Law:

Section:

Section 36(1)(iii) of the income-tax act, 1961-Interest on borrowed capital-Earlier to relevant assessment years, assessee carried on jewellery business and business of exhibition of films-For construction of cinema theatre, assessee had made certain borrowals-Films exhibition business and theatre were transferred by assessee as a going concern to new partnership-Whether jewellery and film exhibition businesses were composite and not separate-Held, no-Whether interest attributable to assessee's impugned borrowals were allowable as business expenditure-Held, no. Facts The assessee, a registered firm, was carrying on business in the manufacture and sale of jewellery. Earlier to the relevant assessment years, the assessee was carrying on business in exhibition of films in their theatre along with the jewellery business. For the construction of the said theatre, the assessee had made borrowals and had been paying interest thereon. The said business of exhibition of films as also the theatre was transferred by the assessee as a going concern to a new partnership concern. The investment in the theatre made by the assessee-firm was treated by the new firm as a fixed deposit of the assessee and interest was paid thereon by the new firm to the assessee. This interest was assessed under the head 'Income from other sources' in the assessee's hands. So long as the assessee ran the business of exhibition of films in the theatre as its own business, the interest paid on the borrowals for the construction of the said theatre was being allowed as a deduction. For the relevant assessment years, the assessee's claim for deduction as business expenditure in respect of interest paid on the borrowals was rejected by the ITO on the ground that the business of exhibition of films in the said theatre was not in existence during the respective year of account and, therefore, the interest on borrowals attributed to that particular business could not be allowed as a deduction in computing the profits of the jewellery business. On appeal before the Tribunal, the assessee contended that since (1) under its deed of partnership it had been authorised to carry on other businesses such as the…

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