2011 (7) TMI 122 - HC - Income Tax

Levy of concessional rate of tax - Under section 115H - Assessee s contention is that as in the interest income derived from foreign exchange asset 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as the investment income derived from foreign exchange asset since the same is traceable to the foreign exchange asset originally made - Yet assessee could not get over the fact that unless and until interest income has a direct nexus with the foreign exchange asset the benefit of section 115H could not be extended to him - 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 - Decided against the assessee.

Summary

Issues:
Assessment of concessional levy claim under section 115H for interest accrued on deposits made out of foreign funds.

Analysis:
The judgment pertains to a Tax Case Appeal related to the assessment year 1996-97 concerning the acceptance of a claim made under section 115H of the Income-tax Act for concessional levy on interest accrued on deposits made out of foreign funds. The Commissioner of Income-tax, in exercise of powers under section 263, sought to revise the assessment order to cancel the concessional levy claim, stating that the interest accrued in India did not acquire the status of an investment made with foreign exchange. The Commissioner rejected the reliance on the Reserve Bank of India's Circular equating interest income to bonus shares, emphasizing that the special treatment for foreign investment interest could not extend to interest on redeposited interest. The Income-tax Appellate Tribunal upheld the Commissioner's decision, leading to the present appeal.

The appellant argued that the benefit available for income from foreign exchange assets should extend to interest earned on redeposited interest, citing Circular No. 4, 1987 of the Reserve Bank of India. However, the court examined Chapter XII-A of the Income-tax Act, which provides for special provisions for non-resident Indians regarding investment income from foreign exchange assets. Section 115H allows continued benefit for investment income derived from specified foreign exchange assets. The court emphasized that the benefit under this provision applies only to income directly derived from foreign exchange assets falling under specified categories.

The court rejected the appellant's argument, citing the Supreme Court's interpretation of "derived from" in a previous case, emphasizing the need for a direct nexus between the interest income and the foreign exchange asset to qualify for concessional treatment under section 115H. The court concluded that the appellant's case did not meet the criteria specified in the section, as the interest income did not have a direct link to the foreign exchange asset. The court upheld the Tribunal's decision, dismissing the Tax Case Appeal with no costs incurred.