G.K. Devarajulu Naidu vs Commissioner of Income Tax, Madras

Ramanuham, J.—The following two common quetions of law have been referred to this court by the Income Tax Appellate Tribunal,

Madras, under s. 256(2) of the I. T. ACt, 1961, hereinafter referred to as ""the ACt"" :

Whether, on the facts and in the circumstance of the case, the inspection notes of the Inspecting Assistant Commissioner from the records of

assessment and the note of the inspector would constitute information within the meaning of section 147(b) so s to justify the application of section

147?

Whether on the fact and in the circumstance of the case, and having regard to the figures given in the order of the Appellate Assistant

Commission, the Tribunal was right in not giving a reasonable opportunity to the assessee for making out a case for allowance of a fair estimate of

interest?

The reference relates to the assessment year 1961-62 to 1963-64. The assessee is an individual deriving income from salary property, shares

from two managing in agency firms and other sources such as divided interest, etc. The original assessment for the assessment year 1961-62 was

completed on January 1, 1963. the ITO proposed to reopen the assessment under s. 147(b) of the Act as he found that in the original assessment

a larger interest was allowed as a deduction from the income asset under the heard ""other sources"". the assessee filed a return in repose to a notice

under s. 148. The assessee has claimed in the original assessment deduction of the interest amounting to Rs. 54,577 under the head ""Other

sources"" and a sum of Rs. 41, . 627 was allowed and the balance wa disallowed. the original disallows wa made on the ground that on his

borrowings to whose interest has been paid has not only gone for the purchase of shares which brought in the divided income be also to his other

person requirements and, therefore, the interest payments, so far as they replied to borrowings made of this personal expenditure, should be

disallowed. After reopen, the ITO presumed that th entire share holding of the assessee were acquired by utilizing the funds borrowed from the

bank and, allowing interest on the amount borrowed at th average rate of 6 1/3 held that a sum of Rs. 15,557 only could be allowed as deducting;

the balance was disallowed. Similarly, for the assessment year 1962-63 the assessment was originally completed on February 29, 1964, but the

same was reopended under s. 147(b) of the ACt. In the original assessment, as against the claim of the assessee for allowance of interest at Rs.,

57,254 the ITO has allowed Rs. 42,184 and disallowed Rs. 14,061. After reopening of the assessment, the ITO took the aggregate value of the

shares held by the assessee in that year at RS., 2,83,611 and adopting the average interest at 6 1/2% he worked out the interest to be allowed at

Rs. 18,500 and the balance was disallowed.

For the assessment year 1963-64, the original assessment was completed on March, 31, 1965. After the reopening of the assessment, the ITo

took the entire value of the shareholding at Rs. 3,48,952 and allowing an average interest thereon at 7% he determined the allowable amount of

interest at Rs. 24,5000 and the balance of the interest payments was disallowed.

Aggrieved by the orders of reassessment passed by the ITO for all the three years, the assessee appealed to the AAC challenging not only the

jurisdiction of the ITO to reopen the assessment under s. 147(b) of the ACt but also on the merits of the disallowance of interest. The AAC dealt

with the appeals for all the three yeas by a common order. He found certain banks and insurance companies s loans, that the land in the first

instance were deposited with M/. s. G. Kuppuswami Naidu and Company and whenever monies were required for payment of tax, LIC premium,

personal expense or loans to other, monies were drawn from the said account and that on the borrowals made by the assessee has has paid

interest. the AAC also found that there was an agreement between the assessee and the ITO for the original disallowance and, therefore, he

concluded;

(1) that from a legal standpoint what has been done now was only on account of change of opinion by the ITO and on account of receipt of

information within the meaning of section 147(b).

(2) that what the ITO head done wa to substitute one mode of computation of inadmissible interest payments by another calculation following a

different method and that

(3) even on facts the reopening was not called for.

In that view, all the assessee''s appeals were allowed by the AAC.

The Revenue took the matte in appeal to the Income-=tax Appellate Tribunal and the Tribunal found that the assessments were reopened on the

basis of ""information"" received by the ITO after he completed the original assessment for these three years, that the said information was contained

in the inspection notes of the IAC and that, there fore s. 147(b) of the ACt has rightly been invoked by the ITO. On the merits of the assessment,

the Tribunal took the view that the assessee was not able to show any correlation between the interest payments and the investments and that in the

absence of any such correlation the allowance now made by the ITO is reasonable and the disallowance was justified. ?Aggrieved by the order of

the Tribunal the assessee sought for and obtained a reference under s. 256(2) of the ACt on the questions referred to above.

The first question referred involves the scope nd ambit of the expression ""information'' occurring in s. 147(b). Though the expression

information"" came up for interpretation in a number of decided cases, m its scope cannot be taken to have been finally and conclusively decide or

explained. Whether a particular fact or material constitutes ""information"" in a particular case has to be decided with reference to the facts of that

case and there cannot be a define or uniform rule as to when a particular material will be taken to be an ""information"".

In R.K. Malhotra, ITO, Group Circle II(1), Ahmedabad Vs. Kasturbhai Lalbhai (Huf), , there was a reopening of the assessment on receipt of

a report from the office of the Comptroller and Auditor-General of India that on a proper interpretation of s. 23(2) of the ACt th deduction of

municipal taxes was not admissible in the computation of annual value of self-occupied house properties., The assessee contended that the said

report died not constitute ""information"" : within the meaning of s. 147(b) and a Bench consisting of two judge of the Supreme Court held that th

audit department was the proper machinery to scrutinies assessments made by the ITO and to point errors of law contained therein and therefore

its report will come within the scope[e of ""information'' occurring in s. 147(b) of the ACt. The court rested its division of Assistant Controller of

Estate Duty, Hyderabad Vs. Nawab Sir Mir Osman Ali Khan Bahadur, H.E.H. the Nizam of Hyderabad and Others, , Commissioner of Income

Tax, Delhi Vs. Chand Kanwarji, Alwar, , Commissioner of Income Tax Vs. Kelukutty, and Vashist Bhargava Vs. Income Tax Officer, Salary

Circle, . However, in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , a Beach of the Supreme

Court overrule the diffusion in Commissioner of Income Tax, Delhi Vs. Chand Kanwarji, Alwar, and Commissioner of Income Tax Vs. Kelukutty,

and disapproved the conclusion in R.K. Malhotra, ITO, Group Circle II(1), Ahmedabad Vs. Kasturbhai Lalbhai (Huf), and held that the opinion

of the audit party on a point of law could not be regarded as ""information"" enabling the ITO to initiate reassessment proceedings under s. 147(b)

and the ITO who mad e the original assessment having considered and applied certain provision of the statue, any different view taken by him

afterwards on the application of those provisions would amount to a change latest pronouncement of the Supreme /Court to be facts of this case,

we have to hold that the reopening of the assessments under s. 147(b) is not possible. From the facts stated above, it will be clear that even at the

original assessment the ITO was aware of the fact that out of the borrowings part, of it has gone to the assessee''s personal expenses and the other

part has gone towards acquisition of shares and it is only on that basis interest payments were apportioned as partly relating to the personal

expenses and partly for he acquisition of share, and adopting an estimate he allowed a pertain of the interest payments as allowable expenditure

and the balance as not allowable. the instructions given by the IAC merely indicated that there has been excessive allowance of interest and that

cannot be taken as ""information"" as contemplated by s. 147(b). it merely means a change of opinion on the part of the ITO on the some materials

and a fresh application of mind on the same set of facts. In fact, even after reopening the ITO adopted in the absence of a proper correlation, a

rough and ready method of apportioning of interest payments partly to personal expenses and partly to investments. In a case where the ITO was

a t the time of original assessment fully aware of the facts and consciously adopted an estimate to determine what portion of the interest payments

is relatable to the investment and what portion related to the assessee''s personal expenses, for the purpose of increasing the disallowance, he

cannot adopt a different estimate by correcting his won earlier estimate, by reopening the assessments. Such reopening can to taken to be the result

of only a change of opinion on the part of the ITO. There has been no erroneous application of the law. Nor was there any new material or

information which was brought to his notice so as to enable him to invoke s. 147(b). the inspection notes of the IAC merely indicated that part of

the borrowings fro which interest has been paid was fro the assessee''s personal expenses, which fact the ITO was well aware of even at the time

of the original assessment. It is not, therefore, open to the ITO, basing himself on the said inspection notes, to change his estimate of disallowance

by adopting different basis. In the original assessment, for purpose of determining the allowable portion of the interest payments, he adopted a

particular method of estimate. When it was pointed out that the amount of interest allowed was excessive he has chosen to adopt a slightly different

basis which is also another estimate. This is clearly a second opinion taken by the ITO on the same matter on the same materials. If the ITO has

proceeded in the original assessment on a wring basis that the entire interest payments related to the investments then the inspection notes can be

taken to be an ""information"" for invoking s. 147(b). But where the ITo is not possible because it will merely amount to a change of opinion on the

same facts and materials. We have to, therefore, hold that in this case the inspect notes of the IAC which itself has been procured by the ITO

would not constitute ""information"" within the meaning of s. 147(b) as to justify application of s. 147 of the ACt.

However, the learned counsel for the Evens refers to the following decisions as supporting his stand that the inspection notes constitutes

information"" : (1) Musasons Private Ltd. Vs. Commissioner Of Income Tax, Madras., and (2) Elgin Mills Co. Ltd. Vs. Income Tax Officer, ""A

Ward, . We are of the view that those decisions cannot apply to th facts of this case. In those decisions the ITO has originally assessed the income

under a wrong head and when that wa pointed out, the ITO, after reopening, assessed the income under the proper head and that is not the case

here. Musasons Private Ltd. Vs. Commissioner Of Income Tax, Madras., , is a case where the original assessment of the assessee was completed

by adopting the sum assessable under the head ""Dividend"" at the gross amount o intercorporate dividend received by the assessee and the audit

party which went into the file of the assessee informed the office that as part of th loans borrowed by the assessee went towards investments in

shares, the interest payments should be apportioned between divided income and business income instant of accepting the assessees claim for

deduction of the entire interest payments against business income alone. On the basis of the information furnished by the audit party the assessment

was reopened under s. 147(b) of the ACt and the amount of divided income assessable was reduced by certain amounts while the business

income was enhanced by similar amounts. When the matter fame up before this court it specifically found the the ITO did not have knowledge

when he completed the assessment of the diversion of only a portion of the borrowed money for investment in shares and that it is only from the

report of the audit party it w known the a Prussian of the borrowed money has been utilised for investment in shares and this would constitute

information"" coming to the possession of the office subsequent to the original assessment in consequence of which he entertained the belief that the

income has escaped assessment and therefore, the reassessment was justified. In Elgin Mills Co. Ltd. Vs. Income Tax Officer, ""A"" Ward, , an

audition objection that an extra shift allowance which has been allowed by the ITO in the original assessment was not in accordance with the I. T.

Rules regulation deprecation, was held to be an ""information"" on the basis of which action for reassessment under s. 147 of the ACt was justified.

thus, in the first case the ITo wa not aware of the fact that the interest payment related party to the equation of shares while in the second case the

correct provision of law has not been applied, while making the original assessment. HOwever, the facts in the case on hand are entirely different.

Even at the stage of the original assessment the ITO was aware of the fact that the borrowings and the interest payments thereon partly related to

the purchase of shares which earned income and partly related to his personal expense. the instruction given by the IAC did not bring in any new

fact or material which was not before the ITO at the stage of the original assessment., The instruction given by the IAC is in essence an intimation

to the ITO that he has given an excessive allowance in the original assessment than what was due to the assessee. Such an intimation cannot

constitute ""information"" as it doe not bring to light any new material. Hence, we answer the first question in the negative and in favour of the

assessee. In view of the fact that we have answered the first questions in favour of the assessee, the second questions referred does not call for any

answer. The reference is answers accordingly. The assessee will have his costs from the Revenue. Counsel''s fee Rs. 500 (one set).