Rama Jois, J.
1. As directed by this court, by an order made under s. 256(2) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question of law for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the interest of Rs. 42,846 claimed by the assessee for the assessment year 1969-70 ?'
2. During the accounting year 1967-68, the assessee was carrying on the business of film distribution on his own and also exhibition of films on percentage basis under agreements entered into by him with theatre owners. For the purpose of securing a lease of a fully equipped cinema theatre,he entered into an agreement dated July 5, 1967, with his wife. According to the agreement, the assessee was to pay to his wife a sum of Rs. 3,50,000 and the wife was to construct the cinema theatre, to equip it fully, for being used for the exhibition of films and to allow the assessee to use the theatre on rental basis and the rent payable was required to be adjusted out of the deposit so made in the manner indicated in the agreement. In terms of the agreement the assessee paid the sum of Rs. 3,50,000 to his wife having borrowed the said amount on payment of interest. During the assessment year 1969-70, he claimed the deduction of interest of Rs. 42,846 paid on the borrowed money. The ITO disallowed the deduction of interest of Rs. 42,846 paid on the borrowed money. The ITO disallowed the deduction claimed on the ground that the money borrowed and paid under the agreement for construction of the theatre and its equipment was not for the purpose of business carried on by the assessee. The AAC, before whom the assessee preferred an appeal against the assessment order, confirmed the order holding that the cinema theatre came into existence only in February, 1969, and, therefore, the capital borrowed was not for the purposes of the appellant's business and the interest paid on such amount is not deductible under s. 36(1)(iii) of the Act. The Tribunal also held that the theatre called 'Kino Theatre' secured by the assessee under the agreement was ready and commenced exhibition only on February 7, 1969, and, therefore during the relevant year it was not capital borrowed for his business. It further held that the amount was paid to his wife and not due to any commercial expediency.
3. Sri K. Srinivasan, learned counsel for the assessee, contended as follows :
(i) As the capital borrowed was invested by the assessee during the accounting year for the purpose of acquiring a business asset notwithstanding the fact that the asset was not available for use during that year; and
(ii) as the assessee was already carrying on film business, both distribution and exhibition on percentage basis, under agreements with the theatre owners, the capital borrowed for the purpose of securing a cinema theatre for doing the business of exhibition on his own, he was entitled to the deduction of the interest paid, under s. 36(1)(iii) of the Act. Sri Rajasekhara Murthy, learned counsel for the revenue, on the contrary contended as follows :
(i) As the exhibition of cinema commenced only on February 7, 1969, the assessee could not claim deduction for the earlier period, as the theatre was not in use before that date.
(ii) The assessee had no exhibition business during the period in question and up to February 9, 1969, and, therefore, as the money borrowed was for exhibition business, and not for distribution business, he was not entitled to the deduction of interest paid on such borrowed money.
4. Before adverting to the rival contentions, it is useful to refer to the relevant parts of s. 36 of the Act. It reads :
'36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in sections 28 - ......
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession........'
5. In the present case, there is no dispute that the capital was borrowed for the purpose of securing a fully equipped cinema theatre lease. The amount was paid under the agreement on July 5, 1967. The conditions contained in the agreement make it clear, that the money paid was for the specific purpose of securing the lease of the cinema theatre. The money so paid was required to be adjusted towards the rent payable from the date of handing over possession of the theatre in the manner provided in the agreement. The learned counsel for the revenue on being asked, stated, at the time of hearing, that deduction of interest was allowed during the assessment year 1970-71 as the exhibition of films in the theater commenced on February 7, 1969. However, he maintained that dedection disallowed during the assessment year 1969-70 was correct as exhibition business had not commenced.
6. On the facts of this case, there can be no doubt that the money was borrowed for the purpose of acquiring the leasehold right in a new theatre and, therefore, it was capital borrowed and invested during the relevant accounting year for purposes of the business of the assessee. The fact that the theatre actually was ready and was occupied by the assessee on February 7, 1969, does not make any difference, for claiming deduction of interest paid on such capital borrowed. Under s. 36(1)(iii) of the Act, it is not necessary that the assessee must have used the business asset for doing business in the relevant accounting year the spending of capital borrowed for purposes of acquisition of business asset, during the relevant accounting year is sufficient, for the entitlement, to the deduction of interest paid under s. 36(1)(iii) of the Act. This is also the view taken by the Division Bench of this court of which one of us (Rama Jois J., was a member in I.T.R.C. No. 165 of 1975 - Addl. CIT v. Southern Founders dated 12-1-1979 (since reported in : 120ITR37(KAR) and also by the Bombay High Court in Calico Dyeing and Printing Works v. CIT : 34ITR265(Bom) . We accept the first contention urged for the petitioner and hold that there is no substance in the first contention urged to the contrary for the revenue.
7. The learned counsel for the revenue, however, contended that even assuming that the assessee had taken loan and invested it during the accounting year for acquiring a theatre for doing exhibition business, the assessee's business during the relevant accounting year was only that of distribution of films and not of exhibition and therefore, it was not capital borrowed for the purposes of his business and, therefore, he was not entitled to the deduction of interest. Elaborating this submission he argued that in order to claim deduction of interest paid on borrowed capital, it is essential that it must be for the purpose of a particular business carried on by the assessee during the relevant year, and if the borrowing is for any other business, deduction is impermissible. So he maintained that distribution of films is a separate and distinct business from exhibition and, therefore, as the assessee was only a distributor, till February 7, 1969, the deduction could not be permitted.
8. In our view the submission of the learned counsel for the revenue, lacks both factual and legal basis. The factual basis for the submission does not exist because the assessment order, annex. A, shows that the assessee was doing business, of exhibition through Geethanjali and Mahalaxmi theatres and his share of income in that business was included in the assessment. Further, the Tribunal in the second para. of its order stated as follows :
'2. The assessee is the proprietor of M/s. Goodwin Pictures Corporation. The assessee does not have a theatre of his own for exhibiting films. The assessee used to enter into agreements with theatre owners as a result of which the latter were to exhibit films on percentage basis. In essence, the assessee's business was as a distributor of films.' (Underlining by us)
9. Having said that the assessee was doing exhibition business, in the next sentence, it proceeded to state that the business of the assessee in essence was only distribution. Having said so, the Tribunal held that deduction of interest on capital borrowed for business of exhibition cannot be permitted. Obviously the Tribunal ignored the fact available from the assessment order and noticed by it that the assessee was also doing exhibition business on percentage basis, in stating that he had no exhibition business. But the uncontroverted facts disclosed from the assessment order and the order of the Tribunal themselves show that the assessee was carrying on business of exhibition also during the relevant year and the capital borrowed was for the purpose of setting up his own independent exhibition business, instead of carrying on the exhibition on percentage basis under agreements with theatre owners. Therefore, the factual basis on which the submission is made for the revenue is non-existent.
10. Secondly, the submission lacks legal basis also. Admittedly, the assessee was a businessman during the relevant year, even assuming that he was only doing business of distribution of films. As he wanted to extend his business to exhibition field also, for that purpose, it was necessary for him to acquire a theatre and for acquiring a theatre he had to pay a sum of Rs. 3,50,000 and it was for that purpose he borrowed money. The learned counsel for revenue strenuously contended that distribution business is entirely different from exhibition business and a person carrying on one such business, cannot claim the benefit of s. 36(1)(iii) of the Act in respect of capital borrowed for doing another business. We fail to see how the capital borrowed by a person doing film distribution business, for extending his business to exhibition also is not for the purpose of his business. Different heads of income chargeable to tax under the Act are classified under s. 14 of the Act, which reads thus :
'14. Heads of income. - Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income : -
A. - Salaries. B. - Interest on securities. C. - Income from house property. D. - Profits and gains of business or profession. E. - Capital gains. F. - Income from other sources.'
11. Under item 'D' aforesaid, profits and gains of business is one such category of income. Therefore, an assessee though he may be carrying on more than one business the income from all such businesses falls only under s. 14-D. There is no scope for treating each business separately. Therefore, in this case the assessee's business was film business, whether he carried on business of only distribution or only exhibition, or both and for the purposes of the Act, his income from such business is liable to tax under the head 'Profits and gains of business'. The fact that the assessee was doing one type of business and wanted to extend to another type of business makes no difference, for computing his income under s. 36 of the Act.
12. The above view receives support from the decision of the Supreme Court in State of Madras v. G. J. Coelho : 53ITR186(SC) . The said case arose under the provisions of the Madras Plantations Agricultural I.T. Act, 1955 (hereinafter referred to as 'the Madras Act'). Section 5(e) of the Madras Act provided for deduction of interest paid during the relevant year on any amount borrowed and actually spent on plantation from which the agricultural income is derived in the income of the assessee. The facts of that case were that the respondent therein, a planter, had borrowed money for the purchase of a new plantation and claimed deduction of interest paid on the borrowed money. The question that arose was whether the interest on money borrowed for the purchase of a new plantation was deductible under s. 5(e) of the Madras Act. The Supreme Court referred to various decisions interpreting s. 10(2)(iii) and (xv) of the Indian I.T. Act, 1922, which was analogous to s. 5(e) of the Madras Act, and held as follows (p. 194) :
'Applying the above principles to the facts of this case, it seems to us that it is impossible to dissociate the character of the assessee as the owner of the plantation and as a person working in the plantation. The assessee had bought the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts. There is nothing in the Act which prohibits such expenses from being deducted. No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses and as long as the deductions he claims, apart from any statutory prohibition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act. In principle, we do not see any distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations; both are for the purpose of the plantation.' (Underlining is ours)
13. Section 36(1)(iii) of the Act is analogous to s. 5(e) of the Madras Act and s. 10(2)(iii) and (iv) of the Indian I.T. Act, 1922. Hence, the above principle equally applies to the present case. There can be no distinction between interest paid on capital if borrowed by the assessee for his film distribution business and the interest on the capital for the acquisition of the lease of theatre for carrying on the business of exhibition. Both are for purposes of his film business and deductible under s. 36(1)(iii) of the Act while computing his profits and gains of business.
14. The learned counsel for the revenue, however, tried to distinguish the said case by inviting our attention to the decision of the Bombay High Court in Metro Theatre Bombay Ltd. v. CIT : 14ITR638(Bom) pointing out that the decision was distinguished by the Supreme Court in Coelho's case : 53ITR186(SC) . In our view, on the facts of this case, the principle laid down in Coelho's case is applicable and the decision of the Bombay High Court is not apposite, as on facts, it was held that the borrowing of capital, had no immediate connection with the cinema business of the assessee in that case. Another decision on which the learned counsel for the revenue relied was the decision of the Gujarat High Court in CIT v. Sandesh Ltd. : 56ITR399(Guj) . In that case, it was held that the money borrowed by the assessee was more in his character as owner of property than as a trader and, therefore, the interest paid on such borrowing was not deductible under s. 10(2) (iii) or (xv) of the Indian I.T. Act, 1922. This decision also has no relevance to this case. As pointed out by the Supreme Court in CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , the expression 'for the purpose of the business' is wider than the expression' for the purpose of earning profits' and in order to claim allowance, the money must have been spent for the business, by the assessee, in his capacity as a person carrying on the business. As stated earlier, in the present case, the capital borrowed was expressly for the purpose of acquiring a full equipped cinema theatre. The capital borrowed was invested immediately by the assessee by handing over the same to his wife under the agreement dated July 5, 1967, and within a reasonable time thereafter the possession of theatre for exhibition of films was secured on February 7, 1969. Therefore, the capital borrowed was for the purposes of business of the assessee and in his capacity as a businessman. There is clear nexus between the capital borrowed and the acquisition of business asset, i.e., cinema theatre by investing the capital so borrowed. It follows therefore, that the assessee is entitled for acquiring leasehold rights of a theatre for his film business. It is also admitted that deduction of the interest paid on the same borrowed amount has been allowed under s. 36(1)(iii) of the Act in favour of the assessee during the accounting year 1969-70. When it is established that the capital borrowed and paid by the assessee to his wife, was for the purpose of his business, i.e., acquisition of leasehold right in the new theatre to be constructed and equipped by the wife, and in fact it was constructed, equipped and handed over to the assessee, the mere fact that the lessor was the wife of the lessee is no ground to hold that the money paid was only on account of relationship and not as a commercial expediency and to disallow the deduction to which the assessee is entitled under s. 36(1)(iii) of the Act. Hence, the second contention urged for the assessee is also upheld and the contention urged to the contrary by the revenue is rejected.
15. In the light of the discussion, we answer the question referred for our opinion in the negative and in favour of the assessee.