Y. UPADHYAY, VICE PRESIDENT: ORDER These two appeals are taken together and disposed of by common order. 2. assessee is in appeal against order passed by CIT under s. 263 of IT Act, 1961 ('the Act'). assessee is individual. assessee was having immovable property at 23A/198A, Block J, Alipore. There was charge on this property in favour of several persons. assessee made arrangement with West Bengal Industrial Development Corpn. Ltd. for advance of money. On 11th March, 1968 Corporation agreed to lend money and sum of Rs. 3,18,000 was granted to assessee for her utilisation in 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 Corporation to lady for purposes of item Nos. (ii) and (iii). loan advanced by Corporation carried interest of 10 per cent per annum. loan was granted by Corporation against mortgage of Alipore and Beliaghata properties and repayment was to be made within period of ten years. assessee made default with regard to payment of instalments. case was filed by Corporation in High Court in Title Suit No. 119 of 1969. assessee in meantime started negotiations with Industrial Reconstruction Corpn. of India Ltd. for loan. Industrial Reconstruction Corpn. of India Ltd. suggested that business of F. N. Gooptu should be converted into private limited company. This was completed by 28th Aug., 1971 and agreement was executed on 4th Sept., 1971. However, in meantime Suit No. 119 of 1969 was mutually settled and assessee on 7th June, 1972 executed promissory note for Rs. 11,57,296. It appears that again assessee could not pay amount according to terms and consequently Corporation filed second suit in Title Suit No. 162 of 1974. assessee claimed deduction for interest in her returns. claim was made on Rs. 14,39,189.96. details of Rs. 14,39,189.96 are as hereunder : Rs. (a) Principal amount due in respect of 11,57,296.00 Promissory Note dt. 7th June, 1972 Interest thereon at rate of 10 per cent per 2,72.043,82 annum from 7th June, 1972 to 12th Oct., 1974 (b) Principal amount due in respect of 8,002.00 Promissory Note dt. 22nd June, 1972 Interest thereon at rate of 10 per cent per 1,848,14 annum from 22nd June, 1972 to 12th Oct., 1974 14,39,189,96 Total ITO allowed deduction for interest at 10 per cent on above amount. Further tenants were liable to bear municipal tax of Alipore and Beliaghata properties. deduction for municipal tax was claimed by assessee and same was allowed by ITO. CIT perused assessment orders passed by ITO for asst. yrs. 1979-80 and 1980-81 and he found that ITO without applying his mind has allowed deduction for interest as well as municipal tax. He further found that ITO has allowed interest on interest and, accordingly, he came to conclusion that orders passed by ITO were erroneous and prejudicial to interests of Revenue and, accordingly, issued show-cause notice to assessee indicating these facts. 3 . assessee before CIT urged that deduction allowed for interest by ITO under s. 24(1) (iv) of Act was fair. assessee urged that loan was taken from Corporation for renewing property and, therefore, interest was allowable under s. 24(1) (vi). assessee also supported order of ITO that ITO was justified in allowing deduction for municipal tax. CIT was not satisfied with explanation of assessee. He discussed agreement of assessee with Corporation and he found that assessee took only loan of Rs. 8,68,000 and sum of Rs. 50,000 was spent utmost on renewal of property and, hence, assessee should not have been allowed deduction for more than Rs. 5,000. He also relying on Shew Kissen Bhatter vs. CIT 1973 CTR (SC) 293 : (1973) 89 ITR 61 (SC) stated that ITO should not have allowed interest on interest. CIT further observed that according to terms of lease agreement assessee had no liability to pay owner's and occupier's share of tax and, consequently, deduction allowed by ITO was incorrect. While passing this order, CIT further observed that ITO should also examine whether lease rent from Beliaghata Road property should be assessed as income from other sources or as income from house property. Consequently, he set aside both assessments and directed ITO to redo same after examining facts of case in light of observation made by him after allowing opportunity of being heard to assessee. 4. Shri Ray, learned counsel for assessee, filed paper book which included brief history, agreement with West Bengal Industrial Development Corpn. Ltd., letter addressed by Industrial Reconstruction Corpn. of India Ltd, to assessee, agreement with Gooptu's Pencil Industries (P) Ltd., Plaint in Title Suit No. 162 of 1974, assessment orders for 1964-65 and 1968-69, show- cause notice under s. 263 and promissory note granted by assessee on 7th June, 1972, etc., On basis of these papers, counsel has referred to show-cause notice of CIT and facts of case. counsel urged that CIT has not correctly mentioned facts and, accordingly, he has come to erroneous conclusion. facts reproduced by learned counsel have already been incorporated in earlier part of this order. On those facts Shri Ray urged that assessee was correctly allowed deduction for interest which was payable to West Bengal Industrial Development Corpn. Ltd. He referred to s. 24(1) (vi) and explained plain meaning of word 'renewed'. In this connection he also referred to commentary of Kanga & Palkhiwals's Law and Practice of Income-tax, Seventh edn., p. 335 and at page 311 of Sixth end. He stated that there was charge in favour of several persons on Alipore property and same was discharged by taking loan from Corporation. He further stated that no doubt total loan was taken at Rs. 8,68,000 carrying interest of 10 per cent per annum but after default promissory note was issued by assessee on 7th June, 1972 for Rs. 11,57,296. counsel was fair enough to indicate that interest should have been allowed at 10 per cent on Rs. 11,57,296 instead of amount on which it has been allowed by ITO. counsel urged that CIT misunderstood this fact that on default of assessee Corporation filed suit and that promissory note was granted by assessee on mutual settlement on 7th June, 1972. assessee again defaulted and second suit was filed before High Court, which is still pending. assessee in meantime, no doubt, negotiated for loan from Industrial Reconstruction Corpn. of India Ltd. and for that purpose F. N. Gooptu & Co. was converted into private limited company but loan was not taken from above Corporation. He stated that loan taken on basis of promissory note dt. 7th June, 1972 wiped out earlier loan and it was fresh loan which was created by assessee on charge of Alipore and Beliaghata properties and, therefore, interest was rightly allowed under s. 24(1) (vi). He also justified claim of municipal tax by assessee. He stated that, no doubt, same was borne by lessee still it was liability of assessee. Shri Ray further submitted that CIT was not justified in giving direction that income from Beliaghata property should be re-examined whether same should be assessed as income from property or other sources. CIT neither mentioned this fact in show-cause notice nor allowed any opportunity to assessee and, therefore, this finding at least may be corrected. 5 . Shri Lahiri, Departmental representative, on other hand, very strongly supported order of CIT. Shri Lahiri urged that even otherwise before meeting with argument of assessee and supporting finding of CIT it could be said on basis of argument of counsel that order passed by ITO was erroneous. assessee himself has stated that interest should have been allowed at Rs. 11,57,296 instead of Rs. 14,39,190. Shri Lahiri referred to provisions of s. 24(1) (vi) and urged that assessee has not renewed property within meaning of s. 24(1) (vi). loan taken by assessee was partly used in discharging liability of Alipore property, in acquiring Beliaghata property for Rs. 3,50,000 and acquiring new business of F. N. Gooptu & Co. Under above circumstances deduction cannot be allowed if it is allowable for interest under s. 24(1) (vi). He further stated that loan was taken by assessee at Rs. 8,68,000. loan carried interest of 10 per cent. assessee is claiming interest at Rs. 11,57,296 which includes interest and after taking into consideration Supreme Court decision in Shew Kissen Bhatter's case (supra), interest on interest was not allowable. He further stated that assessee is incorrect in his argument that after execution of promissory note on 7th June, 1972 first loan was wiped out and it was fresh loan. He also stated that ITO allowed deduction for municipal tax which was borne by lessee and, therefore, order of ITO was erroneous. Shri Lahiri also supported finding of CIT that ITO should reconsider whether income from Beliaghata property should be assessed as income from house property or income from other sources. Accordingly, Shri Lahiri supported order of CIT. 6. assessee had property known as Alipore property on which there was charge in favour of several persons. loan arrangement was negotiated by assessee with West Bengal Industrial Development Corpn. Ltd. Initially sum of Rs. 3,18,000 was granted by Corporation out of which sum of Rs. 2,18,000 was spent in paying off liability on Alipore property and Rs. 50,000 each was spent on acquisition of Beliaghata property and business of F. N. Gooptu & Co. second instalment was given at Rs. 5,50,000 and same was spent by assessee on acquiring Beliaghata property and business of F. N. Gooptu & Co. Interest was payable by assessee on total loan of Rs. 8,68,000 at rate of 10 per cent per annum. assessee made default and, consequently, suit was filed in High Court which was ultimately mutually settled and on 7th June, 1972 assessee executed promissory note payable on demand in favour of Corporation for Rs. 11,57,296. Subsequently, assessee has made further default and, accordingly, fresh suit has been filed in High Court which is still pending. Certain facts about loan arrangement with Industrial Reconstruction Corpn. of India Ltd. and conversion of F. N. Gooptu & Co. into private limited company have been brought on record by assessee's counsel but same has no connection with points in issue and, therefore, they are not discussed here. assessee claimed deduction for interest at Rs. 14,39,190. ITO allowed deduction at 10 per cent on above amount in both of years. assessee in course of hearing had limited her claim on Rs. 11,57,296 and CIT has stated in his order that assessee should be allowed only deduction on part of loan which was utilised on renewal or for acquisition of property. He has taken loan at Rs. 8,68,000 and has estimated allowable interest at Rs. 50,000. loan was taken primarily by assessee for discharging liability over Alipore property, acquiring Beliaghata property and business of F. N. Gooptu & Co. Therefore, this fact will have to be kept in mind that loan was not acquired for one object but it was acquired for three purposes and, therefore, it was necessary for ITO to deal with situation separately whether interest was allowable or not. This fact has not been considered by ITO and ITO has only allowed deduction under s. 24(1) (vi). Therefore, order of ITO was erroneous on this issue which may be prejudicial to interests of Revenue. Before going further on this point it would be relevant to mention that assessee was not liable for municipal tax because it was borne by lessee. Deduction has been claimed and allowed by ITO. This is also erroneous act of assessee and, therefore, CIT was justified in taking action under s. 263. 7 . Now question is that what is amount of loan which could be considered for purpose of allowance of interest under s. 24(1) (vi) or under business or under other sources. Originally loan was taken by assessee at Rs. 8,68,000. loan carried interest of 10 per cent. assessee made default. Corporation filed suit. loan was ultimately settled and assessee executed promissory note payable on demand for Rs. 11,57,296 on 7 t h June, 1972. Therefore, once settlement was arrived at loan was renewed for Rs. 11,57,296 which was originally for Rs. 8,68,000. Under a b o v e circumstances, CIT's observation that loan should only be considered at Rs. 8,68,000 is not correct and loan outstanding against assessee for purpose of consideration of interest under different heads should be taken at Rs. 11,57,296. 8 . next argument of Shri Ray is not correct that on execution of promissory note on 7th June, 1972 first loan was wiped out. assessee made default for payment of loan. case was filed in High Court. case was mutually settled and thereafter assessee executed promissory note by which assessee agreed to pay sum of Rs. 11,57,296. Under above circumstances at no stage loan originally granted by Corporation was paid off by assessee, loan had only been renewed after case was mutually settled before High Court on 7th June, 1972. argument of Shri Ray is not correct that loan was utilised on renewal of Alipore property and acquisition of Beliaghata property. loan was utilised for discharging liability of Alipore property, acquiring business of F. N. Gooptu & Co. and acquiring Beliaghata property. Under above circumstances, interest payable by assessee was available for consideration under different heads and total interest was not allowable under s. 24(1) (vi). CIT's action was right in setting aside order on allowance of corporation tax in hands of assessee. lessee agreed to pay off liability of municipal tax. After considering provisions of s. 24(1) (vi) there was no liability upon assessee and, hence, deduction allowed by ITO was erroneous. hence, finding of CIT on this issue is maintained. 9 . third finding given by CIT is that ITO should re-examine whether income from Beliaghata property should be assessed as income from house property. contention of Shri Ray is correct. This fact was mentioned by CIT in his show-cause notice that ITO had not allowed opportunity to assessee on this issue. Under above circumstances, CIT has not found even after examination of record that order of ITO was erroneous on this issue so far as it was prejudicial to interests of Revenue. Under above circumstances finding of CIT is not correct and this finding of fact is deleted from order of CIT. 10. only other objection taken by Shri Ray was that even after allowance of interest total income determined by ITO came to loss figure and, therefore, order passed by ITO could not be said to be prejudicial to interests of Revenue. This matter cannot be concluded unless allowance of interest is considered on merit from angle as indicated above. Therefore, prima facie, jurisdiction assumed by CIT under s. 263 was correct when he found that ITO without examining case had allowed deduction for interest under s. 24(1) (vi) of municipal tax payable by lessee in hands of assessee. Consequently, after modifying finding of CIT, order of CIT is maintained. 11. In result, appeals are party allowed. *** SMT. PURABI GUHA v. INCOME TAX OFFICER