Madras H.C : Whether where assessee received interest on investment made out of foreign funds which was chargeable to tax at concessional rate under section 115H, said special treatment could not be extended to interest on interest redeposited with original sum

High Court Of Madras

Dr. M. Manohar vs. ACIT, Company Circle II(2), Coimbatore

Assessment Year : 1996-97

Section : 115H

Mrs. Chitra Venkataraman And M.Jaichandren, JJ.

Tax Case (Appeal) No. 759 Of 2004

July 11, 2011


Mrs. Chitra Venkataraman, J. – The Tax Case Appeal relates to the assessment year 1996-97.

2. The assessee herein originally made investment in Bank out of the funds brought by him from abroad. Periodically, the assessee renewed the matured deposits along with the interest amount. The interest accrued thereon on the interest portion of the deposit was also taken as foreign investment eligible for concessional rate of tax in the returns filed for the assessment year 1996-97. The assessee made the said claim under section 115H of Chapter XII-A of the Income-tax Act. Originally, the return filed was processed under section 143(1)(a) thereafter, under section 143(3), the assessment order was passed, accepting the claim made under section 115H for concessional levy. However, in exercise of the powers vested under section 263 of the Income-tax Act, the Commissioner of Income-tax issued notice that acceptance of the claim of the assessee under section 115H had resulted in an erroneous assessment prejudicial to the interests of the Revenue and thus the Commissioner of Income-tax sought to revise the order of assessment to cancel the concessional levy claim under section 115H and accepted by the Assessing Officer.

3. After hearing the assessee’s objection dated 26-10-1999, the notice was confirmed by the Commissioner of Income-tax in his proceedings dated 2-11-2000, whereby, the order dated 3-2-1999, passed under section 143(3), was held as erroneous and prejudicial to the interest of Revenue. In the circumstances, the Commissioner of Income-tax directed the Assessing Officer to redo the assessment in accordance with law. The Commissioner of Income-tax viewed that even though interest along with the original deposit was reinvested or reviewed, since the interest, an interest on the investment out of foreign funds, had accrued in India, the same did not acquire the status of an investment made with foreign exchange. The Commissioner of Income-tax also rejected the reliance placed on the Reserve Bank of India’s Circular dated 11-2-1987 that interest income could be equated to the bonus shares. He pointed out that when an investment is made in shares, the expectation is to earn dividend as well as bonus shares. The Reserve Bank of India’s circular treated the bonus shares on par with foreign exchange assets. However, the same was not the case with dividend income received on the shares. Thus the assessment was set aside to enable the Assessing Officer to redo the assessment in accordance with law. Aggrieved by the same, the assessee went on appeal before the Income-tax Appellate Tribunal, which, however, rejected the appeal and thereby confirmed the section 263 order. The Tribunal held that the special treatment given to the interest on foreign investment could not be extended to the interest on interest redeposited with the original sum. Thus it affirmed the view of the Commissioner of Income-tax. Aggrieved by the same, the present appeal has been filed by the assessee.

4. Learned counsel for the assessee pointed out that the benefit available to the assessee in respect of the income derived from the foreign exchange asset would equally be available to the interest earned on the redeposit of interest along with the original investment. Being a beneficial provision, the assessee should have been granted the benefit under the above said provision. He further submitted that the assessee had not withdrawn the interest which originally accrued to the foreign exchange asset. Consequently, it is submitted that the benefits, as contemplated in Circular No. 4, dated 11-2-1987 of the Reserve Bank of India, in K. Thyagarajan v. Parur Municipality [1987] 165 ITR 320 (Ker.), has to be extended to cover the interest earned on the redeposited interest earned on the foreign exchange asset.

5. Heard the learned counsel appearing for the assessee and the learned counsel appearing for the revenue.

6. Chapter XII-A of the Income-tax Act contains special provision relating to non-resident Indians in respect of their investment income and/or long-term capital gains arising from foreign exchange assets both procedural and substantive with an object of encouraging investment of the foreign exchange earnings in assets in India. Section 115-I gives an option to the non-resident Indian assessees to declare that the provisions of Chapter XII-A need not be applied to them. Section 115C defines foreign exchange asset investment income and specified assets as follows :—

“(b) foreign exchange asset means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange ;

(c) investment income-means any income derived, other than dividends referred to in section 115-O from a foreign exchange asset.”

(f) specified asset-means any of the following assets, namely :

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette. “

7. Section 115E provides for concessional rate of Income-tax at 20 per cent on the income earned from investment or income from long-term capital gains of an asset other than a specified asset.

8. Section 115H speaks about continued availability of the benefit to a non-resident Indian even after the said person has become assessable as a resident in relation to the investment income derived from any foreign exchange asset of a nature referred to in section 115C sub-clauses (ii) (iii) (iv ) or (v) of clause (f). Section 115H reads as follows:

“Section 115H – Benefit under Chapter to be available in certain cases even after the assessee becomes resident.-Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the Assessing Officer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sub-clause (ii) or sub-clause (iii) or sub-clause ( iv) or sub-clause (v) of clause (f) of section 115C; and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets.”

Section 115H stipulates two conditions namely, (i) the assessee should file a declaration along with his return for the assessment year in which he first becomes assessable as a resident seeking such benefit. Secondly, the benefit under this Chapter will continue only in respect of income derived from a foreign exchange asset falling within the definition of “specified assets” as given under section 115C(f )(ii) to (v). Thus so long as the asset retained its character as foreign, each asset retaining the status as specified assets and defined in section 115C(f)( ii) to (v ), the income derived therefrom would continue to enjoy the concessional levy under section 115H.

9. As far as the facts in the present case are concerned, the assessee’s contention is that as in the case of interest income derived from foreign exchange asset, the interest on the deposit made out of the interest income also qualified for concessional rate as the investment income derived from foreign exchange asset, since the same is traceable to the foreign exchange asset originally made.

10. We do not think the section allows such elasticity in interpretation. In the decision CIT v. Sterling Foods [1999] 237 ITR 579 / 104 Taxman 204 , the Supreme Court considered the meaning of the term “derived from” in the context of the deduction claim under section 80HH and pointed out:

“10. The dictionaries state that the word “derive” is usually followed by the word “from”, and it means : get to trace from a source; arise from, originate in; show the original or formation of.

11. The use of the words “derived from” in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word “democracy” is derived from the Greek word “demos”, the people and most dictionaries will so state. That is the ordinary meaning of the words “derived from” and there is no reason to depart from that ordinary meaning here.”

The interpretation given by the Apex Court applies on all fours to section 115H (i) to (v).

11. Learned counsel for the assessee strenuously argued that the interest income earned out of the capitalised interest also would qualify for similar treatment as the income derived from any such foreign exchange asset. Yet he could not get over the fact that unless and until “interest income” has a direct nexus with the foreign exchange asset, the benefit of section 115H could not be extended to him.

12. Thus going by the wording in section 115H, we do not find any ground to accept the assessee’s case. Learned counsel for the assessee further made reference to the beneficial Circular No. 4, dated 11-2-1987, of the Reserve Bank of India, in K. Thyagarajan’s case (supra), which, in our considered view, does not have relevance to the assessee herein. Given the fact that the section is clear and there is no ambiguity that the levy of concessional rate of tax is available only to the investment income derived from the foreign exchange asset, we have no hesitation in confirming the order of the Tribunal. The Tax Case Appeal is accordingly dismissed. No costs.

[Citation : 339 ITR 49]

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