Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 37 of 1984

Judges

R.K Agrawal
Prakash Krishna, JJ.

Acts

section 256(1) of the Income-tax Act, 1961, hereinafter referred to as the Act
section 10(2)(xv) of the Indian Income-tax Act, 1922.
COMPANIES ACT 1956
INCOME TAX ACT
section 143(3)/148

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Smart Summary

Concise, Structured Summary of the Opinion (R.K. Agrawal, J.)

Factual and Procedural Background

The Income-tax Appellate Tribunal (ITAT), Delhi, referred three questions of law to this Court under section 256(1) of the Income-tax Act, 1961. The assessee is a company and a Government of Uttar Pradesh undertaking. For the assessment year 1977–78 (previous year: financial year), the Income-tax Officer (ITO) completed the assessment on December 31, 1977, determining total income at Rs. 1,40,552. In that assessment the ITO allowed a deduction of Rs. 10,417 being interest paid by the assessee to the Uttar Pradesh Government in respect of a "seed loan for industrial estate" and treated the relevant receipts as "Income from other sources".

Subsequently the ITO came across the Calcutta High Court decision in CIT v. New Central Jute Mills Co. Ltd., [1979] 118 ITR 1005 and, on that basis, formed the belief that the earlier allowance of Rs. 10,417 resulted in income escaping assessment. The ITO issued a notice under section 148 (reassessment). The assessee filed a return in response; the reassessment withdrew the deduction of Rs. 10,417 producing a taxable income of Rs. 1,50,970. The reassessment order was upheld by the Commissioner of Income-tax (Appeals) and by the ITAT. The three questions referred to this Court ask whether the reopening and the disallowance of the interest deduction were justified.

Legal Issues Presented

Whether on the facts and in law the Tribunal was justified in confirming the action of the Commissioner of Income-tax (Appeals) who upheld the action of the Income-tax Officer in taking action under section 148 of the Income-tax Act, 1961?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the Commissioner of Income-tax (Appeals), who confirmed the addition of Rs. 10,417 made by the Income Tax Officer under section 143(3)/148 on account of interest payable to the U.P Government on seed loan taken by the company?
Whether, on the facts and law and in the circumstances of the case, the Tribunal was legally right in holding that the interest payable to the U.P Government on seed loan taken was not deductible from the interest earned from the investments of the same loan by the appellant?

Arguments of the Parties

Appellant's (Assessee's) Arguments

The Income-tax Officer merely changed his opinion based on facts already on record at the time of original assessment; therefore the reopening (reassessment) was not valid.
Because the assessee was carrying on business in the assessment year, the interest paid to the State Government towards the "seed loan for industrial estate" was deductible.
Reliance was placed on various authorities in support of the contention that the expenditure was allowable (cases listed by the assessee's counsel in the proceedings were cited).

Revenue's Arguments

Under section 57 of the Act, a deduction from "Income from other sources" is allowable only for expenditure wholly and exclusively laid out for the purpose of making or earning that income. The industrial estate had not yet come into existence; therefore the interest paid on the seed loan was not incurred for earning the interest income that was assessed under "Income from other sources".
The ITO was justified in initiating reassessment proceedings under section 147 (section 147/148), because the Calcutta High Court decision in CIT v. New Central Jute Mills Co. Ltd. supplied information of law indicating that the earlier allowance was incorrect.
The Revenue relied on authorities supporting the proposition that judicial decisions or subsequent legal developments can constitute relevant "information" for reopening an assessment where they affect the legal correctness of an earlier allowance.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
CIT v. New Central Jute Mills Co. Ltd., [1979] 118 ITR 1005 (Calcutta High Court)	Held that interest paid to Government towards a loan obtained for erection of plant pending commencement of business cannot be allowed as revenue expenditure.	The Court treated the Calcutta High Court's decision as information on a point of law which the ITO could legitimately take into account in forming a belief under section 147(b) that income had escaped assessment, thus supporting the validity of reopening the assessment.
State of Madras v. G.J. Coelho, [1964] 53 ITR 186 (Supreme Court)	Held that interest paid on capital borrowed for acquisition of a plantation is in principle similar whether the plantation is existing or to be established.	The Court observed that this decision did not assist the assessee on the facts of the present case (i.e., it was of no help to the assessee's contention that the interest was deductible).
India Cements Ltd. v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 52 (Supreme Court)	Held that certain costs of obtaining a loan (stamp duty, registration fees, lawyer's fees) were not capital expenditure but were incurred wholly and exclusively for business and thus deductible; borrowing is incidental to carrying on business.	The Court recited the principle but did not apply it in the assessee's favour on the facts here because the expenditure in question (interest on seed loan before commencement) was not shown to be incurred for earning the assessed interest income.
Baldeo Ram Salig Ram Ltd. v. ITO, [1991] 189 ITR 554 (this Court)	Held that the ITO could not use section 147(b) to rectify his own mistake (e.g., granting higher depreciation) where there was no new information; such mistakes should be corrected under section 154.	The Court noted this authority to distinguish situations where no new information exists; relied on it to explain that reopening is not permissible for mere change of opinion or to rectify an internal mistake in the absence of fresh information.
Commissioner Of Income-Tax v. Tarai Development Corporation Ltd., [1994] 205 ITR 421 (All India)	Held that moneys borrowed for carrying on business could be spent on any account and interest on such borrowed capital is deductible.	The Court mentioned this principle but did not find it decisive for the assessee because the industrial estate had not commenced; the interest here was not for earning the interest income assessed under section 56.
Commissioner Of Income-Tax, Delhi-II v. Kelvinator Of India Ltd., [2002] 256 ITR 1 (Delhi) [FB]	Held that the ITO cannot achieve a power of review by initiating reassessment proceedings; reassessment may not be used as a back-door review.	The Court cited Kelvinator as authority for the proposition that reassessment cannot be used to effect a review where the ITO lacks review power, and considered its relevance when determining whether reassessment was permissible here.
Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456 (Supreme Court)	Explained that the ITO acquires jurisdiction to reopen under section 147(a) only on the basis of specific, reliable and relevant information coming subsequently which shows omission or failure by the assessee to make true and full disclosure; reopening cannot be mere change of opinion.	The Court relied on this formulation to underline the standard for reopening under section 147(a) and to distinguish genuine fresh information from a mere change of opinion.
Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996 (Supreme Court)	Held that where section 147(b) speaks of "information" as to law, this contemplates information of law created by a formal source (e.g., judicial decisions); judgments can have the character of law and thus constitute information.	The Court relied on this authority to support the view that a judicial decision (New Central Jute Mills) can amount to "information" under section 147(b), justifying reassessment based on a change in the legal position.
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, [1997] 227 ITR 172 (Supreme Court)	Explained that a company may have different heads of income; absence of commenced business means business profits cannot be assessed or adjusted; adjustments between interest payable and interest assessable depend on statutory provisions (sections 56, 57, 70, 71) and cannot be made except as permitted by law.	The Court applied this reasoning to conclude that interest on seed loan (incurred before commencement of the industrial estate) could not be set off against interest assessable under section 56 and therefore was not deductible under section 57.

Court's Reasoning and Analysis

The Court proceeded in two linked strands of analysis: first, whether the reassessment (reopening) was valid; and second, whether the interest of Rs. 10,417 was deductible.

On reassessment: the Court accepted that the ITO had originally allowed the deduction of Rs. 10,417 and later came across the Calcutta High Court decision in New Central Jute Mills which held that interest paid to Government for loan obtained for erection of plant pending start of business cannot be allowed as revenue expenditure. The Court treated that High Court decision as "information" on a point of law. Relying on precedents (in particular Indian and Eastern Newspaper Society and Phool Chand Bajrang Lal), the Court held that information consisting of a judicial decision can constitute relevant information under section 147(b) for forming the belief that income has escaped assessment. The Court distinguished authorities where reopening was impermissible because no fresh information was received (for example Baldeo Ram Salig Ram Ltd.) and emphasised that reopening cannot be used as a device to review where no new information has come to light (Kelvinator principle).

On deductibility of interest: the Court examined section 57 (deductions from "Income from other sources") and the facts that the industrial estate had not come into existence in the assessment year and that the interest was paid in respect of a "seed loan for industrial estate". Relying on the reasoning in Tuticorin Alkali Chemicals & Fertilizers Ltd. and other authorities, the Court explained that where business has not commenced, expenditure incurred to set up the business cannot be allowed as a deduction under provisions governing "Income from other sources" and cannot be adjusted against interest assessable under section 56 unless the statute expressly permits such adjustment (sections 70/71 relate to set-off, but were not available here). The Court therefore concluded that the interest was not "laid out wholly and exclusively for the purpose of making or earning" the interest income assessed under section 56, and hence the deduction under section 57 was not allowable.

Combining these strands, the Court found that the ITO had relevant judicial information (New Central Jute Mills) to form a belief that the earlier allowance resulted in income escaping assessment and that the legal position established by higher courts supported disallowance of the interest. Accordingly, the Court upheld the ITAT's conclusion that reassessment proceedings and the resultant disallowance were justified.

Holding and Implications

Holding: The Court answered all three referred questions in the affirmative, i.e., in favour of the Revenue and against the assessee. The Court's core ruling was:

All three questions of law referred under section 256(1) are answered in favour of the Revenue and against the assessee.

Immediate implications for the parties:

The reassessment initiated by the ITO under section 147/148 was validly initiated on the basis of judicial information (New Central Jute Mills).
The deduction of Rs. 10,417 (interest paid to the U.P. Government on the seed loan) is not allowable under section 57 as a deduction from income assessed under the head "Income from other sources"; the reassessment's addition is sustained and the taxable income stands increased accordingly (as reflected in the reassessment to Rs. 1,50,970).
There shall be no order as to costs.

Broader precedent: The Court applied and relied on existing case law to reach its decision; the opinion does not state that it is laying down any new legal principle or novel precedent beyond applying established authorities to the facts before it.

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U.P State Brassware Corporation Ltd. v. Commissioner Of Income-Tax

R.K Agrawal, J.:— The Income-tax Appellate Tribunal, Delhi, has referred the following three questions of law under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as “the Act” for opinion to this court:

“1. Whether on the facts and in law, the Tribunal was justified in confirming the action of the Commissioner of Income-tax (Appeals) who upheld the action of the Income-tax Officer in taking action under section 148 of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the Commissioner of Income-tax (Appeals), who confirmed the addition of Rs. 10,417 made by the Income Tax Officer under section 143(3)/148 on account of interest payable to the U.P Government on seed loan taken by the company?

3. Whether, on the facts and in law and in the circumstances of the case, the Tribunal was legally right in holding that the interest payable to the U.P Government on seed loan taken was not deductible from the interest earned from the investments of the same loan by the appellant?”

2. Briefly stated the facts giving rise to the present reference are as follows:

The applicant is a company incorporated under the provisions of the Companies Act, 1956. It is a Government of U.P undertaking. For the assessment year 1977–78 for which the previous year is the financial year, the Income-tax Officer completed the assessment vide order dated December 31, 1977, determining the total income at Rs. 1,40,552. In the said assessment, the Income-tax Officer while computing interest under the head “Income from other sources” allowed the deduction of Rs. 10,417 being the amount of interest paid by the applicant to the U.P Government in respect of “seed loan for industrial estate”. Subsequently, he came across a decision of the Calcutta High Court in the case of CIT v. New Central Jute Mills Co. Ltd., [1979]118 ITR 1005 and on the basis of the information as to the legal proposition laid down in the said ruling, he came to believe that as a result of allowance of deduction of interest expenditure of Rs. 10,417 in the original assessment income to that extent had escaped assessment. He issued notice under section 148 of the Act. In response to the said notice the applicant filed the return of income. In the reassessment proceeding the Income-tax Officer withdrew the deduction of Rs. 10,417 resulting in the taxable income assessed at Rs. 1,50,970. The reassessment order has been upheld by the Commissioner of Income-tax (Appeals) as also by the Income-tax Appellate Tribunal, Delhi.

3. We have heard Sri Vikram Gulati, learned counsel for the applicant and Sri A.N Mahajan, learned counsel appearing for the Revenue. Learned counsel for the applicant submitted that the Income-tax Officer had merely changed his opinion on the basis of the facts already on record at the stage of original assessment and, therefore, reopening of original assessment was not valid. He further submitted that as the applicant was carrying on business during the assessment year in question the amount of interest paid by it to the State Government towards “seed loan for industrial estate” was liable for deduction. In support of the aforesaid submissions, he has relied upon the following decisions:

(1) State of Madras v. G.J Coelho, [1964] 53 ITR 186 (SC);

(2) India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC);

(3) Baldeo Ram Salig Ram Ltd. v. ITO, [1991] 189 ITR 554 (All);

(4) Commissioner Of Income-Tax v. Tarai Development Corporation Ltd., [1994] 205 ITR 421 (All); and

(5) Commissioner Of Income-Tax, Delhi-Ii. v. Kelvinator Of India Ltd., [2002] 256 ITR 1 (Delhi) [FB].

4. Sri A.N Mahajan, learned standing counsel appearing for the Revenue, however, submitted that under section 57 of the Act deduction is permissible from the income assessed under the head “Income from other sources” which has been laid out wholly and exclusively for the purposes of making or earning such income. As the applicant had paid interest to the State Government on “seed loan for industrial estate” when that industrial estate has not yet come into existence and no such income of the industrial estate has been assessed the deduction could not have been allowed. He further submitted that the Income-tax Officer was fully justified to take proceedings under section 147 of the Act as the deduction had been wrongly allowed to the applicant in view of the decision of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd., [1979] 118 ITR 1005. In support of his aforementioned submission he has relied upon the following decisions:

(1) CIT v. New Central Jute Mills Co. Ltd., [1979] 118 ITR 1005 (Cal); and

(2) Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456 (SC).

5. Having heard learned counsel for the parties we find that admittedly the Income-tax Officer had allowed deduction of Rs. 10,417 which was towards the interest paid to the State Government in respect of “seed loan for industrial estate” from the interest income computed under the head “Income from other sources”. In the case of New Central Jute Mills Co. Ltd., [1979] 118 ITR 1005 the Calcutta High Court has held that interest paid to the Government towards the loan obtained for erection of chemical plant pending starting of business cannot be allowed as revenue expenditure. The principles laid down by the Calcutta High Court do constitute information on a point of law which should be taken into consideration by the Income-tax Officer in forming his belief that the income to that extent had escaped assessment to tax.

6. In the case of Baldeo Ram Salig Ram Ltd., [1991] 189 ITR 554 this court has held that the Income-tax Officer cannot be permitted to rectify the mistake committed by him in granting higher depreciation on lifts under section 147(b) of the Act. He could have rectified the mistake under section 154 of the Act. This court has held that there was no information received by the Income-tax Officer on the basis of which he could have reopened the assessment.

7. In the case of Kelvindator of India Ltd., [2002] 256 ITR 1 (Delhi) [FB] the Delhi High Court has held that if the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding for reassessment.

8. In the case of Phool Chand Bajrang Lal, [1993] 203 ITR 456, the apex court has held that an Income-tax Officer acquires jurisdiction to reopen an assessment under section 147(a) only if, on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons to believe which he must record that by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but one of acting on fresh information.

9. In the case of Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996 the apex court has held that section 147(b) of the Act is read as referring to “information” as to law, what is contemplated is information as to the law created by a formal source. It is law, we must remember, which, because it issues from a competent Legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of those matters which determine the assessee's tax liability. The apex court has held that the declaration or exposition set forth in a judgment of a court or the order of a Tribunal in itself bears the character of law.

10. Thus, if on the plain language of section 57 of the Act an expenditure which has not been incurred exclusively for earning the income which is to be assessed under the head “Income from other sources” the deduction has been allowed and subsequently in view of the law laid down by one of the High Courts, the Income-tax Officer gets the information to form the opinion on a point of law in that event it cannot be said that the proceeding under section 147(b) of the Act cannot be initiated. In this view of the matter the Tribunal has rightly upheld the initiation of the proceedings under section 147(b) of the Act.

11. So far as the question of deduction of interest expenditure of Rs. 10,417 is concerned admittedly the industrial estate had not come into existence during the assessment year in question. The applicant had paid interest in respect of “seed loan for industrial estate” to the State Government. It was not expenditure for earning interest. In the case of G.J Coelho, [1964] 53 ITR 186, the apex court has held that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation and both are for the purposes of the plantation. The aforesaid decision is of no help to the applicant.

12. In the case of India Cements Ltd., [1966] 60 ITR 52, the apex court has held that the amount spent towards stamp duty, registration fees, lawyer's fees, etc. for obtaining a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the business and was therefore, allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The apex court has further held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained.

13. In the case of Tarai Development Corporation Ltd., [1994] 205 ITR 421, this court has held that the moneys borrowed for the purpose of carrying on business could be spent by the assessee on any account, either capital or revenue and the interest paid on such borrowed capital is liable for deduction.

14. We find that in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, [1997] 227 ITR 172 (SC) the apex court has held as follows (page 179):

“The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head ‘Capital gains’. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act.”

15. The apex court has further held that the question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. The assessee may be entitled to capitalize the interest payable by it but what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. The apex court has further held as follows (page 180):

“There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of income (section 70), as well as setting off loss from one head against income from another (section 71). In the facts of this case the company cannot claim any relief under either of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.

It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Income-tax Act. However, desirable it may be from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment.”

(emphasis1 supplied)

16. Thus the interest paid on “seed loan for industrial estate” cannot be allowed as a deduction under section 57 of the Act as the same has not been expended for earning the interest which has been assessed under section 56 of the Act under the head “Income from other sources”.

17. In view of the foregoing discussion, we answer all the three questions of law referred to us in the affirmative, i.e, in favour of the Revenue and against the assessee. However, there shall be no order as to costs.

U.P State Brassware Corporation Ltd. v. Commissioner Of Income-Tax

Concise, Structured Summary of the Opinion (R.K. Agrawal, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

U.P State Brassware Corporation Ltd. v. Commissioner Of Income-Tax

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