Partial remand and branch-to-head-office interest rules: limitation failed, deduction denied, and demand notice issue was sent back for review.

A partial remand on one issue did not set aside the entire assessment, so limitation under section 153(2A) did not apply; the fresh order was governed by section 153(3) and the assessee's time-bar plea failed. Interest paid by the Indian branch to its head office was held not deductible under the India-UK DTAA, and no exemption was available under section 10(15)(iv)(fa), because the treaty and domestic-law conditions were not satisfied. On levy of interest under section 220(2), the record needed verification as to whether a notice of demand under section 156 had been issued, so that issue was remanded for fresh consideration.

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Issues: (i) Whether the assessment made pursuant to the Tribunal's earlier order was barred by limitation under section 153(2A) of the Income-tax Act, 1961, or governed by section 153(3) of the Income-tax Act, 1961; (ii) whether interest paid by the Indian branch to its head office was deductible under the India-UK Double Taxation Avoidance Agreement or exempt under section 10(15)(iv)(fa) of the Income-tax Act, 1961; (iii) whether levy of interest under section 220(2) of the Income-tax Act, 1961 could stand without issuance of notice of demand under section 156 of the Income-tax Act, 1961.

Issue (i): Whether the assessment made pursuant to the Tribunal's earlier order was barred by limitation under section 153(2A) of the Income-tax Act, 1961, or governed by section 153(3) of the Income-tax Act, 1961.

Analysis: The earlier appellate order had not set aside the entire assessment. Only one aspect, namely allowability of interest paid by the permanent establishment to its head office, was remanded for fresh adjudication after ascertaining the correct facts. Where the entire assessment is not set aside, the limitation applicable to a fresh assessment under section 153(2A) does not apply. The governing provision is section 153(3), which covers an order passed in conformity with appellate findings and directions on a limited issue.

Conclusion: The assessment was not time-barred under section 153(2A); the limitation under section 153(3) applied. The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether interest paid by the Indian branch to its head office was deductible under the India-UK Double Taxation Avoidance Agreement or exempt under section 10(15)(iv)(fa) of the Income-tax Act, 1961.

Analysis: Under Article 7(5) and Article 7(7) of the India-UK Double Taxation Avoidance Agreement, deductions for branch profits are subject to the limitations of domestic law, and the banking-enterprise exception does not override the domestic-law bar where the payment is treated as one to self. The Court distinguished authorities dealing with other treaties and held that the Indo-Japan treaty language relied upon by the assessee was materially different. The claim under section 10(15)(iv)(fa) also failed because the transaction was not a deposit by the scheduled bank in foreign currency to a non-resident as required by the provision, and the Reserve Bank of India directive related to the payment to the National Housing Bank, not to approval of the head-office borrowing as a qualifying deposit.

Conclusion: The interest was not allowable as a deduction and no exemption under section 10(15)(iv)(fa) was available. The issue was decided against the assessee and in favour of the Revenue.

Issue (iii): Whether levy of interest under section 220(2) of the Income-tax Act, 1961 could stand without issuance of notice of demand under section 156 of the Income-tax Act, 1961.

Analysis: The contention that notice of demand under section 156 is a pre-condition for levy under section 220(2) required factual verification from the record. The matter was therefore restored to the Assessing Officer to examine whether such notice had been issued and to decide afresh after giving opportunity of hearing.

Conclusion: The issue was remanded for fresh consideration and was allowed for statistical purposes in favour of the assessee.

Final Conclusion: The appeal succeeded only to the limited extent of remand on the interest under section 220(2), while the principal challenges to limitation and to the deductibility of interest paid to the head office were rejected.

Ratio Decidendi: Where an appellate order remands only a specific issue and does not set aside the entire assessment, limitation for giving effect is governed by the provision applicable to partial appellate directions, and interest paid by a branch to its head office remains non-deductible where the applicable treaty makes deductions subject to domestic-law restrictions and the claimed exemption conditions are not satisfied.

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