Retrospective tax clarification can defeat reassessment where it removes the very basis for alleging income escapement.

Retrospective Explanation 2 to section 10(15)(iv)(c) was treated as removing the very basis for reassessment where reopening under section 148 rested on proposed disallowance of usance interest paid to non-residents on ship purchases. The explanation deems such usance interest, in the specified ship-related context, as interest on a foreign debt incurred for purchase outside India, with the result that it could not be included in total income on the footing assumed by the reopening. The Gujarat HC article notes that once the statutory clarification nullified the alleged escapement, the reassessment notice could not survive and was quashed in favour of the assessee.

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Issues: Whether the notice for reopening the assessment under section 148 of the Income-tax Act, 1961 could be sustained when the basis of reopening was disallowance of usance interest, in view of Explanation 2 to section 10(15)(iv)(c) of the Income-tax Act, 1961.

Analysis: The reopening rested on the premise that usance interest paid to non-residents on purchase of ships was liable to disallowance for want of tax deduction. Explanation 2 to section 10(15)(iv)(c), inserted retrospectively with effect from April 1, 1962, deems usance interest payable outside India by an undertaking engaged in ship-breaking, in respect of purchase of a ship from outside India, as interest payable on a debt incurred in a foreign country in respect of the purchase outside India. On that footing, such interest could not be included in computing total income, and the very foundation for alleging escapement of income disappeared.

Conclusion: The reopening notice was unsustainable and liable to be quashed in favour of the assessee.

Final Conclusion: The petition succeeded, and the reassessment notice was set aside because the retrospective statutory clarification removed the basis for reopening.

Ratio Decidendi: When a retrospective amendment or explanation negates the very basis on which reassessment is initiated, the notice under section 148 cannot survive.

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