1981 (11) TMI 68 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest under section 40(b) of the Income-tax Act during assessment.
2. Validity of re-opening assessment under section 147(b) based on audit objection.
3. Merits of disallowance of interest under section 40(b) on appeal.

Analysis:

1. The original assessment disallowed interest of Rs. 30,556 under section 40(b) of the Income-tax Act, 1961. Subsequently, audit pointed out an additional amount of Rs. 83,780 paid to partners as kartas of their respective HUFs, which was not added. The audit emphasized that section 40(b) makes no distinction between payments to a partner as a partner or in a different capacity. The ITO, treating the audit objection as information, initiated action under section 147(b) and disallowed the additional interest amount.

2. The assessee appealed to the Commissioner (Appeals) challenging the re-opening of assessment under section 147(b) and the merits of the disallowance. The Commissioner held that the audit objection constituted valid information under section 147(b) and upheld the disallowance based on the Allahabad High Court's decision. The assessee contended that the initiation of proceedings under section 147(b) was illegal and the disallowance was unjustified.

3. The appellate tribunal found that the audit merely highlighted the existing interpretation of section 40(b) and did not suggest any new interpretation. The tribunal agreed with the departmental representative that the case fell within the principles laid down by the Supreme Court. The tribunal noted previous decisions supporting the absolute prohibition in section 40(b) and upheld the re-opening of assessment under section 147(b). However, the tribunal remanded the case to the Commissioner for a detailed consideration of the merits of the disallowance under section 40(b).

In conclusion, the appellate tribunal partially allowed the appeal, affirming the validity of re-opening the assessment under section 147(b) based on the audit objection. The tribunal directed a fresh consideration of the merits of the disallowance under section 40(b) by the Commissioner (Appeals) for a more detailed analysis.