1. All these four appeals are preferred by the assessee, against the orders passed by the AAC confirming the reassessments made on the assessee for the assessment years 1974-75 to 1977-78. Since issues involved are common, I consolidate all these four appeals and dispose of them by this common order.
2. The original assessments made on the assessee, an association of persons, for the above assessment years were re-opened by the ITO under Section 147(b) of the Income-tax Act, 1961 ('the Act') on the ground that the interest payments to the members of an association of persons were wrongly claimed and allowed. The ITO observed that the interest payments claimed were not allowable under Section 36(1)(iii) of the Act, because the interest was paid only on the investments made by the proprietors of the business. He further observed that this was the position of law contained in the case of Mian Channu Factories Union v.CIT  4 ITR 203 (Lahore). He further observed that the ruling relied on by the assessee in the case of CIT v. Harnandrai Shrikishan Akodia  61 ITR 50 (MP) took a different view, but then, in view of conflict of opinions, the revenue would necessarily rely upon the decision which is in its favour. He brought to assessment interest payments originally allowed in the reassessments. On appeal, the assessee contended before the AAC that the reassessment was invalid in law, based upon the ruling of the Supreme Court in Indian & Eastern Newspaper Society v. CIT  119 ITR 996. The AAC observed that the action of the ITO was justified under Section 147(6). In this view he rejected the assessee's contentions. On merits it was pointed out that as per the ruling of the Madhya Pradesh High Court in the case of Harnandrai Shrikishan Akodia (supra) there is no case for disallowing the interest claimed. The AAC rejected this contention, observing that no allowance can be made under Section 36(1)(m) where the interest is paid on the capital invested by the co-owners of the business, since the capital invested cannot be considered as capital borrowed. The assessee has come on further appeal before the Tribunal, against the above orders of the AAC.3. The learned counsel for the assessee submitted that on the basis of the ruling of the Supreme Court in the case of Indian & Eastern Newspaper Society (supra) the re-opening of the assessment under Section 147(7;) is invalid in law. He also referred to the ruling of the Bombay High Court in the case of CIT v. H.D. Dennis  135 ITR 1 wherein, the above ruling of the Supreme Court was followed.
Regarding the merits of the case, the learned counsel pointed out that the ruling of the Lahore High Court in the case of Mian Channu Factories Union (supra) relied upon by the ITO did not deal with the issue in this case and therefore it is not applicable to the facts of this case. He pointed out that on the other hand, the ruling of the Madhya Pradesh High Court in Harnandrai Shrikishan Akodia (supra) is a direct authority on the point and clearly supported the assessee's contention. He further submitted that there is no conflict of judicial opinions whatsoever, as pointed out by the ITO and that there was no justification for disallowing the interest claimed. The learned counsel made a further submission that the interests in question were already assessed in the hands of the members of the association of persons, and, therefore, the present assessment seeking to bring to tax, the same income amounts to double assessment which is not authorised by law. In support of this submission he referred to the ruling of the Andhra Pradesh High Court in CIT v. Karkhana Zinda Tilismath  123 ITR 814. On behalf of the revenue, reliance was placed on the orders of the authorities below.
4. I have considered the rival submissions. It is common ground that the assessments, for the above assessment years, on the assessee, an association of persons, were originally made under Section 143(3) of the Act, allowing the interest payments under consideration. It is also common ground that the ITO had reopened the assessments for all the years under appeal under Section 147(6) on the basis of the objection raised by the audit department. The audit note, on the basis of which the reassessments were made, reads as under: Sub : GIR. No. 601-V-Shri Vallamkcmdu Sekharaiah & another AOP- A.Y. 1977-78 P.Ye. 31-3-1977-A.O. dt. 13-2-78 Under Section 143(1) T.I. Rs. 5,910 N.A. Refund of Rs. 6,252 vide R.O.K. 008472/66890 dt.
6-3-1978 not seen by LA.P. As per the provisions of Section 36(m) of l.T. Act interest paid in respect of capital borrowed for the purposes of business or profession is an admissible deduction. But interest paid in respect of amounts financed by a member of AOP is not an admissible deduction as the member of AOP cannot be treated as a 'borrower' and the amount advanced for the business 'borrowal'.
In the case of above assessee, the interests paid (as detailed below) to the members of AOP were admitted and assessments completed. Hence the refund of Rs. 6,253 ordered in the RO cited is not in order. This resulted in a short demand of Rs. 19,000 (approximately) in the hands of the above assessee for the A.Ys.
1974-75 to 1977-7R.A plain reading of the above note, clearly shows that the above audit note has expressed an opinion on a point of law. No reference was also made to any judgment of the High Court or the Supreme Court. The question that arises now is whether the reassessments made on the basis of the above audit note are valid in law. In other words, the question is whether the opinion expressed in the audit note would amount to 'information', within the meaning of Section 147(6). The exact point is answered by the Hon'ble Supreme Court of India, in the case of Indian & Eastern Newspaper Society (supra), in the negative. Respectfully, following the same I hold that the reassessments are not valid in law.
5. The learned counsel for the assessee has submitted that on merits there is no justification for disallowing the interest. Though it is not necessary to go into this claim, I find that the ruling of the Madhya Pradesh High Court relied on by the assessee is directly applicable. The Madhya Pradesh High Court in the case of Harinandrai Shrikishan Akodia (supra) held that a member of an association of persons who advances money to the association, for the purpose of its business, is in the position of a creditor of the association and interest paid by the association to him qua creditor is a legitimate deduction under the Act, in computing the profits of its business. The ruling of the Lahore High Court in the case of Mian Channu Factories Union (supra) relied on by the ITO would not apply to the facts of this case. One of the questions that arose in that case was, whether the money used by the different constituents of the conglomeration of persons in that case, could be considered to be capital borrowed for the purpose of business. The Lahore High Court had referred to the deed under which the Union was constituted, in which it was provided that each factory should invest its own capital for purchase and sale of goods and should get interest at the rate of 10 per cent per mensem.
The Lahore High Court held that the money thus used cannot be considered as capital borrowed for the purpose of business. Further, the above judgment of the Lahore High Court has only persuasive effect, after the inauguration of the Republic of India in the year 1950. The decision of the Madhya Pradesh High Court referred to above is not only directly on the point in issue but there is also no other decision of either the Andhra Pradesh High Court taking a contrary view. In such a situation the following observations of the Bombay High Court, in the case of CIT v. Smt. Godavaridevi Sara/' 113 ITR 589, could apply : . . . an authority like an Income-tax Tribunal acting anywhere in the country has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question. . . .(p. 592) Therefore, on the merits of the case, I hold that there is no jurisdiction for disallowing the interest claimed.
6. The learned counsel for the assessee also argued that since the members of the association have already been assessed in respect of the interest under consideration, the assessment of the same amount in the hands of the assessee, an association of persons, is not legal. The ruling of the Andhra Pradesh High Court in the case of Karkhana Zinda Tilismath (supra) deals with a case relating to the assessment year 1958-59 governed by the old Act, viz., the Indian Income-tax Act, 1922.
The Andhra Pradesh High Court held that when the ITO chose to make regular and final assessments in respect of the share income from the firm in the hands of the partners, it was not, thereafter, open to him to treat the firm as an unregistered firm and tax the very same income in its hands as a unit. In doing so the Andhra Pradesh High Court derived support from the decision of the Supreme Court in the case of CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory  60 ITR 95. The Central Board of Direct Taxes, New Delhi, in F. No.75/191/62-2(1), dated 28-4-1966 stated as under : Although the Supreme Court's decision in Murlidhar Jhawar & Purna Ginning & Pressing Factory  60 ITR 95 is under the Income-tax Act, 1922 the Board is advised that it will equally apply to the decisions made under the Income-tax Act, 1961.
In the case of Universal Commercial Co. v. CIT  130 ITR 775, the Madras High Court had referred to its earlier decision in the case of CIT v. Blue Mountain Engineering Corporation  112 ITR 839 and observed as under : We have considered an identical question in CIT v. Blue Mountain Engineering Corporation  112 ITR 839 (Mad.). We have held therein that with reference to the provisions of the 1961 Act, the assessment made on the firm as an unregistered firm, after the assessment made earlier in the case of one of the partners, was not legal. Though in the present case, the status taken is 'association of persons' there is nothing in principle which would differentiate it from the principle enunciated in the said decision... . (p. 777) The above ruling, undoubtedly supports the contention of the assessee's learned counsel. However, I am not deciding this appeal on the basis of this contention, since it is not necessary to do so, in view of my findings above, that the reassessments themselves are invalid in law.