1. The applicant, in this application under section 245Q, (1) of the Income-tax Act, 1961 (for short “the Act”), is a non-resident Indian citizen. He is stated to have left India in 1970 for employment overseas and, after a sojourn in various African countries he went to the U.K This application, received by the authority from his address in the United Kingdom, raises certain queries as to his liability to income-tax in India, where he wants to settle down, on retirement, around August/September, 1995. From a photocopy of the entries in the applicant's Indian passport, it is seen that the applicant's stav in India during the earlier years has been as follows:
Financial year
Duration of stay (No. of days)
1990-91
36
1991-92
102
1992-93
81
1993-94
122
1994-95
139
2. He was, therefore, a non-resident up to the financial years 1993-94 and 1994-95 and is entitled to maintain the present application.
3. The queries raised by the applicant relate to his future taxability in India after he returns and settles down here. Basically, he requires to be reassured that, for nine assessment years after his return to India, he will be a resident but not ordinarily resident (“RNOR”) and that as such the income derived by him from investments made by him in U.K will be exempt from income-tax and that those derived from his Indian investments will be exempt from tax or liable to tax at a concessional rate. As the application is from one who is broadly familiar with the outlines but not with the details of the Indian tax legislation, it became necessary to seek several clarifications from the applicant. The questions set out in annexure “A” to the application have been considered and this ruling given on the facts stated in relation to these questions in annexure “I” to the application, the contentions raised by the applicant in annexure “II” to the application, the clarifications contained in the applicant's letters dated February 28 and July 18, 1995, and the report of the Commissioner of Income-tax in this matter.
4. At the outset, it is necessary to clarify the residential status of the applicant after his return to India, as the correctness of his impression that he will be resident but not ordinarily resident for nine assessment years following his return to India has to be tested. The residential status of an individual has to be determined in the manner laid down in section 6 of the Act. Sections 6(1) and 6(6) in so far as they are here relevant, read as follows:
“6. Residence in India.— For the purposes of this Act,—
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or….
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year….
(6) A person is said to be ‘not ordinarily resident’ in India in any previous years if such person is—
(a) an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more; or….”
5. In view of this definition, if the applicant returns to India before October 3, 1995, he will be “non-resident” till the financial year 1994-95 (relevant for the assessment year 1995-96) but will become “resident” in India from the assessment year 1996-97 onwards but this residential status will be deferred by one year if he arrives on or after that date as his stay in India in financial year 1995-96 will then be less than 182 days. Acting on the former assumption and the further assumption that he stays in India continuously after his date of return here, the question will arise whether, for the assessment year 1996-97 and thereafter the applicant should be treated as “resident and ordinarily resident (ROR)” or “resident but not ordinarily resident (RNOR)”. The answer to this will depend on the interpretation of section 6(6) the language of which requires some consideration.
6. Section 6(6) is somewhat ambiguous in its wording. It can be read either as the definition of a person who can be treated as “ordinarily resident” in India or as the definition of a person who should be treated as “resident but not ordinarily resident”. The ambiguity arises as a result of the use of the double negative used in the sub-section. The two interpretations possible are—
(1) An individual is resident and ordinarily resident in any previous year only if—
(a) he has been a “resident” [as per section 6(1)] in nine out of ten previous years preceding that year; and
(b) he has been in India for period or periods amounting in all to 730 days or more during the seven years preceding that year.
(2) An individual, though resident, is “not ordinarily resident” in any previous year—
(a) either where he has not been resident, i.e, has been a nonresident in nine out of ten previous years preceding that previous year;
(b) or where he has not been in India (i.e, has been absent from India) for 730 days or more during the seven previous years preceding that year.
7. It will be seen that, if we apply the first of the above two interpretations, the applicant will be resident but not ordinarily resident for the assessment years 1996-97 to 2004-05 as he will have been a “resident” in eight and less number of preceding previous years although his physical stay in India would have exceeded 730 days by the end of the previous year relevant for the assessment year 1998-99. However, if the second of the tests is applied he will be a resident and ordinarily resident only for the assessment years 1996-97 and 1997-98.
8. It is curious that this difficulty in the interpretation of a basic provision of the Act has not been directly resolved even though the Income-tax legislation in this country is about to celebrate its platinum jubilee the provisions of section 6(6) of the Act having been re-enacted materially on the same lines as section 4B of the Indian Income-tax Act, 1922. The first interpretation given above is in accordance with the speech of the Finance Member in the Central Legislative Assembly while introducing the relevant amendment Bill, has been adopted by a circular of the Central Board of Direct Taxes dated December 5, 1962, and also seems to have been broadly accepted, although the alternative view has been touched upon in some judicial dicta: See the discussion in Kanga and Palkivala on the “Law and Practice of Income-tax (8th edition), pages 247-248 and Sampath Iyengar's Law of Income-tax (9th edition), pages 869-872” and the cases cited therein. It seems correct to construe the definition as providing that a person will become resident and ordinarily resident only if (a) he has been “resident” in nine out of the ten preceding previous years, and (b) has been in India for at least 730 days in the seven preceding previous years and that he will be treated as resident but not ordinarily resident if either of these conditions is not fulfilled. The applicant is, therefore, right when he says that he will be having the status of a resident but not ordinarily resident for the assessment years 1996-97 to 2004-05. It is on this assumption that his questions have to be answered and the answers are restricted to the assessment years in respect of which he will be a resident but not ordinarily resident mentioned above.
9. The questions raised by the applicant, somewhat cumbrously and infelicitously worded are as follows:
“1. For an individual resident but not ordinarily resident, whether the following interest and dividends received in foreign country, in a foreign bank account and then remitted to India to be treated as income and charged under the Indian income-tax—
(a) Investments in India Development Bond, marketed by State Bank of India in U.K and U.S.A where interest paid in sterling or United States dollars, paid in foreign bank.
(b) Investments in units of India fund, marketed by Merryll Lynch/Baring Brothers (Guernsey) U.K, in conjuction with the Unit Trust of India and dividend, if any, payable in U.K in a British bank account.
(c) Investments in shares of Lazards Birla India Investment Trust, U.K, market by Lazard Trust, U.K, in conjuction with Birla Brothers of India and dividend, if any, payable in U.K in a U.K bank account.
2. For an individual resident but not ordinarily resident, whether interest on fixed deposit of foreign exchange non-resident external account payable in foreign currency by a foreign bank operating in India in a foreign bank account (U.K) to be treated as Indian income and chargeable under the Indian income-tax.
3. For an individual resident but not ordinarily resident whether any foreign income by way of interest and dividends from foreign bank deposits and investments in units of a foreign company having no business relationship with any Indian bank or Indian companies are chargeable under the Indian Income-tax Act.
4. For an individual resident but not ordinarily resident whether all income by way of interest and dividends from Indian banks and Indian companies from non-resident external rupee deposits and non-resident external units or deposits are chargeable to Indian Income-tax Act at a concessional tax rate.”
10. The applicant's first question relates to the taxability in India of the interest and dividends accruing to him from the following investments made by him, which are received by him and deposited in banks abroad, though they may be remitted later to India:
Particulars
Company
Amount invested
Maturity date
Annual income
(a) India Development Bond
State Bank of India
£xx, xxx
1997
£x, xxx
(b) India Development Bond
State Bank of India
£xx, xxx
1997
£x, xxx
(c) Indian Fund (units)
Merryll Lynch/Baring Brothers
£30,000
—
—
(d) Lazard Birla India Investment Trust (shares)
Lazard Brothers
£12,000
—
—
11. The India Development Bonds have been issued by the State Bank of India under the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act (41 of 1991). The terms and conditions are governed by the provisions of that Act and the India Development Bonds Scheme, 1991. It is sufficient to mention for the purposes of the present enquiry that section 7 of the Act makes the provisions of the Income-tax Act inapplicable to the interest accruing from these bonds. The bonds can only be acquired by non-resident Indians and overseas corporate bodies, but the immunity therefor, once attracted on the bonds fulfilling the requisite conditions, does not depend upon the residential status of the holder or cease to be available because the holder becomes a resident and can indeed even be transferred to resident persons. The terms endorsed at the back of the bond (a photocopy of which has been furnished by the applicant) also clearly mention that the exemption will apply irrespective of the residential status of the holder. The applicant will, therefore, not be liable to pay income-tax on the interest from these shares even after he becomes a resident.
12. The second part of the applicant's first question pertains to the income derived by him from investments floated by foreign companies. It is stated that Meryll Lynch and Baring Brothers of U.K have, in collaboration with the Unit Trust of India marketed units of India Fund and that Lazard Trust, U.K has in conjunction with Birla Brothers of India, floated the Lazard-Birla India Investment Trust. From the photocopies supplied, it is seen that the applicant has invested in India Fund “B” shares issued by Meryll Lynch International Capital Management (Guernsey) Ltd. and in xxxx shares in the Lazard Birla India Investment Trust PLC and is entitled to annual dividends in respect of these shares which are payable to him in U.K in the applicant's foreign bank account. In other words, the applicant has invested in shares of British companies which have, in their turn, made investments in various shares and securities including several in India. The dividends received by the applicant on these shares will be income accruing or arising in U.K These receipts will not fall within the scope of clause (iv), (v), (vi) or (vii) of section 9(1) because they cannot be described as dividends paid by an Indian company or as payments in the nature of interest, royalty or fees for technical services.
13. Question No. 1 has, therefore, to be answered by saying that the applicant will not be liable to tax in respect of the income from the investments referred to therein even after he becomes resident but not ordinarily resident.
14. Question No. 2 pertains to an amount which the applicant has in the London branch of the American Express as a Foreign Currency Non-Resident Fixed Deposit repayable on July 7, 1996. The applicant has stated that it is a cumulative deposit which is payable on maturity into the applicant's London bank account. Annexure “I” to the application also refers to an annual income of xxxx.xx from the deposit but the photocopy of the deposit receipt makes no mention of it. It is only the annual interest worked out at 8.25 per cent, but no such annual interest has been paid or is payable to the applicant. The interest on the fixed deposit is, prima facie, income which accrues in the U.K It is true that such interest will be deemed to accrue or arise in India if the provisions of section 9(1)(v)(c) are attracted but there is no reason to presume or show that the American Express Bank Ltd.-a non-resident company-has borrowed the applicant's funds for the purposes of its business carried on in India. On behalf of the Department, it is said that even foreign income would be assessable in the hands of a resident but not ordinarily resident if it is derived from a business controlled in or profession set up in India. Interest derived by the applicant on his fixed deposit with the American Express can hardly come under this description. There is, however, one point that deserves notice. The deposit on maturity is payable at par, says the receipt, at Bombay, Calcutta, Delhi and Madras. By 1996, the applicant will be a resident in India and if he exercises his right of repayment, or receives repayment, in India, it will be taxable as income factually accruing, arising or received in India unless exempted under any provision of the Act. There is no such exemption available as neither section 10(4) nor section 115C, which may be thought of in this context, are attracted. The interest on the fixed deposit with American Express will, therefore, become liable to tax if it is received, or if the right to receive it is exercised, in India.
15. Question No. 3 raised by the applicant is in two parts, one of which has connection with one of the items referred in question No. 1. By the first part, the applicant seeks to know whether if, before leaving for India, he invests as a deposit in a foreign bank, to purchase some foreign units having no business relationship with India, the income derived from such units would be liable to Indian income-tax. The answer is simple. If it is found that all the premises set out in the question are fulfilled, this question has to be answered in the negative.
16. The second part of question No. 3 is in regard to the tax liability in India that may result on the following proposed transactions:
“I propose to liquidate my investment in India Fund of Merryll Lynch (U.K) as stated above and buy units (in other Merryll Lynch funds) having no business relationship with India, and hold these units as resident but not ordinarily resident.”
17. The two counts on which tax liability could be attracted in such a transaction are: (a) in respect of capital gains on the liquidation of the existing units, and (b) in respect of income-tax on the income derived from the freshly purchased units. As already pointed out, the existing holding is only in shares floated by Merryll Linch and not directly in the Unit Trust of India. Hence, no capital gains tax will be payable on their sale as the capital asset in question is situated outside India and it is stated that the applicant will be effecting the sale while still in U.K and a nonresident. The second count of taxation will also be not attracted for the reasons already discussed under question No. 1. The third question is, therefore, answered by saying that, on the factual foundations mentioned in the question regarding the time of the transactions, the nature of the companies, the securities in which investment is proposed and the absence of any business connection between them and India, no tax liability will be attracted on the proposed transactions.
18. Question No. 4 relates to the tax liability of the applicant, after he becomes resident but not ordinarily resident, on the income from the following investments, presently held by him as a non-resident:
Particulars
Bank/Company
Expiring on
(a) Non-resident external nonrepayable rupee fixed deposit
State Bank of India
1995
(b) do.
Indian Bank
1996
(c) Non-resident external rupee fixed deposit
Indian Bank
1997
(d) Non-resident external repatriable unit
Unit Trust of India
—
(e) Non-resident external repatriable fixed deposit
Lloyds Finance
—
(i) Items (a), (b) and (c):
Items (a), (b) and (c) set out in the Table above are deposits with the State Bank of India and the Indian Bank in non-resident (external) rupee accounts. The interest on these accounts is exempt under section 10(4)(ii) of the Act provided the terms of that clause are fulfilled in respect of the relevant previous year, viz., (a) that the account is being maintained in accordance with the provisions of the Foreign Exchange Regulation Act (FERA) and the Rules made thereunder, and (b) either that the applicant is resident outside India within the meaning of section 2(q) of the Foreign Exchange Regulation Act, 1973, or that, even otherwise, he has been permitted by the Reserve Bank of India to maintain the aforesaid account. Since the applicant is proposing to return to India in August, 1995, for good, he will not be a resident outside India thereafter within the meaning of the Foreign Exchange Regulation Act. The exemption under section 10(4)(ii) will, therefore, be available to the applicant in respect of above interest income only if the account is maintained in accordance with the provisions of the Foreign Exchange Regulation Act, the rules and orders made thereunder and the Reserve Bank of India permits the applicant to continue the aforesaid accounts.
The applicant, however, claims that even if the above interest income is not exempt, he is entitled to be taxed at a concessional rate in respect of the same, because the assets in question are “foreign exchange assets”, i.e, assets acquired out of “convertible foreign exchange”. If the assets acquired are foreign exchange assets as claimed by the applicant, the benefit of the concessional rate of 20 per cent, under section 115E will be available only if the asset in question falls under one of the categories of assets specified in section 115C. The only provision which can at all cover the fixed deposits in the bank is sub-clause (iii) of clause (f) of section 115C. That clause will be attracted only if the bank in which the deposit has been made is an “Indian company which is not a private company as defined in the Companies Act, 1956. Neither of the banks answers the description of a private company in the Companies Act. To find out whether it is an Indian company, one has to turn to the definition contained in section 2(26) of the Act which runs as under:
“S. 2(26).— ‘Indian company’ means a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes,—
(i) a company formed and registered under any law relating to companies formerly in force in any part of India other than the State of Jammu and Kashmir and the Union territories specified in sub-clause (iii) of this clause;
(ia) a corporation established by or under a Central, State or Provincial Act;
(ib) any institution, association or body which is declared by the Board to be a company under clause (17);
(ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State;
(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory:
Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India
19. The State Bank and the Indian Bank will fall within the terms of clause (ia) of section 2(26) extracted above. In particular, so far as the Indian Bank is concerned section 11 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, specifically provides that every nationalised bank shall be deemed to be an Indian company for the purposes of the Income-tax Act, 1961. It is, therefore, clear that these assets will attract the provisions of section 115C and that the applicant will be entitled to the concessional rate of tax of 20 per cent, on the gross amount of the interest without any deductions under section 115D and section 115E read with section 115H on his fulfilling the conditions set out in the last mentioned provision, as discussed under item (e) below.
(ii) Item (d):
Item (d) refers to the income derived from units held by the applicant in the Unit Trust of India (UTI) as a “non-resident external repatriable unit”. Under section 32(1)(aa) of the Unit Trust of India Act, 1963, such income is totally exempt under the Income-tax Act, only if one of the two conditions is fulfilled: either the investment has been made out of the funds in a non-resident (external) account with any bank in India or it has been made out of funds remitted in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act or any rules and orders made thereunder. The applicant has stated in annexure “II” to the application that all these investments have been made out of “convertible foreign exchange” but this does not necessarily mean that the two conditions set out above are also fulfilled. The question can, therefore, be answered only by saying that complete exemption will depend on the fulfillment of either of the conditions mentioned above. The applicant claims that if he is not entitled to exemption in respect of the above income, he will be entitled to be charged at a concessional rate under section 115AC. In the first place the assets held by the assessee do not fall in the category of assets for which relief is available under sub-section (1)(a) of section 115AC. Also the relief under section 115AC is available only to a non-resident assessee and the present query relates to the applicant's tax liability at a point of time when he will be, not a nonresident but, a resident but not ordinarily resident.
(iii) Item, (e):
Item (e) relates to the fixed deposit made by the applicant with Lloyds Finance, a company, in India. The interest is not entitled to exemption under any provision of the Act. However, it has been claimed that this deposit has also been made in “convertible foreign exchange”. If that be so, the assessee will be entitled to be taxed on the gross amount of interest without any deductions at a concessional rate of 20 per cent, under sections 115D and 115E read with section 115H. The concessional rate under section 115E is available to a non-resident but the benefit thereof can be availed of even after the applicant becomes a resident under section 115H. This exemption is conditional on his furnishing to the Assessing Officer a declaration under the latter section along with his return of income for any assessment year stating that he has income from assets of the nature referred to in sub-clause (ii), (iii), (iv) or (v) of clause (f) of section 115C and opting that the provisions of Chapter XII-A may be made applicable to him in relation to the “investment income” from such assets. If he does so, then he will be entitled to the benefit of the concessional rate for that assessment year and subsequent assessment years until the transfer or conversion of such assets into money.
On the basis of the above discussion, the ruling of the Authority on the questions posed by the applicant is as follows:
RULING
Question No. 1: The applicant will not be liable to pay income-tax in India on the income from the three categories of assets set out in the question.
Question No. 2: The interest on the fixed deposit will be liable to income-tax in India if it is received, or the right to receive it is exercised, in India.
Question No. 3: If the factual foundations mentioned in the question are fulfilled, the transaction will not attract any income-tax in India.
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.
(b) The income from the units of the Unit Trust of India [item (d) in paragraph 7 of annexure “I”] will be exempt if the units had been acquired out of funds in a non-resident (external) account with any bank in India or out of funds remitted to India in foreign exchange in accordance with the provisions of the Foreign Exchange Regulation Act, 1973, and the rules and orders made thereunder. The applicant is not entitled to any exemption in respect of this income under section 115AC as claimed by him.
(c) The interest on the fixed deposit with Lloyds Finance in India [item (e) in paragraph 7 of annexure “I”] will not be exempt from tax in India but the applicant can avail of a concessional rate of 20 per cent, on the gross amount of the interest under sections 115D and 115E read with section 115H on complying with the procedural requirements of section 115H.