) and, surprisingly, Chhabda';s case (1967) 65 ITR 638 (SC) is not referred to by the Supreme Court in its four subsequent decisions in the cases of Produce Exchange Corporation Ltd. (1970) 77 ITR 739 (SC), B.R. Ltd. (1978) 113 ITR 647(SC), Hooghly Trust (P.) Ltd. (1969) 73 ITR 685 (SC) and Standard Refinery & Distillery Ltd. (1971) 79 ITR 589 (SC). Perhaps the reason for the case of Chhabda (1967) 65 ITR 638 (SC) not being referred to was that the Supreme Court held in that case that (at page 642): "It was for the appellants to establish that different businesses constitute parts of the same business. There is in this case no evidence about unity of control and management, or inter-relation of the business, of employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business." It will thus be seen that the view of the Delhi High Court is that L.M. Chhabada';s Sons case (supra) would apply where there is dearth of evidence on the other aspects of the case such as unity of control and management, interlacing etc. and the evidence shows that one of the businesses can be closed without affecting the other. We have not been referred to any authority wherein it has been held that notwithstanding that there is evidence to show that there is interlacing, inter-dependence, unity of control and dovetailing between the various businesses, since one of the businesses could be closed without affecting the other, the businesses must be taken to be separate or distinct. In other words, the test is not conclusive when there is evidence on the other aspects of the matter such as interlacing, inter-dependence, dovetailing etc. It also follows that if one business could not be closed without considerably affecting the other, that again would not be conclusive. In B.R. Ltd.';s case (supra) and earlier in Prithvi Insurance Co. Ltd.';s case (supra), the Supreme Court had observed that the fact that one business could be conveniently closed without affecting the other business or businesses is not conclusive that they are all separate or distinct but would afford a strong indication to that effect. Reading all the judgments together, our impression is that the "closure of one business" test if not conclusive one way or the other and it has to be applied in juxtaposition with the evidence in respect of the other tests, such as inter-lacing, inter-dependence, dovetailing, unity of control, common fund and administration, common books of account etc. and the final decision must rest on the cumulative effect of all the facts and circumstances of the case.

43. Having referred to and discussed the legal contentions advanced by both the sides before us, we will now proceed to examine the facts of the case before us in order to apply the tests laid down in the judgments referred to in the above discussion of ours and find out whether the chemicals business and the fertilizer business were one and the same business or constituted a single business so that the interest pertaining to the fertilizer unit at Babrala is allowable against the profits of the business under section 36(1)(iii).

44. The assessee-company was incorporated in 1939 with the object of carrying on "business of manufacturers of and dealers in chemical products of any nature and kind whatsoever" as per clause III(1) of its memorandum of association. It put up a factory at Mithapur, Gujarat, for the manufacture of agro-chemicals and soda ash. A factory was put up at Pithampur for the manufacture of detergents. The company had been contemplating the manufacture of fertilizers in a large scale in order to make a significant contribution to the country';s food problem. Because of lack of certain pre-conditions, no progress could be made in this behalf. The company had, under the leadership of one Mr. Durbari Seth, an expert in chemicals, embarked on a study into the aspect somewhere around 1965. In the statement of the chairman of the company, Mr. J.R.D. Tata, for the accounting year 1966-67, reference was made to the fertilizer project. It was stated by him that the project lent itself ideally to location in the neighbourhood of Mithapur "for both geographical and technical reasons". Reference to the same effect was also made in the Directors'; report to the shareholders. An application was duly submitted to the Government of India for industrial licence in 1967 and reference to this is found in the Directors'; report for the year 67-68. In the chairman';s statement for that year, reference was made to the various reasons for the delay in the Government granting approval. One of the objections raised, it appears, was that the plant, if put up at Mithapur, Gujarat, would result in over-concentration of fertilizer projects in one state. Referring to this objection, the chairman stated: "Apart from the regional aspects of this objection, with which I naturally cannot deal, the fact is that, for technical reasons, our project can only be put up at or near Mithapur, and there can therefore be no question of it being set up anywhere else in India". These statements, made contemporaneously, do show an intention on the part of the assessee-company to commence the fertilizer project as part of its business. The observation that it would be ideal to have the project at Mithapur itself "for technical reasons" is also important in the sense that it indicates that technologically it would be conducive to the manufacture of fertilizers if the fertilizer project is also set up in Mithapur plant. The Assessing Officer has accepted that the fertilizer project was thus originally conceived as a part of the chemicals project, but says that it was only an intention which is "not material".

45. Be that as it may, the application before the Government of India for approval of the fertilizer project was pending for various reasons which are not germane to the present appeal. Ultimately, things began to thaw and in 1980, after about 15 years, the company revived its interest, at a suggestion from the Government, in the manufacture of fertilizers in a large gas-based nitrogenous fertilizer complex in Babrala in the state of Uttar Pradesh. A company by name Tata Fertilizers Ltd. (hereinafter referred to as TFL) was incorporated in the year 1981 for the purpose of setting up the fertilizer plant in UP. This company was incorporated as a 100% subsidiary of Tata Chemicals Ltd., the assessee-company. It was first incorporated as a "private limited" company but later it became a public limited company by virtue of section 43A of the Companies Act and mention to this effect has been made in the certificate of incorporation. In the year 1989, TFL was amalgamated with the assessee-company under orders of the Bombay High Court dated 7th September, 1989. All the properties and assets and the liabilities and all other effects of TFL became those of the assessee-company with effect from 1-4-1989. In 1990, the assessee-company came up with a debenture-issue of 46,00,000 partly convertible debentures (PCD) of the face value of Rs. 175 each for cash, aggregating to Rs. 80.50 crores, bearing interest at 12% p.a. According to the prospectus, "the proceeds of this issue will be exclusively utilised to part-finance the implementation of the Tata Fertilizer project at Babrala now a division of the Company. Tata Chemicals Limited however explicitly volunteers the assurance, with the consent of the Controller of Capital Issues that, in the unlikely event of the proceeds realised from this issue not being utilised for the purpose for which this issue is being made, Tata Chemicals will refund such proceeds to the subscribers together with interest........"

As security for the debenture-holders, an English mortgage of a portion of the property of the assessee-company located in the State of Gujarat was given with a condition that within a period of 12 months from the date of issue, the assets and properties of the fertilizer project would be mortgaged by way of deposit of title deeds. It was also provided that the company shall be at liberty to create any further mortgages or charges of all or any of its assets, including the aforesaid properties and assets, after consulting the debenture-trustees without any reference to the debenture-holders. It will thus be seen that though the debenture-issue was in connection with the fertilizer project at Babrala, UP, the assessee-company had offered the assets and properties of the Mithapur chemical plant at Gujarat as security by way of an English mortgage. The security of the assets of the Babrala fertilizer plant was to be given within a period of 12 months from the issue-date, in addition to the mortgage of the chemical plant';s assets and not in lieu thereof.

46. An important aspect has to be now noticed. This has been described in sufficient detail in the prospectus issued in connection with the issue of PCDs. This has reference to the reasons for amalgamation of TFL with TCL, the assessee-company. This aspect assumes importance in view of the fact that the departmental authorities, as also the learned Senior Departmental Representative before us, laid considerable stress on the fact that the very fact that a separate company was incorporated (TFL) for the purpose of putting up the fertilizer project at Babrala, UP, would show that it was never the intention of the assessee-company to carry on the business of manufacture of fertilizers as its business. In the year 1985, the Government of India issued a letter of intent to TCL (and not TFL), the assessee-company, for setting up the fertilizer project at Babrala. The assessee formed TFL as a 100% subsidiary which later became a public limited Company. Having done this, the question arises as to what were the reasons that prompted the amalgamation. According to the prospectus, having completed all the preliminary work in connection with the project, TFL was at a take-off stage in early 1989, when the Govt. of India, in a bid to reduce the growing subsidy burden on it, revised the parameters for determination of the retention price for fertilizers, with effect from 1st of April 1988. The revision was applicable to gas-based nitrogenous fertilizer plants, which the Babrala project was. It required that the rate of depreciation be reduced from 11.88% to 4.75% and the norm for capacity utilisation be raised from 80% to 90% for the purpose of calculation of retention price. The effect of this, in the words of the company, is: "In their combined effect, the increase in the norm for capacity utilisation and the reduction in the rate of permissible depreciation for determination of the retention price virtually destroyed the viability of the Project it could neither service the share capital nor the loans". To continue the very next paragraph of the prospectus (at page 18): "It became obvious that the Fertiliser Project, on a `stand-alone'; basis, was no longer viable in the context of the new parameters for the determination of the retention prices of the fertilisers. TFL was thus faced with the most unfortunate and unexpected prospect of having to abort the Fertiliser Project on which so much effort, time and money had already been expended and high hopes invested". It was therefore decided that the company could not go back on its commitment to the manufacture of fertilizers. So it "sought ways and means of rescuing the fertiliser project, in the face of the new pricing parameters and, altering the course, decided to undertake and implement the Project as a Division of the Company, drastically altering the means of financing the Project in a manner so as to restore its viability even in the context of the new pricing parameters". These reasons, in our opinion, show that the initial proposal to start the fertilizer business as part of the company';s business, was given effect and the Babrala project was inducted into the company';s fold. It is no doubt true that the initial proposal to start the fertilizer project by the assessee-company was modified by forming a wholly-owned subsidiary company (TFL) and if TFL had continued as it is and had set up the project by itself, no question of the assessee professing to carry on the said business would have and could have arisen. The fact that TFL had to be amalgamated with the assessee-company for reasons of financial viability is a fact in favour of the assessee';s claim that though for some time the fertilizer project was sought to be hived off to another entity, albeit to a wholly-owned subsidiary, its taking over by the assessee-company clearly shows that it gave effect to its original proposal of having the fertilizer project as its own. The reasons given for the amalgamation also show that but for the financial strength and support extended by TCL, the fertilizer project would have become financially non-viable. The intention to absorb TFL at a difficult or critical period of its existence, when the "raison d';etre" itself was being challenged due to pricing policies, shows financial integration. It is said in the prospectus that the situation was so urgent that the whole amalgamation procedure was undergone in a record time of less than 3½ months and the approval of the High Court was obtained. A clue to the sense of urgency (desperation?) is afforded by the fact that the order of the High Court is dated 7th September, 1989 and the foundation stone for the Babrala project was laid on 15th September, 1989

47. We are therefore not able to share the opinion of the income-tax authorities that the original intention to start the manufacture of fertilizer as part of the assessee';s business is "not material".

48. It would be appropriate at this juncture to examine whether the Test of "common fund" has been satisfied in the present case. We have noticed earlier that by offering the assets and properties of the Mithapur chemical plant as security for the debenture-issue made for funding the Babrala Fertilizer project the assessee has shown financial integration between the two businesses. The case of the assessee right through, both before the departmental authorities and before us, was that there was a common account with the bank into which all the sale proceeds were deposited and it was from the same account that the fertilizer project was founded. In the words of the assessee, in the note submitted to the Assessing Officer in the course of the assessment proceedings, "It is also an admitted fact that all the borrowings (whether for capital expenditure or for working capital) and receipts, whether by way of sale proceeds or sale of invest- ments or otherwise are deposited by company in its Cash Credit Account. As and when the funds are required for the purpose of capital expenditure or for revenue expenditure or for the investments, the same are paid from cash credit account. In Cash Credit Account, there are continuously receipts as well as payments, but this does not mean that borrowed money is utilised for other than capital expenditure or receipts from business operations are not utilised for business purposes" (quoted at page 57 of the assessment order). Though this letter was written in the context of allocation of the interest and in response to the view of the Assessing Officer on this point which we will discuss later the letter has been accepted by the departmental authorities as depicting a factual position. When there is intermingling of funds in the cash credit accounts with the banks, both of the sale proceeds and the borrowings, it shows that there is a common fund and that one of the tests laid down as to whether there is a common fund for the various activities pursued by the assessee is answered in the affirmative. A few other aspects may also be noticed in this connection, which strengthen our view. In its letter to the Assessing Officer in the course of the assessment proceedings (quoted at pages 35 to 37 of the assessment order), under the heading "control and management of funds", the assessee stated that out of the revised cost of Rs. 960 crores for the fertilizer project, Rs. 150 crores "was from own funds, i.e. out of internal accruals and profits of existing business". The Assessing Officer';s answer to this is that "the mere fact that the money employed in the previous business" was utilised in the new business "would not by itself be a sufficient circumstance to hold that the two businesses were the same and not distinct" (page 46 of the assessment order). It will be noticed that the factual position that the profits of the existing business were utilised for the fertilizer project to a substantial e|tent is not disputed. Only the impact of the fact on the assessee';s case is disputed. We agree with the Assessing Officer that by itself this fact is not sufficient to establish the oneness of both the businesses. But financial integration or interconnection is established in the case on more than one aspect. Apart from the above, the Assessing Officer has also noticed the contention of the assessee "that if at any time temporarily funds are transferred to New Project or from New Project to other Divisions, then notional interest in both the cases is charged" (page 49 of the assessment order). According to the Assessing Officer, this shows that the financial dealings between the various divisions of the company are at "arm';s length" which shows that there is no organic unity. We look at it differently. This shows that there was movement of funds between the various divisions of the company, such as chemical division, fertilizer division etc. thus adding strength to the claim that there was inter-lacing or inter-mingling of funds. The fact that notional interest was charged is not a point against the assessee, in our view. The charging of notional interest is for purposes of costing and while preparing the final accounts, the effect of inter-unit interest is removed and this has been pointed out to the Assessing Officer himself in the course of the assessment proceedings (page 49, assessment order).

49. We now proceed to consider the position with regard to administration, management and staff. The company';s contention is that it is managed by a single board of directors, that the managing director works under the control and supervision of the board, that in the year 1990 Mr. Vadgama was appointed the joint managing director and Mr. Manu Seth was appointed the deputy managing director, that Mr. Vadgama was put in charge of the fertilizer division and Mr. Manu Seth was made in charge of the chemicals division, that they were either from the head office or from the existing chemical division, that Mr. Vadgama became the managing director from 15-7-1992 in the place of Mr. Durbari Seth, and the entire management team was controlled by the board of directors from Bombay House, Homi Modi Street, Bombay. In the organisation chart filed before the Assessing Officer vide letter dated 20th October, 1994, these facts have been brought out and the management team has been named, as it existed up to 31-3-1992. From this, we find that the team consists of the managing director, joint managing director, deputy managing director, company secretary, controller of finance and accounts, chief purchase executive, chief sales executive and an administration manager for the fertilizer division. This team functioned from "Bombay House" at Bombay. In the works, there was a President for the Chemical Division at Mithapur, a Senior Vice-President at the Babrala Fertilizer Project, a Vice-President each for research & development, services, production, projects and human resources development and administration and a manager each for accounts, soda ash, caustic and marine chemicals, salt works, materials, power plant, development, project services, process equipment, electricals and instrumentation, maintenance, administration and the detergent division at Pithampur. In the said letter, it was further stated :

"Corporate office at Bombay, works under the direct supervision and control of Chairman & Managing Director, Jt. Managing Director & Dy. Managing Director. The main functions of corporate office is centralised purchases through Chief Purchase Executive, centralised sales activities through Chief Sales Executive, centralised finance & accounts function under the Controller of Finance & Accounts and Company Law and other legal matters under Company Secretary". The company had four divisions: Chemicals (Mithapur, Gujarat), Fertilizer (Babrala, UP), Detergent (Pithampur, M.P.) and Cement (Mithapur, Gujarat) and each of these was headed by a Vice-President/Manager, who reported to the Board of Directors."

50. As regards staff, the assessee has pointed out to the Assessing Officer that most of the senior technical people working in the fertilizer division have been transferred either from Head Office or from existing Chemical Division (page 42 of the assessment order). In the assessee';s paper book No. 3, at pages 62 & 63, a list of names of employees, their qualifications and their designation is given. All these employees have been transferred from Mithapur to Babrala during the initial stages of setting up the Barala unit.

51. The Assessing Officer has taken the view that even according to the organisation chart, it was clear that there was no unity of control between the fertilizer and the chemicals division. According to him, in every company there cannot be more than one board of directors and therefore the fact that the various divisions ultimately report to the board or that the board has over-all supervision and control over the divisions does not advance the case of the assessee. He has further noted that wherever the services of the staff of one division are requisitioned by another division, it is done at arm';s length inasmuch as they have to be paid for by the requisitioning division. He has also observed that a separate cell consisting of three persons was formed at the head office in Bombay for the purpose of contacting the suppliers, discussing and releasing advance payment and subsequently making final payment etc. A technical committee consisting of various managers such as costing, accounts, materials and the Vice-President, all stationed at the works, was also formed for taking decisions on capital purchases. This committee';s decisions are reviewed by another committee consisting of the managing director, chief purchase executive, controller of finance and accounts, the joint-managing director and the Vice-President. The Assessing Officer has found (page 44 of assessment order) that during the period of construction of the fertilizer project, decisions for the purchase of cement, steel, various machinery etc. were taken at the head office in Bombay by the joint managing director and the Vice-President of the fertilizer division in co-ordination with the chief purchase executive and controller of finance. From all these, he has drawn the inference that the fertilizer division was separately and independently run and managed. On the contrary, in our view, the above facts show that there was unity of management and control in the sense that it was the board of directors which managed both the chemical and fertilizer units through different committees or cells. A company running various units, for the sake of convenience of management, may form different smaller bodies or committees or cells, but that does not mean that all the businesses are not commonly controlled or managed. The Assessing Officer has accepted that the decisions for the purchase of cement, steel, machinery etc. relating to the fertilizer project were taken at the head office at Bombay House by a team consisting of the Jt. M.D. and Vice-President of the fertilizer project in co-ordination with the chief purchase executive and the controller of finance & accounts. This shows unity of control in the sense that the Purchase executive and the Controller of finance are persons who are to look after the requirements of all the divisions of the company. There was a cell monitoring the supplies; there was a technical committee for effecting capital purchases at the works consisting of technical and accounting personnel. The work of this committee is reviewed at the head office. This organisational set up shows that the ultimate control or monitoring lies with the head office in Bombay and in the decision-making process various personnel are involved. From the fact that in such committees or cells personnel directly or exclusively connected with the fertilizer division were involved it does not follow, as has been inferred by the Assessing Officer, that there was a water-tight set-up for the fertilizer project or unit. We have already seen that for services drawn by the fertilizer division from other divisions, it was charged, and that this practice was for purposes of costing and that in the final accounts the effect of such inter-divisional entries was removed or eliminated. We have to see this in the context of the modern business practice of viewing each division as a "profit centre" for the purpose of assessing its financial viability. That such inter-divisional accounting procedures are followed is not fatal to the claim that all the divisions are part of the composite or single business, in the contemporary business context. The head office cannot be viewed, as was done by the Assessing Officer, as "only a service centre" (page 45) and not as exercising any control over the fertilizer division or any other division.

52. Thus, in respect of administration and management, the control is at Bombay head office, though the actual execution of the work is at the project site. The works are thus "functionally independent", to use an expression coined by Mr. Dinesh Vyas, but dependent on Bombay head office for decisions.

53. Turning now to the accounting set-up, we find from the letter written by the assessee to the Assessing Officer on 25th October 1994 that the following books of account are maintained in the head office at Bombay House: Cash & Bank book, journal, ledger, M.R. sales, loan debenture & deposit register, pay-roll register and investment registers. At the works, the following are some of the books maintained: cash and bank book, general ledger, sales journal, debtors ledger, journal vouchers, contractors ledger and journal, purchase ledger and journal, bills register, petty cash book, sundry cash collection, railway freight register, imprest etc. All the accounts are maintained division-wise and the accounts are consolidated into a single Profit & Loss Account and Balance sheet for the company as a whole. It is of course possible to draw up division-wise profit and loss a/c and balance-sheet. In fact the assessee would appear to have filed such division-wise accounts before the Assessing Officer. There is, in the head office, in the words of the Assessing Officer, "an independent Accounting set-up for the Fertilizer Division and "the expenses in respect of this set-up have been charged to the Fertilizer Division" (page 44). The assessee has contended before the Assessing Officer that this was done to meet various statutory requirements and it does not destroy any organic unity between the various divisions of the company. The Assessing Officer has rejected the contention by saying that the "one profit and loss account and one balance-sheet" theory cannot be relied upon to establish unity amongst the various activities, and that the purpose for which the profit and loss accounts and balance-sheets of the divisions were prepared was immaterial. We are of the view that applying the tests laid down in the several authorities referred to earlier, it is not possible to subscribe to the view of the Assessing Officer. In the cited decisions, the fact that the assessee had prepared a single profit and loss account and balance sheet in respect of the various businesses has been held to be indicative of unity of the businesses. As already observed, for reasons of assessing the financial and costing viability, it is common for large-sized companies having diverse activities to have division-wise accounts from which it is possible to draw up division-wise profit and loss accounts and balance-sheets. The question is who controls the accounts. In the head office at Bombay House, as per the organisation chart furnished by the assessee before the Assessing Officer, there is a Controller of Accounts and Finance, under whom there is an Accounts executive, a Finance Executive and a Taxation Executive. As the name itself suggests, the Controller of accounts is in over-all control of the company';s accounts. It is his responsibility to reconcile the accounts of various divisions of the company, consolidate them and prepare a single Profit and Loss account and Balance sheet giving a true and fair view of the company';s financial position as at the year-end. In the very nature of his duties, he must have access to all divisional accounts and must be in a position to scrutinise them in an over-all perspective. Since one division of the company maintains an account of the other division or divisions for making inter-divisional charges/recoveries, control of all divisions is possible from one place, viz., the Bombay House. He also has the duty to see that there is periodical reconciliation between the various accounts of the divisions. Further, as regards purchases for the fertilizer unit, as per the note of the assessee dated 13th December, 1994, they are co-ordinated by the Bombay office. The major items of purchase are made through requisition sent to the Bombay office.

54. We have earlier noticed that the accounts are maintained division- wise and they are ultimately controlled at the head office by the Controller of Accounts & Finance. In the note filed by the assessee before the Assessing Officer, a copy of which is placed at page 35 of the assessee';s paper book No. 3 (pink flat file), the books of account maintained by the HO and those maintained at the various divisions (chemicals, fertilizers, cement, detergent etc.) have been mentioned and a brief description of the type of entries made therein are given. The accounts at various divisions are linked through a "Head office account" appearing in each division "to account all the transactions which H.O. is doing on their behalf or they are doing on behalf of the H.O. At the end of the year, this account is reconciled and balance is brought to nil". At page 49 of the same paperbook, another note regarding the accounts (and finance) is given, according to which all the sale proceeds are deposited in the bank at Bombay and all payments relating to purchase of raw materials, stores, salaries of all the units are controlled from Head Office, Bombay. All borrowings, either by way of inter-corporate or fixed deposits or working capital loan from banks or fixed loans from various financial institutions are managed from Bombay. Each unit informs the H.O. about its requirements of funds, according to the budget position, the funds are, from time to time, transferred.

55. The aforesaid position regarding the accounts, in our view, supports the contention that the ultimate control rests with the head office at Bombay.

56. Thus there are sufficient facts, brought on record by the assessee, to establish that there is unity of control, inter-lacing, inter-connection and inter-dependence between the various units and financial dovetailing between the businesses.

57. We now turn to the arguments relating to the nature of the items manufactured in the chemical plant at Mithapur and those manufactured at Babrala fertilizer project. Elaborate arguments were advanced before us on this aspect of the matter by both sides. According to Mr. Vyas, the chemical plant was manufacturing "agro-chemicals" which, according to the dictionary, include "fertilizers" and therefore the fertilizer plant at Babrala was only an expansion of the existing business. The details of production of some agro-chemicals were submitted at page 50 of the Green-file paper book filed by the assessee. Such details have also been given to the Assessing Officer. Benzene Hexachloride, copper oxychloride, ethylene dibromide and methyl bromide were stated to belong to the category of agrochemicals. These were stated to be commercially known as pesticides. The argument was that anything that is put into the soil which protects the plants by destroying the pests also does a function similar to a fertilizer, which gives some kind of a nutrition to the plant. The object of both is the growth and well-being of the plant. At any rate, agrochemical has been defined to include fertilizer, fungicide, insecticide etc. in the dictionary. What the assessee did in the Babrala plant was to manufacture the fertilizers in a large scale and thus it was only an expansion of the business. The argument of the Departmental Representative Mr. Tralshawala was that the production of the aforesaid agro-chemicals constituted a negligible percentage of the production of the Mithapur factory. We need not enter into this controversy since it has been held in the decisions which we have earlier referred to that the nature of the two lines of activities is not relevant. However, it is a fact that the aforesaid agro-chemicals were produced in the Mithapur factory from 1973-74 to 1991-92 and the details of production are given at pages 30-32 of the Green file paper book filed by the assessee. Similarly, we are not also dealing with the controversy as to whether the process involved in the manufacture of soda ash, the main product in Mithapur plant, is technically similar to the manufacture of urea, proposed to be manufactured at Babrala. This involves technical expertise. For the same reason, we are not able to examine the claim of the assessee that it is possible, with certain minor adjustments, to make the Mithapur plant suitable for the manufacture of urea, proposed to be manufactured at Babrala.

58. As regards the test whether the closure of one business would affect the other business or businesses, we have seen already on a reference to the relevant authorities that it has not been considered a conclusive test one way or the other but has been held to furnish a strong indication as to whether the businesses are separate or composite. The huge borrowings made by the company for the purpose of setting up the fertilizer plant at Babrala, if they have to be repaid on its assumed closure, will have to be paid back out of the assets of Babrala plant which have been secured to the debenture-holders. If something more remains, the charge created over the Mithapur plant';s assets may have to be enforced, causing a serious setback to the chemical business. Even otherwise, a closure of the fertilizer plant or the chemical plant will have serious repercussions on the other remaining unit because of the sheer size of both the plants and the amount of capital expenditure sunk into them. Apart from serious financial problems, the company will have to consider its market-image, large scale retrenchment of workmen which would also involve the question whether the continuing unit will be able to absorb them, governmental regulations regarding closure of a factory etc. In the present day atmosphere, these are all important considerations and therefore it cannot be said that either the chemical unit or the fertilizer unit can be closed down without affecting the other. Further discussion of the aspect is unnecessary, in view of the fact that the test is not conclusive. Even assuming for the sake of argument that it is possible to close down one of the units without affecting the other, in view of the other tests having been affirmatively answered, it must be held that it is not clinching.

59. We shall now notice a few points made by Mr. Tralshawala on the various aspects of the matter. He asked us to call for and see the industrial licence granted to the assessee and verify whether it throws any light on the question whether the new unit at Babrala is an expansion of the existing business or a new business altogether. Accordingly the assessee has filed copies of the letter of the Govt. of India in No.LI:790 (1985) dated 28th June, 1985. The letter has been issued by the Ministry of Industry and Company Affairs, Dept. of Industrial Development, Secretariat for Indus-trial Approvals. The approval is for the manufacture of Ammonia and Urea in the Babrala unit. We have gone through the letter which imposes various terms and conditions for the issue of the industrial licence under the Industries (Development & Regulation) Act, 1951. No light is thrown on the question whether the new unit has been considered as an expansion of the existing unit or as a new unit altogether.

60. Mr. Tralshawala referred to the 50th annual report of the company (1988-89). In the directors'; report [para 31 at page 131 of the paper-book filed on behalf of the Revenue (Vol. I)], the directors have referred to the Babrala unit as the single largest grass-root venture that the Tatas have undertaken till date and have said that "It is the first step in the long standing commitment of your company to manufacture and supply balanced plant nutrient to the farmer and hopeful open up new vistas for the purposeful growth of the Company in the larger national interests". The argument was that the Babrala unit has been stated to be "the first step" in the manufacture of plant nutrients which shows that it is a new business and not expansion of the existing business. In judging whether a new unit is part of the existing business or not, regard must be had to the tests laid down by the Courts and though the statement made by the directors is not wholly irrelevant, our decision cannot rest on one sentence made by them in their report to the shareholders. The cumulative effect of all the facts and circumstances of the case must be taken into account and to these facts, the tests propounded by the courts of law must be applied.

61. In the same annual report, the directors'; report says that the amalgamation of the assessee-company with TFL will "greatly enlarging and diversifying" the operating base of the Company at an exceptionally low increase of the share capital. The quoted words were pointed out by Tralshawala as showing that the fertilizer business was a diversification and not an expansion. The words used are "enlarging" and "diversifying" and the former signifies expansion, even going by what Mr. Tralshawala means. That apart, the enlargement or diversification is only in respect of the operating base of the company in relation to the share capital. The directors could not have meant to convey that the fertilizer unit was a distinct or separate business within the principles and tests laid down by the reported decisions on the subject. In fact, in the fifty-first annual report (89-90), the directors at para. 49 of their report (page 205 of the Department';s paper-book No. I) say that "the Company';s operations have vastly expanded in recent years and are growing...." Here, though the word used is "expanded" for that reason alone it cannot be stated that the fertilizer unit is only an expansion of the existing business. It has to be remembered that the directors are addressing the shareholders and no legal significance can be attached to any word used in their report';.

62. Both the Assessing Officer and Mr. Tralshawala have observed that even after the amalgamation of TFL with the assessee-company, it was only the corporate structure of the fertilizer project that was dismantled and that the "exclusivity and the separate identity of the fertilizer project was continued to be retained by transforming the same into a Division of the Company". As already observed by us, a company having various activities, for reasons which are predominantly functional and organisational, creates separate divisions for each such activity so that management becomes easy and integrated. Therefore the fact that the fertilizer project was made a separate division of the assessee-company does not ipso facto lead to the conclusion that it is a separate business. At the cost of repetition, we say that we have to apply only the tests laid down in the reported decisions to ascertain the fact.

63. While dealing with the aspect that the services of one division which were requisitioned by another division were notionally charged in the accounts of the divisions concerned, the Assessing Officer had observed, it may be recalled, that it showed that the dealings between the divisions were at "arm';s length". While clarifying this, Mr. Tralshawala submitted that by "arm';s length" is meant "commercial or near-commercial rates". Mr. Vyas had however pointed out that there was no "add-on" or profit element in such inter-unit charges. We have already held that such notional charges between the divisions were only for the purposes of costing or for ascertainment of the profitability of the divisions. We have also noted that in the `final consolidated Profit & Loss a/c and balance-sheet the effect of such entries was removed.

64. For all the above reasons, we hold that the fertilizer unit at Babrala, UP, the chemical unit at Mithapur, Gujarat, and the detergent business at Pithampur, MP, all constituted one composite or single business and therefore the disallowance of the interest of Rs. 35,13,55,815 is not justified. The same is deleted and the first ground is allowed.

65. The second ground is against the allocation of interest amounting to Rs. 31,30,32,000, on estimate, as interest on capital borrowed and utilised for the purpose of "investments". Out of the interest so allocated, the Assessing Officer allowed deduction of Rs. 10,95,01,310 under section 57(iii) and the balance of interest of Rs. 20,35,30,690 was disallowed. The allocation of the interest has been made on the basis of a somewhat complex formulae worked out at pages 63 to 66 of the assessment order. The basis has been indicated at para-55 at page 62 of the assessment order. Broadly speaking, out of the total borrowed funds of Rs. 622.62 crores, an amount of Rs. 225.53 crore has been deployed towards "investments", representing 36.22%. Accordingly, the pro-rata interest attributable to funds deployed in "investments" out of the borrowings is estimated at Rs. 3130.32 lakhs. Consequently, the amount of interest attributable to borrowings for the purposes of the business is Rs. 86,42,54,952 Rs. 31,30,32,000 = Rs. 55,12,22,952. The aforesaid interest comprises, according to the Assessing Officer, interest of Rs. 35,13,55,815 on capital borrowed and utilised by the company for the business of fertilizer division and the balance interest of Rs. 19,98,67,137 on capital borrowed for the other existing business operations. This is allowed as deduction against the business income. Out of Rs. 31,30,32,000 the Assessing Officer disallowed Rs. 20,35,30,690. This, according to the Assessing Officer, represents interest on capital borrowed and utilised for the purpose of investment in "tax-free bonds".

66. It is difficult to sustain the disallowance. The investments have been made in the course of the business. The fact that they are tax-free bonds does not mean that the interest attributable to the capital borrowed for purchasing them has to be disallowed. In the course of the business, a company may have to park the funds in investments as a matter of prudence. It is essentially a business decision. So long as the investment in the tax-free bonds has been made in the course of the business, the interest is allowable notwithstanding that the income from the bonds is not taxable. The judgment of the Supreme Court in Indian Bank Ltd.';s case (supra) fully supports the assessee';s claim. The letter written by the assessee to the Assessing Officer, extracted fully at pages 56-58 of the assessment order has highlighted certain salient points. Firstly, it has been stated that the investment was out of own funds and not borrowed funds. In support of this claim, it has been pointed out that the capital expenditure incurred was more than the amount borrowed. Secondly, it has been pointed out that all the receipts, including sale proceeds and borrowings both for capital expenditure and for working capital have been deposited in the Cash Credit A/c and from this account the payments, both for capital expenditure and revenue expenditure, have been effected. When own funds and borrowings have been mixed, it cannot be presumed that the investment in tax-free bonds came out of borrowed funds. Thirdly, the profits of the company cash profits are substantial as also its free reserves, a substantial part of which is on account of share premium. Fourthly, it has been stated that in the past 12 years, the gross block of the company has increased from Rs. 67 cr. to Rs. 698 cr., while borrowings increased from Rs. 24 cr. to Rs. 623 cr. The borrowings were for both capital expenditure and working capital. This shows that for incurring capital expenditure, in addition to borrowings, internal cash accruals have also been utilised. Fifthly, it has been pointed out that during the year, no fresh borrowings were made. In this letter, it has also been submitted that the investment in tax-free bonds was "to have liquidity, income and appreciation in the value".

67. The following judgments of the Calcutta High Court support the contention of the assessee that where there is a mixed fund consisting of both own funds and borrowed funds, it cannot be assumed that a payment for non-business purposes came out of borrowed funds :

Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219/(1981) 7 Taxman 188 (Cal.)

Reckitt & Colman of India Ltd. v. CIT (1982) 135 ITR 618/10 Taxman 189 (Cal.)

Indian Explosives Ltd. v. CIT (1984) 147 ITR 392/(1983) 15 Taxman 232 (Cal.)

Alkali & Chemical Corp. of India Ltd. v. CIT (1986) 161 ITR 820/ 28 Taxman 423 (Cal.)

British Paints (India) Ltd. v. CIT (1991) 190 ITR 196(Cal.)

A similar view was taken by the Gujarat High Court in Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 and

CIT v. Cotton Fabrics Ltd. (1981) 131 ITR 99/ 6 Taxman 231(Guj.).

68. At any rate, having regard to the facts as well as the legal position enunciated by the Supreme Court in the case of Indian Bank Ltd. (supra) as well as the other judgments of the High Courts cited above, it is not possible to view the investment in the tax-free bonds as representing a utilisation of the borrowed capital for non-business purposes. We therefore delete the disallowance of Rs. 20,35,30,690. The interest claimed cannot be allocated in the manner done by the Assessing Officer. In our view, the amount has to be considered and allowed under the head "Business". We direct accordingly and allow the ground.

69. Ground No. 3 is directed against the disallowance of the expenses of Rs. 16,99,497 incurred in connection with the issue of non-convertible and partly convertible debentures. This issue has been discussed at paragraphs 63 and 64 of the assessment order. The claim has been made in the revised return. The assessee relied on the judgment of the Supreme Court in the case of India Cements Ltd. (supra) in support of the claim for deduction. On the ground that the debenture issue was made for the purpose of raising capital for the fertilizer project which was a different and distinct business which was not carried on by the assessee during the previous year, the deduction was negatived. The disallowance was confirmed by the CIT(A). In our view, the action of the income-tax authorities is not justified. We have already held that the fertilizer division is part of the business that was being carried on by the assessee during the relevant previous year. Following our view, we hold that the debenture issue expenses are allowable as deduction. The disallowance is deleted and the ground is allowed.

70. Ground No. 4 is directed against the disallowance of the commitment charges of Rs. 2,37,52,000. This issue is discussed in paragraph 65 of the assessment order. The disallowance is based on the same reason as given for the disallowance of the debenture issue expenses. The commitment charges were paid to the financial institutions in connection with the sanctioning of the loans. It was explained before the Assessing Officer that for the purpose of financing the fertilizer project, the assessee took term loans and foreign currency loans from various financial institutions. Commitment charges were payable to these institutions on the undrawn amount of the loans sanctioned. Follow-our view in respect of ground No. 3, where the debenture issue expenses were disallowed for the same reason, we delete the disallowance of the commitment charges and allow the ground.

71. Ground No. 5 is directed against the disallowance of depreciation, salaries and food expenses in respect of the guest houses at Bombay. As regards depreciation, respectfully following the order of the Third Member in the case of Mahindra & Mahindra Ltd. v. Dy. CIT (1997) 61 ITD 129 (Mum.), we hold that the depreciation cannot be disallowed under section 37(4) of the Act. The contention against the disallowance of the salaries and food expenses under section 37(4) is not pressed. Accordingly the Assessing Officer is directed to modify the disallowance. The ground is partly allowed.

72. In ground Nos. 6 to 15 the assessee has challenged various disallowance as under :

In ground No. 6	-	disallowance of share issue expenses Rs. 16,511
Ground No. 7	-	disallowance of prospecting and survey expenses Rs. 2,31,992
Ground No. 8	-	AGM expenses Rs. 30,107
Ground No. 9	-	disallowance of 50% entertainment expenses as attributable to staff members
Ground No. 10	-	disallowance of Delhi office expenses Rs. 30,000
Ground No. 11	-	disallowance of foreign travel expenses in connection with purchase of machinery Rs. 5,45,114
Ground No. 12	-	disallowance of payment to Tata Sports Club Rs. 1,42,339
Ground No. 13	-	disallowance of payments to Fort Medical Society Rs. 82,000
Ground No. 14	-	disallowance of contribution to Sarva Dharma Maitri Pratisthan Rs. 10,000
Ground No. 15	-	restricting the profits of the business for the purpose of section 80HHC by reducing 90% of the interest therefrom.

73. All the aforesaid grounds were not pressed in view of the smallness of the amounts involved and without prejudice to the assessee';s right to agitate such matters in the other years if so advised. Accordingly we dismiss the same, except that in respect of ground No. 11 the Assessing Officer may allow depreciation on the foreign travel expenses added to the cost of the machinery.

74. Before closing, we wish to place on record the very able assistance rendered by both sides before us. Very elaborate and well prepared arguments were advanced before us which have helped us in arriving at our decision. Special mention must also be made of the meticulous manner in which the paper books were prepared and filed by both the sides.

75. In the result, the appeal is partly allowed.

 

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