1. The assessee in this case is a registered firm of five partners carrying on business in the manufacture and sale of jewellery. Earlier to the assessment years 1967-68 to 1969-70, the assessee was carrying on business in the exhibition of films in their theatre 'Safire' along with the jewellery business. For the construction of the said theatre, the assessee had made borrowals and has been paying interest thereon. However, the said business of exhibition of films as also the 'Safire' theatre was transferred by the assessee as a going concern to a new partnership concern with effect from July 31,1965. The investment in the 'Safire' theatre made by the assessee-firm to the extent of Rs. 12.39 lakhs was treated by the new firm as a fixed deposit of the assessee firm and interest was paid thereon by the new firm to the assessee-firm at 5% p. a. The interest earned by the assessee on the said deposit from the new firm was assessed under the head 'Other sources' in the assessee's hands. So long as the assessee ran the business of exhibition of films in Safire theatre as its own business, the interest paid on the borrowals for the construction of the said theatre was being allowed as a deduction. However, for the assessment years 1967-68 to 1969-70, the assessee's claim for deduction as business expenditure in respect of interest paid on the borrowals referred to above was rejected by the ITO holding that the business of exhibition of films under the name of Safire theatre was not in existence during the respective years of account and, therefore, the interest on borrowals attributable to that particular business cannot be allowed as a deduction in computing the profits of the jewellary business.
2. The assessee took the matter in appeal to the AAC contending that once the monies are borrowed and used for business, they can never lose their character, that the interest paid thereon should be allowed as a business expenditure relying on the decisions in AL. A.R. Brothers v. CIT  3 ITC 209 and Mitapchand R. Shah v. CIT : 58ITR525(Mad) and that the interest attributable to the investments in M/s. Safire Theatre should be considered under the head 'Business' only and not under the head 'Other sources'. The AAC accepted the assessee's contention and held that as the borrowals at the time when they were made were only for the business, the disallowance of the claim for deduction merely because the borrowed funds lost their identity at a later period of time cannot be justified in law especially when the monies had been borrowed for, and had been used in, the construction of the theatre, the income from which was assessed in the earlier years under the head 'Business'. He also held that the decisions above referred to as also the decision of the Bombay High Court in Mills Store Company v. CIT : 80ITR225(Bom) , supported the assessee's contention. He alternatively held that the business in jewellery and the exhibition of films should be taken to be the same business and so long as the jewellery business is continued, the interest paid on the borrowings for the purpose of the construction of the theatre is to be allowed as a deductions as part of the same business being carried on.
3. Aggrieved by the order of the AAC, the Revenue preferred appeals to the Income-tax Appellate Tribunal contending that the AAC erred in holding that the interest payments should be allowed as an admissible deduction under the head 'Business' on the ground that the assessee should be considered as having continued the business of exhibition of films ignoring the fact that the assessee did not carry on the business of exhibition of films during the previous years relevant to the assessment years in question and no income in respect of this business was charged to income-tax under s. 28 and that, therefore, the question of allowing any expenditure under the head 'Business', in respect of the said business, did not arise. It was also contended by the Revenue that the interest payment should not be allowed as an admissible deduction under the head 'Business', that during the relevant previous years, the assessee carried on the business of jwellery alone and that the two business, namely, jewellery and exhibition of films, were not interdependent, interlinked or : interlaced and as such they cannot from part of the same business. The assessee, on the other hand, contended before the Tribunal that under clause 4 of the deed of partnership dated April 21, 1961, as amended on November 5, 1962, the firm has been authoriesed to carry on other businesses such as running of restaurants, cinema theatres, tourist services, travel agencies and such other business as the partners may decide from time to time, that therefore, all the businesses it may undertake should be taken to be a composite one and not separate, that as a consolidated balance-sheet was maintained in respect of the borrowals, the borrowings should be taken to be for the whole business and not for the business of exhibition of films alone and, hence, even if the film business has been stopped, the assessee is entitled to the deduction of the interest payments under the head 'Business' and not under the head 'Other sources'.
4. The Tribunal on these rival contentions found that the Safire theatre was constructed by the assessee-firm and films were being exhibited therein, that the income therefrom was admitted in the assessee's return as business income, that with effect from July 31, 1965, the business of exhibition of films in Safire theatre was transferred by the assessee to a new partnership, that for the construction of the theatre, the assessee had made heavy borrowals, that the interest on such borrowals was allowed by the Department as a deduction so long as the firm was running the theatre as its own business and that the assessee had made interest payments for the years in question in respect of the said old loans. On those facts, the Tribunal held that the assessee's claim was clearly admissible, that the business of the assessee in jewellery and in exhibition of films from part of the same business as is clear from clause 4 of the deed of partnership as amended and that merely because the assessee has stopped the activity on July 31, 1965, of exhibition of films, it cannot be taken to have discontinued the business as admittedly it is carrying on the jewellery business. According to the Tribunal, once it is found that there has been a borrowal for the purpose of business carried on by the assessee and it has been used in the business, even if that business for which the borrowal was made is discontinued, the assessee is entitled to claim deduction so long as it carried on some business. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference to this court on the following questions :
'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 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 July 31, 1965, and the business of exhibition of cinematographic films stopped on and from July 31, 1965
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 ?'
5. The second question has to be taken up first, for, if the jewellery business and the business of exhibition of films are taken as a composite business, then, notwithstanding the stoppage of a portion of the business, the assessee is entitled to claim the interest paid on the capital borrowed for the purpose of that portion of the business and the deduction can be allowed in respect of the other portion of the composite business. Therefore, we proceed to deal with the question as to whether the jewellery business and the business of exhibition of films is a composite business as has been held by the Tribunal or they are separate businesses as urged by the learned counsel for the Revenue.
6. In a recent unreported decision of this court in CIT v. Blue Mountain Estates and Industries Ltd. (T.Cs. Nos. 378 of 1978. etc. - since reported in : 151ITR616(Mad) , this court, after referring to the decisions of the Supreme Court in CIT v. Prithvi Insurance Company Ltd. : 63ITR632(SC) , Standard Refinery and Distillery Ltd. v. CIT : 79ITR9(SC) , CIT v. Maharashtra Sugar Mills Ltd. : 82ITR452(SC) and B. R. Ltd. v. V. P. Gupta, CIT : 113ITR647(SC) , had held that unity of control is not the sole and exclusive test and that even in cases where the test of unity of control is satisfied, the other tests such as interconnection, interlacing and interdependence are to be satisfied, if the various lines of businesses are taken to be the same and composite business. No doubt, in this case, since the assessee had run the business of jewellery as well as the business of exhibition of films, the test of unity of control is satisfied. But that is not sufficient to hold that the businesses are composite. It is not in dispute that the assessee was originally carrying on the jewellery business and the cinema business was started later and the borrowing in this case is in respect of that new business. That business has now been closed while the old business of jewellery still continue. The closing of the cinema business has not affected in the least the assessee's old business in jewellery. Thus there is no interconnection, interlacing or interdependence between the jewellery business and the cinema business. Unless there is interconnection, interlacing or interdependence between the jewellery business and the cinema business, it is not possible to say that both the businesses constitute a composite or same business. In this case, the Tribunal has merely proceeded on the basis that since the test of unity of control is satisfied, it should automatically lead to the inference that both the businesses constitute the same business. In another unreported decision of this court in Tube Suppliers Ltd. v. CIT (T. Cs. Nos. 1275 and 1276 of 1977 - Since reported in  152 ITR 693, where the assessee who originally carried on refractory works for manufacture of fire bricks, started two other business, one in lamp factory and another in collapsible tubes. The question arose whether all the three businesses comprise one and the same business for the purpose of allowance of unabsorbed losses and unabsorbed depreciation. This court after referring to the decisions of the Supreme Court in Produce Exchange Corporation Ltd. v. CIT : 77ITR739(SC) , Standard Refinery and Distillery Ltd. v. CIT : 79ITR9(SC) , and B. R. Ltd. v. V. P. Gupta, CIT : 113ITR647(SC) , held that in all these cases the Supreme Court has proceeded on the basis that unless the business which has been stopped is an integral part of the business which has been continued, the benefit of carry forward of losses or carry forward of unabsorbed depreciation cannot be claimed by an assessee. We have to, therefore, answer the second question in the negative and in favour of the Revenue.
7. Coming to the first question, it involves two aspects, (1) whether the interest paid on the borrowals made by the assessee for the construction of the Safire theatre could or whether it should be allowed under the head 'Other sources' as claimed by the Revenue, and (2) whether the investment of amounts borrowed for the purpose of construction of the Safire theatre after its sale which clearly amounts to a diversion of the funds and whether the interest paid on the same is to be allowed assuming that the jewellery business as well as the cinema business are one and entire. In view of our finding on the second question that the jewellery business and the cinema business are two separate businesses, the borrowings made by the assessee for the construction of the theatre cannot be allowed as a deduction under the head 'Business' after the business of running the cinema theatre had been closed as a result of the sale of the theatre on July 31, 1965, as a going concern to a different firm. Once the assessee has ceased to carry on that business for which the amount was borrowed, the interest payments cannot be deducted as a business expenditure as admittedly the business had been stopped and no income accrued therefrom. Now we come to the alternative contention put forward by the Revenue that even if the two businesses are taken to be the same and the assessee is taken to have carried on the same business even after July 31, 1965, still the amounts borrowed for the construction of the theatre, after the transfer of the theatre to a different concern, has been used for investment, the interest payments cannot be treated in any sense a business expenditure. The learned counsel of the Revenue, in support of the said contention, refers to an unreported decision of this court in CIT v. Sujani Textiles Private Ltd. (T.C. Nos. 130 to 134 of 1978 and T.Cs. No. 408 of 1978 - since reported in : 151ITR653(Mad) . In that case, the assessee which is a limited company borrowed certains funds from the public by inviting deposits for the purpose of purchasing shares. However, shares were not purchased in the name of the company but were purchased in the names of its directors and in the books of account of the company respective amounts were shown as having been advanced to them by the company. The company claimed deduction in respect of the interest paid on the amounts borrowed and the lower authorities having rejected that claim on the ground that the amount borrowed has been used for non-business purposes, that is for the purpose of investments and that, therefore, the borrowed amount cannot be said to have been used for the purpose of the business. When the matter reached this court, this court held that since the amount borrowed stands diverted to a non-business purpose, the interest paid on the borrowings cannot be claimed as a deduction under s. 36(1)(iii) of the Act. In that case, it has been specifically pointed out that once there is a diversion of the funds either for investment or for non-business purposes, the interest payments cannot be claimed as deduction under s. 36(1)(iii). Following the said decision, we have to hold that the Tribunal is in error in this case in accepting the assessee's claim for deduction under s. 36(1)(iii) when the entire amount borrowed, though originally utilised for the construction of the theatre, now stands invested in the firm which had purchased the cinema theatre from the assessee and that in view of such a diversion, it cannot be taken that the accounts borrowed have been used in the business in the relevant assessment years so as to attract s. 36(1)(iii) of the Act.
8. The learned counsel for the assessee has raised at the time of the hearing a new factual position. According to him, the interest payment in respect of which deduction is claimed is on the amounts borrowed for the purpose of the jewellery business and so long as the jewellery business is continued, the assessee is entitled to claim deduction of the interest payments under the head 'Business'. His submission is that the Safire theatre was sold as a going concern to a new firm with all rights and liabilities and, therefore, the liability to pay interest on the capital borrowed for construction of the cinema theatre is on the transfer firm and that the claim made by the assessee now is only in respect of the interest payments on the borrowals made for the purpose of the jewellery business. If this were the correct factual position, then there may not be any difficulty in the assessee succeeding in his claim for deduction of the interest payments under the head 'Business' for admittedly the assessee is still carrying on the jewellery business or which the borrowal is made. But the factual position put forward by the learned counsel for the assessee now therefore us does not seem to have any real basis at all. Right through, the assessee has been claiming deduction of the interest payments treating the borrowals as having been made for the construction of the Safire theatre of the payments of interest had not been treated as exclusively relatable to the borrowings made for the jewellery business. As a matter of fact the order of the AAC refers to the claim of the assessee in this regard and says :
'He (learned counsel for the assessee) pleads that interest payments attributable to the investment in M/s. Safire theatre should be considered as a deduction under 'Business' only and not under the head 'Other sources'.
9. This clearly indicates that the interest payments in respect of which relief was claimed by the assessee related only to the borrowings made for the construction of the Safire theatre. The same was not claimed by the assessee at any time before as referable to the jewellery business. Therefore, there does not appear to be any factual basis for the present contention put forward by the learned counsel for the assessee that the interest payments in respect of which relied if claimed by the assessee in this case related to the jewellery business and not to the cinema business.
10. In CIT v. Somasundaram, AIR 1928 Mad 487, a Full Bench of this court, construing s. 10(2)(iii) of the Indian I.T. Act, 1922, corresponding to s. 36(1)(iii) of the 1961 Act, held that the expression 'the business' occurring in that section means the business whose profits are being assessed in the year under consideration and from the profits of which, interest on capital is sought to be excluded for the purpose of taxation. In that case, the assessee carried on business at various places including Madras where the head office was, and Ipoh, a place in the federated Malay States. Money was borrowed by the assessee in Madras and part of the money was sent to Ipoh and was used as capital in the conduct of the Ipoh business. Deductions were claimed in respect of the entire interest paid by the assessee. The ITO allowed deductions so far as they related to the Branches in British India but disallowed the deductions claimed in respect of such sums of money as were remitted as capital to the Ipoh branch. When that was challenged on a reference to this court, this court held that the deductions to be made are normally those as represent sums of money which it is necessary to pay out in order to earn the very profit which are under review to be taxed such as any rent paid for the premises in which such business is carried on and repairs thereto. The learned judges construed the expression 'capital borrowed for the purposes of the business' as meaning capital borrowed and used for the purpose of the business the income of which is sought to be taxed. The above decision has been referred to with approval by the Supreme Court in CIT v. Indian Bank Ltd. : 56ITR77(SC) .
11. As a result of the above discussion, we also answer the first question referred to us in the negative and against the assessee. The answer will pay costs of the Revenue. Counsel's fee Rs. 500 (one set).