2001 (8) TMI 101 - HC - Income Tax

Summary

Issues Involved:
1. Eligibility of the assessee for exemption under section 10(4A) of the Income-tax Act, 1961.
2. Interpretation of the term "non-resident" as per section 2(30) of the Income-tax Act.
3. Applicability of the Foreign Exchange Regulation Act and the Reserve Bank of India circulars.
4. Legislative intent and retrospective application of the 1982 amendment.
5. Credibility of the Income-tax Department and the principle of fairness and justice.

Detailed Analysis:

1. Eligibility of the Assessee for Exemption Under Section 10(4A) of the Income-tax Act, 1961:
The core issue was whether the interest earned by the assessee was exempt under section 10(4A) of the Act. The applicant-assessee, a Hindu undivided family, had a status of "resident, but not ordinarily resident" during the assessment years 1977-78 and 1978-79. The assessee had opened a fixed deposit account with the Central Bank of India, treated as a "Non-resident (External) Account" under the Foreign Exchange Regulation Act, 1947, and claimed exemption for the interest earned. The Tribunal denied this exemption, holding that section 10(4A) applied only to "non-residents".

2. Interpretation of the Term "Non-Resident" as per Section 2(30) of the Income-tax Act:
The assessee argued that they were "non-resident" when the account was opened and should continue to receive the exemption despite the change in status. The department contended that "non-resident" as defined in section 2(30) did not include "not ordinarily resident". The court examined the definitions and concluded that the term "non-resident" should be interpreted in the context of section 10(4A) to include those eligible under the Foreign Exchange Regulation Act.

3. Applicability of the Foreign Exchange Regulation Act and the Reserve Bank of India Circulars:
The court considered the circulars issued by the Reserve Bank of India and the Central Board of Direct Taxes, which indicated that the exemption was intended for funds repatriable outside India. The court noted that the scheme for "Non-resident (External) Account" allowed individuals who were "not resident in India" to open such accounts, aligning with the Foreign Exchange Regulation Act definitions.

4. Legislative Intent and Retrospective Application of the 1982 Amendment:
The Finance Act, 1982, amended section 10(4A) to clarify that the exemption applied to "persons resident outside India" as defined in the Foreign Exchange Regulation Act. The court held that this amendment was declaratory of the legislative intent and should apply retrospectively. Thus, the assessee was entitled to the exemption for the years in question.

5. Credibility of the Income-tax Department and the Principle of Fairness and Justice:
The court emphasized the importance of the department's credibility and the need for fairness and justice. It referenced past judgments that highlighted the potential harm to the department's credibility if taxpayers who responded to government appeals were denied benefits. The court concluded that denying the exemption would be counterproductive and unjust.

Conclusion:
The court held that the Tribunal was not justified in denying the assessee's claim for exemption under section 10(4A). The interest earned by the assessee was indeed exempt, and the question was answered in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.