Gujarat H.C : Whether on the facts and in the circumstances of the case, the interest earned by the assessee was exempt under s. 10(4A) ?

High Court Of Gujarat

Rambhai L. Patel vs. CIT

Sections 2(30), 10(4A)

Asst. Year 1977-78, 1978-89

A.R. Dave & D.A. Mehta, JJ.

IT Ref. No. 130 of 1986

9th August, 2001

Counsel AppearedJ.P. Shah, for the Petitioner : Manish R. Bhatt & Akil Kureshi, for the Respondent

JUDGMENT

D.A. MEHTA, J. :

The following question of law has been referred to us under s. 256(2) of the IT Act, 1961 (hereinafter referred to as “the Act”), by the Tribunal, Ahmedabad Bench ‘C’, Ahmedabad, for the opinion of this Court : “Whether on the facts and in the circumstances of the case, the interest earned by the assessee was exempt under s. 10(4A) ?”

The applicant-assessee is an HUF and the status under the Act is “resident, but not ordinarily resident”. The assessment years involved in this reference are 1977-78 and 1978-79 and the relevant accounting periods are financial years ended on 31st March, 1977 and 31st March, 1978, respectively.

The applicant-assessee opened an account with Central Bank of India which was a fixed deposit account and the same was treated as “non-resident (external) account” as per the provisions of Foreign Exchange Regulation Act (FERA) 1947. The status of the assessee under the Act was “nonresident” when the aforesaid account was opened. For the two years under consideration the assessee earned interest of Rs. 22,710 and Rs. 52,629, respectively and the said interest was claimed to be exempt under the provisions of s. 10(4A) of the Act.

For the asst. yr. 1977-78, the claim was accepted by the ITO while for the asst. yr. 1978-79 the claim was rejected. For the first year, i.e., asst. yr. 1977-78 the CIT, under s. 263 of the Act, directed ITO to include the interest earned by the assessee in the taxable income on the ground that the exemption provided by s. 10(4A) of the Act was not available to an assessee who was “not ordinarily resident”. The assessee preferred an appeal before the Tribunal against the aforesaid order under s. 263 of the Act. For the second year the assessee’s appeal before the AAC failed and the assessee preferred the second appeal before the Tribunal. The Tribunal heard both the appeals together and held that the assessee was not entitled to the exemption granted under s. 10(4A) of the Act, as exemption was available only in case of assessee who is “non-resident”, while the assessee was “not ordinarily resident” as defined under the Act.

Mr. J.P. Shah, learned counsel for the assessee, made the following points : (1) that the assessee was “non- resident” when the account was opened and, therefore, the benefit should be available; (2) that it was a question of credibility of Government of India and not the IT Department, because the circular issued by the Reserve Bank of India (RBI) under the provisions of FERA and Rules thereunder should also have the same binding force as the were from another Government Department falling under the same ministry; (3) that the provisions of s. 10(4A) of the Act must be interpreted keeping the object of the provisions in mind, namely, to bring foreign currencies in the country; (4) literal interpretation of the provisions should be avoided if it defeated object of the provisions; (5) that the amendment made in 1982 specifically highlighted the fact that anomaly existed and hence the amendment should be held to be declaratory and should thus be made applicable for the earlier assessment years also; (6) that while reading provisions of s. 10(4A) of the Act a mechanical approach should be avoided and the Department must act with fairness and justice.

It was further contended by Mr. Shah that when the Government of India, through Department of Banking, continued to use the funds deposited by the assessee it was necessary that the interest earned on those funds should continue to be exempt, especially in view of the fact that the assessee was admittedly “non-resident” when the moneys were deposited and the subsequent change in status should not be pleaded against the assessee for denying the exemption under s. 10 (4A) of the Act. It was further contended that though the term “non-resident” was defined under s. 2(30) of the Act, the same should be interpreted as understood popularly or at least, as understood and defined under the FERA, because of the compelling circumstances surrounding the case of the assessee. For this proposition our attention was invited to the opening portion of s. 2 wherein phrase “unless the context otherwise requires” has been used.

Shri Akil Kureshi, learned standing counsel appearing on behalf of the respondent-Department, has referred to the definition of “non-resident” within the meaning of s. 2(30) of the Act and urged that the said definition has to be read in context of the meaning of “resident” as defined in s. 6 and “not ordinarily resident” as defined in s. 6(6) of the Act. According to Mr. Kureshi it was not possible to urge the meaning of “non-resident” as including “not ordinarily resident” for the purposes of s. 10(4A) of the Act; as where the legislature intended such inclusion it had specifically provided and for this purpose our attention was drawn to the mention of ss. 92, 93 and 168 of the Act in the definition cl. 2(30) of the Act defining term “non-resident”. Mr. Kureshi further submitted that there was nothing in the context of s. 10(4A) of the Act which would permit reading of the term “not ordinarily resident” so as to mean “non-resident”; that s. 10(4A) specifies two conditions and only on fulfilment of the said conditions, did an assessee qualify for the exemption granted by the said provision. That mearly because an assessee was entitled to be treated as person not resident in India under the FERA it did not permit him to automatically qualify for exemption under s. 10(4A) of the Act. It was further submitted that the provisions of s. 10(4A) of the Act are clear, unequivocal and the bare reading of the same clearly shows that no other interpretation was possible and it was only in this context that the legislature amended the provisions in 1982. It was further urged that the amendment of 1982 being clarificatory in nature cannot be applied retrospectively, and to the contrary, by virtue of the said amendment it was abundantly clear that the provisions as they stood before the amendment were not applicable in cases of persons who did not fulfil the criteria of being “non-resident” within the meaning of the IT Act. Referring to the circulars issued by the RBI, it was submitted that the same were issued under s. 73 of the FERA, and the RBI had no powers to grant exemption under the provisions of IT Act and even if it was so mentioned in the circular, it was misreading of powers by the said authorities and the said circular cannot have the force of the statutory provision.

Mr. Kureshi, pointedly drew our attention to the decision of the Supreme Court in case of Smt. Tarulata Shyam & Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) : TC 68R.379 and submitted that as stated thereunder when the wordings of provision are clear and unambiguous, when they plainly manifest what is stated therein, there is no scope for importing or substituting words in the provision, and the provision of s. 10(4A) of the Act are such where it is not possible to ascribe any other meaning to the word “not resident”. When the Finance Act, 1968, amended and altered the exemption originally granted by s. 10 (4A) of the Act w.e.f. 1st April, 1969, the CBDT issued Circular No. 6-P (LXXVI-66) of 1968, dt. 6th July, 1968. The relevant portion from the said circular reads as under : “Interest income of non-residents from non-resident accounts in a bank in India. 115. Under the provisions in s. 10(4A) of the IT Act prior to its amendment by the Finance Act, 1968, a non-resident was exempt from tax on his income by way of interest on moneys standing to his credit in a non-resident account in any bank in India in accordance with the FERA, 1947, and any rules made thereunder. The intention underlying this provision has been to provide the exemption in respect of interest only on funds which are repatriable outside India. In order to bring out this intention, s. 10(4A) of the IT Act has been amended by the Finance Act, 1968. Under the amended provisions, the exemption will be available only in respect of interest on moneys standing to the credit of a non-resident in a “non-resident (external) account in any bank in India in accordance with the FERA, 1947, and any rules made thereunder. The rules in this behalf will be made and notified by the RBI. This provision takes effect, prospectively, from the asst. yr. 196970” [Circular No. 6-P (LXXVI-66) of 1968, dt. 6th July, 1968]. Thus, legislative intent underlying the provisions is to provide exemption in respect of interest earned only on funds which are repatriable outside India. It is further clear that the exemption will be available in respect of interest on moneys credited in “non-resident (external) account” in case of “non-resident”; that such account has to be maintained in accordance with the FERA and Rules made thereunder, and such rules are to be made and notified by the RBI. Therefore, the rules and the scheme framed by the RBI for the purpose of opening and operating a “non-resident (external) account” will have to be taken into consideration for the purpose of ascertaining the eligibility of assessee to claim exemption under s. 10(4A) of the Act.

The scheme for opening and maintenance of “non-resident account” in designated in foreign currencies with authorised dealers in foreign exchange as framed by the RBI is available at p. 41 of the paper-book and the eligibility of opening an account is in the following terms : Eligibility for opening accounts : “The benefit of the scheme will be available to all individuals, being Indians and persons of Indian origin who are not resident in India. For the purpose of this scheme, non-residents will be persons resident outside India as defined in s. 2(q) of the FERA, 1973. Companies, firms, bodies, corporate and other AOPs, by whatever name called, will not be eligible to open foreign currency (nonresident) accounts under the scheme”. Thus, a person who is an individual, will be permitted to open non-resident account and will be treated as “non-resident” for the purposes of operating “non-resident (external) account”, if he is an Indian or a person of Indian origin who is not resident in India. It is further clarified that a person shall be held to be “not-resident in India” as defined in s. 2(q) of the FERA, 1973. It is pertinent to note that the “Non-resident (External) Account” Rules 1970, were published by Government of India under the Notification No. GSR/265, dt. 10th Feb., 1970. Admittedly, in case of the assessee, he was permitted to open “non-resident (external) FD account” when his status was “non-resident” within the meaning of the Act. Further, there is no dispute that even for the years under consideration, the status of the assessee was “not ordinarily resident” and he was a person who was not resident in India within the meaning of provisions of s. 2(q) of the FERA, 1973, and thus was eligible to open and operate “non-resident (external) account” as per the rules and the scheme framed by the RBI. The effect of this situation is by virtue of the aforesaid Circular dt. 6th July, 1968, that the assessee who fulfils the eligibility conditions under the scheme framed by the RBI was entitled to operate “non-resident (external) account” and in light of the same he would be entitled to the benefit of being treated as “nonresident” for the purposes of the Act as specified in the circular issued by CBDT.

The provisions of s. 10(4A) as was effective from 1st April,1969, upto 31st March, 1982, reads as follows :

“(4A) in the case of a non-resident, any income from interest on moneys standing to his credit in a non-resident (external) Account in any bank in India in accordance with the FERA, 1947 (7 of 1947), and any rules made thereunder;”

14.1 The amended provision as substituted w.e.f. 1st April, 1982, by the Finance Act, 1982, reads as under : “(4A) in the case of a person resident outside India, any income from interest on moneys standing to his credit in a non- resident (external) account in any bank in India in accordance with the FERA, 1973 (46 of 1973), and any rules made thereunder. Explanation : In this clause “person resident outside India” shall have the meaning assigned to it in cl. (q) of s. 2 of the FERA, 1973 (46 of 1973).”

15. Therefore, what was stated by way of circular being Circular No. 6P(LXXVI-66) of 1968, dt. 6th July, 1968, was incorporated as part of the provisions w.e.f. 1st April, 1982. Therefore, the position in relation to assessee who is otherwise eligible to open and operate “non-resident (external) account” as per the guidelines issued by RBI is that such person is entitled to be treated as “nonresident” for the purpose of exemption under s. 10(4A) of the Act by virtue of the Circular dt. 6th July, 1968, upto 31st March, 1982, and by virtue of the provisions itself w.e.f. 1st April, 1982. The amendment is thus declaratory of the legislative intent as can be gauged from the circular and even on that count assessee would be entitled to the relief claimed.

16. Even otherwise the term “non-resident” as defined in s. 2(30) of the Act has to be read in the contextual setting of s. 10(4A) of the Act and if read in that manner the term “non-resident” will have to include within its fold the meaning as prescribed under the provisions of FERA and Rules thereunder. Thus, s. 10(4A) of the Act will apply to a person who is not resident in India, that is to say, “non-resident” will be a person residing outside India. We may usefully reproduce from the decision of the Supreme Court in the case of K.V. Muthu vs. Angamuthu Ammal AIR 1997 SC 628, where it is stated: “While interpreting a definition, it has to be borne in mind that the interpretation placed on it should not only be not repugnant to the context, it should also be such as would aid the achievement of the purpose which is sought to be served by the Act. A construction which would defeat or was likely to defeat the purpose of the Act has to be ignored and not accepted”.

17. As already seen, circular of 6th July, 1968, specifically declares object of the provisions and incorporates the provisions of the FERA and Rules framed thereunder by the RBI in s. 10(4A) of the Act. Thus, those provisions should be applicable to a person claiming exemption under s. 10(4A) of the Act and in this situation also the context requires that the term “non-resident” should be read so as to include the definition of the “non-resident” as understood under the provisions of FERA and the Rules thereunder.

18. During the course of hearing we were addressed at great length by both the sides on the applicability or otherwise of doctrine of promissory estoppel. However, without going into that aspect of the matter we feel that the matter should be approached from another angle as stated by this Court in case of Taiyabji Lukmanji vs. CIT (1981) 24 CTR (Guj) 204 : (1981) 131 ITR 643 (Guj) : TC 69R.296 wherein it was observed that : “In our opinion, the Tribunal ought to have considered the question as regards the legality and propriety of levying penalty under s. 271(1)(c) of the Act in the light of the instructions given by the Board in the advertisement referred to above. Whether or not it amounted to promissory estoppel and created a legal right apart, the question was required to be examined from the standpoint of the credibility of the Department. Would it not cause greater harm to the Department itself if assessees who respond to its appeals and desire to cleanse themselves of the past sins are deterred from doing so ? In a way, in the long run, it might be counter productive to do so. All these questions cannot be elbowed aside. They have to be met squarely in the face by the Revenue authorities and the Tribunal by addressing themselves to it and answering the same in the manner considered right by them on policy and principle”. Therefore, even from the standpoint of the credibility of the Department and in light of the aforesaid circular it is necessary that the assessee should be granted benefit of the exemption under s. 10(4A) of the Act.

In light of what is stated hereinbefore we hold that the Tribunal was not justified in denying the claim of assessee that the interest earned by the assessee was exempt under s. 10(4A) of the Act. The question referred to us is, therefore, answered in the affirmative i.e., in favour of the assessee and against the Revenue.

The reference stands disposed of accordingly with no order as to costs.

[Citation : 252 ITR 846]

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