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Rainbow Dyestuff Ltd. v. Commissioner Of Income-Tax.
Structured Summary of the Opinion
Factual and Procedural Background
The assessee was a dealer in dyes who set up one or more factories for manufacturing dyes at different places. For installing assets for the manufacturing unit(s) the assessee made borrowings and paid interest of Rs. 82,283. The Income-tax Officer estimated interest attributable to borrowing for installation of assets as Rs. 82,283 and disallowed that amount treating it as capital in nature. The assessee appealed to the Commissioner of Income-tax (Appeals), relying on the decision in CIT v. R. Tolat and Co. The Commissioner (Appeals) allowed the appeal in part, holding the interest to be deductible as revenue expenditure. The Department appealed to the Income-tax Appellate Tribunal, which distinguished the facts from CIT v. R. Tolat and Co., rejected the assessee's claim, and held the deduction was not allowable. The Tribunal referred the following question to the High Court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure by way of interest of Rs. 82,283 paid on the borrowings of funds for constructing a factory for the manufacture of dye-stuffs was not a revenue expenditure ?"
The High Court heard counsel for the parties, considered authorities and the materials on record, and disposed of the reference with no order as to costs.
Legal Issues Presented
- Whether the expenditure by way of interest of Rs. 82,283 paid on borrowings for constructing a factory for manufacture of dye-stuffs was a revenue expenditure or a capital expenditure (i.e., whether the Tribunal was right in holding it was not a revenue expenditure)?
Arguments of the Parties
Assessee's Arguments
- The assessee relied on the decision in CIT v. R. Tolat and Co. to support the contention that the interest paid on borrowings for setting up the manufacturing unit was deductible as a revenue expenditure.
- The Commissioner of Income-tax (Appeals) accepted the assessee's contention in part and allowed the appeal on that basis.
Department's Arguments
- The Department treated the interest as being capital in nature and disallowed it at the assessment stage; it agitated that disallowance before the Tribunal and thereafter by reference to the High Court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. R. Tolat and Co. [1980] 126 ITR 551 | Authority relied on by the assessee to treat interest on borrowings for installing assets as deductible revenue expenditure. | The Tribunal found the facts of the present case distinguishable from R. Tolat and Co. and held the deduction was not allowable; the High Court noted that distinction in affirming the Tribunal's finding. |
| CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 | Illustration of when two units/lines of activity constitute the "same business" due to common organisation, administration and funds. | The High Court drew attention to this decision outlining factors showing units were the same business and used the principle as part of the analysis to decide whether the assessee's trading and manufacturing activities constituted the same business; it concluded they did not on the facts before it. |
| Commissioner Of Income Tax, Madras v. Prithvi Insurance Co. Ltd.. [1967] 63 ITR 632 | Test for determining whether two lines of business constitute the "same business" within the meaning of section 24(2). | The High Court noted this authority as laying down the test for "same business" and applied that principle in assessing whether the trading and manufacturing activities were the same; it concluded they were not the same business here. |
| Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 | Approval of the test for "same business" and related principles under section 24(2). | The Court cited this decision as approving the test and treated it as part of the body of authority against which the facts of the present case were compared; the Court found no inconsistency between the Tribunal's factual finding and these authorities. |
| B.R Limited v. V.P Gupta, Cit. CIT [1978] 113 ITR 647 (SC) | Context of set off of carried forward loss under section 24(2); emphasis on common management and control when deciding whether two businesses are the "same". | The High Court referred to this Supreme Court authority as illustrating that common management and control can render distinct activities the "same business" for set-off purposes; the Court nevertheless found on the present facts that the trading and the new manufacturing business were not the same. |
| Hooghly Trust (P) Ltd. v. Cit, West Bengal, Etc. [1969] 73 ITR 685 (SC) | One of the decisions considered when assessing the "same business" question under section 24(2). | This case was noted as part of the jurisprudence surveyed in B.R. Limited and considered relevant background; the High Court considered these authorities in concluding the Tribunal's factual finding was consistent with established principles. |
| Shree Ramesh Cotton Mills Ltd. v. CIT [1967] 64 ITR 317 (Cal) | Another decision considered in the context of whether separate activities constitute the "same business". | The High Court noted this decision as part of the authorities considered in B.R. Limited and observed that the Tribunal's finding did not conflict with these precedents. |
Court's Reasoning and Analysis
The Court proceeded by examining the factual materials and the authorities dealing with when two lines of activity constitute the "same business" for tax-law purposes (particularly under section 24(2)). It highlighted decisions (such as Alembic Glass and the Supreme Court authorities cited therein) that set out tests involving common organisation, administration, control and inter-dependence of units.
Applying those principles to the present record, the Court accepted the Tribunal's factual finding that the petitioner (assessee) had been engaged in a trading business and had started an independent manufacturing business at a different place. On the materials before the Tribunal, the two activities were not found to be the "same business." The Court found the Tribunal's conclusion to be consistent with the record and not contrary to the principles established by the cited Supreme Court and High Court decisions. The Court also noted that the Tribunal had considered and distinguished the precedent relied upon by the assessee (CIT v. R. Tolat and Co.) on the facts.
Holding and Implications
Holding: The question referred is answered in the affirmative in favour of the Revenue and against the assessee; the Tribunal was right in holding that the interest of Rs. 82,283 was not a revenue expenditure.
Implications: The direct effect is that the assessee's claim for deduction of the said interest was rejected and the Tribunal's conclusion was upheld. The reference was disposed of with no order as to costs. The opinion does not discuss any broader novel precedent to be applied beyond affirming that the Tribunal's factual finding was consistent with existing authorities.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench "C" (hereinafter referred to as "the Tribunal"), at the instance of the assessee has referred the following questions for the opinion of the High Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure by way of interest of Rs. 82,283 paid on the borrowings of funds for constructing a factory for the manufacture of dye-stuffs was not a revenue expenditure ?"
2. It appears from the materials on record that the assessee at the material time was a dealer in dyes. The assessee set up a factory for manufacturing dyes at different places. For the installation of the assets certain borrowing were made on which interest had been paid. The Income-tax Officer estimated the interest attributable to borrowings in installation of assets of Rs. 82,283 and disallowed the same treating the payment as of capital nature. Being aggrieved by this, an appeal was preferred before the Commissioner of Income-tax (Appeals) and reliance was placed on the decision of this court in CIT v. R. Tolat and Co. [1980] 126 ITR 551. The Commissioner of Income-tax (Appeals) allowed the appeal of the assessee in part, by accepting the contention of the assessee. The expenditure of interest was found to be as deductible revenue expenditure. The Department being aggrieved by the said decision had gone before the Tribunal. The Tribunal, however, found that the facts of the present case and the case in CIT v. R. Tolat and Co. [1980] 126 ITR 551 (Guj) were quite distinguishable and held that the deduction claimed by the assessee was not allowable. In the background of such facts and circumstances, the present reference has been made.
3. We have heard Mr. Talati, learned counsel for the applicant, and Mr. Mihir Thakore for the respondent at length.
4. Our attention has been drawn to the decision of this court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715, wherein it was held in the facts of that case that it could not be disputed that the business organisation, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organisation of both the units. The production of both the units was considered the production of the assessee company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on November 8, 1959, and in the application for licence submitted by the assessee to the Government, it was stated that the new unit at Bangalore was nothing but an expansion of the existing business. It was found in that case that there was complete inter-connection, interlacing and inter-dependent of both the units. This test has been laid down by determining whether two lines of business constitute the "same business" within the meaning of section 24(2) by the Supreme Court in the case of Commissioner Of Income Tax, Madras v. Prithvi Insurance Co. Ltd.. [1967] 63 ITR 632 and again approved by the Supreme Court in the case of Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739. By following the said principle, the Division Bench found the necessary criteria for finding the "same business".
5. Our attention has also been drawn to another decision in the case of B.R Limited v. V.P Gupta, Cit., CIT [1978] 113 ITR 647 (SC), which is a case in the context of set off of carried forward loss under section 24(2) of the Act for the purpose of ascertaining whether two lines of business constitute the same business. In the aforesaid case, where the company having incurred a loss in the business of import and sale of fabrics in the calendar year 1952, which was the previous year relevant to the assessment year 1953-54, closed the business towards the end of that calendar year and started from the commencement of the calendar year 1953, relevant to the next assessment year 1954-55, the business of exporting cotton textiles and earned profits in the business in that year and subsequent years, it was held that in view of the common management and common control of the businesses the company was entitled to carry forward the loss in the import business of the assessment year 1953-54 and set it off against the profits of the export of the export business of the assessment years 1954-55 to 1956-57. While deciding that case, the decisions in the case of Hooghly Trust (P) Ltd. v. Cit, West Bengal, Etc. [1969] 73 ITR 685 (SC), Shree Ramesh Cotton Mills Ltd. v. CIT [1967] 64 ITR 317 (Cal) and other decisions were considered.
6. So far as the facts of the present case are concerned, we find that the petitioner was engaged in trading business. He started an independent manufacturing business at a different place. The facts of each case have got to be appreciated in the proper perspective. Considering the nature of the trading business and considering in depth the business of manufacturing since started by the assessee. The Tribunal has considered the materials on record and found that both the businesses are not the same business and the relief sought for by the assessee will not be available. The finding of fact of 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 several other High Courts, as discussed above. We do not find anything wrong with the judgment of the Tribunal. We, therefore, answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee.
7. This reference accordingly stands disposed of with no order as to costs.
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