- (1.) 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 89 ITR 61 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.;