Lachhiram Puranmal vs Commissioner of Income Tax

S.K. Kulshrestha, J.—Pursuant to the direction of this Court vide order dated 9-4-1995 in M.C.C. No. 141 of 1990, the Tribunal, Indore Bench, has drawn up a statement of the case and referred the following question for the opinion of this Court : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in upholding the action of the ITO in disallowing part interest for the years 1976-77, 1977-78 and 1978-79 when the issue involved stood finally concluded by the CIT(A)''s order dated 20-12-1978 for the assessment year 1975-76?

The applicant-assessee derives income from business in grains and cotton. He was assessed to income tax for the assessment years 1976-77 to 1978-79. The ITO disallowed the interest of Rs. 35,595 for diversion of borrowed money to non-business purposes during the assessment pertaining to the assessment year 1976-77. In appeal before the Commissioner (Appeals), the order was confirmed. However, in appeal to the Tribunal, in respect of the addition of Rs. 25,752 on the ground of diversion of borrowed funds to Trilokchand Ghanshyamdas, the Tribunal set aside the order of the ITO as also of the Commissioner (Appeals) and directed the ITO to re-examine the circumstances enumerated in the order and consider the plea of the assessee. In respect of the disallowance of interest of Rs. 9,828 representing the borrowed funds utilised for the purchase of agricultural land, the Tribunal observed that there was no dispute that a sum of Rs. 82,083 was utilised for the purchase of agricultural land which was admitted to be not a business investment. The disallowance was, therefore, maintained. In the subsequent years also, the Tribunal followed the order passed in the assessment year 1976-77 and maintained the disallowance. Against the order of the Tribunal, the assessee sought reference u/s 256(1) of the income tax Act, 1961 (''the Act'') which was declined. On a direction being, however, issued u/s 256(2), the said question has been referred for our opinion.

We have heard the learned counsels for the parties and perused the record.

The learned counsel for the assessee has submitted that the Tribunal erred in maintaining the disallowance on the ground that the part of the interest for which the same was claimed represented the borrowed funds utilised for the purchase of agricultural land, especially when the Commissioner (Appeals), for the assessment year 1975-76, had allowed the same and the assessment had attained finality as no appeal was preferred by the department against the order of the Commissioner (Appeals). The learned counsel has referred to the decision of the Supreme Court in Union of India and others Vs. Kamlakshi Finance Corporation Ltd., in support of his contention that once the Commissioner (Appeals) had, in the assessment year 1975-76, held that the borrowed funds had not been diverted for the purchase of agricultural lands, the disallowance could not be made, the Assessing Officer was bound by the said direction while making assessment in respect of the allowance of interest claimed in the subsequent assessment years. The learned counsel has also referred to the decision of the Allahabad High Court in Commissioner of Income Tax Vs. Kamla Town Trust, as also to the decision of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, in support of his contention that such departure could not have been made in the subsequent years. The learned counsel for the department has submitted that the principle of res judicata and estoppel do not apply in such matters and the decision given by an ITO for one assessment year cannot affect or bind his decision for another year.

The main ground on which the learned counsel for the assessee has assailed the order of the Tribunal is that since the issue with regard to the disallowance made by the ITO in the assessment year 1975-76 treating a part of the interest as representing borrowed funds utilised for the purchase of agricultural land stood finally concluded by the Commissioner (Appeals), the Tribunal could not have upheld the disallowance in the subsequent assessment years. In A. Ranganathan Vs. Controller of Estate Duty, , the Supreme Court has ruled that in matters of taxation there can be no question of res judicata and the decision given by an ITO for one assessment year cannot affect or bind his decision for another year. Again in M.M. Ipoh and Others Vs. Commissioner of Income Tax, Madras, it has been observed that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year and the assessment and the facts found are conclusive only in the year of assessment. The question came up again before the Supreme Court in Commissioner of Income Tax, West Bengal Vs. Brij Lal Lohia and Mahabir Prasad Khemka, . In the said case, the assessee, a dealer in jute, had claimed that on 12-7-1943, he had made a gift of Rs. 5,11,101 to his brother and another sum of Rs. 2,50,000 to his nephew and both of them had then started a new firm dealing in jute and, at about the same time, the assessee had stopped his business. The Tribunal had not accepted that the gifts were genuine for the assessment years 1945-46 and 1946-47 and ultimately the Supreme Court had also refused to interfere with that finding. However, in the subsequent years on the basis of the material placed by the assessee where the question again came up for consideration before the authorities, the Tribunal, after taking into consideration the decision rendered by the Tribunal in the previous proceedings, came to the conclusion that the gifts in question were genuine. It was urged that in view of the earlier decision of the Tribunal, it was not open to the Tribunal to hold that the gifts were genuine. The Supreme Court observed that the fact that in the earlier proceedings the Tribunal took a different view of the two gifts was not a conclusive circumstance and it did not operate as res judicata. In CIT v. British Paints India Ltd. AIR 1991 SC 1338, it has again been observed in paragraph 12 as under:

It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the Officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters, and the Officer is not bound by the method followed in the earlier years.

From the above decisions, it is clear that although the findings arrived at in the previous assessment may have some value as cogent evidence, they do not bind the authorities either on the principle of res judicata or as estoppel. We may here also refer to a decision of the Allahabad High Court in BENOY RATAN BANERJI Vs. COMMISSIONER OF Income Tax, U. P. C. P. AND BERAR., bearing on the facts similar to the one in the present case. In the said case, in the assessment year 1939-40, the AAC had treated the income derived as purely agricultural income but from the subsequent year of assessment, it was held that the said income from the sale of forest trees of spontaneous growth without the intervention of human agency, was not agricultural income exempted from the Indian income tax Act, 1922. The assessment of this income to the tax was challenged, inter alia, on the ground that since in the earlier year of assessment the income was treated as exempted, it was not permissible for the assessing authorities to treat it differently in the subsequent years. It was observed that each year is a separate self-contained period of time for purposes of assessment and the opinion of the AAC made in connection with the previous assessment year was not relevant.

In view of the abovereferred decisions, it is necessary to refer to the finding recorded by the Commissioner (Appeals) and the Tribunal. While dealing with the claim for amounts of the interest on borrowing of the assessee, the Commissioner (Appeals) has observed in paragraph 2.7 of the order as under:

2.7. It is, therefore, clear that the assessee had in fact borrowed substantial amounts on interest in order to inflate the available cash balance, a few days before the date of purchase and but for the said borrowings the assessee would not have been able to invest the said amounts in the purchase of agricultural lands. The ITO was, therefore, justified in coming to the conclusion that interest bearing borrowings had in fact been diverted to non-business use and assessee''s plea that substantial capital stood credited in the accounts of the partners is of no avail, the said capital was obviously locked up in other assets, and was not available for purchase of the agricultural land. The addition of Rs. 9,840 is, therefore, confirmed.

In dealing with this aspect, the Tribunal has observed that there was no dispute that a sum of Rs. 82,083 was utilised for the purchase of agricultural land which was admitted to be not a business investment. It has further been observed that the learned counsel for the assessee though placed on record certain cash books of the assessee, he was unable to show that the finding of the Commissioner (Appeals) to the effect that loans from bank were utilised for purchase of agricultural land was in any way erroneous. It is, therefore, clearly on appreciation of the facts brought on record in the assessment year in question that the Tribunal has arrived at the conclusion that borrowed funds were utilised for the purchase of agricultural lands and the amount representing the interest on such amount as was utilised for this purpose, has been disallowed.

The learned counsel has placed strong reliance on the decision of the Supreme Court in Kamlakshi Finance Corpn. Ltd. (supra) but in the said case, the question before the Supreme Court was whether the strictures passed by the High Court against the two Assistant Collectors for not following the classification of goods as per the direction of the Collector (Appeals) based on the Tribunal''s judgment which was upheld by the Supreme Court, were justified. In the said case, in response to the notice issued by the Assistant Collector of Central Excise, the assessee had, in reply, pointed out that its claim that the goods were classifiable under Heading 85.46 and that Heading 39.19 had no application had been accepted by the Collector of Appeals and the Assistant Collector had not accepted the assessee''s contention. Against the order of the Assistant Collector, the assessee had approached the Bombay High Court in a writ petition in which while quashing the order of the Assistant Collector, strictures were passed against the two Assistant Collectors who had dealt with the matter. It was in the context of these facts that it was observed that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities and merely because an order of the appellate authority was not acceptable to the department, it was no ground for not following it unless its operation had been suspended by the competent court. In the present case, the contention of the learned counsel for the assessee is that the order passed by the Commissioner (Appeals) in the earlier year should have been followed by the Tribunal. As observed above, the assessment in the earlier years does not bind the assessing authority and the assessing authority can on the material placed before it, take a different view in the subsequent years although the findings in the earlier years on the same subject-matter can be considered as cogent evidence. In view of the facts taken into consideration by the Tribunal with regard to the diversion of the borrowed funds in purchase of the agricultural lands of which the income was not ploughed back in the account of the firm as admittedly the agricultural income, as per books of account of the assessee''s firm, was distributed amongst the partners and not utilised for reducing the loan utilised for non-business purposes, the Tribunal in no way erred in maintaining the disallowance upheld by the Commissioner (Appeals). We, therefore, find that the Tribunal was fully justified in law in upholding the action of the ITO in disallowing part interest for the years 1976-77, 1977-78 and 1978-79 notwithstanding that in the earlier assessment year 1975-76, the issue was decided in favour of the assessee by the Commissioner (Appeals). In the result, we answer the question against the assessee and in favour of the department.