Commissioner of Income Tax vs N. Sundarraman

D. Murugesan, J.—The above tax case appeals have been preferred by the Revenue under s. 260A of the IT Act against the order dt. 29th Dec, 2003 passed by the Tribunal, Chennai "A" Bench, in ITA Nos. 1379/Mad/2003 to 1382/Mad/2003 respectively, raising the following substantial questions of law :

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessments for the asst. yrs. 1994-95 to 1996-97 have not been validly reopened ?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that notices under s. 143(2) were not issued within twelve months from the end of the month in which the return was filed in response to the notices under s. 148, which finding is contrary to facts on record, and, therefore, the orders of reassessment were invalid without noticing that the notices under s. 143(2) have been actually issued within the time prescribed under the proviso to the said section contrary to the facts on record ?

Without prejudice to question No. 2 above, whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the time-limit prescribed under the proviso to s. 143(2) is applicable to cases where notice under s. 148 have been issued for reopening the assessments ?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to the concessional rate of tax under s. 115H when the assessee has not satisfied the procedural and substantive requirements under Chapter XII-A of the IT Act?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the status of the assessee was that of ''resident but not ordinarily resident and in directing to grant exemptions under s. 115E and/or provisions of s. 10(15)(iv)(fa) to the assessee in respect of his income from deposits in his name and also deposits of the assessee''s wife which has been clubbed to the assessee''s total income under s. 64(1)(iv) ?

The above appeals are by the Revenue in respect of the asst. yrs. 1994-95 to 1997-98. The assessee was employed with UNICEF and he had been residing outside India since 14th Feb., 1977. He returned to India on 6th Feb., 1992 on his superannuation, barring certain intervening visits. Thereafter, again he had gone out of India, on UNICEF duty, on 5th April, 1992 and returned on 7th May, 1992. From that date onwards, he has been residing in India permanently.

During his employment in UNICEF outside India, he had earned considerable sums of money by way of salary and had remitted the same in India in foreign exchange. The investments had been made mainly in bank deposits. The core question that arose before the AO was, whether the assessee could be considered as a resident or non-resident Indian and consequently, he would have the tax benefit under s. 115E or under s. 115H of the IT Act. The assessee filed return of income claiming tax benefit under s. 115E/115H of the IT Act, 1961. The same was processed under s. 143(1)(a) of the Act. Later, the AO reopened the assessment on the ground that there is escapement of income tax. Therefore, on reopening the assessment under s. 147 of the Act, the AO denied the exemption. Aggrieved by that order, the assessee filed appeal before the Crl(A). The CIT(A) held that reopening is valid and accordingly, denied the benefit of tax payment at 20 per cent. Aggrieved by that order, the assessee filed appeal before the Tribunal. The Tribunal held that the AO was not justified in reopening the assessment and considered the case on merits and allowed the case of the assessee. Aggrieved by that order, the Revenue has filed the present tax case appeals raising the above questions of law.

The learned counsel appearing for the Revenue contended that the Tribunal was wrong in holding that there is no valid reason for reopening of the assessment and the same was bad in law. He further contended that the Tribunal ought to have seen that the assessee is a "resident" and the same was shown in the return. Therefore, he is not entitled to the concessional rate of tax under s. 115E/115H of the IT Act, 1961. Therefore, he contended that the order of the Tribunal is not in accordance with law and the same has to be set aside.

Per contra, the learned counsel appearing for the assessee submitted that the Tribunal considered the facts and circumstances of the case and rightly held that reopening is bad in law and the Tribunal has correctly applied the provisions of s. 115E of the Act and allowed the case of the assessee. He therefore, contended that the order of the Tribunal has to be confirmed.

Heard the learned counsel on either side and perused the materials available on record. In respect of question of law Nos. 1 to 3 are concerned, both counsel fairly state that the issue is covered by the apex Court judgment in favour of the Revenue in the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., Following the above judgment, we answer the above questions of law Nos. 1 to 3 in favour of the Revenue and against the assessee.

As far as questions of law Nos. 4 and 5 are concerned, it is the claim of the assessee that returns were filed based on s. 115E of the Act. On the other hand, the AO had found that returns were filed under s. 115H of the Act and as per the said section, at the time of filing the return, it is incumbent on the part of the assessee to make a declaration in writing to the effect that the provisions of Chapter XII-A shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sub-cl. (ii) or sub-cl. (iii) or sub-cl. (iv) or sub-cl. (v) of cl. (f) of s. 115C of the Act. In as much as the declaration was made much later and not along with the returns, the assessee was not entitled to the benefit of tax exemption as per Chapter XII-A and therefore, on the strength of the declaration that he is a resident, he is liable to pay tax as applicable in case of regular assessment. There is no dispute that the assessee was working in UNICEF and he had been earning salary and had been remitting the same in India in foreign exchange, which amount had been invested mainly in bank deposits. From the records, It is seen that the respondent/assessee had been a ''non-resident" for 12 years prior to his return to India. He has been In India only for 323 days during the previous seven years preceding the asst. yr. 1993-94. Therefore, the Tribunal was of the view that the respondent/assessee falls within the scope of s. 6(6)(a) of the IT Act, 1961. So, the Tribunal held that the status of the assessee is "not ordinarily resident". It is pertinent to note that the assessee in his original return declared his status as "resident". Therefore, the AO denied the benefit. The real status of the assessee cannot be denied merely the assessee made a wrong declaration when he satisfied all the conditions. Therefore, the Tribunal, applying the scope of the provisions of s. 6(6)(a) of the Act, given a categorical finding that the status of the assessee is "not ordinarily resident" during the relevant assessment year and also upto the asst. yr. 20.01-02. Because of the status of the assessee is ''Not ordinarily resident'' during the year, the assessee Is entitled to the benefit of s. 115E of the IT Act, 1961. In the present cases, the entire deposit held by the assessee was brought into India in the form of foreign exchange through legal channels as approved by the RBI. The status of the assessee was "non-resident" upto the asst. yr. 1992-93. There is no dispute and the AO himself held that the only income of the assess after 12th Nov., 1992 has to be taxed. The relevant provision for our consideration is s. 115E of the IT Act which grants to the assessee the choice to be taxed at a concessional rate of 20 per cent as against the normal rate. Chapter XII-A of the IT Act, 1961 deals with special provisions relating to certain incomes of non-residents. The said chapter was inserted by the Finance Act, 1983 w.e.f. 1st June, 1983. The purpose of introduction of this chapter was with a view to encouraging the flow of foreign exchange remittances into India and investment in India by "non-resident Indians". It deals with special provisions of the taxation of the following categories of income derived by non-resident Indians :

(a) investment income, and

(b) long-term capital gains.

Sec. 115E of the Act deals with tax on investment income and long-term capital gains. The section reads as follows :

115E. Tax on investment income and long term capital gains-Where the total income of an assessee, being a non-resident Indian, includes-

(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of-

(i) the amount of income tax calculated on the income in respect of investment income referred to in cl. (a), if any, included in the total income, at the rate of twenty per cent:

(ii) the amount of income tax calculated on the income by way of long- term capital gains referred to in cl. (b), if any, included in the total income, at the rate of ten per cent; and

(iii) the amount of income tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in cl. (a) and (b).

From the reading of the above, it is clear that the assessee has to be a "non-resident". The word "non-resident" is defined in s. 115C(e) of the Act. It means an individual, being a citizen of India or a person of Indian origin who is not a "resident". Therefore, the Tribunal applied the above definition and has come to the conclusion that the assessee status is only "not ordinarily resident". Therefore, the Tribunal held that the assessee is not a resident and entitled to the benefit of s. 115E of the Act. In this case, there is no dispute regarding the interest earned on the various deposits in the bank, which Is specified under s. 115E of the Act and the assessee is subject to 20 per cent of taxation. So, the argument of the Revenue that requirement of filing of the declaration does not arise since that is not the condition for getting the benefit. Therefore, the Tribunal correctly held that the assessee had no obligation to file any declaration under s. 115H or 115E of the Act. Therefore, the Tribunal had correctly held that the assessee was not obligated to file any such declaration until the asst. yr. 2002-03. In respect of the nature of investment, the Tribunal also held in detail in para 28 and has come to a conclusion that the subsequent redesignation of the NRE accounts into NRNR accounts has been made only from out of the convertible foreign exchange lying to the credit of the assessee in his various accounts which had been opened with the inflow of the original foreign exchange transferred to India as approved by the RBI. Under these circumstances, the assessee must be a non-resident Indian. This question was considered by the AO, who had gone by the declaration of the assessee made in terms of s. 115H of the Act and consequently, impliedly, negatived the claim of tax benefit under s. 115E of the Act. This question was considered by the Tribunal, which held that merely because a declaration was made by the assessee due to ignorance of law, it would not nullify the entitlement of a non-resident Indian. Factually, the Tribunal found that the assessee, at the time of filing the returns, was a "Non-resident Indian" and hence, the assessee would be entitled to file returns under s. 115E of the Act. That apart, in the wake of the provisions of s. 115E that he is a non-resident Indian and the income derived is from the investment in a bank, the claim of the assessee could be considered only under s. 115E of the Act. Though the assessee had filed returns claiming benefit under s. 115E r/w s. 115H of the Act, keeping in mind the factual scenario, the Tribunal had correctly held that the assessee is a non-resident Indian and merely because there is a wrong description in the returns that he is a resident, it would not alter the status of the assessee that he is a non-resident Indian for the assessment years in question. On the basis of the above factual finding, the Tribunal allowed the appeals.

Therefore, the Tribunal correctly applied the provisions and came to the conclusion that the assessee is entitled to benefit of s. 115E of the Act. Learned counsel for the Revenue is also unable to bring to notice of this Court any new material of evidence or any provisions of law to take a contrary view of the Tribunal. The finding is based on valid material and evidence. Therefore, the order passed by the Tribunal is in accordance with law. Accordingly, the questions of law Nos. 4 and 5 are answered against the Revenue and in favour of assessee. In the result, the tax case appeals are partly allowed. No costs.