1994 (2) TMI 105 - AT - Income Tax

1961 Act, Assessed Income, Assessing Officer, Assessment Year, Deduction Of Interest, Income Escaping Assessment, Income From House Property, Income From Property, Income Tax Act, Original Assessment

Summary

Issues Involved:
1. Reopening of assessment proceedings under Section 148 of the Income-tax Act for various assessment years.
2. Validity of reassessment proceedings based on alleged non-disclosure of material facts.
3. Applicability of Section 149(1)(b)(ii) concerning the threshold for reopening assessments.
4. Deductibility of compound interest (interest on interest) under Section 24(1)(vi) of the Income-tax Act.
5. Consideration of interest on interest as an annual charge under Section 24(1)(iv) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Reopening of Assessment Proceedings Under Section 148:
The assessee challenged the reopening of assessments for the years 1985-86, 1986-87, 1988-89, 1989-90, and 1990-91 under Section 148 of the Income-tax Act. The Assessing Officer (AO) found that the assessee had claimed interest on interest on loans borrowed for property construction, which was not initially disclosed. The AO reopened the assessments based on this new information. The Tribunal found that the original assessments for 1985-86 and 1986-87 were made under Section 143(1) without any detailed inquiry, and thus, there was no change of opinion. For the years 1988-89 to 1990-91, the assessee had shown only a 20% share in rental income instead of the actual 25%, justifying the reopening of assessments.

2. Validity of Reassessment Proceedings Based on Alleged Non-disclosure of Material Facts:
The assessee contended that all primary facts were disclosed during the original assessments, and thus, reopening was invalid. However, the Tribunal observed that the assessee did not disclose that the interest claimed included interest on interest, which was a material fact necessary for assessment. For the years 1988-89 to 1990-91, the assessee suppressed the fact of having a 25% share in the property instead of 20%. The Tribunal held that the AO was justified in reopening the assessments as there was no change of opinion but rather a discovery of new facts.

3. Applicability of Section 149(1)(b)(ii):
For the year 1985-86, the assessee argued that the difference between the originally assessed income and the finally assessed income was less than Rs. 25,000, and thus, reopening was not permissible under Section 149(1)(b)(ii). The Tribunal noted that at the time of recording the reasons for reopening, the AO believed that income escaping assessment was Rs. 83,310, which was above the Rs. 25,000 threshold. Therefore, the reopening was valid, and the ground challenging it was rejected.

4. Deductibility of Compound Interest Under Section 24(1)(vi):
The assessee argued that interest on interest should be allowed as a deduction under Section 24(1)(vi), similar to deductions allowed for business income. The Tribunal referred to the Supreme Court decision in Shew Kissen Bhatter v. CIT, which held that compound interest is not deductible as it could lead to tax evasion. The Tribunal concluded that the interest allowable under Section 24(1)(vi) pertains to the principal amount borrowed for property purposes, and not compound interest. Therefore, this argument was rejected.

5. Consideration of Interest on Interest as an Annual Charge Under Section 24(1)(iv):
The assessee claimed that interest on interest should be considered an annual charge under Section 24(1)(iv). The Tribunal noted that the Supreme Court in Shew Kissen Bhatter had clarified that the real capital charge is the original amount due, and interest on interest due to non-payment of installments is a voluntary action by the assessee. Therefore, such interest does not qualify as an annual charge under Section 24(1)(iv). The Tribunal also distinguished the facts from the Andhra Pradesh High Court decision in CIT v. Rajah Dhanrajgiriji, concluding that no deduction for interest on interest is allowable under Section 24(1)(iv).

Conclusion:
All six appeals were dismissed, and the Tribunal upheld the reopening of assessments and denied the deductibility of compound interest and its consideration as an annual charge.