C T DESAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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 :

(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.) 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 threatre commenced on February 7, 1969. However, he maintained that dedection disallowed during the assessment year 1969-70 was corect as exhibition business had not commenced.