2010 (11) TMI 801 - HC - Income Tax

Concessional rate of tax under section 115H r.w.s. 115E on the interest received from the bank deposits maintained by the assessee - NRNR deposits are transferred by the assessee from one bank to another Held that - Deposits retain character as a foreign exchange asset because, asset, namely the deposit, was acquired with convertible foreign exchange, so long as the original source of the deposit is convertible foreign exchange, the transfer of such foreign exchange asset, namely the deposit from one bank to another will not affect it s identity as a foreign exchange asset. So much so, finding of the Tribunal that assessee is entitled to concessional rate of tax on the interest earned from NRNR deposits under section 115H read with section 115E is correct. Accordingly, we dismiss the department appeal.

Summary

Issues:
1. Entitlement to concessional tax rate on interest received from bank deposits under sections 115H and 115E.

Analysis:
The main issue in this case was whether the respondent assessee is entitled to a concessional rate of tax under section 115H read with section 115E on the interest received from bank deposits maintained by the assessee. The assessee, initially a non-resident Indian, made deposits in Indian banks with convertible foreign exchange under the non-resident non-repatriable scheme. Subsequently, the assessee became a resident of India and transferred the NRNR accounts to other scheduled banks. The assessing officer revised the assessment, denying the concessional rate, stating that the transferred deposits ceased to be foreign exchange assets. The department argued that once the NR deposits are closed, subsequent deposits are only Indian rupee deposits made by a resident, not foreign exchange assets. On the other hand, the senior counsel for the assessee contended that the transfer of deposits does not change their character as foreign exchange assets. The court analyzed the relevant sections 115C(b) and 115H of the Act to determine the eligibility for the concessional rate.

The court noted that the deposits were made in converted foreign exchange, meeting the definition of foreign exchange assets under section 115C(b) of the Act. The crucial question was whether transferring the NR deposits from one bank to another would alter the identity of the asset as a foreign exchange asset. Section 115H specifies that a foreign exchange asset only ceases to be one when transferred or converted into money, which applies to specific assets like shares and debentures, not bank deposits. The court emphasized that the transfer of specified assets without changing their character would not affect their identity as foreign exchange assets. Despite the assessee becoming a resident, the court held that the deposits retained their character as foreign exchange assets since they were initially acquired with convertible foreign exchange. Therefore, the court upheld the Tribunal's decision that the assessee was entitled to the concessional tax rate on the interest earned from NRNR deposits under sections 115H and 115E, ultimately dismissing the department's appeal.