I.T.A No. 34 of 2000

Decided on May 19, 2005

The Judgment of the Court was delivered by

J.B Koshy, J.:— This appeal is filed by the Revenue raising the following questions as substantial questions of law arising from the order of the Income-tax Appellate Tribunal:

“1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to the benefit of section 115H of the Income-tax Act?

2. Whether, on the facts and in the circumstances of the case and the provision being applicable only in a case where the person was assessed earlier as a non-resident, the Tribunal is right in law and fact in relying on the order of the Tribunal for a subsequent year (1992-93) for which year there was no adjudication of the issue by the Tribunal?

3. Whether, on the facts and in the circumstances of the case, should not the Tribunal have considered the issue on the merits for the assessment year without relying on an order for the subsequent year?”

2. The assessment year is 1991-92. The assessee was a non-resident and he had deposited money in non-resident accounts with various branches of State Bank of Travancore, Central Bank of India, Indian Bank, etc. When he came back to India, he claimed concessional rate of tax under section 115H of the Income-tax Act and filed necessary declaration for being taxed only at the rate of 20% interest. That was disallowed by the Assessing Officer. The Commissioner of Income-tax (Appeals) allowed the appeal. The Tribunal dismissed the appeal of the Revenue on the reasoning that the same benefit was given to the assessee by the same Tribunal for the assessment year 1992-93 in I.T.A Nos. 816 and 817 (Coch.)/95 by order dated August 30, 1999, and it has become final. The appeals were allowed on the basis of an order of the Tribunal in another assessee's case in I.T.A No. 462.Coch./95 wherein the same question was decided in favour of the assessee. It was pointed out by counsel for the assessee that no appeal was filed by the Revenue for the assessment years 1988-89 and 1989-90 also though the same issue was decided in favour of the assessee. However, the appeal was filed by the Revenue for this assessment year alone. We may first consider the relevant sections. Section 10(4)(ii) is quoted below:

“10. Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—…….

(4)(ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a non-resident (External) account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made thereunder:

Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid account :”

3. But, that benefit is applicable only so long as a person is completely a non-resident. But, normally, he will be liable to tax when he comes to India and becomes a resident. Section 115H as existed during the relevant time is as follows:

“115H. Benefit under Chapter to be available in certain cases even after the assessee becomes resident.—Where a person, who is a nonresident 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.”

4. In this appeal, the Revenue has no dispute that the income in question is arising out of a foreign exchange asset as mentioned in clause (f) of section 115C. We may also extract section 115E(1):

“115E. Tax on investment income and long-term capital gains.—

(1) Where the total income of an assessee, being a non-resident Indian, consists only of investment income or income by way of long-term capital gains or both, the tax payable by him on his total income shall be the amount of income-tax calculated on such total income at the rate of twenty per cent, of such income.”

5. Before going into the rival contentions, we may also refer to the Budget speech of the Finance Minister and Memorandum explaining the Finance Bill for 1983-84 while the above section was introduced (see : [1983] 140 ITR (St.) 27) as well as the object of incorporating section 115. The Budget speech reads as follows:

“As I indicated earlier, I have decided to liberalise further the tax incentives in respect of non-resident Indians investing in India. I propose to levy a flat rate of tax of 20 per cent, plus surcharge on incomes derived by such persons from their specified investments in India made through foreign exchange remittances.”

6. The object as stated in the Finance Bill is as follows (see [1983] 140 ITR (St.) 132):

“New section 115E seeks to provide that income-tax on any investment income or income by way of long-term capital gain of a nonresident Indian will be calculated at the rate of twenty per cent, plus surcharge at the rate of 12-½ per cent, of such income-tax. It is also proposed to provide that investment income and long-term capital gain of a non-resident Indian will not be aggregated with his other Indian income for charging income-tax on such other income.

New section 115H seeks to provide that in the case of non-resident Indian who becomes resident in India in a subsequent year, the provisions of the new Chapter XII-A will continue to apply in relation to the investment income derived from debentures of and deposits with an Indian public limited company and Central Government securities, acquired in convertible foreign exchange, until the transfer or conversion (otherwise than by transfer) into money of such asset.”

7. A perusal of the section clearly shows that the concessional rate of tax provided under sections 115H and 115E is enacted with a beneficial object intended to give concessional rate of tax to persons like the assessee on the income of investment they made while they were non-residents, in spite of the fact that they became residents subsequently provided the foreign exchange is not converted. They are entitled to concessional rate provided they conform to the procedure prescribed under section 115H. On going through the section, we see no room for a different interpretation. Even if the contention of learned senior standing counsel that another view is possible, the well-known principle in taxation is that if two views are possible, the view in favour of the assessee has to be accepted as held by the apex court in CIT v. Kulu Valley Transport Co. (P.) Ltd., [1970] 77 ITR 518. A taxing statute has to be interpreted strictly. The Supreme Court in A.V Fernandez v. State of Kerala, [1957] 8 STC 561; AIR 1957 SC 657, at page 661 observed as follows:

“In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.”

8. Though the rule of strict compliance is applicable in taxation law, the assessee claiming exemption has to establish the same as held by the apex court in CIT v. Ramakrishna Deo, [1959]35 ITR 312; AIR 1959 SC 239, pages 241 and 242. But, exemption made with a beneficial object has to be liberally construed, (see : CIT v. U.P Co-operative Federation Ltd., [1989]176 ITR 435; (1989) 1 SCC 747 : AIR 1989 SC 915, at page 919 and Tata Oil Mills Co. Ltd. v. CCE, [1991] 82 STC 225; (1989) 4 SCC 541 : AIR 1990 SC 27, at page 30). An exemption notification cannot be denied full effect by any circuitous process of interpretation. (M/S Swadeshi Polytex Ltd. v. Collector Of Central Excise ., (1990) 2 SCC 358 : AIR 1990 SC 301 at page 306. The apex court in Collector of Customs v. Bharat Heavy Electricals Ltd., [1992] 61 ELT 332 (SC) held that a reasonable construction which gives effect to true intent and purpose of the provisions has to be adopted without violating the language of the notification. It is true that the question whether exemption is applicable shall be construed strictly and once the doubt about the applicability is lifted, exemption shall be given a wider and liberal construction as held by the apex court in Union of India v. Wood Papers Ltd., [1991] 83 STC 251; (1990) 4 SCC 256 : AIR 1991 SC 2049. As far as section 115H is concerned, it was enacted with the beneficial object of earning and preserving foreign exchange and there is no room for doubt that the subject-matter is clearly covered by section 115H. When words are clear and directly conveying the meaning, there is no need for any interpreting process as held by the apex court in Mangalore Chemicals and Fertilisers Ltd. v. Deputy CCT, [1991] 83 STC 234; 1992 Supp (1) SCC 21. There is no other view possible than in favour of the assessee. Further, we also notice that the Authority for Advance Rulings, considered the same point and it was answered like this as can be seen from the decision reported in [1997]223 ITR 379 (Advance Ruling Application No. P-5 of 1995) (page 392):

“Question No. 4 : (a) No income-tax will be payable in India on the interest from the fixed deposits with the State Bank of India and the Indian Bank [items (a), (b) and (c) of paragraph 7 in annexure ‘I’] for any assessment year if, in respect of the relevant assessment year, the conditions set out in Section 10(4)(ii) of the Income-tax Act, 1961 are fulfilled. However, even if the exemption is not available under Section 10(4)(ii), the applicant will be liable to tax on the gross interest income at the concessional rate of 20 per cent, under sections 115C and 115D read with sections 115E and 115H, provided the applicant fulfils the procedural requirements of section 115H.”

9. A contention was raised by senior standing counsel that to apply section 115H, the assessee should be a non-resident and should have been assessed as such in the previous year. The above view is also not tenable because section 115H is applicable when a non-resident in a previous year becomes a resident and liable for taxation. We also note that with regard to another assessee, the same view was taken by the Tribunal and the Department accepted the same for the previous years in the assessee's case also. Those orders were allowed to become final. The Department should be consistent at least in respect of the same assessee and it cannot also differentiate between various assessees as held by the three-member Bench of the apex court in Union of India v. Kaumudini Narayan Dalai, [2001]249 ITR 219. In this case, we are in full agreement with the views of the Tribunal and therefore the question of law referred are to be answered in favour of the assessee and the appeal is dismissed.