Holding

Interest on loans taken for a business remains deductible under Sec. 36(1)(iii) even if that specific business is later closed, and the jewellery and cinema activities are to be treated as a composite business.

Summary

Veecumsees, a jeweller, also operated a cinema theatre (Safire Theatre) for which it obtained loans in 1961. The theatre was built in 1962 and ran until it was sold as a going concern on 31 July 1965. The Income Tax Officer disallowed interest on those loans as a deduction under Sec. 36(1)(iii) of the Income Tax Act for assessment years 1967‑68 to 1969‑70, contending that the cinema business no longer existed. The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal allowed the deduction, holding that the loans were taken for a business purpose at the time of borrowing and that the jeweller and cinema activities formed a composite business. The Madras High Court reversed, saying there was no inter‑connection between the two businesses. The Supreme Court allowed the appeal, ruling that the closure of the cinema business does not affect the deductibility of interest and that the two activities constitute a composite business, thereby affirming the Tribunal’s decision.

Issues considered

Whether interest on loans taken for the construction of a cinema theatre can be allowed as a deduction under Sec. 36(1)(iii) of the Income Tax Act after the cinema business has been closed or sold.
Whether the jewellery business and the cinema exhibition business carried on by the assessee constitute a composite or 'same' business for the purpose of Section 36(1)(iii) deductions.

Legislation cited

Income Tax Act, 1961s. 36(1)(iii)

Subjects

Income TaxSection 36(1)(iii)interest deductioncomposite businesssame business testloan interestbusiness closurededuction eligibility

Judgment

A MIS VEECUMSEES, MADRAS
v.
COMMISSIONER OF INCOME TAX, MADRAS

APRIL 26, 1996 .. -

B [S.P. BHARUCHA AND G.B. PATTANAIK, JJ.J

Income Tax Act, 1961.:

S. 36(I)(iiij-Assessment years 1967-68, 1968-69 and 1969- 70-Inter-
C est on loans borrowed-A/lowing of under the head business--Assessee run-
ning a composite business of jewellery and exhibition of cinematographic
films-Loan borrowed for the business of exhibition of cinematograph
films-Allowed by the Appellate Assistant Commissioner and upheld by the
Tribunal-High Court disallowing the claim-On appeal, held : Transferring
or closing down of the said business did not alter the fact that the loans had,
D when obtained, been for the assessee's business-Test of 'same business"
1

appropriate for set off carry forward losses is not appropriate in this case-Fur-
ther Tribunal found that the business carried 011 was a composite busi-
ness-Hence assessee entitled to the deduction of interest paid on the loans.

E B.R. Ltd. v. V.P. Gupta, Commissioner of Income-Tax, Bombay, 113
!TR 647 and Produce Exchange Corporation Ltd. v. CIT, (1970) 77 !TR 739,
referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 7660-62
of 1996.
F
From the Judgment and Order dated 13.12.83 of the Madras High
Court in T.C. Nos. 18-20 of 1979. -

M. Uttam Reddy, AV. Rangam and A. Ranganathan for the Appel-
lants.
G
Dr. G. Ganrishanker, S. Rajappa and S.N. Terdol for the Respon-
dent.

The following Order of the Court was delivered :

H Leave granted.
, w
VEECUMSEES v. C.l.T 61

·We are concerned with the following questions, which were A
answered, in the judgment and order of the High Court at Madras which
is under appeal, in the negative and in favour of the Revenue.

1. Whether, on the facts and in the circumstances of the case, and
having regard to the provisions of Section 36(1)(iii) of the Income
Tax Act, 1961, the Appellate Tribunal was right in holding that the B
interest attributable to the loans borrowed by the assessee firm for
the purpose of construction of Safire Theatre should be allowed
under the head "business" especially when the theatre complex was
sold as a going concern on 31.7.1965 and the business of exhibition
of cinematographic films stopped on and from 31.7.1965 ? c
2. Whether the conclusion of the Appellate Tribunal that the
business carried on by the assessee as jewellers and in the running
of the cinema theatre, restaurant, etc., are composite is based on
valid materials and is a reasonable view to take on the facts and
in the circumstances of the case ?" D

The assessment years with which we are concerned are Assessment
Years 1967-68, 1968-69 and 1969-70.

The assessee ran a jewellery business. It then commenced business E
also in the exhibition of cinematographic films. In 1961 it obtained loans
for building a cinema theatre. The said theatre was built in 1962 and was
run by the assessee until 31st July, 1965, when it was transferred to another
firm. For the years during which the assessee exhibited films in the said
theatre the interest paid on the loans obtained for constructing it were
allowed by the Revenue as a deduction under the provisions of Section F
36(1)(iii) of the Income Tax Act, that is to say, as being the amount of
interest paid in respect of capital borrowed for the purpose of the
assessee's business. For the years in question, however, the Income Tax
Officer declined that deduction on the ground that the business of exhibi-
tion of films in the said theatre was no longer in existence; therefore, the G
=--o interest on borrowings attributable to this particular business could not be
_ allowed as a deduction in computing the profits of the other business of
the assessee. In appeal the Appellate Assistant Commissioner allowed the
deduction as claimed by the assessee.

The Income Tax Appellate Tribunal noted the facts aforementioned H
62 SUPREME COURT REPORTS [1996] SUPP. 2 S.C.R.

A and found that there was no dispute that for the construction of the said
theatre the assessee had made heavy borrowings and the interest on such •
borrowings had been allowed by the Revenue as a deduction as the
assessee was running the said theatre as its own business. The assessee
had admittedly paid the interest in question for the years under appeal in
respect of the loans which had been obtained for the purpose of investing
B
in the business of exhibition of films. The Appellate Assistant Commis-
sioner had found that it was not disputed that the moneys were borrowed
for the purposes of the business of exhibition of films and for the construc-
tion of the said theatre, the income from which had been assessed in the
earlier years. It was thus clear that at the time when the borrowings were
C made they were made for business purposes. The Revenue, the Tribunal
noted, did not and could not challenged the correctness of this. The
Tribunal also found that there was force in the submission on behalf of the
assessee that the business carried on by the assessee as a jeweller and in
the running of the said theatre, restaurant, etc., were composite. The
D assessee was carrying on both the business in jewellery and in the exhibition
of films till 31st July, 1965, and that only thereafter was the activity of
exhibition of films discontinued. The liability to pay interest had arisen in
respect of the business carried on by the assessee till 31st July, 1965.,The
Tribunal, accordingly, upheld the decision of the Appellate Commissioner
to permit the deduction under Section 36(1)(iii) of the Income Tax Act.
E
The High Court considered the second question referred to it first
and came to the conclusion that, since the closing of the cinema business
had not affected in the least the assessee's old business in jewellery, there
was no inter-connection, inter-lacing or Inter-dependence between the
F jewellery business and the cinema business. Unless there was such inter-
connection, inter-lacing or inter-dependent, it was not possible to say that
both businesses constituted a composite or same business. It, therefore,
answered the second question against the assessee. In view of that answer,
it held that the borrowings made by the asseessee for the construction of

G
the said theatre could not be allowed as a deduction under the head or
'business' after the business of running the cinema theatre had been closed
as a result of the sale of the said theatre on 31st July, 1965 as a going
concern to a different firm. Once the asseS&ee had ceased to carry on that
business for which the amount was borrowed, the interest payments could
not be deducted as a business expenditure as, admittedly, the business had
-
H stopped and no income accrued therefrom. The High Court relied upon
VEECUMSEES v. C.l.T. 63

judgments that related to the benefit of carry forward losses and carry A
-0 forward depreciation.

Learned counsel for the assessee drew our attention to the judgment
of this Court in B.R. Ltd. v. V.P. Gupta, Commissioner of Income-Tax,
Bombay, 113 !TR 647. This Court affirmed what had been held earlier in
B
Produce Exchange Corporation Ltd. v. CIT, (1970) 77 !TR 739. Both these
related to the meaning to be ascribed to the expression "same business" for
the purposes of set off of carry forward loss. In the former case this Court
said:

"...... The decisive test, as held by this court in Produce Exchange C
Corporation .... .is unity of control and not the nature of the two
lines of business ..... The fact that one business cannot conveniently
be carried on after the closure of the other may furnish a strong
indication that the two businesses constitute the same business.
But the decision of this Court in Prithvi Insurance Co. (1967) 63 D
!TR 632 (SC) shows that no decisive inference can be drawn from
the fact that after the closure of one business, another may or may
not conveniently be carried on......Thus, the unity of control and
the other circumstances adverted to above show that there was
dovetailing or interlacing between the business of import and the
business of export carried on by the assessee and that they con- E
stitute the same business. 11

The fact that the Revenue had during the years when the assessee
carried on the business of cinematographic films permitted as a deduction
under Section 36(1)(iii) the interest on loans obtained by the assessee for F
the purpose of constructing the said theatre shows that at the time when
the loans were obtained the said theatre was a part of the business of the
assessee. It was interest on these loans, borrowed for the purpose of the
business of the assessee, which was being paid in the years in question and
the Tribunal was, in our view, right in concluding that such interest had to G
be treated as a deduction under Section 36(1)(iii). The loans had been
obtained for the purposes of the assessee's business. The fact th2t the
particular part of the business for which the loans had been obtained had
been transferred or closed down did not alter the fact that the loans had,
when obtained, been for the purpose of the assess's business. The test of
11 11
same business appropriate for set off of carry forward losses is not H
64 SUPREME COURT REPORTS [1996] SUPP. 2 S.C.R.

A appropriate here.
Apart from this, the Tribunal found as a fact that the business carried
on by the assessee as jeweller and in mnning the cinema theatre, etc., was
composite. In view of this finding also, the assessce was entitled to the
deduction of the interest paid on the loans aforementioned under Section
B 36(1)(iii) of the Income- Tax Act.

The appeal is allowed. The judgment and order of the High Court
under appeal is set aside and the questions aforequoted are answered in
the affirmative and in favour of the assessee.

C There shall be no order as to costs.

G.N. Appeal allowed.

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