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Issues: (i) Whether revision under section 263 of the Income-tax Act, 1961 was valid in respect of the assessments which accepted that interest paid by the Indian branch to its head office and overseas branches was not taxable in India; (ii) whether Explanation (a) to section 9(1)(v)(c) of the Income-tax Act, 1961, introduced by the Finance Act, 2015, could be applied to the assessment years in dispute.
Issue (i): Whether revision under section 263 of the Income-tax Act, 1961 was valid in respect of the assessments which accepted that interest paid by the Indian branch to its head office and overseas branches was not taxable in India.
Analysis: The assessments were completed after specific enquiry by the Assessing Officer, who considered the assessee's explanation and supporting precedents before accepting the claim. The issue whether interest paid by an Indian branch to its head office or overseas branches is taxable had already been decided by the Special Bench on the basis that such payment is in substance a payment to self and is governed by the principle of mutuality. The same reasoning also supported the view that the beneficial provisions of the Act would prevail over the treaty. In that background, the assessment orders could not be treated as unsustainable merely because the revisional authority preferred a different view.
Conclusion: The revision under section 263 was not justified and the assessments could not be revised on this issue.
Issue (ii): Whether Explanation (a) to section 9(1)(v)(c) of the Income-tax Act, 1961, introduced by the Finance Act, 2015, could be applied to the assessment years in dispute.
Analysis: The amendment deeming interest paid by an Indian branch of a non-resident bank to be taxable in India was held to operate prospectively from 1 April 2016. The assessment years under dispute preceded that date. In any event, revisionary jurisdiction could not be used to give effect to a later retrospective or prospective change in law where the assessments were made on the basis of the law prevailing at the time and the issue was at least debatable.
Conclusion: The amendment could not be invoked to sustain the revision for the years under appeal.
Final Conclusion: The revisional orders were unsustainable, the original assessments were restored, and the assessee succeeded in the appeals.
Ratio Decidendi: An order under section 263 cannot be sustained where the Assessing Officer has taken a possible view on a debatable issue after enquiry, and a subsequent amendment cannot be used to brand the assessment erroneous for an earlier year when the law then in force supported the view adopted.
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