JOINT OFFICIAL LIQUIDATOR OF BANK OF CREDIT & COMMERCE (OVERSEAS) LTD. v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2005-LL-1125-1]

Citation 2005-LL-1125-1
Appellant Name JOINT OFFICIAL LIQUIDATOR OF BANK OF CREDIT & COMMERCE (OVERSEAS) LTD.
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 25/11/2005
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags deemed to accrue or arise in india • deduction of tax at source • business or profession • sufficient compliance • non-resident assessee • non-resident company • memorandum of appeal • residential status • deeming provision • additional ground • business activity • concessional rate • foreign currency • levy of interest • foreign company • foreign concern • interest earned • interest income • monies borrowed • speaking order • indian company • interest paid • foreign bank • head office • pe in india • rate of tax
Bot Summary: The three issues that we are required to adjudicate in this appeal are: whether or not the provisions of s. 115A of the IT Act will apply to a case where a non-resident has placed deposits with Indian branch of a foreign bank; whether or not the levy of interest under s. 234B of the IT Act can be made when entire income of the non-resident assessee was liable to the deduction of tax at source under s. 195 of the Act; and whether or not the interest paid by Indian branch of a foreign bank to the non-resident assessee before us, on the facts of this case, will qualify for exemption under s. 10(15)(iv)(fa) of the Act. Learned CIT(A) then reproduced an extract from the State of Tamil Nadu vs. Kodaikanal Motor Union Ltd. 3 SCC 91 referring to Lord Denning s observation to the effect that it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity and Justice Hand s words that we must not make a fortress out of a dictionary but remember that statutes must have some purpose or object whose imaginative discovery is judicial craftsmanship. For our purposes, ft is not necessary to go any further into the scope of the provisions of s. 115A. The scheme of s. 115A, so far as applicable to the interest income, is like this. Unless an interest income received by the non- resident abroad is deemed to accrue or arise in India under s. 9(l)(v), there cannot be any occasion to tax the same in India under s. 115A. It is also clearly discernible from the scheme of s. 9(1)(v) that a resident carrying on business in India and a non-resident carrying on business in India are at par so far as the interest paid by them to a non-resident is required to be treated as accruing or arising in India. Once the Board takes the stand that the interest payable by the branch office of a foreign concern/company to its head office/overseas branches is entitled to be taxed under s. 115A, it cannot be open to the AO to decline application of s. 115A to the assessee only for the reason that the interest is paid by Indian branch of a foreign bank. As regards CIT(A) s reliance on the observations of Lord Denning and Justice Hand reproduced by Their Lordships of Hon ble Supreme Court, we see no assistance to Revenue s case. For the reasons set out above, we are of the considered view that the expression Indian concern , for the purposes of s. 115A, will also include Indian branch offices of foreign companies.


three issues that we are required to adjudicate in this appeal are: "(a) whether or not provisions of s. 115A of IT Act will apply to case where non-resident has placed deposits with Indian branch of foreign bank; (b) whether or not levy of interest under s. 234B of IT Act can be made when entire income of non-resident assessee was liable to deduction of tax at source under s. 195 of Act; and (c) whether or not interest paid by Indian branch of foreign bank to non-resident assessee before us, on facts of this case, will qualify for exemption under s. 10(15)(iv)(fa) of Act." Out of three issues identified above, first two issues emerge out of grievances raised by assessee, as set out in memorandum of appeal, which are as follows: "The learned CIT(A) erred in confirming action of AO in computing tax on interest income at rate of 48 per cent as against 20 per cent as specified in s. 115A of IT Act, 1961. learned CIT(A) erred in holding that Indian branch of Nova Scotia is not Indian concern within meanings of s. 115A. learned CIT(A) erred in not directing AO to follow Circular No. 740 dt. 17th April, 1996 issued by CBDT. learned CIT(A) erred in confirming levy of interest under s. 234B of Rs. 5,99,404. CIT(A) ought to have deleted interest levied under s. 234B." third main issue, as identified by us, emerges out of additional ground of appeal filed by way of letter dt. 20th July, 2005 which was as follows: learned Jt. CIT erred in treating interest income of Rs. 42,76,580 received by appellant on deposits with Bank of Nova Scotia as being taxable under IT Act ("the Act)". He erred in not holding that said income was exempt under provisions of s. 10 of Act. facts giving rise to this appeal before us are like this. assessee- appellant before us is non-resident company in liquidation. In relevant previous year, assessee has placed fixed deposits aggregating to US $ 50,95,135.83 in FCNR (Foreign Currency Non Resident) accounts with Bank of Nova Scotia s Mumbai branch. While scrutinizing its IT return for asst. yr. 1998-99, in course of assessment proceedings under s. 143(3) of IT Act, AO noticed that only source of assessee s income was interest on fixed deposit placed with Bank of Nova Scotia s Mumbai branch, and that assessee had paid tax @ 20 per cent, under s. 115A of Act, on income of Rs. 42,76,580 so earned by way of interest on fixed deposit. AO was of view that s. 115A can only be applied when interest is earned from Indian concern and that Bank of Nova Scotia cannot be treated as Indian concern. assessee s contention was that since expression Indian concern has not been defined anywhere in Act, and in light of observations made by Hon ble Bombay High Court in case of Dr. J.M. Mokashi vs. CIT (1993) 115 CTR (Bom) 73: (1994) 207 ITR 252 (Bom) and in light of CBDT Circular No. 740, dt. 17th April, 1996 [(1996) 132 CTR (St) 5], Indian branches of foreign banks should also be treated as Indian concerns . AO, however, was far from impressed by stand of assessee. He was of view that foreign company, by no stretch of logic, could be treated as Indian concern, and, accordingly, s. 115A could not apply to facts of this case. He was also of view that since assessee admittedly did not incur any expenditure in earning this interest income, entire interest income is to be taxed @ 48 per cent, i.e., rate applicable to company other than domestic company. Aggrieved, assessee carried matter in appeal before CIT(A) but without any success. CIT(A) upheld action of AO, and, in fact fortified same by observing that "the phraseology Indian concern has to be read together and if it read together, inescapable inference is that it must be concern rooted to Indian soil, must have residential status in India" and that ". . . in taxing statute, one has to find out intention of legislature and here intention is definitely Indian concern alias Indian company and certainly not branch of foreign company". Learned CIT(A) then reproduced extract from State of Tamil Nadu vs. Kodaikanal Motor Union (P) Ltd. (1986) 3 SCC 91 referring to Lord Denning s observation to effect that it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity and Justice Hand s words that we must not make fortress out of dictionary but remember that statutes must have some purpose or object whose imaginative discovery is judicial craftsmanship. CIT(A) was of view that in light of these observations, "the learned counsel should not make fortress of dictionary meaning and should confine himself to legislative intent as explained above". plea of assessee regarding applicability of s. 115A on facts of this case was thus dismissed by CIT(A) as well. As regards appeal against levy of interest under s. 234B, CIT(A) held that no appeal lies against same. assessee is not satisfied by order of CIT(A) either, and is in second appeal before us. We have heard rival contentions, perused material on record and duly considered facts of case as also applicable legal position. Let us first take up issue whether or not provisions of s. 115A of IT Act will apply to case where non-resident has placed deposits with Indian branch of foreign bank. Sec. 115A, so far as it relates to issue before us, provides that where total income of non-resident (not being company) or of foreign company "includes interest received from Government or Indian concern on monies borrowed or debt incurred by Government or Indian concern in foreign currency", income-tax payable on such income will be calculated at rate of twenty per cent It is also provided that no deduction in respect of any expenditure or allowance shall be allowed to assessee under ss. 28 to 44C and s. 57 in such case. expression Indian concern , however, remains undefined under this section, or, for that purpose, in entire IT Act. For our purposes, ft is not necessary to go any further into scope of provisions of s. 115A. scheme of s. 115A, so far as applicable to interest income, is like this. interest income of non-residents is to be taxed on gross basis though at concessional rate of 20 per cent As income is to be taxed on gross basis, there is no question of any deductions being allowed under ss. 28 to 44C, or under s. 57. As rate of tax is also given in allowed under ss. 28 to 44C, or under s. 57. As rate of tax is also given in section itself, there is no need for separate prescription of rate, as was practice till s. 115A was introduced vide Finance Act, 1976. applicability of this exemption of interest income is, however, confined to "interest received from Government or Indian concern on monies borrowed or debt incurred by Government or Indian concern in foreign currency". Even as this section refers to interest received from Indian concern, connotations of expression Indian concern are not expressly defined in this section or, for that purpose, anywhere else in entire Act. In terms of s. 5(2) of IT Act, subject to provisions of Act, total income of non-resident includes all income, from whatever source derived, which is (i) received or is deemed to be received in India by or on behalf of such non-resident; or (ii) accrues or arises or is deemed to accrue or arise in India. It is important to bear in mind fact that interest income arising in India is deemed to accrue or arise in India by virtue of s. 9(1)(v) of Act which provides as follows: "(1) following income shall be deemed to accrue or arise in India: ** ** ** (v) income by way of interest payable by (a) Government; or (b) person who is resident, except when interest is payable in respect of any debt incurred, or moneys borrowed and used for purpose of business o r profession carried on by such person outside India or for purpose of making or earning any income outside India; (c) person who is non-resident, where interest is payable in respect o f any debt incurred, or moneys borrowed and used, for purpose of business or profession carried on by such person in India." plain reading of above deeming provision makes it unambiguously clear that in construing as to whether income is deemed to accrue or arise in India or not, emphasis is on business being carried on in India and not on domicile of person who is carrying on such baseness. Even when non-resident is carrying on business in India and incurs debt in that connection, deeming fiction under s. 9(1)(v)(c) comes into play on interest paid by non-resident in respect of such debt, while even when person resident in India incurs debt in connection with business being carried on outside India or for purpose of making or earning any income outside India, exclusion clause embedded in s. 9(1)(v)(6) ensures that interest paid on such debt in not deemed to accrue or arise in India. It is thus clear that what is important is place where business is being carried on, rather residential status of person who is carrying on such business. Sec. 9(1)(v) and s. 115A are closely connected in sense that while s. 9(1)(v) sets out circumstances in which income is deemed to accrue or arise in hands of non-resident, s. 115A prescribes rate at which interest income in hands of non-resident is to be taxed. Unless interest income received by non- resident abroad is deemed to accrue or arise in India under s. 9(l)(v), there cannot be any occasion to tax same in India under s. 115A. It is also clearly discernible from scheme of s. 9(1)(v) that resident carrying on business in India and non-resident carrying on business in India are at par so far as interest paid by them to non-resident is required to be treated as accruing or arising in India . question then arises as to whether there can be different treatment to interest payable by non-resident in connection with business carried on in India vis-a-vis interest payable by resident in connection with business carried on in India. There cannot be, in our humble understanding, any good reasons to do so, particularly as statute does not specifically lays down such differential treatment. expression used in statute is Indian concern and there is nothing to suggest that scope of this expression is to be inferred as confined to assessee resident in India . meaning to be assigned to expression must flow from context in which it is used. If we are to see context, it is in respect of business carried on by assessee, and not residential status of assessee, that interest income is deemed to accrue or arise in India. In case of Dr. J.M. Mokashi (supra), Hon ble Bombay High Court had occasion case of Dr. J.M. Mokashi (supra), Hon ble Bombay High Court had occasion to deal with scope of expression concern though in context of s. 64(1)(iii) of Act. Their Lordships observed that "the word concern is of wide import and it conveys different ideas or meanings depending upon context and setting in which it appears" and that it "takes within its sweep and ambit all organizations or establishments engaged in business or profession; whether owned by company, partnership, individual or any other entity". This observation by Hon ble Bombay High Court makes it clear that there can be distinction between company and concern, and that company can be larger than concern, inasmuch as company can own concern. In this view of matter, merely because Indian branch office of Bank of Nova Scotia is fully owned by non-resident company, i.e., Bank of Nova Scotia, it could not be said that Indian branch office of Bank of Nova Scotia is foreign concern. It is also important to appreciate that in international tax treaties, branch office outside country of domicile is treated as separate entity so far as computation of profits are concerned. It is treated as separate profit centre for purposes of taxation in country in which such branch is operating and what is really taxed is not actual profits earned by branch but hypothetical profits which such PE, i.e., branch, might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independent of enterprise of which it is PE. That is common thread in all tax treaties and in US, OECD and UN Model Conventions. Therefore, there is difference in connotations of foreign company in India and its PE in India. These expressions are neither synonymous nor devoid of any distinction. Therefore, harmonious interpretation would suggest that meaning of Indian concern should be taken as business carried on in India which may essentially include business carried on in India even by non-resident. Undoubtedly, taxable entity is only foreign company, though in respect of profits attributable to PE in India, and not such PE itself, but then CBDT itself has taken view that "the branch of foreign company/ concern in India is separate entity for purpose of taxation" and that "interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by provisions of s. 115A of Act" (CBDT Circular No. 740, dt. 17th April, 1996, [(1996) 132 CTR (St) 5]. However, if we are to uphold stand of Revenue that PE of foreign company cannot be treated as anything but foreign concern, we end up holding that there is no distinction between foreign company in India and its PE in India. emphasis shifts from business activity to ownership of concern. Such shift is not only contrary to . scheme of Act, but also diametrically opposed to stand taken by CBDT in aforesaid circular. It is also to be noted that, in this very circular, Board has taken stand that interest paid by branch of foreign company/concern will be governed by provisions of s. 115A of Act. No doubt this circular is in context of interest paid by branches to head office but once Revenue takes stand that branch and head office are required to be treated as separate taxable entities, it does not make difference whether interest is paid to head office or to any other person. In any event, what is important from point of view of s. 115A is whether payment is made by Indian concern to non-resident or not. Once Board takes stand that interest payable by branch office of foreign concern/company to its head office/overseas branches is entitled to be taxed under s. 115A, it cannot be open to AO to decline application of s. 115A to assessee only for reason that interest is paid by Indian branch of foreign bank. It is only elementary in scheme of things under IT Act that beneficial circular is binding on Revenue authorities. In context of case before us, and to extent this circular recognizes that provisions of s. 115A will also govern cases in which interest is payable by Indian branches of foreign banks, this circular is clearly beneficial circular to assessee. For present purposes, we need not examine contents of CBDT Circular 740 beyond this aspect of matter. conclusion that we have arrived at is thus also supported by aforesaid circular. In his impugned order, CIT(A) has observed that "the phraseology Indian concern has to be read together and if it is read together, inescapable inference is that it must be concern rooted to Indian soil, must have residential status in India" and that "... in taxing statute, one has to find out intention of legislature and here intention is definitely Indian concern alias Indian company and certainly not branch of foreign company". We are, however, unable to find anything to even remotely suggest that intent of legislature is that Indian concern is same thing as Indian company or that reference is to assessee having residential status in India. As regards CIT(A) s reliance on observations of Lord Denning and Justice Hand reproduced by Their Lordships of Hon ble Supreme Court, we see no assistance to Revenue s case. co- ordinate Bench of this Tribunal, in case of Satyam Enterprises vs. Jt. CIT (2005) 93 TTJ (Mumbai) 489: (2005) 93 ITD 606 (Mumbai) and having taken note of these observations, concluded that "One of things which is clearly discernible from above observations of Their Lordships is that while interpreting statutes, one must not surrender to become prisoner of words employed and thereby disregard context and underlying scheme of legislation in which words are set out". Viewed in this perspective also, we have to approve interpretation in harmony with scheme of Act, and, therefore, we have to hold that, in context of s. 115A r/w s. 9(1)(v), Indian concern includes business carried on in India by non-resident. For reasons set out above, we are of considered view that expression Indian concern , for purposes of s. 115A, will also include Indian branch offices of foreign companies. Accordingly, correct rate of tax applicable on income earned by assessee, by way of interest earned on foreign currency deposits with Bank of Nova Scotia s Mumbai branch, will be 20 per cent. plea of assessee is correct and meets our approval. first issue is thus decided in favour of assessee. Ground Nos. 1, 2 and 3 are thus allowed. next issue that we are required to adjudicate is whether or not levy of interest under s. 234B of IT Act can be made when entire income of non-resident assessee was liable to deduction of tax at source under s. 195 of Act. CIT(A) dismissed this grievance of assessee as not maintainable by observing that "no appeal lies against charging of interest, and that "however, appellant company will get consequential relief". That stand certainly cannot be approved in light of settled legal position now. Having heard rival contentions on this issue, however, we are of considered view that CIT(A) ought to have admitted ground of appeal and decided same on merits. In this view of matter, we deem it fit and proper to remit matter to file of CIT(A) for adjudication on merits of matter. Ground No. 4 is also thus allowed for statistical purposes. That takes us to third issue that we are required to decide in this appeal, i.e., whether or not interest paid by Indian branch of foreign bank to non-resident assessee before us, on facts of this case, will qualify for exemption under s. 10(15)(fa) of Act. This issue is raised by assessee by way of additional ground of appeal. application has also been filed for admission of this additional ground, and parties have been heard on this application as well. issue raised by assessee being purely legal, and in light of Hon ble Supreme Court s judgment in case of National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC), we deem it fit and proper to admit this ground of appeal. Sec. 10(15)(iv)(fa) prescribes that interest payable by scheduled bank to non-resident "on deposits in foreign currency where acceptance of such deposits by bank is approved by RBI" shall not be included in total income of assessee. This plea has not been taken at any stage before any of authorities below. There is no finding by any of authorities below that acceptance of such deposits was approved by RBI for purposes of s. 10(15)(iv)(fa). Learned counsel for assessee has filed some correspondence entered into by assessee with RBI and contended that as RBI had permitted assessee to keep these deposits in foreign currency with scheduled bank, it should be treated as sufficient compliance with conditions laid down under s. 10(15)(iv)(fa). Learned Departmental Representative, on other hand, submitted that approval needed for purpose of exemption under s. 10(15)(iv)(fa) has to be recipient specific, that approval has to be specifically for purposes of said section and that merely because permission has been granted, in some other context, to assessee to keep funds in scheduled bank, it cannot be inferred that RBI has granted approval to acceptance of deposits by scheduled bank . It was also contended that since assessee did not take up this issue at any other stage, relevant facts have not been scrutinized by AO or CIT(A). If at all we decide to admit ground, this issue can at best be remitted to file of AO or CIT(A) for fresh adjudication after ascertainment of facts. We are not inclined to uphold, based on facts found by authorities below, plea of assessee, or even examine, at this stage, evidences filed in support of contention that acceptance of such deposits by scheduled bank was approved by RBI. evidences which are now filed by assessee were not before any of authorities below for purposes of examining whether or not conditions laid down under s. 10(15)(iv)(fa) was fulfilled or not. In fact, this aspect of matter has not been considered at all. However, as we have admitted appeal on this important legal issue, we deem it fit and proper to remit matter to file of AO for adjudication on this plea by way of speaking order, in accordance with law and after giving due and fair opportunity of hearing to assessee. As we are restoring this issue to file of AO for adjudication de novo, we refrain from making any observations on merits of assessee s case on this issue. additional ground filed by assessee is thus allowed. In result, appeal is partly allowed. *** JOINT OFFICIAL LIQUIDATOR OF BANK OF CREDIT & COMMERCE (OVERSEAS) LTD. v. JOINT COMMISSIONER OF INCOME TAX
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