foreign exchange asset - Definition / Legal Terminology - Income Tax

As per section 115C(b) of the Income tax Act 1961, In the Chapter XII-A (Special provisions relating to certain incomes of Non- residents) , unless the context otherwise requires,- foreign exchange asset means- any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; V RAVI NARAYANAN, IN RE- [ 2008 (3) TMI 52 - AUTHORITY FOR ADVANCE RULLINGS] Whether the non-resident ordinary (NRO) deposit acquired with convertible foreign exchange can be treated as a ' foreign exchange asset ' under section 115C of the Income-tax Act, 1961? Whether the interest on such NRO deposits can be treated as 'investment income' under sec. 115C of the Income-tax Act, 1961 and liable to be taxed at 20% only under sec. 115E? At what rate tax is required to be deducted at source by the person responsible for paying such interest? 9. Chapter XIIA was inserted vide Finance Act, 1983 with effect from 1.6.1983. Its object is to provide certain concessions to non-resident Indians with a view to primarily encourage them to invest their foreign exchange earnings in assets and sources of income in India. This chapter contains special provisions for taxation of investment income and long term capital gains of non-residents. Section 115D states that the provisions of this Act with regard to deduction of expenditure and allowances in calculating the total income of an assessee, shall not be applicable in computing the investment income of a non-resident Indian. Section 115E is the charging section. According to this section, investment income of a non-resident Indian shall be charged @ 20%. The expression 'non-resident Indian' has been defined in section 115C to mean a citizen of India or a person of Indian origin who is not a resident. 14. Now coming to the NRO account, Schedule 3 of the Foreign Exchange Management (Deposit) Regulation, 2000 made by the RBI under the Foreign Exchange Management Act, 1999 specifies the features of this account. This schedule says that the balance in NRO account is not eligible for remittance outside India without the approval of the RBI; funds received by way of remittances from outside India in foreign exchange which have not lost their identity as remittable funds will only be considered by the RBI for remittance outside India. Further, RBI press release No. 387 dated 18.9.2003 states that current income (i.e. interest) is freely repatriable from NRO account, but the principal amount is repatriable only upto USD 1 million per financial year. So it would not be correct to say that the moneys lying in the NRO account cannot be repatriated at all. Indeed, there are restrictions on their repatriation. But the question here is not whether such repatriation is permitted or not, but whether repatriation is a requirement of sections 115C, 115D and 115E of the Act. In other words, can only a repatriable bank deposit be regarded a foreign exchange asset ? 17. In the light of the above discussion, we hold that - (i) the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as ' foreign exchange asset ' under clause (b) of Section 115C of the Act; (ii) income by way of interest earned from the said NRO deposit shall be treated as 'investment income' under clause (c) of Section 115C and shall be liable to be taxed at the rate of twenty per cent under section 115E; and (iii) the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of twenty per cent.