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Issues Involved:
1. Validity of reopening under Section 147(b) of the IT Act. 2. Disallowance of Rs. 10,469 as interest expenditure. Issue-wise Detailed Analysis: 1. Validity of Reopening under Section 147(b) of the IT Act: The first issue revolves around the validity of the reopening of the assessment under Section 147(b) of the Income Tax Act. The original assessment was completed on 12th Dec., 1974, where the interest expenditure of Rs. 10,469 was allowed as a deduction. The reopening was initiated based on an internal audit note suggesting that certain expenses, which are capital in nature, were incorrectly allowed as revenue expenses. The audit note indicated that the assessee was not carrying on any business activity during the relevant assessment years and that the interest expenditure was related to a new project under construction, thus not allowable under Section 57(iii). The assessee contended that the reopening was invalid as it was based solely on the audit note, which constitutes a reappraisal of existing records rather than new information. The counsel for the assessee cited the Supreme Court decision in Indian and Eastern Newspapers Ltd. vs. CIT, which held that an internal audit party's opinion on a question of law does not constitute information for reopening under Section 147(b). The Departmental Representative argued that the original ITO did not apply his mind to the material on record, and the successor ITO independently concluded that the audit objections were correct before issuing the notice for reopening. After considering the rival contentions, the tribunal agreed with the assessee's counsel, concluding that the original ITO had indeed applied his mind to the facts on record and allowed the deduction after thorough verification. The tribunal found that the reopening based on the audit note was not valid as it did not constitute new information but rather a change of opinion, which is not permissible under Section 147(b). The tribunal also referenced the Madhya Pradesh High Court decision in Ram Kishan Oil Mills vs. CIT, which supported the view that a successor ITO's different opinion does not justify reopening. 2. Disallowance of Rs. 10,469 as Interest Expenditure: The second issue concerns the disallowance of Rs. 10,469 as interest expenditure. The assessee argued that this interest expenditure should be adjusted against the interest income of Rs. 1,13,076 received during the year, claiming it as a deduction under Section 57(iii). The Departmental Representative countered that the interest expenditure was not incurred for earning the interest income and thus not allowable under Section 57(iii), which requires a direct nexus between the expenditure and the income earned. The tribunal examined the facts and found that the interest expenditure was incurred to preserve the income-earning apparatus, as the assessee borrowed funds to purchase an industrial plot instead of withdrawing from its bank deposits, thereby maintaining the interest income from the deposits. The tribunal referenced the Bombay High Court decision in CIT vs. H. H. Maharani Shri Vijaykuverba Saheb of Morvi, which allowed the deduction of interest on borrowings used to preserve the source of income. On the merits, the tribunal held that the interest expenditure of Rs. 10,469 was allowable under Section 57(iii) as there was an indirect connection between the borrowings and the interest income. However, the tribunal did not accept the assessee's alternative argument that the interest expenditure should be allowed as a business expense under Section 37(1), as the business income represented arrears from prior years and not current business operations. Conclusion: The tribunal allowed the appeal of the assessee on both jurisdictional and merit grounds, setting aside the orders of the lower authorities. The reopening under Section 147(b) was deemed invalid, and the interest expenditure of Rs. 10,469 was allowed as a deduction under Section 57(iii) of the IT Act.
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