1968 (4) TMI 15 - HC - Income Tax

In the course of the assessment proceedings ITO discovered that the entire borrowed money had not been utilised for the purposes of the business - reassessment made by the ITO under s. 34(1)(b) - Tribunal was not right in holding that the reassessment made by the ITO was incompetent

Summary

Issues Involved:
1. Legality of the Income-tax Officer's action under Section 34(1)(b) of the Indian Income-tax Act, 1922.
2. Interpretation of the term "information" in Section 34(1)(b).
3. Applicability of the Supreme Court's interpretation of the term "escaped" in Section 34(1)(b).

Issue-wise Detailed Analysis:

1. Legality of the Income-tax Officer's Action under Section 34(1)(b):
The primary issue was whether the Income-tax Officer (ITO) was justified in reopening the assessment for the year 1956-57 under Section 34(1)(b) of the Indian Income-tax Act, 1922. The original assessment allowed a deduction of Rs. 43,116 as interest paid on borrowed money. However, during the assessment for 1958-59, the ITO discovered that the borrowed money was not used for business purposes but was given as interest-free advances to the partners. Consequently, the ITO reassessed the income, adding Rs. 43,116, which led to the dispute over the legality of this reassessment.

2. Interpretation of the Term "Information" in Section 34(1)(b):
The term "information" as used in Section 34(1)(b) was crucial to this case. The Tribunal had earlier held that the ITO's action was based on a mere change of opinion without any new material information. However, the High Court referred to the Supreme Court's interpretation in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, which stated that "information" includes knowledge about the state of law or judicial decisions, and not just factual data. The High Court emphasized that the ITO's realization during the 1958-59 assessment constituted new "information" that was not apparent during the original assessment.

3. Applicability of the Supreme Court's Interpretation of the Term "Escaped" in Section 34(1)(b):
The Supreme Court's interpretation of the term "escaped" was also examined. According to the Supreme Court, "escaped" means any income that has not been assessed due to an error or oversight, even if a return was filed. The High Court applied this interpretation, stating that the ITO's failure to initially notice that the borrowed funds were not used for business purposes constituted an "escape" of income from assessment. This interpretation supported the ITO's jurisdiction to reassess the income under Section 34(1)(b).

Conclusion:
The High Court concluded that the ITO was justified in reopening the assessment under Section 34(1)(b) based on new information obtained during the subsequent assessment year. The Tribunal's presumption that the ITO had allowed the interest deduction with full knowledge was incorrect. The High Court ruled in favor of the revenue, answering the question of law in the negative and against the assessee. The judgment highlighted the importance of the ITO's jurisdiction to reassess based on new information, even if such information could have been obtained during the original assessment with greater diligence.