(Unreported)
A.Y. : 2008-09. Dated : 3-3-2008
1. S. 115C, S. 115D, S. 115E, Income-tax Act.
Issues :
(i) Whether deposit in NRO account made with convertible
foreign exchange is ‘foreign exchange asset’ ?
(ii) Whether interest earned on such deposit is ‘investment
income’ qualifying for benefit u/s. 115E of the Act ?
(iii) What should be the rate of TDS on such interest ?
Facts :
The applicant had left India during the relevant previous
year and was a non-resident during that year. He proposed to open a Non-Resident
Ordinary (‘NRO’) account with a bank in India. The intended source of deposits
in the NRO account was remittances from outside India. He contended that the
interest earned on such deposits would be ‘investment income’ u/s.115C of the
Act and accordingly, applicable rate of tax should be 20% u/s.115E of the Act.
He was informed that since banks in India do not treat this as ‘investment
income’, tax would be deducted @ 30%.
The AAR considered the provisions of S. 115C, S. 115D and S.
115E of the Act, which are contained in Chapter XIIA of the Act. The AAR
observed that the applicant is a citizen of India, who is a non-resident. Hence,
he would qualify to claim benefit u/s.115E of the Act. Thereafter, the AAR
considered the provisions of the Companies Act, 1956 and the Banking Regulation
Act, 1949 in order to test whether NRO deposit would constitute ‘specified
asset’ being deposits with Indian company. The AAR concluded that an Indian bank
governed by the Banking Regulation Act is also a company which is not a private
company as defined in the Companies Act, 1956 and therefore, a deposit made with
it would be a ‘specified asset’ within the meaning of S. 115C(f)(iii) of the
Act.
The representative of the Revenue had contended before the
AAR that :
(a) though NRO deposit is acquired with convertible foreign
exchange, its maturity proceeds are not repatriable;
(b) hence such a deposit does not constitute a ‘foreign
exchange asset’ u/s.115C of the Act;
(c) as such, interest earned on it does not qualify as
‘investment income’ u/s.115C of the Act; and
(d) since it is not ‘investment income’, tax should be
deducted @ 30%.
The AAR observed that the question is whether repatriability
of the deposit was a requirement and found that it was not a requirement under
Chapter XIIA of the Act.
Held :
(i) Deposit made in NRO account with a banking company,
which is not a private company, by remitting convertible foreign exchange,
would be ‘foreign exchange asset’ u/s.115C(b) of the Act.
(ii) Interest earned on deposit in NRO account mentioned in
(i) above would be ‘investment income’ u/s.115C(c) of the Act and would be
subject to tax @ 20% u/s.115E.
(iii) Deposit with a banking company is a ‘specified asset’
u/s.115C(f) of the Act.
(iv) Banks paying interest on the deposit in NRO account
mentioned in (i) above are required to deduct tax @ 20%.
