Shift in tax basis and retrospective disallowance relief: unexplained cash credit addition deleted, section 40(a)(ia) cut to 30%.

An addition of customer advances as unexplained cash credits could not be sustained where the assessment had originally proceeded on cessation of liability, because the basis was shifted to section 68 without proper notice and the advances were explained in remand proceedings; the addition was deleted. On disallowance under section 40(a)(ia), the amendment brought by the Finance Act, 2014 was treated as curative and retrospective, so the disallowance was restricted to 30% rather than the full amount. The assessee therefore obtained relief on both issues to the extent indicated.

---

---

Issues: (i) Whether the addition of customer advances of Rs. 9,77,500 as unexplained cash credits under section 68 was sustainable when the assessment had originally proceeded on cessation of liability under section 41(1). (ii) Whether disallowance under section 40(a)(ia) was to be restricted to 30% in view of the amendment brought in by the Finance Act, 2014.

Issue (i): Whether the addition of customer advances of Rs. 9,77,500 as unexplained cash credits under section 68 was sustainable when the assessment had originally proceeded on cessation of liability under section 41(1).

Analysis: The addition was made in the assessment on the footing that the liability towards customer advances had ceased. In appellate proceedings, a different basis was adopted by invoking section 68 for the remaining amount said to be unexplained. The assessee had not been put on notice for such a shift in the basis of addition, and the amount in question arose from advances already carried forward or otherwise explained in the remand proceedings. The original statutory basis was section 41(1), not section 68.

Conclusion: The addition of Rs. 9,77,500 was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether disallowance under section 40(a)(ia) was to be restricted to 30% in view of the amendment brought in by the Finance Act, 2014.

Analysis: The amendment reducing the disallowance to 30% was treated as curative in nature and therefore retrospective. The disallowance could not continue at the full amount when the amended provision governed the computation on a beneficial basis.

Conclusion: The disallowance was directed to be restricted to 30%, and the issue was partly allowed in favour of the assessee.

Final Conclusion: The appeal succeeded on the first issue and was partly allowed on the second issue, resulting in relief to the assessee on both counts to the extent indicated.

Ratio Decidendi: An addition cannot be sustained on a basis different from the one on which the assessment was originally made without proper notice, and a curative amendment reducing a disallowance can operate retrospectively where the legislative intent is remedial.

---