JUDGMENT
Satish Chandra, J.
1. Messrs. Prem Spinning and Weaving Mills Ltd., the assessee, is a limited company which runs a spinning and weaving mill at Ujhani. The previous year relevant for the assessment year 1966-67 ended on 12th April, 1966. It appears that the assessee wanted to set up a straw-board manufacturing factory. To that end it secured a loan of Rs. 7,50,000 from the U. P. Financial Corporation. The assessee incurred an expenditure of Rs. 38,450 on account of this loan. This amount included Rs. 11,621 paid to the Corporation as interest, Rs. 1,850 on account of commitment levy, Rs. 16,852 on account of cost of stamp, Rs. 7,561 on account of registration charges and Rs. 564 on account of legal charges. The question was whether the expenditure of Rs. 38,450 was
deductible under Section 37 of the Income-tax Act, 1961, as an expenditure laid out wholly and exclusively for the purpose of business. The Income-tax Officer disallowed the claim. He held that this was an expenditure incurred for setting up a new business and not for one which was already in existence. This expenditure cannot hence be allowed out of the profits earned by the textile business of the assesses. This view was affirmed on appeal by the Appellate Assistant Commissioner.
2. The assessee then took the dispute to the Tribunal. The Tribunal held that the amount in question did not represent an expenditure incurred in connection with an existing or a continuing business. It was incurred in connection with the business which was newly set up. There was no relation between the textile mills and the straw-board factory. It was altogether a fresh venture undertaken with the help of surplus funds and also of borrowals from the Financial Corporation. The new project, however, could not be identified with the old existing business. The decisions of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax, [1966] 60 ITR 52 (SC) and in Netherlands Steam Navigation Co. Ltd. v. Commissioner of Income-tax, [1969] 74 ITR 72 (SC) were held applicable to an expenditure incurred in connection with an existing business. They were inapplicable to the facts of the present case. The Tribunal further held that the loan will not bring into existence any capital asset and the ultimate use to which the loan was put would not be material to the decision about the nature of expenditure incurred. But, when the business in connection with which the expenditure was incurred had not yet been set up, let alone commenced, all those considerations did not arise at all. The question of allowing expenditure would arise only after the business has reached a take-off stage.
3. At the instance of the assessee, the Tribunal has referred the following question of law for the opinion of this court:
“Whether, on the facts arid in the circumstances of the case, the amount of Rs. 38,450 was allowable as a deduction in determining the business profits of the assessee-company for the assessment year 1966-67 ? ”
4. The admitted position is that the memorandum of association of the
assessee-company specifically states that one of the objects of the company
is to manufacture straw-board, mill board, pulp board, coir-washers and to
sell the same. The straw-board factory was set up by the assessee by
utilising its existing surplus funds and borrowals from the Financial
Corporation. The borrowings from the Financial Corporation were specifically for the purpose of setting up a new plant and machinery and for
construction of a new factory building for straw-board factory. There is no
denial that the assessee is controlling its existing spinning mill as well as
the new project of straw-board factory. There is one establishment in regard
to control of both the units. The business is interconnected. The profit and loss account ox the company embraces the business of the straw-board factory. The balance-sheet represented the financial picture of the company after taking Into consideration the affairs of both the units.
5. In our opinion the Tribunal was in error in holding that the assesses has set up a new business. In Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax, [1961] 41 ITR 272 (SC) the Supreme Court held :
“In order to determine whether different ventures can be said to constitute the same business what one has to see is whether there was any interconnection, any interlacing, any interdependence, any unity embracing the ventures, whether the different ventures were so inter-laced and so dovetailed into each other as to make them into the same business.”
6. The decision of the Supreme Court in Produce Exchange Corporation Ltd. v. Commissioner of Income-tax, [1970] 77 ITR 739 (SC) is apposite, There, the assessee carried on the business as a dealer in several commodities as well as In stocks and shares. It had suffered loss in the sale of shares which the company claimed to carry forward and set off against the profits of subsequent years from transactions in other commodities. It was found that there was complete unity of control and shares were one of a number of commodities in which, the company dealt in the ordinary course of business and that there was no element of diversity or distinction or separateness about the transaction in shares. The Supreme Court held that the decisive test was unity of control and not the nature of the two lines of business. Where the management was common, the trading organisation, the administration, the funds and the place of business were common, it cannot, be said that the different ventures were different businesses carried on by the same company. The same view was reiterated in Standard Refinery and Distillery Ltd. v. Commissioner of Income-tax, [1971] 79 ITR 589 (SC). Applying these settled principles it is evident that in the present case the assessee controls both the ventures of spinning and weaving mills as well as the straw-board factory. The management, trading organisation, the administration, the funds and the place of business are identical. It cannot, hence, be said that the setting up of a straw-board factory was initiation of a different business by the assessee and on that ground the expenditure could not be disallowed. The question that the nature of the business was different from the existing one is immaterial for determining whether the business was different.
7. Learned counsel for the department argued that the amount spent was in the nature of capital expenditure. This submission is contrary to the decision of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax. In that case the assessee had obtained a loan of Rs. 40,00,000
from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyers’ fees, etc., and claimed the amount as business expenditure. The Supreme Court held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee’s business and was therefore allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The act of borrowing money was incidental to the carrying on of the business, the loan obtained was not an asset or an advantage of an enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained.
8. We, accordingly, answer the question referred to us in the affirmative, in favour of the assessee and against the department. The assessee would be entitled to costs which we assess at Rs. 200. The fee of the learned counsel is assessed in the same figure.