ISMAIL J. - The Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act, 1961, has referred the following question of law for the opinion of this court :
'Whether, on the facts and circumstances of the case, the reassessments made under section 147(b) of the Income-tax Act, 1961, against assessee for the assessment year 1963-64, 1964-65 and 1965-66 are legally valid ?'
The assessee is a private limited company deriving income mainly from (a) business in cigarettes; and (b) investment in shares of other companies. While making the original assessment, the Income-tax Officer adopted a sum assessable under the head 'Dividends' at the gross amount of dividend received by the assessee-company. The audit party which went through the file of the assessee-company noticed that a part of the loans borrowed by the assessee-company went towards investment in shares. The audit party accordingly informed the Income-tax Officer that he should have apportioned the interest payment between the dividend income and business income instead of accepting the assessee's claim for deduction of entire interest payment against business income alone. Acting on this information, the Income-tax Officer reopened the assessment under section 147(b) and reduced the income assessable under the head 'Dividends' by the following amounts :
Assessment year 1963-64
Assessment year 1964-65
Assessment year 1965-66
The Income-tax Officer did not disturb the total income since he enhanced the business income by the corresponding sums. The assessee preferred appeals before the Appellate Assistant Commissioner. It was contended before him that there was no escapement of the income to warrant action under section 147(b) and the reopening of the assessment and the reapportionment of interest was based on a change of opinion rather than on any specific information in the possession of the Income-tax Officer. The Appellate Assistant Commissioner rejected this contention and dismissed the appeals preferred by the assessee. The assessee preferred further appeals to the Income-tax Appellate Tribunal. It was contended before the Tribunal that (i) no income escaped assessment and the reopening of the assessment under section 147(b) is not warranted; and (ii) the reopening of the assessment is bad in law as it is based on a change of opinion rather than by specific information in the possession of the Income-tax Officer.
The Tribunal on the first contention held that by the deduction of the entire interest from the business income, without apportioning any part of it to dividend income, it was obvious that the income had been assessed at a low rate and the case, therefore, fell within the ambit of Explanation 1(b) of section 147. On the second contention it held that the Income-tax Officer had no knowledge of diversion of the borrowed money for the investment in shares nor did he apply his mind regarding apportionment of interest towards dividend income and business income and consequently the plea that the Income-tax Officer merely changed his opinion could not be accepted. It is the correctness of this conclusion of the Tribunal that is challenged in the form of the question extracted already.
In the order of the Tribunal, after referring to Explanation 1(b) of section 147, the Tribunal pointed out that :
'Interest paid on borrowals was deducted from the business income when the Income-tax Officer made the original assessment. After the assessment, it transpired that the money borrowed was utilised not only for business but also for making investment in shares from which the dividend income was earned by the appellant. So, part of the interest should have been apportioned to the dividend income. Dividend income, as it is well known, suffers tax at a lesser rate than other income. So by deducting the entire interest from the business income without apportioning any part of it to dividend income, it is obvious that the income had been assessed at a low rate.'
The Tribunal also observed :
'Secondly, the plea of change of opinion connotes that the Income-tax Officer had applied his mind to those facts and came to the conclusion that the gross amount of dividend should be taken for assessing the dividend income. It is obvious that the Income-tax Officer had no knowledge of diversion of the borrowed money for investment in shares nor has he applied his mind regarding the apportionment of interest towards dividend income and business income.'
It is not disputed beofre us that the entire borrowals were not utilised for the purpose of business and part of the borrowals was utilised for making investment. If so, if the dividends were assessed without deducting the interest referable thereto, it would inevitably follow that the ultimate tax payable on the total income was lower than the actual tax payable because the rate of tax payable on inter-corporate dividend was certainly lower than the rate applicable to the other income. Consequently, it is clear that the requirement of section 147(b) as to the income having escaped assessment is satisfied in the present case.
However, Mr. K. Srinivasan, the learned counsel for the assessee, contended that, on the facts, it could not be said that the Income-tax Officer came into possession of any information subsequent to the assessment in consequence of which he formed the opinion that the income had escaped assessment. According to the learned counsel, all the facts were before the Income-tax Officer and if the Income-tax Officer had drawn the necessary inference from the facts placed before him, it could not be contended that as a result of any subsequent information he entertained the opinion that income had escaped assessment. We are unable to entertain this argument in view of the clear finding of the Tribunal that it was obvious that the Income-tax Officer had no knowledge of diversion of the borrowed money for investment in shares at the time when he made the original assessment. This finding of fact recorded by the Income-tax Appellate Tribunal has not been challenged by asking for reference of an appropriate question. Consequently, that finding of fact has to remain. If that finding of the fact remains, the report of the audit party would undoubtedly constitute 'information' coming into possession of the Income-tax Officer subsequent to the original assessment, in consequence of which he entertained the belief that the income had escaped tax. Under these circumstance, we answer the question referred to this court in the affirmative and against the assessee. The Commissioner is entitled to his costs. Counsel's fee Rs. 500.