Commissioner Of Income-Tax v. Asandas Khatri

A.K Patnaik, C.J:— This is an appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”), filed by the Commissioner of Income-tax, Bhopal, against the order dated December 11, 2000, of the Income-tax Appellate Tribunal, Indore Bench, Indore, passed in IT(SS) No. 66.Ind/1997.

2. The facts briefly are that search and seizure operations under section 132 of the Act were carried out in the premises of the respondent, Shri Purushottam Khatri, Shri C.L Khatri and their group during October 18, 1996, to October 30, 1996. Thereafter, block assessment was made under section 158BC read with section 143 by the Assessing Officer on October 29, 1997 for the block period April 1, 1986 to October 18, 1996 determining the total undisclosed income of the respondent as Rs. 7,22,537. Aggrieved by the said assessment, the respondent filed an appeal before the Income-tax Appellate Tribunal, Indore Bench, Indore (for short “the Tribunal”). By order dated December 11, 2000, the Tribunal held that if the total income for those years in which the returns were not filed before the search remained below the taxable income after deduction claimed under section 80L, the income of that year shall not be included in the undisclosed income of the block period. The Tribunal also found that during the block period various fixed deposit receipts of different amounts were prepared in the name of the respondent out of his NRE account on which the respondent earned interest but the Assessing Officer has treated the interest on FDRs as part of the undisclosed income of the block period and the Tribunal held that the interest earned by the respondent on the FDRs made from the NRE accounts were exempt from income-tax as per the provisions of section 10(4)(ii) of the Act. On July 18, 2001, the court at the time of admitting the appeal for hearing formulated the following two substantial questions of law for decision in this case:

“(i) Whether, on the facts and circumstances of the case and the provisions of sections 158BB(1) and 158BB(1)(c), the learned Tribunal was justified in holding that if the total income in those assessment years in which the return was not filed before the search was conducted, is below the taxable limit after claiming deduction under section 80L of the Act, the income of that year shall not be considered as part of the undisclosed income?

(ii) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in applying the provisions of section 10(4)(ii), to hold that interest on FDRs, made out of withdrawal from NRE account should also be treated as exempt under the said pro vision and thereby deleting the addition of Rs. 2,24,213 being interest earned on FDRs?”

3. On the first substantial question of law, Mr. Rohit Arya, learned senior counsel for the appellant, very fairly submitted that section 158BB of the Act has been amended by the Finance Act of 2002 with retrospective effect from July 1, 1995 and the effect of such amendment is that the undisclosed income for the block period will be the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of the Act including the provisions of section 80L of the Act as reduced by the aggregate of the total income or, as the case may be, as increased by the aggregate of the losses, of such previous years determined in the manner mentioned therein. In view of the aforesaid submission made by Mr. Rohit Arya, we hold that the learned Tribunal was justified in holding that where the total income in those assessment years in which returns were not filed before the search was conducted remains below the taxable limit after claiming deduction under section 80L of the Act, the income of that year shall not be included in the undisclosed income of the respondent. The first substantial question of law is answered accordingly.

4. On the second substantial question of law, Mr. Rohit Arya, learned senior counsel for the Department submitted that the language of section 10(4)(ii) of the Act is clear that only if moneys are deposited with any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 and the rules made thereunder, any income by way of interest on such moneys will not be included in the total income of the previous year of a person. He submitted that in the present case it cannot be said that the FDRs made by the respondent were moneys deposited with the bank in accordance with the Foreign Exchange Regulation Act, 1973, and, therefore, the income by way of interest on such FDRs were not exempt under section 10(4)(ii) of the Act.

5. Mr. A.P Shrivastava, learned counsel for the respondent, on the other hand, relied on the reasons given by the Tribunal in paragraphs 68 to 70 of the impugned order and supported the conclusion of the Tribunal that the interest income earned on the NRE FDRs by the respondent are exempt as per the provisions of section 10(4)(ii) of the Act. He further submitted that the copy of the assessment order in the case of Prakash Chotrani for the block period 1987-88 to 1997-98 filed along with the reply of the respondent as annexure R/18 would show that the Assessing Officer has held that such interest income on FDRs in NRE accounts under section 10(4)(ii) of the Act is allowable.

6. The Assessing Officer found that there are three FDRs in the name of the respondent, of the value of Rs. 2,39,463, Rs. 1,02,368 and Rs. 2,88,167. The Assessing Officer found that the source of the FDR of Rs. 2,39,463 was a fixed deposit of Rs. 50,000 which was made from money lying in deposit in the NRE account of the respondent and this fixed deposit of Rs. 50,000 had been renewed from time to time and had become Rs. 2,39,463 after accumulation of interest. The respondent claimed exemption of interest on this FD from the assessment year 1987-88 till the assessment year 1996-97 as per the provisions of section 10(4)(ii), but the Assessing Officer held that the exemption on interest is available on money standing to the credit of Non-resident (External) account in any bank in accordance with the Foreign Exchange Regulation Act, 1973 and this section does not incorporate interest on fixed deposit made out of the NRE account in Indian rupees. Therefore, the exemption claimed by the assessee on interest on Indian fixed deposits for all the assessment years, i.e, 1987-88 till 1996-97 cannot be allowed.

7. When the respondent carried the matter in appeal, the Tribunal held that admittedly the respondent has deposited the foreign currency brought from his NRE account and out of the NRE account, the FDRs were prepared in his name and so long as the foreign currency remains with the bank in any account, the interest earned thereon should be allowed to be exempted from income-tax as per the provisions of section 10(4)(ii) of the Act because the object of the introduction of the provision is to encourage non-resident Indians to bring foreign currency into India and earn interest thereon without paying any income-tax, and accordingly directed the Assessing Officer to delete the interest income earned on the NRE FDRs by the respondent from the undisclosed income for the block period. In our considered opinion, the view taken by the Tribunal is correct. section 10(4)(ii) is quoted hereinbelow:

“10. 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:

Provided further that nothing contained in this sub-clause shall apply to any income by way of interest paid or credited on or after the 1st day of April, 2005 to the Non-resident (External) Account of such individual.”

8. The language of the aforesaid provision in section 10(4)(ii) makes it clear that any income by way of interest on moneys standing to the credit of an individual in a Non-Resident (External) account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973, and the rules made thereunder, would be excluded from the total income of the individual. The Assessing Officer has found that the original source of the FDR of Rs. 2,39,463 was money deposited by the respondent in the NRE account. The Assessing Officer has not recorded a finding that the money was lying in the said NRE account out of which the FDR of Rs. 50,000 was initially prepared on July 28, 1982 was not deposited in accordance with the Foreign Exchange Regulation Act, 1973 and the rules made thereunder. He has held that section 10(4)(ii) does not exempt interest on fixed deposit made out of NRE account in Indian rupee. What the Assessing Officer has failed to appreciate is that the FDR of Rs. 2,39,463 comprised of Rs. 50,000 which was lying in deposit in the NRE account of the respondent and the accumulated interest thereon and represents moneys standing to his credit in the NRE account in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 and the rules made thereunder, since the original deposit in the NRE account had been made in accordance with the said Act and the Rules and the said Act and the Rules did not prohibit an individual from earning interest on such deposit. The interest on the said FDR of Rs. 2,39,463 was thus exempted under section 10(4)(ii) of the Act.

9. Since we have answered both the substantial questions of law against the appellant, this appeal stands dismissed.