1992 (8) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest income accrued on NRE account under Section 10(4A) and Section 10(4B) of the Income-tax Act.
2. Applicability of Section 11 of the Income-tax Act for exemption of income.
3. Inclusion of foreign remittances in NRE account as income under Section 5(2) of the Income-tax Act.
4. Inclusion of NRE account balances and interest income in the wealth of the assessee under the Wealth-tax Act.
5. Exemption of properties held for charitable purposes under Section 5(1)(i) of the Wealth-tax Act.

Detailed Analysis:

1. Taxability of Interest Income on NRE Account:
The Income Tax Officer (ITO) treated the entire deposits and interest accrued in the Non-Resident (External) Account (NRE) as income of the assessee for the assessment years 1985-86 to 1987-88. The CIT (Appeals) held that the assessee is a "person resident outside India" under Section 2(q) of the Foreign Exchange Regulations Act, 1973, and that interest income earned on the NRE account was totally exempt from tax under Section 10(4A) of the Income-tax Act. The appellate tribunal endorsed this view, stating that the Department's attempt to apply Section 10(4B) was unfounded since it applies to income from interest on saving certificates, which was not the case here.

2. Applicability of Section 11 of the Income-tax Act:
The CIT (Appeals) accepted the Department's argument that the assessee was not entitled to the benefit under Section 11 of the Income-tax Act. However, the assessee contended that any accretion to the NRE account or interest accrued thereon should be exempt under Section 11, as the funds were used solely for charitable purposes. The tribunal did not agree with this line of reasoning, noting that the entire interest income accrued on the NRE account in these assessment years was not spent on recognized charitable institutions.

3. Inclusion of Foreign Remittances in NRE Account as Income:
The tribunal upheld the CIT (Appeals)'s finding that foreign remittances credited to the NRE account were not the income of the assessee within the ambit of Section 5(2) of the Income-tax Act. The deposits in the NRE account were under the control of the Reserve Bank and could only be utilized for specific purposes with its permission. Therefore, such remittances could not be treated as income.

4. Inclusion of NRE Account Balances and Interest Income in Wealth:
The A.O. included the balances in the NRE account and the net income of interest during the assessment years 1985-86 and 1986-87 in the wealth of the assessee. The CWT (Appeals) held that these were exempt under Section 6(ii) of the Wealth-tax Act. The tribunal sustained these findings, noting that the NRE account deposit and interest accrued thereon could not be included in the total wealth of the assessee.

5. Exemption of Properties Held for Charitable Purposes:
The assessee claimed exemption for properties held for charitable purposes under Section 5(1)(i) of the Wealth-tax Act. Although no formal deed of trust was executed, the tribunal found that the properties were held under trust or legal obligation for charitable purposes. The properties included the Main Hostel building, other buildings used for school purposes, plots of land, and the Jamuna Hotel Complex. The tribunal noted that the rental income from the Jamuna Hotel Complex was used for charitable purposes and was not part of any business activity. The tribunal concluded that the assessee was under legal obligation to hold these properties for charitable purposes, as per the conditions laid down by the Reserve Bank for raising loans from the NRE account. Consequently, the wealth of Rs. 44 lakhs for the assessment year 1985-86 and Rs. 61.67 lakhs for the assessment year 1986-87 was deleted from being taxed.

Conclusion:
All the appeals of the assessee were allowed, and those of the Department were dismissed. The interest income on the NRE account was exempt under Section 10(4A) of the Income-tax Act, and the foreign remittances were not considered income under Section 5(2). The NRE account balances and interest income were exempt from wealth tax, and the properties held for charitable purposes were exempt under Section 5(1)(i) of the Wealth-tax Act.