2013 (12) TMI 1422 - HC - Income Tax

Validity of assessment u/s 147 - Held that - Chart of computation of income was furnished along with the return, share of the assessee was mentioned as 20% in the rental income, whereas during scrutiny of the cases, it was found that the assessee had not disclosed her income truly in the income tax return - When pursuant to notice under section 148 of the Act, the assessee had furnished the return, income was declared disclosing 25% share in the income of the property - It was thus clearly a case of escape of income from the assessment - It was not at all a case of change of opinion but was a clear case of escapement of income from assessment - Decided against assessee. Whether simple interest or compound interest charged by the bank on the amount borrowed by the assessee be allowed - Held that - As per section 24(1)(vi) of the Act - Amount of interest payable on capital borrowed, for construction of the property yielding income, is an admissible deduction - Only interest payable on such borrowed capital is to be deducted while computing income chargeable to income tax under the head income from house property - Interest paid on interest levied by the bank, because of non-payment of instalments of borrowed capital to the bank, does not qualify for an admissible deduction - Decided against assessee.

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the Assessing Officer was justified in resorting to action under Section 148 of the Income Tax Act, 1961.
2. Whether the claim of deduction made by the assessee on account of interest paid to the bank is an allowable deduction under Section 24(1)(vi) or Section 24(1)(iv) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Justification of Action Under Section 148 of the Income Tax Act, 1961

Facts and Proceedings:
- The assessee was assessed for the years 1985-86, 1986-87, and 1988-89 to 1991-92, with returns accepted summarily under Section 143(1) of the Income Tax Act, 1961.
- During subsequent assessments, it was discovered that the assessee claimed compound interest on a loan for property construction, which was not disclosed initially.
- Notices under Section 148 were issued for income escaping assessment, and the assessee furnished returns without computation details, leading to further notices under Sections 143(2) and 142(1).

Arguments:
- Assessee: Contended that the issue of simple vs. compound interest was a "change of opinion" and not grounds for reopening under Section 148.
- Revenue: Asserted that the assessee did not furnish complete details initially, and thus, there was no prior application of mind by the AO on the interest claim.

Judgment:
- The court held that the AO, DCIT(A), CIT(A), and Tribunal rightly concluded that it was not a case of "change of opinion" but a clear case of "escapement of income from assessment."
- The reopening under Section 148 was justified as the assessee failed to disclose complete facts initially, leading to income escaping assessment.

Issue 2: Allowability of Deduction for Interest Paid to the Bank

Relevant Provisions:
- Section 9(1)(iv) of the Indian Income Tax Act, 1922: Allowed deduction of interest on borrowed capital for property construction.
- Section 24(1)(vi) of the Income Tax Act, 1961: Similar provision allowing deduction of interest on borrowed capital.

Arguments:
- Assessee: Claimed that compound interest paid to the bank should be deductible.
- Revenue: Cited the Supreme Court judgment in Shew Kissen Bhatter, which allowed only simple interest as deductible, not compound interest.

Judgment:
- The court referred to the Supreme Court's decision in Shew Kissen Bhatter, which disallowed compound interest as it was considered interest on interest, not on the original capital charge.
- The court affirmed that only simple interest on borrowed capital is deductible under Section 24(1)(vi).
- The Tribunal was correct in disallowing compound interest and allowing only simple interest as a deduction.

Conclusion:
- Both substantial questions of law were answered in favor of the revenue.
- The references were adjudicated against the assessee, affirming the Tribunal's decisions on both the justification of action under Section 148 and the allowability of interest deductions.