2015 (3) TMI 100 - HC - Income Tax

India Development Bonds received from NRI s/Overseas Corporate Bodies as gifts - immunity provided to the bond holder u/s 6 and 7 of the Remittance of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991 which includes that no enquiry to be made from bond holder, regarding the source, is also available to gifts, which are found to be bogus? - Held that - Under clause (a) of sub-section (1) of Section 6 of the Act, the immunity would extend only against the disclosure of the nature and source of the investment in the bonds. The immunity would be available to an NRI or OCB who or which owns the bonds on the one hand and, on the other hand, to a resident of India to whom a gift of such bonds have been made by an NRI or OCB. The immunity would not be applicable where the gift is found not to meet the requirements spelt out in clause (a) of sub-section (1) of Section 6. The immunity in clause (a) is against a disclosure of the nature and source of the investment in such bonds; in clause (b) against enquiry or investigation on the ground that such person owns such bonds and in clause (c) against the reception in evidence of the fact that any of the persons mentioned in clause (a) owns such bonds, in any proceedings relating to an offence or the imposition of any penalty under the Acts in question. Thus the judgment of the Division Bench at Lucknow in Usha Omer (2011 (7) TMI 441 - Allahabad High Court ) would have to be read down so as to confer an immunity only on compliance with the conditions of Section 6 and to the extent legislated, as explained in answer to Question-A above. - Decided against assessee.

Summary

Issues Involved:
1. Interpretation of Sections 6 and 7 of the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991.
2. Validity of gifts received through India Development Bonds (IDBs) and their immunity from investigation.
3. Correctness of the judgment in Commissioner of Income Tax vs. Smt. Usha Omer regarding the non-investigation of IDBs received as gifts.

Detailed Analysis:

Issue 1: Interpretation of Sections 6 and 7 of the Act
The case revolves around the interpretation of the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991, specifically Sections 6 and 7. Section 6(1) provides immunity to Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) owning Foreign Exchange Bonds (FEBs) and to residents in India who receive such bonds as gifts from NRIs or OCBs. This immunity includes protection against disclosing the nature and source of the investment, immunity from inquiries or investigations, and inadmissibility of bond ownership as evidence in legal proceedings. Section 7 specifies that the provisions of the Income Tax Act do not apply to interest accruing on FEBs.

Issue 2: Validity of Gifts Received Through IDBs and Their Immunity from Investigation
The court examined whether the immunity provided under Sections 6 and 7 extends to gifts of IDBs that are found to be bogus, potentially used to route unaccounted money. The court clarified that immunity under Section 6(1)(a) applies only to NRIs or OCBs who own FEBs and to residents in India who receive such bonds as gifts from NRIs or OCBs. The immunity is strictly against disclosing the nature and source of the investment. If the conditions of Section 6(1)(a) are not met, such as when the gift does not originate from an NRI or OCB, the immunity does not apply. The court emphasized that the immunity is not blanket protection against all inquiries but is limited to specific conditions outlined in the Act.

Issue 3: Correctness of the Judgment in Commissioner of Income Tax vs. Smt. Usha Omer
The Division Bench in Usha Omer held that the identity of NRIs/OCBs gifting IDBs need not be disclosed and that the Income Tax Department cannot inquire into such gifts. However, the Full Bench clarified that this interpretation must be read down. Immunity under Section 6 only applies if the conditions of the section are met, meaning the gift must be from an NRI or OCB owning FEBs. The judgment in Usha Omer was thus limited to the extent that immunity is conferred only when the statutory conditions are satisfied.

Conclusion:
The Full Bench concluded that the immunity under Section 6(1)(a) of the Act extends only to NRIs or OCBs owning FEBs and to residents in India receiving such bonds as gifts from NRIs or OCBs. The immunity is against disclosing the nature and source of the investment, inquiry or investigation based on bond ownership, and the use of bond ownership as evidence in legal proceedings. The judgment in Usha Omer was read down to align with this interpretation, ensuring that immunity applies only when the statutory conditions are met. The writ petitions were directed to be placed before the regular Bench for disposal.