1991 (11) TMI 11 - HC - Income Tax

Summary

Issues:
Interpretation of the term "first created" in the context of tax assessment under the Income-tax Act, 1961 regarding deposits renewed after the Convention for Avoidance of Double Taxation came into force.

Detailed Analysis:

The judgment by the High Court of Calcutta involved a reference made by the Tribunal under section 256(1) of the Income-tax Act, 1961, regarding the correctness of an assessment order. The Commissioner of Income-tax contended that the assessment order for the year 1985-86 was erroneous due to an incorrect application of tax rates and provisions of the Convention for Avoidance of Double Taxation, resulting in undercharged tax. The Commissioner initiated proceedings under section 263 to rectify the assessment order. The Tribunal later annulled the Commissioner's order, stating that the deposits renewed after a specific date should be treated as new loans and taxed at a lower rate. This decision was challenged before the High Court.

The primary issue revolved around the interpretation of the term "first created" in article 12(2) of the Convention for Avoidance of Double Taxation between India and the United Kingdom. The Commissioner argued that the renewed deposits should not be considered as "first created" loans, thus not eligible for the lower tax rate. However, the Tribunal held that when a deposit is renewed based on a fresh application, it constitutes a new contract, and therefore, should be treated as a loan "first created" after a specific date, making it eligible for the lower tax rate.

The High Court analyzed the meaning of "renewal" in the context of legal and commercial parlance. It was established that the renewal of a deposit involves the creation of a new asset, as evidenced by the submission of a fresh application and acceptance by the depositee. The Court emphasized that renewal signifies the establishment of a new contract, distinct from the original deposit, and should be considered as a fresh deposit for tax assessment purposes.

Furthermore, the Court referred to previous judgments interpreting the term "renewal" in different legal contexts, such as the Companies Act, to support the notion that renewal implies the acquisition of fresh deposits. The Court concluded that a renewed deposit, accompanied by a new application as required by the terms and conditions, constitutes a fresh deposit, making it eligible for the lower tax rate under the Convention for Avoidance of Double Taxation.

In light of these considerations, the High Court ruled in favor of the assessee, affirming that the renewed deposits should be treated as fresh deposits, thus qualifying for the lower tax rate under article 12(2) of the Convention. The Court upheld the Tribunal's decision and answered the reference question in favor of the assessee, with no order as to costs.