Law:

Section:

JUDGMENT Banerjee, J.-Section 34 of the Indian Income-tax Act, 1922, which has been interpreted by the Supreme Court and by different High Courts in India in a number of cases, still remains a rich germinating ground for forensic arguments. One such argument confronts us in this reference. The circumstances in which this reference has been made are hereinafter related in brief. The assessee, Messrs. Kalyanji Mavji & Co., is a registered firm. The year of assessment, with which we are concerned in this reference, is 1956-57, corresponding to the accounting year being the Gujrati Diwali year 2011. The original assessment for the year in question was completed, on February 20, 1957, on a total income of Rs. 7,44,551, after having allowed deduction of a sum of Rs. 43,116 being interest paid by the assessee on borrowed money. This assessment was reduced by the Appellate Assistant Commissioner by a sum of Rs. 9,200, by his order dated July 3, 1958. In the course of the assessment proceedings for the year 1958-59, the Income-tax Officer discovered that the assessee's claim for payment of interest on money said to have been borrowed for the purpose of business was not sustainable. In the opinion of the Income-tax Officer the entire borrowed money had not been utilised for the purposes of the business, but for the purpose of giving interest-free advances to the partners of the assessee-firm. As a result of the discovery, the Income-tax Officer took action under section 34(1)(b) of the Indian Income-tax Act, 1922, on the ground that he had reasons to believe that the assessee's claim of payment of interest on money borrowed was not proper and that income to the extent of Rs. 43,116 was under-assessed. In the reassessment that followed, the Income-tax Officer added the sum of Rs. 43,116 to the total income and reassessed the total income at Rs. 7,78,467. The relevant portion of the order of the Income-tax Officer is hereinbelow set out : "In their letter dated April 22, 1961, Messrs. S.K. Sawday & Co. have given their objections to my action under section 34. In fact no argument as regards the allowance or disallowance of the interest amount in question was placed…

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