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Issues Involved:
1. Validity of reassessment proceedings under Section 34(1)(a) of the Indian Income-tax Act, 1922. 2. Permissibility of disallowing previously allowed deductions during reassessment. 3. Jurisdiction of the Income-tax Officer under Section 34(1)(a) and Section 34(1)(b). 4. Period of limitation for reassessment under Section 34(1)(b). Issue-wise Detailed Analysis: 1. Validity of Reassessment Proceedings under Section 34(1)(a): The court confirmed that the reassessment proceedings were validly initiated under Section 34(1)(a) of the Indian Income-tax Act, 1922. The notice of reassessment was specifically under Section 34(1)(a), and there was no dispute about the initiation's validity. The court emphasized that Section 34 must be strictly construed due to its extraordinary nature, and it should not be liberally interpreted despite being a machinery section. 2. Permissibility of Disallowing Previously Allowed Deductions During Reassessment: The court addressed whether the interest payable to M/s. Vussonjee Munjee & Co. Pvt. Ltd., previously allowed as a deduction, could be disallowed in the reassessment proceedings. The Tribunal had earlier held that such interest was not a permissible deduction under Section 10. The court noted that the reassessment proceedings did not entirely set aside the original assessment but allowed for the reassessment of items that had escaped assessment. Therefore, the court concluded that the disallowance of the interest was permissible during reassessment. 3. Jurisdiction of the Income-tax Officer under Section 34(1)(a) and Section 34(1)(b): The court examined whether the Income-tax Officer could reassess items falling under Section 34(1)(b) during proceedings initiated under Section 34(1)(a). The court held that if a notice is specifically given under Section 34(1)(a), the reassessment can only include items falling under that clause. The court rejected the view that the Income-tax Officer could reassess items under Section 34(1)(b) if the reassessment proceedings were initiated within the four-year period specified for Section 34(1)(b). The court emphasized that a notice under Section 34(1) should be construed as under both clauses (a) and (b) unless facts indicate otherwise. 4. Period of Limitation for Reassessment under Section 34(1)(b): The court clarified that the four-year period of limitation applies to the notice and not the item that had escaped assessment. The court disagreed with the view that items under Section 34(1)(b) could be reassessed during proceedings initiated under Section 34(1)(a) after the four-year period had expired. The court emphasized that the Income-tax Officer could not indirectly do what he could not do directly by issuing a specific notice under Section 34(1)(b). Conclusion: The court answered the question referred to it in the negative and in favor of the assessee. The Commissioner was ordered to pay the assessee's costs of the reference. The court's decision emphasized the strict construction of Section 34 and the separate and distinct jurisdictions of clauses (a) and (b) under Section 34(1).
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