KANTAWALA,J. - (1.) THIS is a reference under S. 66(1) of the Indian INCOME TAX ACT, 1922, at the instance of the Revenue. The question that is referred to us for determination is whether, on the facts and in the circumstances of the case, the ITO was justified in reopening the assessments for the years 1955 -56, 1957 -58 and 1958 -59 under S. 34(1)(b) of the Act ?
(2.) THE assessee is a registered firm doing business in yarn and also commission agency. The question for determination is confined to asst. yrs. 1955 -56, 1957 -58 and 1958 -59. The corresponding previous years are Samvat years 2010, 2012 and 2013. Up to and including S. Y. 2011, the assessee -firm had three partners, viz., Bhagwandas, Ramniklal and Vrajlal. For and from S. Y. 2012 the firm had six partners, viz., Ramniklal, Vrajlal, Ishwarlal, Kumudchandra, Vinodchandra and Indulal. In the books of the assessee there was an account in the name of Bombay Import and Export Agency (hereinafter referred to as "the Agency firm"). During the relevant period, the partners of the assessee -firm were interested in the Agency firm as there were common partners. The account of the assessee -firm with the Agency firm commenced many years ago and right up to S. Y. 2007, interest was charged to the account of the Agency firm and was included in the business profit of the Agency firm. From S. Y. 2008 onwards the Agency firm started incurring losses and the assessee -firm did not charge interest to the account of the Agency firm. In the beginning of S. Y. 2010, the Agency firm was indebted to the extent of Rs. 4,76,722 to the assessee -firm, and at the end of S. Y. 2014, the Agency firm was indebted to the assessee -firm in the sum of Rs. 6,09,129. Original assessment for the asst. yrs. 1955 -56, 1957 -58 and 1958 -59 of the assessee -firm was completed by the ITO by his orders passed on April 17, and December 31, 1957, and on November 27, 1958. In none of these three years was the interest payable by the Agency firm to the assessee -firm added to the total income of the assessee -firm. Later on the assessments for these three years were reopened under S. 34(1)(b) of the Act, on the following ground : The assessee -firm had paid interest to various parties on funds borrowed from them. However, part of the funds borrowed has been invested in the Agency firm in which the partners of the assessee -firm were also partners. No interest appears to have been charged from this account to the Agency firm. It is the case of the Revenue that this fact has come to the notice of the officer while examining the account books for the year 1959 -60. On the basis of this fact, a notice was issued under S. 34(1)(b) of the Act to reopen assessment on the ground that certain income for the three years had escaped assessment. Before the ITO on behalf of the assessee -firm, it was sought to be contended that the provisions of S. 34(1)(b) were not attracted because there was no discovery of information on the basis of which such a notice to reopen assessment could be issued. That contention, however, was rejected by the ITO and he passed supplemental assessment orders on the footing that the assessee -firm had, as part of its income, the interest payable by the Agency firm on the amount due by it to the assessee -firm. An appeal by the assessee -firm to the AAC was dismissed. On further appeal by the assessee -firm before the Tribunal, it was urged that all relevant facts were known to the ITO at the time when he passed the original assessment order for all the three relevant years ; that there was no discovery of information which could have justified the issue of a notice under S. 34(1)(b) ; that the mere change of opinion on the part of the ITO cannot be the basis for issue of such a notice. The contention, on the other hand, on behalf of the Revenue was that even though the specific statement of accounts of the Agency firm for all the three relevant years were filed before the ITO when he passed the original assessment order, the same was done only to enable the ITO to issue intimation slips to the other firm ; that there was no conscious application of the mind by the ITO to the question whether the amounts advanced to the Agency firm were for the purposes of the business and whether any money borrowed to the extent of advance was not for the purposes of business. The Tribunal rejected the contention urged on behalf of the Revenue and accepted the contention of the assessee -firm and set aside the supplemental orders of assessment passed for these three relevant years. Upon an application of the Revenue, the Tribunal has referred the above question to this Court for our determination.
(3.) MR . Joshi on behalf of the Revenue has contended that merely because the statement of account for the relevant year of the Agency firm was filed before the ITO, it cannot be said that while passing the original assessment orders, the ITO consciously applied his mind to the facts disclosed thereby and to the inference to be drawn therefrom. He submitted that the assessee - firm had borrowed large sums of money and in respect of the said sums so borrowed, interest paid to the creditors was permitted to be deducted in calculating the income of the assessee -firm. A part of this borrowed amount was utilised for making payment to the Agency firm and no interest was charged on the amount due by the Agency firm. His submission was that the fact that no interest was charged to the Agency firm was discovered by the ITO when he passed the assessment order for the asst. year 1959 -60. As this fact was discovered later on, his submission was that a case was made out for issue of a notice under S. 34(1)(b) of the Act.;