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TMI Blog1985 (9) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... the debit of Rs. 10,469 was already considered and adjusted. After the completion of the original assessment, consequent upon receipt upon receipt of information from the audit note of the internal audit party to the effect that income chargeable to tax had escaped assessment and inasmuch as certain expenses which are capital in nature have been claimed and allowed as revenue in computing the total income in the original assessment, the ITO gave notice of repining under s. 147 (b) of the IT Act. The extract from the audit objection is as follows: "The business of the assessee-company was taken over by the Kerala State Electricity Board w.e.f. 3rd Dec., 1970. So during the previous years relevant for the asst. yrs. 1972-73 and 1973-74, the assessee has not been carrying on any business activity, the income in respect of which is included in the total income. The only income credited in the P L A/c reliable to business activity is the amount received from the K.S.E. Board in respect of sale of energy till the date of taking over. Most of the over-head expenses debited in the P L A/c are not allowable under s. 57 (iii) also. For example, in the P L A/c for 1973-74 assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Peenya Industrial Estate is being mentioned as Bangalore business of the assessee. In the accounting year relevant to asst. yr. 1973-74 the assessee had not set up its Bangalore business. It was only in the process of acquiring an industrial plot at Bangalore to se up its business. However, the assessee company was having huge deposits in banks of about Rs. 21 lakhs comprising either the compensation received from the Kerala Electricity Board or the rears due to the assessee-company from the consumers till the take over of the assessee-company, subsequently collected by Kerala Electricity Board and made over to the assessee-company after the take over. During the accounting year relevant to asst. yr. 1973-74 the assessee-company was being credited with interest over its bank deposits. According to the original assessment order dt. 12th Dec., 1974 the assessee was deriving income under the heads (i) interest on securities, (ii) business and (iii) other sources. As already stated the original assessment was completed against it on a total income of Rs. 1,31,860. Instead of withdrawing the amount of Rs. 1,40,000 from its bank deposits and paying the some towards the purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no information placed before the ITO or any such information came into his possession. It is actually a reappraisal of the available record and re-determination of the point at issue. The ITO who framed the reassessment did not form any opinion of his own and he did not lay down the law. The opinion of the Internal Audit Party about the non-allowability of the deduction of Rs. 10,469 cannot constitute information and in support of this contention the ld. counsel for the assessee cited before us the decision of Hon'ble Supreme Court in Indian and Eastern Newspapers Ltd. vs. CIT (1979) 12 CTR (SC) 190 : (1979) 119 ITR 996 (SC) where it was held that internal audit party is not competent to lay down any law and much less its opinion about a question of law is binding on the ITO and therefore such opinion does not constitute any information on the basis of which reopening may be resorted to under s. 147 (b) of the IT Act. 5. The ld. Departmental Representative countered the arguments of the assessee's counsel by submitting that the ITO who had framed the original assessment did not apply his mind on this use. He did not consider the relevant material on record. Consideration of mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (b) r/w. 148 after referring to the Internal Audit Party's objection dt. 15th March 1978 held that the objections are found correct and subsequent to such finding only he happened to issue notice under s. 147 (b) and s. 148. Therefore, the ld. Departmental Representative argued that the ITO did not automatically issue notice of reopening on the strength of mere Internal Audit Party's objection. He had exercised his independent volition and came to the conclusion that the Internal Pary's objection is correct and then only he issued the notice of reopening. He did not blindly follow the Audit Part's note. In those circumstances it cannot be argued successfully that his assumption of jurisdiction under s. 147 (b) or his act of reopening is bad under law. In support of his contention the ld. Departmental Representative cited the recent Madras High Court decision in M. A. Murugappan vs. CWT (1984) 42 CTR (Mad) 35 : (1985) 153 ITR 626 (Mad). 6. The ld. counsel for the assessee again countered the argument of the ld. Departmental Representative by stating that the allegation that the ITO who originally completed the assessment did not consider any material before allowing Rs. 10,469 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d when they are satisfied about their deductibility. We also found that this is an usual practice that after obtaining full information abourt the deduction claimed if the ITO is satisfied about its allowability than only he would accept the net profit figure. Otherwise he would add such of the deductions claimed which he wanted to disallow. So from the state of records the argument that the ITO who made the original assessment must have satisfied both about the nature as well as the allowability of interest expenditure of Rs. 10,469 and after having satisfied himself only be ITO in all probability should have taken the net profit figure at Rs. 53,431 appears to the plausible and acceptable. Therefore, in view of the state of record before us we are unable to give credence to the argument of the ld. Departmental Representative that the ITO who originally completed the assessment did not apply his mind to the allowability of Rs. 10,469 and therefore we hold that the Kerala High Court decision reported in CIT vs. Kerala State Industrial Development Corporation Ltd. 1978 CTR (Ker) 340 : (1979) 116 ITR 158 (Ker) does not apply to the facts on hand. 8. It is no doubt true that the Ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as income from other sources and the interest payment of Rs. 10,469 was not incurred for the purpose of earning the interest income from other sources and therefore the said interest expenditure is not allowable under s. 57 of the IT Act is an opinion expressed on a question of law and its opinion should not constitute information to validly reopen the assessment under s. 147 (b) and the same is held by the Hon'ble Supreme Court in (1979) 119 ITR 996 (SC). In the headnote Hon'ble Supreme Court held that the opinion of the Audit Party on a point of law should not be regarded as information enabling the ITO to initiate reassessment proceeding under s. 147 (b). Therefore, we hold that the ratio of the Supreme Court clearly applies to the facts of the case on hand and consequently our conclusion that the reopening under s. 147 (b) is not valid follows. 9. Our above conclusion itself would be sufficient to dispose of the appeal. However, as the matter was argued even on merits also in order to complete the record, we give our decision even on merits. 10. The first argument is that interest expenditure should be adjusted towards interest income. In this case interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental Representative that the borrowing from the bank and purchasing industrial plot at Bangalore by the assessee-company has nothing to do with the electricity business which it had carried on prior to 1972 and therefore the interest payment cannot be adjusted against each and other. The ld. Departmental Representative also argued that this interest expenditure is not allowable even from business income of that assessee-company. It is significant that the assessee earned business income of Rs. 18,324 in the accounting year relevant to assessment year under consideration though the assessee did not carry on any business at all during the said accounting year. The business receipts of the assessee-company constitute arrears due to it prior to take over period of 1972 and passed on to it by the Kerala Electricity Board. Se. 37 allows expenditure laid out wholly and exclusively for the purpose of business. This borrowing for purchase of industrial plot at Bangalore is not an expenditure laid out wholly and exclusively for the purpose of earning the business income of the assessee and therefore it cannot be allowed as a business expenditure. 11. The ld. counsel for assessee counter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s repaid some times in 1962. The trustees claimed the interest amounts as deductions against their income under the heads dividends and interest on securities. In that case the Bombay High Court had duly taken into consideration the earlier decision in Bai Bhuriben Lalubhai vs. CIT (1956) 29 ITR 543 (Bom) and they found out the flowing to the one of the principles laid down in that case by the Bombay High Court as can be seen from the decision in (1975) 100 ITR 67 (Bom) at 75. "But in the same context, the Court has observed that if the assessee borrowed the moneys in order to maintain or preserve the fixed deposit or help her to earn interest then obviously the deduction would be permissible under s. 12 (2) of the Act. They approved the Tribunal's decision which stated that interest on amounts borrowed for the purpose of preserving a source of income or avoiding the dissipation of the source of income should also be allowed as deduction under s. 12 (2) of the IT Act, 1922. so the ld. Counsel for the assessee contended that in Bai Bhuriben Lalubhai vs. CIT the borrowing was made only to purchase jewellery and for household expenses and not to preserve the source yielding income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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