Rectification and treaty taxation of interest income: bank interest taxed normally, refund interest at concessional rate, one issue remanded.

Rectification under section 154 was treated as valid where the lower tax rate on interest income had been allowed without conscious examination in the original assessment, so the challenge failed. Interest on bank deposits was held attributable to the permanent establishment and taxable at the normal rate, following the assessee's own earlier-year position. Interest on income-tax refund was held eligible for concessional treaty taxation under co-ordinate bench reasoning. The component relating to delayed payment on a foreign supply contract was not decided by the first appellate authority and was restored to the assessing authority for fresh adjudication after hearing the assessee.

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Issues: Whether the rectification under section 154 was valid for altering the rate of tax on interest income; whether interest on bank deposits was taxable at the normal rate; whether interest on income-tax refund was taxable at the concessional treaty rate; and whether the interest from delayed payment on a foreign supply contract required fresh adjudication.

Issue (i): Whether the rectification under section 154 was valid for altering the rate of tax on interest income.

Analysis: The assessee had itself disclosed the interest income as taxable at a concessional rate, and nothing was shown to establish that the original assessment had consciously examined and accepted that rate after applying mind. In these circumstances, the subsequent action was treated as correction of an apparent mistake and not as a mere change of opinion. The absence of a reply in the rectification proceedings also weighed against the assessee's challenge.

Conclusion: The rectification under section 154 was held valid and this challenge failed.

Issue (ii): Whether interest on bank deposits was taxable at the normal rate, whether interest on income-tax refund was taxable at the concessional treaty rate, and whether the interest from delayed payment on a foreign supply contract required fresh adjudication.

Analysis: Bank interest was held to be attributable to the permanent establishment and, following the assessee's own earlier year decision, liable to tax at the normal rate. Interest on income-tax refund was held to fall for concessional taxation under the applicable treaty principle, following binding co-ordinate bench reasoning that such interest was not to be subjected to the higher domestic rate. The component relating to delayed payment on the foreign supply contract had not been adjudicated by the first appellate authority, so it was restored to the assessing authority for decision on merits after giving an opportunity of hearing.

Conclusion: Bank interest was held taxable at the normal rate, interest on income-tax refund was held taxable at the concessional rate, and the foreign supply contract interest issue was remanded for fresh adjudication.

Final Conclusion: The appeals succeeded only in part, with some issues decided against the assessee, one issue decided in its favour, and one issue sent back for reconsideration.

Ratio Decidendi: A rectification is permissible where the lower tax rate was applied without conscious examination in the original assessment, interest attributable to a permanent establishment may be taxed at the normal rate, and an issue not adjudicated below may be restored for fresh decision.

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