Recently Madras High Court in the case of Dr. M MANOHAR(Appeal No 759 of 2004) decided an important question “ Whether 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as the investment income derived from foreign exchange asset, since the same is traceable to the foreign exchange asset originally made.
The assessee herein originally made investment in Bank out of the funds brought by him from abroad.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 under section 115H in the returns filed for the assessment year 1996-97. The same was not accepted by the Commissioner Income Tax and he held that the interest on 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.
To understand this case let us first understand that Chapter XIIA of the Income Tax Act,1961, 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 .Section 115H gives a 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 – 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. (ii) 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 there from would continue to enjoy the concessional levy under Section 115H.
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. “
Section 115E provides for concessional rate of income tax at 20% on the income earned from investment or income from long term capital gains of an asset other than a specified asset.
In the appeal filed before the Tribunal it was held that the special treatment given to the interest on foreign investment could not be extended to the interest on interest redeposit with the original sum.
The Madras High Court held that :-
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, reported in [1987] 165 ITR 320 (K.Thyagarajan Vs. Parur Municipality (Ker.), 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.
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