T.U.MEHTA J. - (1.) THIS reference arises out of the assessment of the respondent's income for the asst. yrs. 1965-66 and 1966-67 involves a question : "Whether the amounts spent by the assessee in payment of interest on the borrowings, on the establishment of a new undertaking at Bangalore, and other miscellaneous expenses and travelling relating to the setting up of the said undertaking at Bangalore, should be taken on the revenue account or on the capital account ?"
(2.) FOLLOWING are the short facts leading to this reference. The respondent-assessee is a company manufacturing glass at Baroda, and is in existence ever since the year 1947. During the accounting period relating to the years of assessment, the company incurred certain expenditure for establishing a new glass manufacturing unit known as "White field Factory" at Bangalore. The said unit did not go into production during the two assessment years in question. The assessee, however, incurred expenses for the purpose of the Bangalore unit during the accounting period in question to the tune of Rs. 77,53,084 and Rs. 77,00,000 respectively. During the course of the assessment, the ITO noticed that a part of these borrowings was used for the purpose of setting up the Bangalore unit and, therefore, he disallowed the payment of interest on such borrowings. According to the estimation of the ITO the interest referable to the establishment of the Bangalore unit was to the tune of Rs. 50,000 for the asst. yr. 1965-66, and to the tune of Rs. 2,00,000 for the asst. yr. 1966-67. Since the Bangalore unit had not commenced the production, the ITO disallowed this payment of interest as revenue expenditure. He further held that the Bangalore unit was not the branch of the assessee's factory at Baroda and was, therefore, a new business and since this new business had not started production during the accounting period in question, the payment of interest cannot be taken as revenue expenditure. The company had incurred some miscellaneous expenditure and travelling expenditure during the accounting periods. The ITO found that for the asst. yr. 1965-66 the miscellaneous expenditure to the tune of Rs. 5,427 was referable to the setting up of the Bangalore unit, and for the asst. yr. 1966-67, the miscellaneous expenditure to the tune of Rs. 18,676 was also referable to the establishment of the new unit at Bangalore. So far as the travelling expenditure is concerned, he found that for each of the assessment years, the expenditure of Rs. 4,000 was referable to the establishment of the new unit at Bangalore. This Bangalore expenditure was also disallowed as revenue expenditure, because the unit had not started production during the accounting period. Being aggrieved by this decision of the ITO the respondent- assessee approached the AAC who came to the conclusion that though the unit established at Bangalore was a new one, it did not become a new business undertaking and, therefore, the deductions claimed by the respondent- assessee ought to have been allowed by the ITO. He, therefore, allowed all these deductions with the result that the Revenue approached the Tribunal in appeal. The Tribunal found that the establishment of the new unit was not a new business of the respondent-assessee, though the unit was newly established. The Tribunal, therefore, agreed with the view taken by the AAC and dismissed the appeal preferred by the Revenue. Being aggrieved by this, the Revenue has preferred this reference, in which the Tribunal has referred the following two questions for our opinion: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the White field Factory at Bangalore did not constitute a separate undertaking but was only an establishment of a new unit of the existing factory at Baroda ? (2) Whether, on the facts and in the circumstances of the case, the interest, miscellaneous expenses and travelling expenses incurred by the assessee referable to the Bangalore unit are wholly and exclusively for the purpose of the assessee's business ?" After hearing the parties, we find that question No. 1 is not correctly framed. We, therefore, recast the first question as under : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the White field Factory at Bangalore did not constitute a new business but was the new establishment of a new unit of an existing business at Baroda ? The first question is whether the establishment of the new unit at Bangalore can be treated as a new or separate business of the assessee. This question does not present any difficulty in view of the decisions given by the Supreme Court in CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) and Produce Exchange Corp. Ltd. vs. CIT (1970) 77 ITR 739 (SC). In Prithvi Insurance Co. Ltd. (supra), the test for determining whether two lines of businesses constitute the "same business" within the meaning of s. 24(2), at the relevant time, is stated as under : "A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt, J. said in Scales vs. George Thompson and Co. Ltd. (1927) 13 Tax Cases 83, 89 (KB) : 'Was there any inter-connection, any inter-lacing, any inter-dependence, any unity at all embracing those two businesses ?' That inter-connection, inter-lacing, inter-dependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business." In the subsequent decision in the case of Produce Exchange Corpn. Ltd. (supra), the Supreme Court has approved of the above test and has further observed that it is not possible to agree with the proposition that the decisive test for determining whether the two lines of businesses constitute the same business, is the nature of the two businesses. Now, applying the above test to the facts of the present case, it cannot be disputed that the business organisation, administration and the fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, are common. There is one company which controls the administration of both the units. It is one company which supplies the staff to both the units, and it is one company which manages the whole of the business organisation of both the units. The production of both units is considered the production of the assessee-company itself. It should be noted here that application for the proposed expansion of the establishment of the new unit at Bangalore was made by the assessee to the Under-Secretary to the Government of India on 8th Dec., 1959, wherein it was specifically mentioned that this new unit at Bangalore was for the manufacture of glass bottles and was nothing but the expansion of the existing business. In the application for licence, which was submitted by the assessee to the Government, it is specifically mentioned that the newly envisaged unit would be nothing but the expansion of the business carried on by the existing unit at Baroda. This correspondence has been produced and relied upon by the assessee during the course of the proceedings before the Tribunal and the taxing authorities below. A compilation of the same has been produced before us and the contents of this compilation clearly show that the newly established unit at Bangalore is nothing but the extension and expansion of the existing business which the assessee-company was conducting at Baroda at the relevant time. Thus, there is complete inter-connection, inter- lacing and inter-dependence of both the units. Shri Kaji, who appeared on behalf of the Revenue , contended that there is no common place of business, because the Bangalore unit is many miles away from Baroda. This contention is not acceptable because the head office of the assessee-company is at Baroda and it is the head office which controls the affairs of both the units and, therefore, it is not possible to say that there is no common place of business of both the units.
(3.) IT was contended by the Revenue that the real test for considering whether a particular unit is a separate business from the business of the other unit or not, is to see whether the closure of one unit would affect the other unit or not. Even applying this test we find that the closure of any of the two units would surely affect the working and the business of the remaining unit for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit. Reliance was placed by Shri Kaji on the decision of the Supreme Court given in L.M. Chhabda and Sons vs. CIT (1967) 65 ITR 638 (SC). The Supreme Court has therein observed that if the assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under s. 10 of the Indian IT Act of 1922, of an outgoing attributable to the business which is closed against the income of his other business in that year. It was further observed that there is no general principle that where an assessee carried 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 : whether different ventures carried on by the assessee form part of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the different ventures constitute parts of the same business. In our opinion the facts of this case have no application to the facts of the case under our consideration, because in the case considered by the Supreme Court, the assessee owned two theaters at two different places. Each of these the attars had a separate and distinct business of its own, and closure of one could obviously not have affected the business of the other which was situated at a different place. That is not the case here, because it cannot be gain said that the closure of either of the two units at Baroda or at Bangalore would have an obvious impact on the business carried on by the other unit. Taking, therefore, all these facts and circumstances into consideration, we have no hesitation in concluding that the Tribunal was justified in law in holding that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business at Baroda. Therefore, our answer to the first question, which is reframed by us, is in the affirmative.;