Full Interest Deduction for Let-Out Property Upheld; No Lender Certificate Required Under Section 24(b) Provisos

ORDER

1. Mr. Pardiwala, the learned Senior Counsel appearing on behalf of the Petitioner, has tendered draft amendments termed as “Schedule of Amendments” to the above Writ Petition. The amendments are basically to bring on record a copy of the notice issued under Section 148 as well as adding certain grounds and prayers.

2. Considering the amendments are formal in nature, bringing a challenge to the notice issued under Section 148, and also considering that this is a pre-admission amendment, the amendments tendered to the Court are taken on record and marked “X” for identification. The Petitioner is permitted to amend the Writ Petition in terms of the draft handed in.

3. The amendments shall be carried out forthwith in front of the Associate. Re-verification is dispensed with.

4. Rule. Respondent waives service. With the consent of the Advocates for the Petitioner as well as the Respondent, the same is made returnable forthwith and heard finally.

5. The present Petition challenges the validity of a notice dated 28th March 2021 issued under Section 148 of the Income Tax Act, 1961 (for short “IT Act”) for the Assessment Year 2014-15, along with a notice dated 30th July 2021 issued under Section 143(2) read with Section 147, and the order dated 9th February 2022 disposing of the objections filed against the notice under Section 148.

6. The Petitioner is an individual and earns income that is chargeable under various heads such as “Income from House Property”, share in profits of partnership firms, income chargeable under the head “Profits and gains of business”, “Capital gains”, and “Income from other sources”. The Petitioner filed his return of income for the Assessment Year 2014-15 on 29th November 2014. The total income declared in the return was Rs. 5,87,74,290/-. Income aggregating to Rs. 4,44,10,063/-was declared under the head “Income from house property “. This included income from eight properties which were let out by the Petitioner. One such property was a property situated at Muttha Chambers II in respect whereof the Petitioner had received rental income of Rs. 7,65,23,124/-. After claiming a deduction as permitted under Sections 23 and 24 of the IT Act (which included interest on borrowed capital of Rs. 4,10,67,473/-) the Petitioner declared an income of Rs. 1,20,34,183/-.

7. A notice under Section 143(2) was issued on 28th August 2015 asking for certain details, and in response thereto, the Petitioner by his letter dated 26th October 2015 filed inter alia a copy of the statement of computation of total income as well as a copy of his profit and loss account and balance sheet. Both these documents are statutory documents which are required to be filed along with the return of income. These documents disclosed that the Petitioner had earned rental income as well as that he had claimed a deduction for interest in terms of Section 24(b) of the IT Act. Subsequently by a letter dated 24th May 2016 the Petitioner clarified the various sources of income that were earned by him and also furnished the assessment orders of the earlier three years. Respondent No.1 had also called upon the Petitioner to submit details of rental income earned as well as a reconciliation of income disclosed in the income-tax returns as well as that which was reflected in Form 26-AS. These details were filed under cover of letter dated 30th June 2016. Thereafter by a letter dated 10th December 2016 the Petitioner clarified the reason for the increase in rental income during the present Assessment Year compared to the rental income disclosed in the earlier year. In this regard, it was pointed out that the second floor in Muttha Chambers II was let to Druva Software Private Limited for a period of three months only during the previous year relevant to Assessment Year 2013-14 whilst the entire second floor was occupied throughout the previous year which ended on 31st March 2014 initially by Druva Software Private Limited till November 2013 and thereafter by Druva Data Solutions Private Limited. Thus, the factum that this property was let out, was once again demonstrated in the course of the assessment proceedings.

8. Respondent No.1 completed the Petitioner’s assessment by an order dated 23rd November 2016 under Section 143(3) and accepted the income declared in the return.

9. Thereafter, Respondent No.1 issued a notice dated 15th February 2021 under Section 133(6) pointing out that “on going through the audited financial statement for the year under consideration and computation of total income furnished during the course of the assessment proceedings, it is evident that you have claimed a deduction under section 24 being interest on borrowed capital of Rs. 4,10,67,473/-. Against the rental income from property of Muttha Chambers II and in that no certificate for the same was furnished during the course of the assessment proceedings”. The Petitioner was called upon to furnish a copy of the certificate for the deduction claimed under Section 24 on or before 22nd February 2021. The Petitioner’s representative attended the office of Respondent No.1 on 24th February 2021 but was unable to meet Respondent No.1. Therefore, by an email dated 27th February 2021, the Petitioner’s Chartered Accountant requested for a fresh opportunity of being heard in person. As the Petitioner had not received any response from Respondent No.1 pursuant to the aforesaid request, he filed a letter dated 22nd March 2021 pointing out that he was never asked to produce any certificate under Section 24 in the course of the original assessment proceedings. It was also submitted that there was no statutory requirement to furnish such a certificate. It is probably for this reason that the certificate was not called for.

10. Inspite of the aforesaid reply, the impugned notice under Section 148 [dated 28th March 2021] was issued by Respondent No.1, which notice, on the face of it, records that the same is being issued after obtaining the necessary satisfaction of the Principal Commissioner of Income-tax, Pune-2.

11. Be that as it may, the Petitioner filed a return on 27th April 2021 in response to the notice and asked for a copy of the reasons recorded by Respondent No.1 prior to the issuance of the impugned notice.

12. Respondent No.1 thereafter issued a notice dated 30th July 2021 under Section 143(2) whereby he enclosed a copy of the reasons recorded prior to the issuance of the impugned notice. The reasons as recorded read thus:-

“1. Brief details of the Assessee: The assessee is an individual engaged in the business of rendering services pertaining to maintenance of commercial premises and derives income from house property, Capital gain and Income from other sources. The assessee filed his return of income for AY 2014-15 on 29.11.2014 declaring total income of Rs. 5,87,74,290/-. Subsequently, the case of the assessee was selected for scrutiny by CASS and notice u/s 143(2) of the Act dated 28.08.2015 was issued and duly served upon the assessee. Thereafter, assessment was completed u/s 143(3) of the Act on 23.11.2016 assessing total income as per returned income at Rs. 5,87,74,290/-.

2. Brief details of Information collected/received: It has been observed from the assessment record that for the year under consideration, the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the course of assessment proceedings.

3. Analysis of information collected/ received: On going through the Audited financial statements for the year under consideration and computation of total income furnished during the course of assessment proceedings, it is seen from the computation of income that the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the course of assessment proceedings.

4. Enquiries made by the AO as sequel to information collected/received: Thereafter, letter calling for information u/s 133(6) dated 15.2.2021 was issued and duly served upon the assessee after prior approval of the Pr.CIT-2, Pune. The assessee was required to furnish a copy of certificate for the deduction claimed u/s 24 of Rs. 4,10,67,473/- by 22.2.2021. The assessee has failed to furnish any submission till date even after sufficient time has elapsed.

5. Findings of the AO: On going through the audited financial statements and submissions made by the assessee during the course of assessment proceedings, it is seen from the computation of income that the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the course of assessment proceedings. On perusal of the Balance-sheet of the assessee, it is seen that the assessee has only two major loan accounts i.e. HDFC loan DOD a/c Zeus, Infrastructure account and that none of the loan outstanding seemed to be a home loan. Further, it is seen that the certificate pertaining to interest expense claimed on borrowed capital has not been furnished by the assessee till date. Hence, it is deduced that the assessee does not have the requisite certificate in his possession.

6. Basis of forming reason to believe and details of escapement of income: In the computation of total income for AY 2014-15 furnished by the assessee during the course of assessment proceedings, the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the course of assessment proceedings. Further, the requisite certificate has not been furnished by the assessee even after granting sufficient time vide notice u/s 133(6). Therefore, it is clear that there is under-assessment of income to the tune of Rs. 4,10,67,473/-. In the case of assessee for the year under consideration.

7. Findings of the AO on true and full disclosure of the material facts necessary for assessment under Proviso to section 147: Considering the above discussed facts, it is clear that the assessee has failed to furnish the requisite certificate pertaining to interest expense claimed on borrowed capital resulting in incorrect computation of house property income and underassessment of total income to the tune of Rs. 4,10,67,473/-. In this regard, the assessee has failed to fully disclose all material facts necessary for his assessment before the AO thereby attracting the provisions of Explanation 1 to section 147 of the Act.

8. Applicability of the provisions of section 147/151 tothe facts of the case:

In this case a return of income was filed for the year under consideration and regular assessment u/s 143(3) was made on 23.11.2016. Since, 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceeding u/s 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above (Para 1 to 7). I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment/re-assessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for his assessment for the year under consideration with respect to incorrect computation of house property income to the tune of Rs. 4,10,67,473/- thereby necessitating reopening under section 147 of the Act. It is true that the assessee has filed a copy of annual report and audited P & L account A/c and Balance-Sheet along with return of income where various information/material were disclosed. However, the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced books of accounts, annual report, audited P & L A/c and balance sheet or other evidence as mentioned above, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered by the AO, accordingly, attracting provisions of Explanation of 1of section 147 of the Act.

It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the course of regular assessment. This fact is corroborated from the contents of notices issued by the AO u/s 143(2)/142(1) and order sheet entries dated 04/11/2016, 11/11/2016 and 16/11/2016 recorded during the 143(3) proceedings. It is important to highlight here that material facts relevant for the assessment on the issue(s) under consideration were not filed during the course of assessment proceeding and the same may be embedded in annual report, audited P & L A/c, balance sheet and books of account in such a manner that it would require due diligence by the AO to extract this information. For aforesaid reasons, it is not a case of change of opinion by the AO.

In this case, more than four years have lapsed from the end of assessment year under consideration. Hence, necessary sanction to issue notice under section 148 has been obtained separately from Principal Commissioner of Income Tax as per the provisions of section 151 of the Act”.

13. By a letter dated 11th October 2021 the Petitioner filed his objection to the validity of the assumption of jurisdiction under Section 147 by Respondent No.1. It was inter alia pointed out that no income had escaped assessment on account of the wrongful claim of the deduction by way of interest in a sum of Rs. 4,10,67,473/- as alleged, and therefore, the Respondent could never have formed a valid belief of such escapement. It was further submitted that as the reopening proceedings were initiated beyond a period of four years, the proviso to Section 147 would apply, and because there was no failure on the part of the Petitioner to disclose fully and truly all material facts, the assumption of jurisdiction was bad in law. It was further contended that the alleged belief that was formed was nothing but a change of opinion, and for this reason also, the reassessment proceedings initiated were illegal. It was further stated that no tangible material had come into the possession of Respondent No.1 after the completion of the original assessment proceedings that would justify the initiation of action to reassess the Petitioner’s income.

14. However, Respondent No.1 passed an order dated 9th February 2022 disposing of the Petitioner’s objections and rejected the Petitioner’s contentions. He noted that the availability of the deduction under Section 24 was not relevant at the stage of examining the validity of the reassessment proceedings but would have to be considered only at the time of the final assessment. He also held that there was a failure on the part of the Petitioner to disclose fully and truly all material facts without specifying which fact was not disclosed.

15. In the Affidavit in Reply that has been filed by Respondent No.1, reliance has been placed on an audit memo issued by the Director General of Audit (Central), Mumbai, on the basis whereof it would appear that the present reassessment proceedings have been initiated. Further, it has been accepted by the Respondent that the property situated at Muttha Chambers II was let out.

16. In this factual backdrop, the learned Counsel for the Petitioner submitted that before reassessment proceedings can be validly initiated, Respondent No.1 has to comply with certain jurisdictional pre-conditions, some of which are detailed hereinafter:-

17. It was submitted that the burden is on the Revenue to establish the existence of the aforesaid jurisdictional pre-conditions and as Respondent No.1 has failed to do so, the reassessment proceedings are not validly initiated.

18. It was further elaborated that the Supreme Court as well as this Court in a series of judgments has held that the reasons which lead to the formation of the belief must have a material bearing on the question of escapement of the income of the Assessee from the assessment. If there exists reasonable grounds for the Income-tax Officer to form the aforesaid belief, that would be sufficient to clothe him with the jurisdiction to issue the notice. Whether the grounds are adequate or not is not a matter for the Court to investigate but it is always open to the Assessee to challenge the existence of the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith. It cannot be merely a pretence, and therefore, it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief. It was emphasised that the words used in the statute are “reason to believe” and not “reason to suspect” and, therefore, it is essential that there exists a live link or close nexus between the material before the Income-tax Officer and the belief which he forms regarding the escapement of the income of the Assessee from assessment. If the link is too tenuous to provide a legally sound basis for reopening the assessment, then, it must follow that the reassessment proceedings must be quashed (see ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)).

19. It was submitted that the only reason on the basis of which the impugned notice has been issued is that the claim for deduction of interest was allowed without a certificate [as contemplated in Section 24(b) of the IT Act] being on record. In this regard it was submitted that the entire reasons proceed on a misunderstanding of the relevant provisions of Sections 23 and 24. It is apparent from a plain reading of the said provision that a certificate to substantiate the claim for deduction of interest was not required to be filed. The deduction for interest is allowable in terms of Section 24(b) of the IT Act which provides that income chargeable under the head “Income from house property” shall be computed after allowing a deduction for the amount of any interest payable on capital that was borrowed and was utilised for the acquisition, construction, repair, renewal or reconstruction of the house property. It is apparent from a perusal of clause (b) that the entire interest paid as a deduction as aforesaid is allowed as a deduction in computing the income chargeable under the said head. However, the first and the second proviso put some fetters on the allowability of the deduction in its entirety. The first proviso says that if the property is of the type referred to in sub-Section (2) of Section 23, the amount of deduction will not exceed Rs. 30,000/-. The second proviso relaxes this limit and provides that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after 1st April 1999 and such acquisition or construction is completed within five years from the end of the financial year in which the capital was borrowed, the amount of deduction will not exceed Rs. 2 lakhs. The third proviso, in its turn, imposes a further condition for the allowability of the deduction of interest in terms of the second proviso and stipulates that no deduction shall be made under the second proviso unless the Assessee furnishes a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the Assessee for the purpose of such acquisition or construction of the property or conversion of the whole or any part of the capital borrowed which remained to be repaid as a new loan.

20. It was submitted that on a plain reading of the aforesaid statutory provisions it is apparent that the requirement of furnishing a certificate for claiming a deduction is only mandated in respect of property that is referred to in Section 23(2) of the IT Act. Section 23(2) of the IT Act in turn provides that where the property consists of a house or a part of the house which:-

In such an event the annual value of such house or part of the house shall be taken to be nil. It was explained that the fetter on the allowability of the quantum of the deduction by way of interest applies where the annual value of the property is taken as nil. In such an event the Legislature has put a cap on the quantum of interest that is allowed as a deduction and, in these circumstances, a certificate from the recipient of the interest is mandatorily required to be furnished. In the present case it is an undisputed fact that the office premises situated at Muttha Chambers II were let out by the Assessee during the entirety of the previous year, and therefore, the question of the property being regarded as falling within the scope of Section 23 of the IT Act could never arise. In these circumstances it was submitted that the formation of the belief that income had escaped assessment on the basis that no certificate as contemplated under the third proviso to Section 24(b) of the IT Act, is too tenuous to provide a legally sound basis for re-opening the assessment. It was submitted that the existence of the reason to believe on the basis of this alleged default is challenged and not merely the sufficiency of the reasons.

21. It was next submitted that in any event, there was no failure on the part of the Petitioner to disclose fully and truly all material facts. It was submitted that the duty on the Assessee is to disclose fully and truly the primary facts. Once the Assessee has done so, it is for the Assessing Officer to draw the correct inference from the primary facts and there is no responsibility of the Assessee to advice the Income-tax Officer with regard to the inference he has to draw from such primary facts. It is submitted that the primary facts in the present case was that the property was let, the Petitioner had received rent in respect of the property so let, and that the Petitioner had paid interest on monies borrowed for acquiring the property. There is no dispute that the aforesaid primary facts were fully and truly disclosed. In fact, the reasons itself record “on going through the audited financial statements for the year under consideration and computation of the total income furnished during the course of the assessment proceedings, it is seen from the computation of income that the Assessee had claimed a deduction under section 24 being interest on borrowed capital of Rs.4,10,17,473/- against the rental income of the property Muttha Chambers II”.

22. Therefore, it is apparent that the primary facts as aforesaid were disclosed and, hence, there can be no substance in the allegation that there was a failure on the part of the Petitioner to make a full and true disclosure of the primary facts.

23. It is submitted that it is well settled that the reasons must set out what is the primary fact that has not been disclosed. In the present case there is no such averment in the reason and, hence, the Petitioner cannot be held guilty of failing to make a full and true disclosure. In fact, this Court in Sesa Goa Ltd. v. Jt. CIT ITR 101 (Bombay) has held that mere making a bald statement as to the failure to make a full and true disclosure of the material facts is not sufficient. The only allegation that is made is that no certificate as contemplated under Section 24(b) of the IT Act was furnished. If the law does not mandate a certificate to be filed along with the return in support of the claim for a deduction, then, an alleged failure to file such a certificate can never justify the invocation of the proviso to Section 147. It is submitted that there are several instances in the Act where the Legislature has mandated that a certificate or an audit report has to be filed along with the return in order to support a claim for deduction. A failure to do so may in an appropriate case tantamount to a failure to disclose truly and fully all material facts. However, in the present case, an alleged failure to file a certificate under Section 24(b) of the IT Act can never justify the assumption of jurisdiction.

24. Since reliance was placed by the Revenue on Explanation 1 below Section 147 to justify their allegation that there was failure on the part of the Petitioner to make a full and true disclosure, it was submitted by the Petitioner that Explanation 1 could have no relevance to the Petitioner’s claim for deduction. The scope of Explantation 1 to Section 147 has been considered by this Court on several occasions. Counsel for the Petitioner initially invited our attention to a judgment in 3i Infotech Ltd. v. Asstt. CIT  (Bombay) where the Court inter alia held that the Parliament has used the word “necessarily” in Explanation 1. The expression “necessarily” means inevitably or as a matter of compelling inference. The production of accounts books or other evidence before the Assessing Officer will not therefore amount to an inference of disclosure within the meaning of the first proviso. This Court referred to, with approval, to a judgment of the Calcutta High Court in Imperial Chemical Industries Ltd. v. ITO [1978] 111 ITR 614 (Calcutta) and the Delhi High Court in Rakesh Agarwal v. Asstt. CIT (Delhi) wherein it was observed that it is the nature of the document and the circumstances in which it is produced that has a bearing on whether the case falls within the Explanation. Thereafter reference was made to the judgment in Ananta Landmark (P.) Ltd. v. Dy. CIT (Bombay) where the principle laid down in 3i Infotech Private Limited (supra) was reiterated.

25. In Kalpataru Ltd. v. Dy. CIT (Bombay) whilst dealing with an argument of the Revenue that by virtue of Explanation 1 to Section 147 there was a failure to disclose fully and truly all material facts, the Court noted that the Petitioner had filed its annual returns along with the computation of taxable income as well as the computation of the book profits as per the provisions of Section 115JB, the audit annual financial statements, the annual tax statements in Form 26-AS in response to the notices received under Section 142(1) and Section 143(2). The Court held that such a disclosure met with the requirement cast upon the Assessee and it could not be said that there was any failure on the part of the Assessee to disclose fully and truly all material facts. The Court observed that Explanation 1 to Section 147 has nothing to do with inferences and deals only with the question where the primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. Explanation 1 does not have the effect of enlarging the section by casting a duty on the Assessee to disclose inferences that should be drawn. The duty to draw the proper inference is on the Income-tax Officer. It was further submitted that Section 139 mandates that a return of income which does not comply with the various clauses of the Explanation below the section would be regarded as defective. One of such clauses is that the return has to be fully filled up in respect of the computation of income chargeable under each head of income. Another clause mandates that the return has to be accompanied by the Profit and Loss Account and the Balance Sheet as well as the Audit Report. It was submitted that if the facts are disclosed in one of the documents that has to be mandatorily filed along with return it cannot be said that Explanation 1 would apply to such a case. In this regard reliance was placed on a judgment of the Calcutta High Court in ITO v. Calcutta Chromotype (P.) Ltd. [1974] 97 ITR 55 (Calcutta) as well as of this Court in Tumkur Minerals (P.) Ltd. v. Jt. CIT ITR 286 (Bombay). It was submitted that a failure to apply the law or the provisions of a Section to admitted facts is not covered by Explanation 1.

26. It was thereafter submitted that the Petitioner, in the course of the original assessment proceedings, has disclosed that he earned income by way of rent and the party from whom such rental income was earned in respect of Muttha Chambers II. The claim for deduction of interest under Section 24(b) was specifically made in respect of this house property and the same was allowed after due examination by Respondent No.1. Therefore, it was submitted that Respondent No.1 was not justified in forming his belief which was based merely on a change of opinion.

27. The Petitioner also submitted that the entire reopening was predicated on an audit objection as is brought out in the affidavit in reply, and it is now well settled if that be so, the provisions are inapplicable. In this regard, reliance was placed on a judgment of the Supreme Court in Indian & Eastern Newspaper Society v. CIT ITR 996 (SC).

28. It was also submitted that a perusal of the reasons would reveal that there is no fresh tangible material that has come into the possession of the Assessing Officer after the initial assessment was completed, and which would give him jurisdiction to reassess the income as held by the Supreme Court in CIT v. Kelvinator of India Ltd. (SC). For all these reasons, it was submitted that the notice issued under Section 148 cannot be sustained and be quashed and set aside.

29. On behalf of the Respondent it was urged that the issue as to whether the Assessee would be entitled to a deduction for the interest was not one that could be gone into at this stage of the proceeding. It was further submitted that this was a case which would be covered by Explanation 1 to Section 147. In this regard reliance was placed by the Revenue on a judgment of this Hon’ble Court of Delhi High Court in Honda Siel Power Products Ltd. v. Dy. CIT (Delhi) in support of its contention that an Assessee could be guilty of a failure to make a full and true disclosure even if all the relevant columns of the return are filled up.

30. We have considered the rival contentions of both the parties and have come to the conclusion that Respondent No.1 has not validly assumed jurisdiction to initiate re-assessment proceedings. It is apparent from a plain reading of the reasons recorded by Respondent No.1 that the only basis on which Respondent No.1 has formed his belief that income had escaped assessment is that the deduction of interest claimed under Section 24(b) of the IT Act was allowed inspite of there being no certificate from the recipient of the interest on record. It is an undisputed position before us that the property in respect of which the deduction of interest is claimed, viz., Muttha Chambers II, is one which is let out throughout the previous year and in respect of which the Petitioner has received rental income which has been offered for tax under the head “Income from house property”. Thus, it is apparent that the belief formed by Respondent No.1 is bereft of any legal basis.

31. A deduction under Section 24(b) is allowed in respect of interest paid on capital borrowed which was utilised for the purpose of acquiring, constructing, repairing, renewing or reconstructing the house property. The deduction is to be allowed in its entirety without any other condition to be fulfilled in terms of clause (b). The three provisos to clause (b) impose fetters on the allowability of the deduction of interest. The first two provisos put a monetary cap on the quantum of interest that can be allowed as a deduction, viz.,a sum of Rs. 30,000/- in terms of the first proviso and a sum of Rs. 2 lakhs in terms of the second proviso. The third proviso imposes a further condition on the fulfilment of which the interest referred to under the second proviso can be allowed, i.e., it mandates that the Assessee claiming such interest has to furnish a certificate from the person to whom the interest is payable specifying the amount of interest payable. It is imperative to note that both the first and second provisos put the fetter only where the interest is claimed in respect of a property referred to in Section 23(2) of the IT Act. Section 23 provides for the manner of determination of the annual value. Sub-Section (1) provides that the annual value has to be determined inter alia having regard to the sum for which the property might reasonably be expected to be let out from year to year or if the property is let out and the actual rent received or receivable by the owner in respect thereof is in excess of the amount so let, then, the actual rent received or receivable. Sub-Section (2) in its turn provides that where the property consists of a house or a part of the house and (a) is in the occupation of the owner for the purpose of his own residence; or (b) cannot be occupied by the owner by reason of the fact that owning his employment, business or profession carried on at any other place, he has to reside at the other place in a building not belonging to him; then the annual value of such house or part of the house shall be taken to be nil.

32. It is thus apparent that the restriction of the quantum of the interest that is to be allowed in terms of the first and second provisos to Section 24(b) of the IT Act is only applicable to a case where the annual value of the house is determined at nil having regard to the circumstances specified in Section 23(2). In the present case the annual value of the property at Muttha Chambers II was determined having regard to Section 23(1)(b) and, hence, it is clear that there is no foundation in law for coming to the belief that interest on borrowed capital has wrongly been allowed as a deduction. Undoubtedly as held by the Supreme Court in its judgment in Lakhmani Mewal Das (supra), a Court, on a challenge to an assumption of jurisdiction, cannot go into the sufficiency of the reasons, but the Supreme Court itself said that the existence of the reasons can always be subject to judicial scrutiny. In the present case, we have no doubt that there exists no reason on the basis of which any reasonable person could have come to the conclusion that the Petitioner’s income has escaped assessment on account of an allowance of interest that was claimed as a deduction under Section 24(b) of the IT Act. The link between the material and the formation of the belief has no rational connection and is so tenuous that one would have no option but to conclude that the first jurisdictional condition referred to hereinbefore viz., that the Assessing Officer does not have the requisite material to form a belief that income has escaped assessment is not satisfied. Hence, the impugned notice must be quashed. We may note that we had put to counsel for the Revenue as to whether there was any dispute as to the facts viz., that the deduction was claimed in respect of a property which was let out and whose annual value was not taken to be nil in terms of Section 23(2). The Revenue fairly did not dispute this position. If that be so we have no option but to conclude that the proceedings for re-assessment have not been validly initiated.

33. As we have struck down the notice on this ground it is strictly not necessary for us to deal with the other contentions raised by the parties. However, for the sake of completeness, we may briefly advert to other conditions. The impugned notice pertains to the Assessment Year 2014-15 and is dated 28th March 2021. In the present case an assessment was originally framed under Section 143(3) on 23rd November 2016. Therefore, this is a case to which the proviso to Section 147, as it then existed, would apply. The proviso imposed a further jurisdictional condition that the escapement of the income has to be on account of a failure to disclose fully and truly all material facts. It is well settled by a series of judgments of the Supreme Court starting with a judgment of the constitution Bench of the Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) that the duty which is cast upon the Assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. In the present case the primary facts are that the Assessee has claimed interest as a deduction while computing its income under the head “Income from house property”. Such interest is claimed in respect of a property whose value has been determined at a positive figure having regard to the rent received or receivable. Another primary fact would be that the property is not a self-occupied property. There is no doubt that all these primary facts were disclosed in the course of the original assessment proceedings. The computation of income that is mandatorily required to be filed with the return of income in terms of the Explanation to Section 139(9), makes it abundantly clear that the property at Muttha Chambers II was let out. The reply filed by the Petitioner to the specific query raised by Respondent No.1 seeking an explanation as to why the annual rent of the Muttha Chambers II had increased over the earlier year makes it clear that the property was let out throughout the previous year as against for a part of the earlier previous year and the annual value was determined having regard to the rent actually received. According to us, the initial disclosure of the primary facts is to be in the return of income or in the documents that are required to be filed along with the return of income. But, the duty of the Assessee, does not end there. There is a further obligation to furnish full and true facts during the course of the assessment proceedings when called upon to do so by the Assessing Officer. Once there is no allegation that an Assessee has not made a full and true disclosure in the return of income or in the documents required to be filed with the return of income and there is no allegation that the Assessee has not furnished any facts that it was called upon to furnish during the course of the assessment proceedings, there can be no failure on the part of the Assessee as contemplated in the proviso to Section 147. It may also be noted that if the Petitioner’s case fell within the scope of the second proviso to Section 24(b), and the Petitioner had not filed a certificate as contemplated by the third proviso to Section 24(b), it would have been a case where the Assessee may have been regarded as not having made a full and true disclosure. However, since the Petitioner’s case does not fall within the second proviso, the failure to file a certificate as contemplated in the third proviso would not tantamount to a conclusion being drawn that there was a failure on the part of the Petitioner to make a full and true disclosure of the primary facts as contemplated by the first proviso to Section 147.

34. The Revenue has relied upon Explanation 1 to Section 147 to come to the conclusion that there was a failure on the part of the Petitioner to make a full and true disclosure. This contention of the Revenue, in our opinion, cannot be accepted for the reason that the sole allegation for the belief that income has escaped assessment is that the Petitioner has failed to furnish a certificate as contemplated in the third proviso to Section 24(2). If that be so, we do not understand how it could be said that the production before the Assessing Officer of accounts books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the substantive part of Section 147. We agree with the contention on behalf of the Petitioner that any disclosure made in the computation of income or financial statement accompanying the return would not fall within the scope and ambit of Explanation 1 as held by the Calcutta High Court in Calcutta Chromotype (P.) Ltd. (supra) and by this Court in Tumkur Minerals (P.) Ltd. (supra). We have also agreed with the view expressed in the judgment referred to by the Petitioner that whether a case falls within the scope of the Explanation will have to be determined on the basis of the facts of each case. In the case of the Petitioner, the letter dated 10th November 2016, wherein the factum of the property being let out was again referred, was in response to a specific query raised, and a disclosure in a specific reply to a query can never be hit by Explanation 1.

35. Another aspect of the matter is that merely making a bald averment that there has been a failure to disclose is not sufficient. As held by this Hon’ble Court in Sesa Goa Ltd. ‘s case (supra), the reasons must necessarily set out what is the fact that was not disclosed. The reasons in the present case undoubtedly refer to the fact that a certificate as contemplated by the third proviso was not filed. But if there is no statutory requirement to file a certificate in support of a claim, the failure to file such a certificate can never tantamount to a failure to make a full and true disclosure.

36. The Supreme Court in Kelvinator of India Limited (supra) has clearly held that after the amendment made in 1989, in order that an Assessing Officer can validly assume jurisdiction, some tangible material must come to his possession after the assessment was completed, which enables him to form the belief that income has escaped assessment. In the present case, as is apparent from paragraph 3 of the reasons recorded, the alleged belief has been formed after going through the audited financial statements for the year under consideration and the computation of total income furnished during the course of the assessment proceedings. It is further apparent that there has been no tangible material that has come into the possession of Respondent No.1 post the completion of the initial assessment that has given rise to the formation of the alleged belief, and hence, for this reason also, the proceedings must be struck down.

37. The only material which is not adverted to in the reasons, but is referred to in the Affidavit in Reply, is that there was an audit objection raised subsequent to the completion of the original assessment proceedings. We are of the view that it is now well settled by several judgments of this Court that the validity of the reopening has to be tested on the basis of the reasons recorded. We may refer only to the judgment in Hindustan Lever Ltd. v. R.B. Wadkar (Bombay) that the validity of the reasons has to be adjudicated on the basis of what is stated therein and not by relying on something stated in the affidavit. Even otherwise we are of the view that as held by the Supreme Court in the case of Indian and Eastern Express Newspaper Limited (supra), the factual material that was pointed out by the audit department viz., the absence of a certificate, cannot give Respondent No.1 a valid basis to exercise the re-assessment proceedings.

38. The judgment of the Delhi High Court in Honda Siel Power Products Limited (supra) relied upon by the Revenue is wholly in apposite. One of the reasons given by the Assessing Officer in that case to re-open the assessment was that by virtue of Section 14A of the IT Act, which was introduced after the return of the income for the Assessment Year 2000-01 was filed, certain expenses were required to be disallowed. It was urged that when the Petitioner filed its return of income there was no obligation on its part to disclose any fact in respect of the expenditure incurred to earn the exempt/ tax free income, and hence, there was no failure on the part of the Assessee to make a full and true disclosure. Rejecting this argument, the Court observed that it was incumbent on the Assessing Officer to disallow expenditure incurred for earning the exempt income when he completed the assessment on 7th March 2003 as by then Section 14A was on the statute book. In paragraph 10, the Court noted that the Petitioner therein had accepted and admitted that he had not given any details with regard to the proportionate expenses relatable to tax free or exempt income which were claimed as a deduction. In paragraph 15 the Court further noted the acceptance by the Petitioner that the material particulars referred to in the first proviso not only refers to the details in the return but also includes the details called for during the course of the proceedings. The Court thereafter concluded that if that be so, it was clearly a case where there was an omission on the part of the Petitioner to point out the expenses incurred relatable to tax free exempt income which prima facie were claimed as a deduction in the Income and Expenditure Account. In the present case the sole allegation is the failure on the part of the Petitioner to furnish a certificate as mandated by the third proviso to Section 24(b). As we have stated hereinbefore, there is no statutory requirement to file any such certificate as the Petitioner’s case did not fall within the second proviso. The Delhi High Court was concerned with a case where admittedly the expenditure incurred to earn tax free income had to be disallowed. Merely because the provisions were introduced after the return of income was filed does not mean that there was no failure on the part of the Assessee to make a full and true disclosure in the course of the assessment proceedings, and hence, this judgment would not come to the assistance of the Revenue to validate the assumption of jurisdiction to make a re-assessment.

39. In view of the forgoing discussion, we quash and set aside the impugned notice dated 28th March 2021 issued under Section 148 of the IT Act for the Assessment Year 2014-15, and the order dated 9th February 2022 disposing of the objections filed against the notice under Section 148.

40. Rule is made absolute in the aforesaid terms, and the Writ Petition is also disposed of in terms thereof. No order as to costs.

41. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.