MANSUKHRAM K AND SONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a registered partnership firm. The concerned assessment years are 1966 67, 1968 69 and 1969 70, the corresponding previous years being Samvat years 2021, 2022, 2023 and 2024, respectively. The proceedings for the assessee's assessment to income tax for the aforesaid years were reopened by the ITO under S. 147(b) of the IT Act, 1961 (hereinafter referred to as "the Act"), and the question which arises for consideration is whether the reassessments made pursuant to such reopening are valid.

(2.) IT appears that in the course of the original assessments, the ITO had allowed, as a permissible deduction under S. 40(b), certain amounts which were paid to three partners of the assessee firm as and by way of interest. Those three partners were representatives of their respective HUFs, in the partnership firm. The claim for deduction of the interest credited to the respective joint family accounts was disallowed but interest credited to the individual accounts of the three partners was allowed as a permissible deduction in the course of the original assessments. The ITO then came across the decision of the Tribunal, Bombay Bench, in the case of another assessee wherein it was held that so long as interest was paid to a partner, whatever may be the capacity in which he receives the payment, whether as a partner representing the HUF or in his personal capacity, the claim for deduction would be inadmissible under S. 40(b). The ITO, in the light of the aforesaid exposition of law, was of the view that the interest credited to the individual accounts of the three partners could not have been allowed as a permissible deduction and he, therefore, issued a notice under S. 148 in respect of each year of assessment and called upon the assessee to show cause why the assessments should not be reopened with a view to adding back the amount of interest which was wrongly allowed as deduction. Ultimately, the assessments were reopened under S. 147 (b) and the income of each assessment year was reassessed by adding back the amount of interest which was allowed as deduction in the course of the original assessment proceeding.

(3.) THE assessee carried the matters in further appeal before the Tribunal. At the hearing of the appeals before the Tribunal, it was stated on behalf of the assessee that the orders of reassessment were not proposed to be challenged on merits. The only submission urged for the consideration of the Tribunal was that the assessment proceedings could not have been reopened under S. 147(b) of the Act because there was no "information" in the possession of the ITO on the basis of which he could have had reasons to believe that income chargeable to tax had escaped assessment for the concerned assessment years. This submission was substantiated on the ground that in the course of the original assessment proceedings, the provisions of S. 40(b) were considered and applied and payment of interest to partners in their individual capacity was allowed as a permissible deduction after taking into account the relevant law and facts and that save and except the decision of the Tribunal, Bombay Bench, given in the case of another assessee, there was no other material before the ITO for justifying the reassessments and that the said decision would not constitute "information" from an external source within the meaning of S. 147(b). The Tribunal rejected the aforesaid contention holding : (i) that it was not in dispute that the decision of the Tribunal, Bombay Bench, had come into the possession of the ITO after the completion of the original assessments ; (ii) that it was indisputable that there was escapement of income in the original assessments inasmuch as interest paid to the partners in their individual accounts was not disallowed by the ITO, although, having regard to the true interpretation of S. 40(b), the deduction was not permissible ; (iii) that the "information" as to the correct state of law embodied in S. 40(b) came into the possession of the ITO from an external source and it was on the basis of the said information that the ITO had formed the belief as to the escapement of income ; (iv) that the decision of the Tribunal, Bombay Bench, on the question of law with regard to the true scope and effect of S. 40(b) was rendered by an authority competent and authorised to pronounce upon the law ; (v) that, therefore, the ITO had acted on material which constituted "information" within the meaning of S. 147(b) of the Act ; and (vi) that this was, therefore, not a case of mere change of opinion by having a second look at the same facts. In this view of the matter, the appeals were dismissed.