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Smt. Purabi Guha Vs. Income-tax Officer. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberI. T. APPEAL NOS. 2276 AND 2277 (CAL.) OF 1983 [ASSESSMENT YEAR 1979-80 AND 1980-81]
Reported in[1986]17ITD164(Cal)
AppellantSmt. Purabi Guha
Respondentincome-tax Officer.
Excerpt:
- .....rate of 10 per cent per annum from 22-6-1972 to 12-10-1974 1,848,14 total 14,39,189,96 the ito allowed deduction for interest at 10 per cent on the above amount. further the tenants were liable to bear the municipal tax of alipore and beliaghata properties. the deduction for municipal tax was claimed by the assessee and the same was allowed by the ito. the commissioner perused the assessment orders passed by the ito for the assessment years 1979-80 and 1980-81 and he found that the ito without applying his mind has allowed the deduction for interest as well as the municipal tax. he further found that the ito has allowed interest on interest and, accordingly, he came to the conclusion that the orders passed by the ito were erroneous and prejudicial to the interests of the revenue and,.....
Judgment:
ORDER

Per Shri Y. Upadhyay, Vice President - These two appeals are taken together and disposed of by a common order.

2. The assessee is in appeal against the order passed by the Commissioner under section 263 of the Income-tax Act, 1961 (the Act). The assessee is an individual. The assessee was having an immovable property at 23A/198A, Block J, Alipore. There was a charge on this property in favour of several persons. The assessee made an arrangement with West Bengal Industrial Development Corpn. Ltd. for the advance of money. On 11-3-1968 the Corporation agreed to lend the money and a sum of Rs. 3,18,000 was granted to the assessee for her utilisation in the following manner :

(i) Rs. 2,18,000 for renewing her property, at 23A/198A, Block J, Alipore;

(ii) Rs. 50,000 for paying earnest money for her purchasing F. N. Gooptu & Co. for Rs. 3,50,000;

(iii) Rs. 50,000 for paying earnest money for her purchasing premises No. 12, Beliaghata Road for Rs. 3,50,000.

Balance money of Rs. 5,50,000 was aid by the Corporation to the lady for the purposes of item Nos. (ii) and (iii). The loan advanced by the Corporation carried interest of 10 per cent per annum. The loan was granted by the Corporation against mortgage of Alipore and Beliaghata properties and the repayment was to be made within a period of ten years. The assessee made default with regard to the payment of the instalments. A case was filed by the Corporation in the High Court in Title Suit No. 119 of 1969. The assessee in the meantime started negotiations with the Industrial Reconstruction Corpn. of India Ltd. for loan. The Industrial Reconstruction Corpn. of India Ltd. suggested that the business of F. N. Gooptu should be converted into a private limited company. This was completed by 28-8-1971 and the agreement was executed on 4-9-1971. However, in the meantime the Suit No. 119 of 1969 was mutually settled and the assessee on 7-6-1972 executed a promissory note for Rs. 11,57,296. It appears that again the assessee could not pay the amount according to the terms and consequently the Corporation filed a second suit in Title Suit No. 162 of 1974. The assessee claimed deduction for interest in her returns. The claim was made on Rs. 14,39,189.96. The details of Rs. 14,39,189.96 are as hereunder :

Rs.

(a)

Principal amount due in respect of Promissory Note dated 7-6-1972

11,57,296.00

Interest thereon at the rate of 10 per cent per annum from 7-6-1972 to 12-10-1974

2,72.043,82

(b)

Principal amount due in respect of Promissory Note dated 22-6-1972

8,002.00

Interest thereon at the rate of 10 per cent per annum from 22-6-1972 to 12-10-1974

1,848,14

Total

14,39,189,96

The ITO allowed deduction for interest at 10 per cent on the above amount. Further the tenants were liable to bear the municipal tax of Alipore and Beliaghata properties. The deduction for municipal tax was claimed by the assessee and the same was allowed by the ITO. The Commissioner perused the assessment orders passed by the ITO for the assessment years 1979-80 and 1980-81 and he found that the ITO without applying his mind has allowed the deduction for interest as well as the municipal tax. He further found that the ITO has allowed interest on interest and, accordingly, he came to the conclusion that the orders passed by the ITO were erroneous and prejudicial to the interests of the revenue and, accordingly, issued a show-cause notice to the assessee indicating these facts.

3. The assessee before the Commissioner urged that the deduction allowed for interest by the ITO under section 24(1) (iv) of the Act was fair. The assessee urged that the loan was taken from the Corporation for renewing the property and, therefore, the interest was allowable under section 24(1) (vi). The assessee also supported the order of the ITO that the ITO was justified in allowing deduction for municipal tax. The Commissioner was not satisfied with the explanation of the assessee. He discussed the agreement of the assessee with the Corporation and he found that the assessee took only loan of Rs. 8,68,000 and a sum of Rs. 50,000 was spent utmost on the renewal of the property and, hence, the assessee should not have been allowed deduction for more than Rs. 5,000. He also relying on Shew Kissen Bhatter v. CIT : [1973]89ITR61(SC) stated that the ITO should not have allowed interest on interest. The Commissioner further observed that according to the terms of the lease agreement the assessee had no liability to pay the owners and occupiers share of tax and, consequently, the deduction allowed by the ITO was incorrect. While passing this order, the Commissioner further observed that the ITO should also examine whether the lease rent from the Beliaghata Road property should be assessed as income from other sources or as income from house property. Consequently, he set aside both the assessments and directed the ITO to redo the same after examining the facts of the case in the light of the observation made by him after allowing an opportunity of being heard to the assessee.

4. Shri Ray, the learned counsel for the assessee, filed paper book which included a brief history, agreement with the West Bengal Industrial Development Corpn. Ltd., letter addressed by the Industrial Reconstruction Corpn. of India Ltd, to the assessee, the agreement with Gooptus Pencil Industries (P.) Ltd., Plaint in Title Suit No. 162 of 1974, assessment orders for 1964-65 and 1968-69, show-cause notice under section 263 and the promissory note granted by the assessee on 7-6-1972, etc., On the basis of these papers, the counsel has referred to the show-cause notice of the Commissioner and the facts of the case. The counsel urged that the Commissioner has not correctly mentioned the facts and, accordingly, he has come to the erroneous conclusion. The facts reproduced by the learned counsel have already been incorporated in the earlier part of this order. On those facts Shri Ray urged that the assessee was correctly allowed deduction for interest which was payable to the West Bengal Industrial Development Corpn. Ltd. He referred to section 24(1) (vi) and explained the plain meaning of the word renewed. In this connection he also referred to the commentary of Kanga & Palkhiwalss Law and Practice of Income-tax, Seventh edn., p. 335 and at page 311 of the Sixth end. He stated that there was a charge in favour of several persons on Alipore property and the same was discharged by taking loan from the Corporation. He further stated that no doubt the total loan was taken at Rs. 8,68,000 carrying interest of 10 per cent per annum but after the default a promissory note was issued by the assessee on 7-6-1972 for Rs. 11,57,296. The counsel was fair enough to indicate that the interest should have been allowed at 10 per cent on Rs. 11,57,296 instead of the amount on which it has been allowed by the ITO. The counsel urged that the Commissioner misunderstood this fact that on the default of the assessee the Corporation filed the suit and that the promissory note was granted by the assessee on mutual settlement on 7-6-1972. The assessee again defaulted and a second suit was filed before the High Court, which is still pending. The assessee in the meantime, no doubt, negotiated for loan from the Industrial Reconstruction Corpn. of India Ltd. and for that purpose F. N. Gooptu & Co. was converted into a private limited company but loan was not taken from the above Corporation. He stated that the loan taken on the basis of the promissory note dated 7-6-1972 wiped out the earlier loan and it was a fresh loan which was created by the assessee on the charge of Alipore and Beliaghata properties and, therefore, the interest was rightly allowed under section 24(1) (vi). He also justified the claim of municipal tax by the assessee. He stated that, no doubt, the same was borne by the lessee still it was the liability of the assessee. Shri Ray further submitted that the Commissioner was not justified in giving a direction that the income from Beliaghata property should be re-examined whether the same should be assessed as income from property or other sources. The Commissioner neither mentioned this fact in the show-cause notice nor the allowed any opportunity to the assessee and, therefore, this finding at least may be corrected.

5. Shri Lahiri, the departmental representative, on the other hand, very strongly supported the order of the Commissioner. Shri Lahiri urged that even otherwise before meeting with the argument of the assessee and supporting the finding of the Commissioner it could be said on the basis of the argument of the counsel that the order passed by the ITO was erroneous. The assessee himself has stated that the interest should have been allowed at Rs. 11,57,296 instead of Rs. 14,39,190. Shri Lahiri referred to the provisions of section 24(1) (vi) and urged that the assessee has not renewed the property within the meaning of section 24(1) (vi). The loan taken by the assessee was partly used in discharging the liability of Alipore property, in acquiring the Beliaghata property for Rs. 3,50,000 and acquiring new business of F. N. Gooptu & Co. Under the above circumstances deduction cannot be allowed if it is allowable for interest under section 24(1) (vi). He further stated that the loan was taken by the assessee at Rs. 8,68,000. The loan carried interest of 10 per cent. The assessee is claiming interest at Rs. 11,57,296 which includes interest and after taking into consideration the Supreme Court decision in Shew Kissen Bhatters case (supra), interest on interest was not allowable. He further stated that the assessee is incorrect in his argument that after the execution of the promissory note on 7-6-1972 the first loan was wiped out and it was a fresh loan. He also stated that the ITO allowed deduction for municipal tax which was borne by the lessee and, therefore, the order of the ITO was erroneous. Shri Lahiri also supported the finding of the Commissioner that the ITO should reconsider whether the income from Beliaghata property should be assessed as income from house property or income from other sources. Accordingly, Shri Lahiri supported the order of the Commissioner.

6. The assessee had a property known as Alipore property on which there was a charge in favour of several persons. The loan arrangement was negotiated by the assessee with the West Bengal Industrial Development Corpn. Ltd. Initially a sum of Rs. 3,18,000 was granted by the Corporation out of which a sum of Rs. 2,18,000 was spent in paying off the liability on Alipore property and Rs. 50,000 each was spent on the acquisition of Beliaghata property and the business of F. N. Gooptu & Co. The second instalment was given at Rs. 5,50,000 and the same was spent by the assessee on acquiring the Beliaghata property and the business of F. N. Gooptu & Co. Interest was payable by the assessee on the total loan of Rs. 8,68,000 at the rate of 10 per cent per annum. The assessee made default and, consequently, a suit was filed in the High Court which was ultimately mutually settled and on 7-6-1972 the assessee executed a promissory note payable on demand in favour of the Corporation for Rs. 11,57,296. Subsequently, the assessee has made further default and, accordingly, a fresh suit has been filed in the High Court which is still pending. Certain facts about the loan arrangement with the Industrial Reconstruction Corpn. of India Ltd. and conversion of F. N. Gooptu & Co. into a private limited company have been brought on record by the assessees counsel but the same has no connection with the points in issue and, therefore, they are not discussed here. The assessee claimed deduction for interest at Rs. 14,39,190. The ITO allowed deduction at 10 per cent on the above amount in both of the years. The assessee in course of hearing had limited her claim on Rs. 11,57,296 and the Commissioner has stated in his order that the assessee should be allowed only deduction on the part of the loan which was utilised on renewal or for the acquisition of the property. He has taken the loan at Rs. 8,68,000 and has estimated the allowable interest at Rs. 50,000. The loan was taken primarily by the assessee for discharging the liability over Alipore property, acquiring the Beliaghata property and the business of F. N. Gooptu & Co. Therefore, this fact will have to be kept in mind that the loan was not acquired for one object but it was acquired for three purposes and, therefore, it was necessary for the ITO to deal with the situation separately whether interest was allowable or not. This fact has not been considered by the ITO and the ITO has only allowed deduction under section 24(1) (vi). Therefore, the order of the ITO was erroneous on this issue which may be prejudicial to the interests of the revenue. Before going further on this point it would be relevant to mention that the assessee was not liable for municipal tax because it was borne by the lessee. Deduction has been claimed and allowed by the ITO. This is also an erroneous act of the assessee and, therefore, the Commissioner was justified in taking action under section 263.

7. Now the question is that what is the amount of loan which could be considered for the purpose of allowance of interest under section 24(1) (vi) or under business or under other sources. Originally the loan was taken by the assessee at Rs. 8,68,000. The loan carried interest of 10 per cent. The assessee made default. The Corporation filed a suit. The loan was ultimately settled and the assessee executed a promissory note payable on demand for Rs. 11,57,296 on 7-6-1972. Therefore, once a settlement was arrived at the loan was renewed for Rs. 11,57,296 which was originally for Rs. 8,68,000. Under the above circumstances, the Commissioners observation that the loan should only be considered at Rs. 8,68,000 is not correct and the loan outstanding against the assessee for the purpose of consideration of the interest under different heads should be taken at Rs. 11,57,296.

8. The next argument of Shri Ray is not correct that on the execution of promissory note on 7-6-1972 the first loan was wiped out. The assessee made default for payment of the loan. A case was filed in the High Court. The case was mutually settled and thereafter the assessee executed promissory note by which the assessee agreed to pay a sum of Rs. 11,57,296. Under the above circumstances at no stage the loan originally granted by the Corporation was paid off by the assessee, the loan had only been renewed after the case was mutually settled before the High Court on 7-6-1972. The argument of Shri Ray is not correct that the loan was utilised on renewal of Alipore property and acquisition of Beliaghata property. The loan was utilised for discharging the liability of Alipore property, acquiring the business of F. N. Gooptu & Co. and acquiring the Beliaghata property. Under the above circumstances, the interest payable by the assessee was available for consideration under different heads and total interest was not allowable under section 24(1) (vi). The Commissioners action was right in setting aside the order on the allowance of corporation tax in the hands of the assessee. The lessee agreed to pay off the liability of the municipal tax. After considering the provisions of section 24(1) (vi) there was no liability upon the assessee and, hence, the deduction allowed by the ITO was erroneous. hence, the finding of the Commissioner on this issue is maintained.

9. The third finding given by the Commissioner is that the ITO should re-examine whether the income from Beliaghata property should be assessed as income from house property. The contention of Shri Ray is correct. This fact was mentioned by the Commissioner in his show-cause notice that the ITO had not allowed an opportunity to the assessee on this issue. Under the above circumstances, the Commissioner has not found even after examination of the record that the order of the ITO was erroneous on this issue so far as it was prejudicial to the interests of the revenue. Under the above circumstances the finding of the Commissioner is not correct and this finding of fact is deleted from the order of the Commissioner.

10. The only other objection taken by Shri Ray was that even after the allowance of interest the total income determined by the ITO came to a loss figure and, therefore, the order passed by the ITO could not be said to be prejudicial to the interests of the revenue. This matter cannot be concluded unless the allowance of interest is considered on merit from the angle as indicated above. Therefore, prima facie, the jurisdiction assumed by the Commissioner under section 263 was correct when he found that the ITO without examining the case had allowed deduction for interest under section 24(1) (vi) of the municipal tax payable by the lessee in the hands of the assessee. Consequently, after modifying the finding of the Commissioner, the order of the Commissioner is maintained.

11. In the result, the appeals are party allowed.


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