ORDER
N.V. Balasubramanian, J.
1. In compliance with the directions of this Court dt. 15th Feb., 1983, the Tribunal, Madras, has stated a case and referred the following questions of law under Section 256(2) of the IT Act, 1961, for our opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the reassessment made under Section 147(b) of the IT Act for the asst. yr. 1972-73 ?
2. Whether, the Tribunal’s view that there was no new information within the meaning of Section 147(b) of the IT Act for reopening of the assessment for the year 1972-73 is based on valid and relevant material and is sustainable in law ?
2. The assessee is an individual and the reference relates to the asst. yr. 1972-73 and during the previous year relevant to the assessment year the assessee has derived interest income which was chargeable under the heads, ‘Interest on securities’, ‘House property’, ‘Capital gains’ and ‘Other sources’. The assessee during the previous year relevant to the asst. yr. 1972-73 borrowed a sum of Rs. 11.5 lakhs on 16th Oct., 1971, from the Canara Bank repayable with interest at 11.5 per cent p.a. on the said sum. The said sum was utilised by the assessee as under :
1. Advance to Madurai South India Corporation (P) Ltd. 5,00,000 2. Advances to Dubarry Group Estates 2,35,000 3. Repayment of old loans from Canara Banking Corpn. Ltd. 4,15,000
The assessee claimed deduction of the entire interest on the ground that the moneys were borrowed for payment of the wealth-tax. The assessee also stated at the time of original assessment that she had received interest from M/s Madurai South India Corporation (P) Ltd. on the sum of Rs. 5,00,000 at the rate of 6 per cent p.a. The ITO disallowed the interest of 5-1/2 per cent on the sum of Rs. 5 lakhs advanced to Madurai South India Corporation Ltd. and held that the entire interest cannot be allowed and he disallowed the difference of the amount between 6 per cent and 11-1/2 per cent. Accordingly, the ITO disallowed a sum of Rs. 22,258 out of the claim made by the assessee.
3. The assessee appealed to the CIT(A), who confirmed the findings of the ITO. The assessee preferred a further appeal before the Tribunal, Madras. The Tribunal, by order dt. 31st Dec., 1976 in ITA No. 983/Mds/1975-76, held that the transaction was not found to be genuine or colourable and hence, no part of interest paid could be disallowed as both the borrowings and the lending were commercial transactions:
4. The ITO subsequently received a report from the internal audit party to the effect that a copy of the account of the assessee in the books of M/s Madurai South India Corporation (P) Ltd. showed that apart from a sum of Rs. 5,00,000 borrowed from the said corporation, the assessee had borrowed a sum of Rs. 1 lakh from one Segappi Achi at the interest rate of 3 per cent on 16th Oct., 1971. The report of the auditor pointed out that the entire sum of Rs. 6 lakhs was utilised by the assessee for payment of Rs. 4,70,113 as advance to the estate of her late husband, Kumararajah M.A.M. Muthiah Chettiar for the payment of estate duty and wealth-tax of the estate and a sum of Rs. 1,16,521 was drawn for the payment of her own wealth-tax. The audit report also pointed out that the disallowance of interest at 11 1/2 per cent on the sum of Rs. 5 lakhs and 3 per cent on the sum of Rs. 1 lakh from the said Sigappi Achi would be justified as the funds were utilised for the payment of tax dues of the estate of her late husband and the tax dues of her own.
5. The ITO, on the basis of the audit report, initiated proceedings to reopen the assessment by issuing a notice under Section 147(b) of the Act and called upon the assessee to file her return. The assessee objected to the proposal for reassessment both on the ground of jurisdiction and on merits. The ITO overruled the objections of the assessee on the ground that the borrowed amounts were utilised by the assessee for the payment of wealth-tax of her own assessment and payment of estate of her late husband, Kumararaja M.A.M. Muthiah Chettiar and, therefore, the interest at 11-1/2 per cent as well as the interest at 3 per cent on the loan from Sigappi Achi cannot be allowed. In this view of the matter, he completed the reassessment disallowing the interest of a sum of Rs. 34,347 and allowed only the balance amount of interest.
6. The assessee preferred an appeal to the AAC challenging the order of the ITO both on the question of jurisdiction and on merits of the case. The AAC found that the information received by the ITO, namely, ‘the amount received from Sigappi Achi’ was an information of fact and there was no question of change of opinion on the part of the ITO in making the reassessment. The AAC also held that the information received did not relate to the interpretation of the provision of law and the ITO became aware of the fact only after the completion of the assessment as the withdrawal of the sum from M/s Madurai South India Corporation (P) Ltd. was not shown before the ITO at the time of completion of assessment. He also noticed the letter of the assessee dt. 17th Sept., 1974, and found that the original assessment was completed without the full knowledge of the fact. He, therefore, held that the ITO had jurisdiction in reopening the assessment under Section 147(b) of the Act. The AAC also decided the matter on merits and sustained the order of the ITO.
7. The assessee carried the matter on appeal before the Tribunal. The Tribunal held that a disputable proposition of law is involved when the audit party pointed out that the interest should be disallowed and the alleged new fact pointed out by the audit party did not lead to a new information. The Tribunal, therefore, held that there was no new information available with the ITO who invalidly reopened the assessment. Applying the principles laid down by the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT the Tribunal held that the ITO had no jurisdiction to reopen the assessment. In this view of the matter, the Tribunal did not go into the merits of the matter. Aggrieved by the order of the Tribunal, the Revenue sought for a reference and on the direction of this Court, the Tribunal has stated a case and referred the questions of law mentioned above.
8. Notice was served on the assessee and there was no representation for and on behalf of the assessee on 5th Nov., 1997, 6th Nov., 1997 and 8th Nov., 1997. Hence, we are constrained to proceed with the disposal of the tax case on the basis of perusal of the records as well as on the representation made by the learned counsel for the Revenue.
9. Mr. C.V. Rajan, learned counsel appearing for the Revenue submitted that the audit party has not interpreted any question of law and the audit party has merely brought to the knowledge of the ITO certain new facts which were not before the ITO at the time of completion of the original assessment. According to the learned counsel for the Revenue, no legal issue was involved when the audit party has pointed out that the sums deposited in M/s Madurai South India Corporation (P) Ltd. were drawn for the payment of estate duty of the assessee’s late husband and also for the payment of her wealth-tax dues and hence, the audit party has not interpreted the law. He also submitted that the issue raised before the Tribunal when the matter came up earlier before it was different and the question that was raised earlier was with regard to the allowability of interest from 6 per cent to 11.5 per cent and not with regard to the reopening of assessment, Learned counsel submitted that the Tribunal proceeded on a wrong basis that it was a case of allowance of business expenditure against the business income and the decisions relied upon by the assessee before the Tribunal have no application. Learned counsel submitted that the decision of the Supreme Court in Indian and Eastern Newspaper Society’s case (supra) really supports the case of the Department.
10. We have carefully considered the submission of the learned counsel for the Revenue and we have also perused the records in entirety. The facts of the case has already been stated in detail. The Tribunal has decided the case and held that the reassessment was not justified on certain reasons. The first reason that was given by the Tribunal to hold that the reassessment was not justified is that the case of disallowance of a part of interest on borrowings of 11.5 lakhs from Canara Banking Corporation Ltd. was a subject-matter before the Tribunal earlier and the Tribunal found that the interest was allowable. The Tribunal, therefore, held that the earlier decision should not likely be disturbed unless there were now facts which would unsettle the earlier decision.
11. There can be no quarrel over the proposition laid down by the Tribunal that a decision given by the Tribunal should not likely be disturbed by the ITO and there must be positive materials before the ITO to hold that there is a case of escapement. However, the Tribunal has not examined the question whether there were new facts for the ITO or not when he initiated reassessment proceedings. The impression gained by the Tribunal from the proceedings of the ITO was that he was trying to unsettle the earlier decision of the Tribunal. This view of the Tribunal is quite wrong and is not accurate as the ITO, by reassessment, has not disturbed the earlier order. Further more, the question that was raised in the earlier order of the Tribunal was regarding the disallowance of a part of interest between the interest on the amount borrowed from M/s Canara Banking Corporation and the interest paid to M/s Madurai South India Corporation (P) Ltd. and the question whether the interest can be allowed or not was not the subject-matter of consideration either before the AO or before the CIT(A) or before the Tribunal. It is only in the light of the objection raised on the audit party the ITO has received information that the moneys borrowed were utilised for the payment of taxes and since that information was received subsequent to the order of the ITO, it cannot be said that the ITO is trying to unsettle the earlier order of the Tribunal. Consequently, we are of the view that the first reason given by the Tribunal that unless there are positive material which would render an earlier decision of the Tribunal wrong, the reassessment cannot be resorted to, though the proposition of law is correct is not applicable as the Tribunal has not examined the question whether there was any new material before the ITO to reopen the assessment.
12. The second reason given by the Tribunal was that the use of a part of the money deposited with Madurai South India Corporation (P) Ltd. was not so relevant as to make the original borrowing from Canara Banking Corporation as a non-business one. The Tribunal, apparently has proceeded on the wrong assumption as income was not assessed under the head ‘Business’ but interest of the income was assessed only under the head ‘Income from other sources’ and it is not the case of deduction under Section 36(3)(i) (sic) of the Act, The assumption that the further use of moneys has no relevance for disallowance is also not correct as the use of the moneys would have relevance in determining the question whether the interest on moneys borrowed should be allowed as deduction in the computation of income, Therefore, when the information was brought by the audit party to the attention of the ITO, it cannot be said that the subsequent user of the moneys is not a relevant circumstance. The second reason given by the Tribunal also is not justified.
13. The other reason given by the Tribunal is that there was a mixing up of the fund between the assessee’s own money and the money held in investment and, therefore, no disallowance is called for. This finding, in our view, is not based on any material and there were no materials placed either before the ITO or even before the CIT(A) by the assessee to show that there was mixing up of funds. On the other hand, there was a clear finding of the CIT(A) that the assessee had withdrawn the deposits to pay the taxes and after perusing the accounts of the assessee with Madurai South India Corporation (P) Ltd., he has found that a sum of Rs. 5 lakhs deposited on 16th Oct., 1971, was in the deposit for a period of three days and the deposit was withdrawn on 19th Oct., 1971, the date on which the money was utilised for the payment of taxes, The CIT(A) has rendered the finding on the basis that there were no materials placed by the assessee. The order of the Tribunal does not indicate that any new material was placed by the assessee before it to show that there was mixing up of the assessee’s own funds with the money deposited with the said Corporation. The Tribunal has proceeded to record such a finding without any material or evidence on record that there was mixing up of funds. The Tribunal should have realised that it was dealing with the case of jurisdiction of the ITO to reopen the assessment and in consideration of the question as to whether the reassessment was justified or not, it need not have gone into the question on merits and made certain observations as regards the mixing up of the funds. The above observation of the Tribunal is not warranted on the facts of the case.
14. Yet another reason that was given by the Tribunal was that the money ought to have been given by the assessee as a loan to the estate of late Kumararajah M.A.M. Muthiah Chettiar on the basis of the decision of the Bombay High Court in CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Mom and Anr. (1975) 100 ITR 67 (Bom) where it was held that there was no cause for reopening the assessment. Here also the Tribunal has gone into the merits of the case in considering the question of jurisdiction of the ITO. The Tribunal should have noticed that the facts in H.H. Maharani Shri Vijaykuverba Saheb of Morvi’s case (supra) are entirely different and the assessee therein was a trustee created by Maharaja Shri Mahendrasinhji of Morvi in favour of his son and the trust property consists of certain shares and securities and the income of the trust was of dividends from shares and interest on securities. On the death of Maharaja Shri Mahendrasinhji of Morvi the question of liability of the estate duty arose. The trustees of the trust paid estate duty and for the payment of estate duty they borrowed certain money and claimed deduction of interest on the borrowings. The Bombay High Court held that the borrowings made by the trustees for the purpose of meeting the estate duty liability attached to the property and to maintain the property of the trust, the trustees borrowed money and therefore, the interest paid on the borrowings during the concerned years was an expenditure incurred solely for the purpose of earning income and would fall within Section 12(2) of the Indian IT Act, 1922, The facts of the case are entirely different. In the case on hand, the assessee is not a trustee, but she advanced money for the payment of estate duty liability of her husband and therefore, it cannot be said that it is a case of preservation of estate and for the preservation of estate, certain moneys were borrowed and on the said amount interest is claimed. Since the Tribunal has rendered findings on merits of the case, we are not expressing any final opinion on the question whether the interest paid is allowable.
15. These are the four reasons on the basis of which the Tribunal came to the conclusion that there was a disputable proposition of law involved on the report of audit party and therefore, the ITO was not justified in reopening the assessment. We are of the view that the final conclusion of the Tribunal is not warranted on the basis of the reasoning given by it. The Tribunal has clearly misdirected itself in law in holding that there was no information before the ITO to reopen the assessment. The only question that was in issue before the Tribunal was whether the reopening was justified on the basis of the report of the audit party and for determining the question, the Tribunal should have decided the question whether in the report of the audit party there was new information on the question of fact or on the question of law. The Tribunal has not posed the proper question, but proceeded on the wrong direction and held that certain disputable proposition of law was involved and hence, the reopening was not justified. We are, therefore, of the view that the conclusion of the Tribunal is not justified on the facts of the case.
16. It is seen from the order of the CIT(A) that when the ITO made assessment, he had no-information that the sum of Rs. 5 lakhs deposited by the assessee with M/s Madurai South India Corporation (P) Ltd. was withdrawn for the payment of taxes. The CIT(A) also referred to the letter dt. 17th Sept., 1974, of the assessee wherein the assessee made a reference to the payment of estate duty on the estate of her late husband and in that letter, and explanation was made about the receipt of interest and dividend. The CIT(A), only from the letter, found that the amount deposited by the assessee with M/s Madurai South India Corporation (P) Ltd. was withdrawn within a period of three days from the date of deposit and the withdrawal of Rs. 5 lakhs and the payment of taxes are all material facts which are relevant in considering the question that arose before the ITO whether any portion of the interest is deductible or not. It is clear that the ITO did not have those information at the time of completion of assessment and it is only by virtue of the report of the audit party, the information came out. The audit party, by informing the ITO of the withdrawal of deposit of Rs. 5 lakhs and the utilisation of the same for the payment of her tax liability and also the estate duty liability of her late husband, has not interpreted any law, but informed the ITO of certain new facts which were not available to him at the time of completion of original assessment. Hence, it cannot be said that there was a change of opinion on the part of the ITO when he initiated reassessment proceedings on the basis of the report of the audit party. Therefore, we hold that the Tribunal was not right in holding that the ITO had no jurisdiction to reopen the assessment under Section 147(b) of the Act.
17. In Smt. Indira Devi v. CIT this Court, following the decisions of the Supreme Court in Indian and Eastern Newspaper Society v. CIT (supra) and A.L.A. Firm v. CIT , has held that if the audit party brings to the notice of the ITO certain facts overlooked by him, he could change his opinion on the basis of the new facts and reassessment proceedings in such a case would be justified. In the case on hand, the ITO had no occasion to apply his mind on the question of disallowance of interest with reference to the material fact of withdrawal of deposit amount and utilisation of the same for the discharge of estate duty liability of her husband and her tax liability and the information was brought to the attention of the ITO only by the audit party and it cannot be held that the audit party has interpreted the law by furnishing the information to the ITO. In our opinion, the audit party brought to the notice of the ITO only certain new material facts necessary for the assessment of assessee’s case and hence, the ITO was justified in reopening the assessment in the assessee’s case.
18. No doubt, Mr. C.V. Rajan, learned counsel appearing for the Revenue relied on the decision of the Supreme Court in Smt Padmavathi Jaikrishna v. Addl. CIT wherein the Supreme Court held that interest on amounts borrowed to pay taxes and annuity deposit would not be an admissible deduction under Section 57(iii) of the IT Act. The Supreme Court in East India Pharmaceutical Works Ltd. v. CIT has held that the interest on money borrowed for payment of income-tax was not an expenditure laid out wholly and exclusively for the purpose of business as contemplated in Sub-section (1) of Section 37 of the IT Act. However, since those decisions turn on the merits of the case, we are examining the question whether on the merits of the case the assessee’s claim can be justified or not. As the Tribunal decided the case only on the question of jurisdiction to reopen the assessment, we hold that the Tribunal was not right in cancelling the reassessment made by the ITO and the view of the Tribunal that there was no new information within the meaning of Section 147(b) of the Act for reopening the assessment is also not justified. In this view of the matter, we answer the questions referred to us in the negative and in favour of the Revenue. No costs.