- (1.) IN this reference, the INcome-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), has referred the following questions for the opinion of this court : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing a sum of Rs. 34,072 being the amount of interest paid by the assessee on moneys borrowed for the purpose of constructing a new cinema building called Mayank which was not brought into use in the accounting year under reference ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 2,740 being the amount of travelling expenses incurred for procuring loan for con struction of Mayank cinema is allowable as a deduction ? "
(2.) THIS reference relates to the assessment year 1976-77. M/s. Shah Theatres Private Limited (hereinafter referred to as "the assessee") is a private limited company incorporated in 1962. It carries on the business of exhibition of motion pictures. During the relevant previous year, the assessee started construction of a cinema building known as "Mayank" cinema at Jaipur and for that purpose, it borrowed money. A sum of Rs. 34,072 was paid by the assessee as interest on the said loan and it was claimed as business expense by the assessee. In addition to the said sum, the assessee claimed Rs. 1,748 and Rs. 922 as travelling expenses incurred by Gauri Shanker, Advocate, and Sah Anil Kumar, respectively. The Income-tax Officer, Central Circle-V, Jaipur (hereinafter referred to as "the Income-tax Officer"), disallowed the claim of interest of Rs. 34,072 on the ground that the expenditure on borrowing for construction of a new unit was of a capital nature. The Income-tax Officer also disallowed the travelling expenses claimed by the assessee on the ground that such expenses were not incurred wholly and exclusively for the purpose of business. On appeal, the Appellate Assistant Commissioner of Income-tax, Central Range, Jaipur (hereinafter referred to as "the Appellate Assistant Commissioner"), allowed the said interest of Rs. 34,072 as business expenses on the view that this was a case of extension of the existing business and not of setting up of a new business and, therefore, the interest on funds borrowed in the course of business is to be allowed as revenue expenditure. The Appellate Assistant Commissioner also allowed the claim for travelling expenses incurred by Gauri Shanker, Advocate, and Sah Anil Kumar. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. Thereafter, the Tribunal has referred these questions for the opinion of this court at the instance of the Revenue. The relevant provision with regard to deduction from the income of the assessee relating to an amount of interest is contained in Section 36(1)(iii) which provides for deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. In the Indian Income-tax Act, 1922, the corresponding provision was contained in Section 10(2)(iii). The aforesaid provision contained in Section 10(2)(iii) came up for consideration before the Bombay High Court in Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 (Bom).In that case, the assessee. firm was carrying on the business of bleaching, dyeing and printing cloth and had borrowed money in order to extend its business and with that money it purchased land and erected an additional plant and machinery and claimed deduction of the interest paid on the borrowed capital as business expenses. The Bombay High Court held that the said interest was deductible as business expenses under Section 10(2)(iii) of the Indian Income-tax Act, 1922, and that it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset and that if the capital was used in the year of account and the use is for the purpose of the business of the assessee, it was immaterial whether the user of the capital actually yielded profit or not and it was not open to the Department to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital was unremunerative. In India Cements Ltd. v. CIT [1966] 60 ITR 52, the Supreme Court was dealing with a case where the assessee, a running concern, had obtained a loan from the Industrial Finance Corporation and it claimed the expenses incurred in obtaining the said loan as business expenses. In that case, it was found that part of the loan was utilised to pay a prior debt incurred for acquiring a capital asset by the assessee. The Supreme Court held that it was irrelevant to consider the object with which the loan was obtained and that the expenditure which was incurred by the assessee for the purpose of obtaining loan was not in the nature of capital expenditure and was expenditure incurred wholly and exclusively for the purpose of the assessee's business. In Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the Supreme Court was dealing with a case where the assessee had borrowed money for the installation of machinery and plant and the interest paid on the said loan was being claimed as part of the capital expenditure as the cost of the machinery by the assessee. The Revenue, on the other hand, was asserting that the said interest paid on loan must be treated as revenue expenditure. The Supreme Court accepted the claim of the assessee and held that in a case where money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. In that case, the Supreme Court has considered its earlier decision in India Cements Lid. v. CIT [1966] 60 ITR 52 (SC) and has pointed out that in that case the act of borrowing money was incidental to the carrying on of the business and the assessee was a running concern, whereas in the case which was being dealt with by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), the assessee was not a running concern and the loan was raised by the assessee before commencement of production, and not at a later stage.
(3.) 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. In CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715, the Gujarat High Court has considered both the decisions of the Supreme Court, namely, India Cements Ltd. v. CIT [1966] 60 ITR 52 and Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The assessee in that case was a company manufacturing glass at Baroda from 1947. During the previous year relating to the assessment year in question, the company had incurred expenditure for establishing a new glass manufacturing unit at Bangalore and had borrowed money for that purpose and the interest paid on the said borrowings was claimed as business expense. The Gujarat High Court held that the said interest was deductible as business expenses. It was observed that where borrowing is for the purpose of a business, the interest paid on such a borrowing becomes eligible for deduction contemplated by Section 10(2)(iii) of the Act of 1922 or Section 36(1)(iii) of the Act of 1961, and this would be so, whether 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 the capital to acquire an asset and that 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 installation of the said asset and hence should be treated as capital expenditure and not covered by Section 36(1)(iii) of the 1961 Act. In the present case, the Tribunal has followed the aforesaid decision of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 and has found that the loan raised by the assessee was raised for the purpose of the cinema under construction. The Tribunal has found that there was an existing business with reference to which the capital was borrowed and that the construction of Mayank cinema was not a new unit of business but was only an extension of the existing business. In view of the aforesaid finding, the Tribunal held that the interest amount of Rs. 34,072 had been rightly allowed as business expenditure by the Appellate Assistant Commissioner. ;