Tribunal upholds CIT decision on time-barred assessment, Indo-UK DTAA, remands levy of interest for fresh adjudication

The Tribunal partly allowed the appeal, upholding the CIT (Appeals) decisions on the time-barred assessment and the deduction of interest under the Indo-UK DTAA. The matter concerning the levy of interest under Section 220(2) was remanded to the Assessing Officer for fresh adjudication. The withdrawal of the grant of interest under Section 244A was considered consequential and did not necessitate separate adjudication.

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Issues Involved:
1. Time-barred assessment under Section 153(2A) of the Income Tax Act, 1961.
2. Deduction of interest paid by the Indian branch to its Head Office under the India-UK Double Taxation Avoidance Agreement (DTAA).
3. Withdrawal of grant of interest under Section 244A.
4. Levy of interest under Section 220(2) without issuance of notice of demand under Section 156.

Detailed Analysis:

1. Time-barred Assessment under Section 153(2A):
The assessee bank contended that the assessment order dated 3.12.2010 was time-barred as it was passed much after the nine-month period prescribed by the second proviso to Section 153(2A) of the Income Tax Act. The Tribunal had set aside the matter on 18.08.2006, and the order reframing the assessment was made on 3.12.2010, which the assessee argued was beyond the statutory limitation period. The CIT (Appeals) had interpreted the limitation period of nine months as being applicable only when the entire assessment is set aside by the Tribunal. The Tribunal concurred with the CIT (Appeals) that the entire assessment was not set aside, but only a particular aspect regarding the allowability of interest paid by the Indian PE to its head office. Therefore, the prescribed time limit for compliance was to be computed under Section 153(3) and not Section 153(2A). Thus, the Tribunal upheld the CIT (Appeals) decision, rejecting the grounds related to the time-barred assessment.

2. Deduction of Interest under India-UK DTAA:
The main grievance of the assessee was the disallowance of the deduction of interest paid by the Indian branch to its Head Office. The assessee argued that this interest was fully allowable under the exception clause to Article 7(7) of the India-UK DTAA. The assessee cited several rulings, including the Special Bench decision in Sumitomo Banking Corporation Vs. DDIT, which allowed tax deductibility of interest paid by a branch to its head office under DTAA provisions. However, the CIT (Appeals) and the Tribunal found that under the domestic tax law, payment by a branch office to its head office is in the nature of payment to self, which is neither taxable nor tax deductible. The Tribunal noted the distinction between the Indo-Japan DTAA and the Indo-UK DTAA, emphasizing that the latter contains a stipulation that deductions are subject to the limitations of domestic law. Consequently, the interest paid by the PE to the HO was not deductible under Article 7(5) read with Article 7(7) of the Indo-UK DTAA. The Tribunal upheld the CIT (Appeals) decision, rejecting the grounds related to the deduction of interest.

3. Withdrawal of Grant of Interest under Section 244A:
The assessee contended that the CIT (Appeals) erred in confirming the withdrawal of grant of interest under Section 244A amounting to Rs. 88,56,062/-. The CIT (Appeals) had disposed of this ground on the basis that the issue was consequential in nature. The Tribunal concurred with the CIT (Appeals) that the matter was indeed consequential and did not require independent adjudication.

4. Levy of Interest under Section 220(2) without Notice under Section 156:
The assessee argued that the levy of interest under Section 220(2) amounting to Rs. 18,67,14,012/- was invalid as it was done without issuing a notice of demand under Section 156, which is mandatory. The CIT (Appeals) had disposed of this ground stating that the assessee had not made any specific submission. The Tribunal, however, agreed with the assessee that issuance of a notice of demand under Section 156 is a precondition for levying interest under Section 220(2). The Tribunal set aside this matter to the Assessing Officer to examine whether the notice of demand was issued and to decide the matter afresh as per the law after providing an opportunity of being heard to the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the CIT (Appeals) decisions on the issues of time-barred assessment and the deduction of interest under the Indo-UK DTAA. The matter regarding the levy of interest under Section 220(2) was remanded back to the Assessing Officer for fresh adjudication. The issue of withdrawal of grant of interest under Section 244A was deemed consequential and did not require independent adjudication.

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