My client, a returned NRI, keeps renewing his bank deposits by rolling the accrued interest back into the principal, and has claimed the concessional rate under section 115H on the whole of the interest each year. The Commissioner has revised the assessment under section 263. Is the claim on the interest-on-interest sustainable?
No. The Madras High Court held that section 115H does not allow that elasticity: the concessional rate is available only to investment income DERIVED FROM the foreign exchange asset, and unless the interest income has a direct nexus with the foreign exchange asset the benefit cannot be extended. The section 263 revision and the Tribunal's order confirming it were upheld and the assessee's appeal was dismissed.
Decided by the High Court (Chitra Venkataraman J and M. Jaichandren J (judgment delivered by Chitra Venkataraman J), High Court of Judicature at Madras) on 2011-07-11, reported as Tax Case (Appeal) No. 759 of 2004; appeal under section 260A against an order of the Income Tax Appellate Tribunal 'D' Bench dated 18 March 2004; assessment year 1996-97. It bears on section 115H, section 115C, section 115C(b), section 115C(c), section 115C(f), section 115E, section 115-I, section 263, section 143(3), section 143(1) of the Income Tax Act 1961, in Residence & Treaty Benefit, Capital Gains Exemptions, Revision & Rectification and How Tax Law Is Read matters.
This is the Revenue-side authority on Chapter XII-A and the library should not carry only the assessee-side line. The Court's reasoning is that section 115H stipulates two conditions — a declaration filed with the return for the assessment year in which the assessee first becomes assessable as a resident, and a benefit confined to income derived from a foreign exchange asset falling within the 'specified assets' definition in section 115C(f)(ii) to (v) — and that the benefit continues only so long as the asset retains its character. On the meaning of 'derived from' the Court applied the Supreme Court's analysis in CIT v. Sterling Foods, which traces the expression to the original source of the income, and held that it applies on all fours to section 115H. The practical consequence bites hard on the commonest NRI arrangement of all, the auto-renewed fixed deposit: the original foreign-exchange-funded principal keeps its character, but each tranche of capitalised interest is a fresh Indian-sourced deposit and the interest it generates does not qualify. Note also two secondary points the Court decided against the assessee: it rejected the argument that the RBI's Circular No. 4 dated 11 February 1987, which treats bonus shares on a par with foreign exchange assets, could be extended to interest — pointing out at the Commissioner's stage that a bonus share is not the same thing as dividend income on a share — and it upheld the use of section 263 to revise an assessment that had accepted the claim under section 143(3).
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessment year was 1996-97. The assessee had originally made investments in a bank out of funds brought by him from abroad, and periodically renewed the matured deposits along with the interest amount, treating the interest accrued on the interest portion of the deposit as foreign investment eligible for the concessional rate and claiming the benefit under section 115H of Chapter XII-A. The return was processed under section 143(1)(a) and an assessment order under section 143(3) dated 3 February 1999 accepted the claim. The Commissioner of Income Tax issued a notice under section 263 on the footing that acceptance of the section 115H claim had made the assessment erroneous and prejudicial to the interests of the Revenue, and by proceedings dated 2 November 2000, after hearing the assessee's objection dated 26 October 1999, held the section 143(3) order erroneous and prejudicial and directed the Assessing Officer to redo the assessment. The Commissioner's view was that even though interest along with the original deposit was reinvested or renewed, the interest, being interest on an investment out of foreign funds that had accrued in India, did not acquire the status of an investment made with foreign exchange; he rejected reliance on the Reserve Bank of India's Circular dated 11 February 1987 equating interest income with bonus shares, pointing out that the circular treated bonus shares on a par with foreign exchange assets but that dividend income on shares stood differently. The Tribunal rejected the assessee's appeal and confirmed the section 263 order, holding that the special treatment given to interest on foreign investment could not be extended to interest on interest redeposited with the original sum.
The Tax Case Appeal was dismissed with no costs. Section 115H does not allow such elasticity in interpretation. The section stipulates two conditions — that the assessee file a declaration along with his return for the assessment year in which he first becomes assessable as a resident seeking the benefit, and that the benefit continue only in respect of income derived from a foreign exchange asset falling within the definition of specified assets in section 115C(f)(ii) to (v) — so that so long as the asset retains its character as foreign and retains its status as a specified asset, the income derived from it continues to enjoy the concessional levy. The assessee could not get over the fact that unless and until the interest income has a direct nexus with the foreign exchange asset the benefit of section 115H cannot be extended to him, and, the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the order of the Tribunal was confirmed (paragraphs 8, 10, 11 and 12).
The Court described Chapter XII-A as containing special provisions relating to non-resident Indians in respect of investment income and long-term capital gains arising from foreign exchange assets, both procedural and substantive, with the object of encouraging investment of foreign exchange earnings in assets in India, and noted that section 115-I gives the non-resident Indian the option to declare that the chapter need not apply to him; it then reproduced the definitions in section 115C(b), (c) and (f) and the whole of section 115H (paragraphs 6 and 8). From the section it drew the two conditions and the proposition that the benefit endures only while each asset retains its character as a specified asset (paragraph 8). Against the assessee's contention that interest on the deposit made out of the interest income was traceable to the original foreign exchange asset and so qualified (paragraph 9), the Court held that the section does not allow such elasticity, and applied the Supreme Court's construction of 'derived from' in CIT v. Sterling Foods, where the dictionaries were consulted and the expression held to require the original source of the product to be found, holding that the interpretation applies on all fours to section 115H(i) to (v) (paragraph 10). Counsel's argument that interest earned out of capitalised interest deserved the same treatment could not get over the requirement of a direct nexus with the foreign exchange asset (paragraph 11). The Reserve Bank of India's beneficial Circular No. 4 dated 11 February 1987 was held to have no relevance to the assessee, and the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the Tribunal's order was confirmed (paragraph 12).
Yet he could not get over the fact that unless and until "interest income" has a direct nexus with the foreign exchange asset, the benefit of Section 115H could not be extended to him.
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Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court held that section 115H does not allow that elasticity: the concessional rate is available only to investment income DERIVED FROM the foreign exchange asset, and unless the interest income has a direct nexus with the foreign exchange asset the benefit cannot be extended. The section 263 revision and the Tribunal's order confirming it were upheld and the assessee's appeal was dismissed. This was decided by the High Court (Chitra Venkataraman J and M. Jaichandren J (judgment delivered by Chitra Venkataraman J), High Court of Judicature at Madras) and bears on section 115H, section 115C, section 115C(b), section 115C(c), section 115C(f), section 115E, section 115-I, section 263, section 143(3), section 143(1) of the Income Tax Act 1961. It is reported as Tax Case (Appeal) No. 759 of 2004; appeal under section 260A against an order of the Income Tax Appellate Tribunal 'D' Bench dated 18 March 2004; assessment year 1996-97. This is the Revenue-side authority on Chapter XII-A and the library should not carry only the assessee-side line. The Court's reasoning is that section 115H stipulates two conditions — a declaration filed with the return for the assessment year in which the assessee first becomes assessable as a resident, and a benefit confined to income derived from a foreign exchange asset falling within the 'specified assets' definition in section 115C(f)(ii) to (v) — and that the benefit continues only so long as the asset retains its character. On the meaning of 'derived from' the Court applied the Supreme Court's analysis in CIT v. Sterling Foods, which traces the expression to the original source of the income, and held that it applies on all fours to section 115H. The practical consequence bites hard on the commonest NRI arrangement of all, the auto-renewed fixed deposit: the original foreign-exchange-funded principal keeps its character, but each tranche of capitalised interest is a fresh Indian-sourced deposit and the interest it generates does not qualify. Note also two secondary points the Court decided against the assessee: it rejected the argument that the RBI's Circular No. 4 dated 11 February 1987, which treats bonus shares on a par with foreign exchange assets, could be extended to interest — pointing out at the Commissioner's stage that a bonus share is not the same thing as dividend income on a share — and it upheld the use of section 263 to revise an assessment that had accepted the claim under section 143(3). If it applies to you, the first step is this: Split the deposit at every renewal: keep the foreign-exchange-funded principal identified separately from every tranche of capitalised interest, and claim the concessional rate only on income attributable to the former.
The assessment year was 1996-97. The assessee had originally made investments in a bank out of funds brought by him from abroad, and periodically renewed the matured deposits along with the interest amount, treating the interest accrued on the interest portion of the deposit as foreign investment eligible for the concessional rate and claiming the benefit under section 115H of Chapter XII-A. The return was processed under section 143(1)(a) and an assessment order under section 143(3) dated 3 February 1999 accepted the claim. The Commissioner of Income Tax issued a notice under section 263 on the footing that acceptance of the section 115H claim had made the assessment erroneous and prejudicial to the interests of the Revenue, and by proceedings dated 2 November 2000, after hearing the assessee's objection dated 26 October 1999, held the section 143(3) order erroneous and prejudicial and directed the Assessing Officer to redo the assessment. The Commissioner's view was that even though interest along with the original deposit was reinvested or renewed, the interest, being interest on an investment out of foreign funds that had accrued in India, did not acquire the status of an investment made with foreign exchange; he rejected reliance on the Reserve Bank of India's Circular dated 11 February 1987 equating interest income with bonus shares, pointing out that the circular treated bonus shares on a par with foreign exchange assets but that dividend income on shares stood differently. The Tribunal rejected the assessee's appeal and confirmed the section 263 order, holding that the special treatment given to interest on foreign investment could not be extended to interest on interest redeposited with the original sum. The matter was decided on 2011-07-11 by the High Court (Chitra Venkataraman J and M. Jaichandren J (judgment delivered by Chitra Venkataraman J), High Court of Judicature at Madras). On those facts the High Court held as follows. The Tax Case Appeal was dismissed with no costs. Section 115H does not allow such elasticity in interpretation. The section stipulates two conditions — that the assessee file a declaration along with his return for the assessment year in which he first becomes assessable as a resident seeking the benefit, and that the benefit continue only in respect of income derived from a foreign exchange asset falling within the definition of specified assets in section 115C(f)(ii) to (v) — so that so long as the asset retains its character as foreign and retains its status as a specified asset, the income derived from it continues to enjoy the concessional levy. The assessee could not get over the fact that unless and until the interest income has a direct nexus with the foreign exchange asset the benefit of section 115H cannot be extended to him, and, the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the order of the Tribunal was confirmed (paragraphs 8, 10, 11 and 12).
The Court described Chapter XII-A as containing special provisions relating to non-resident Indians in respect of investment income and long-term capital gains arising from foreign exchange assets, both procedural and substantive, with the object of encouraging investment of foreign exchange earnings in assets in India, and noted that section 115-I gives the non-resident Indian the option to declare that the chapter need not apply to him; it then reproduced the definitions in section 115C(b), (c) and (f) and the whole of section 115H (paragraphs 6 and 8). From the section it drew the two conditions and the proposition that the benefit endures only while each asset retains its character as a specified asset (paragraph 8). Against the assessee's contention that interest on the deposit made out of the interest income was traceable to the original foreign exchange asset and so qualified (paragraph 9), the Court held that the section does not allow such elasticity, and applied the Supreme Court's construction of 'derived from' in CIT v. Sterling Foods, where the dictionaries were consulted and the expression held to require the original source of the product to be found, holding that the interpretation applies on all fours to section 115H(i) to (v) (paragraph 10). Counsel's argument that interest earned out of capitalised interest deserved the same treatment could not get over the requirement of a direct nexus with the foreign exchange asset (paragraph 11). The Reserve Bank of India's beneficial Circular No. 4 dated 11 February 1987 was held to have no relevance to the assessee, and the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the Tribunal's order was confirmed (paragraph 12). In the words reproduced by the source cited on this page: "Yet he could not get over the fact that unless and until "interest income" has a direct nexus with the foreign exchange asset, the benefit of Section 115H could not be extended to him." The decision followed or applied CIT v. Sterling Foods [1999] 237 ITR 579 (SC) — applied, on the meaning of 'derived from'.
It was decided by the High Court on 2011-07-11 and is reported as Tax Case (Appeal) No. 759 of 2004; appeal under section 260A against an order of the Income Tax Appellate Tribunal 'D' Bench dated 18 March 2004; assessment year 1996-97. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 115H, section 115C, section 115C(b), section 115C(c), section 115C(f), section 115E, section 115-I, section 263, section 143(3), section 143(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Tax Case Appeal was dismissed with no costs. Section 115H does not allow such elasticity in interpretation. The section stipulates two conditions — that the assessee file a declaration along with his return for the assessment year in which he first becomes assessable as a resident seeking the benefit, and that the benefit continue only in respect of income derived from a foreign exchange asset falling within the definition of specified assets in section 115C(f)(ii) to (v) — so that so long as the asset retains its character as foreign and retains its status as a specified asset, the income derived from it continues to enjoy the concessional levy. The assessee could not get over the fact that unless and until the interest income has a direct nexus with the foreign exchange asset the benefit of section 115H cannot be extended to him, and, the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the order of the Tribunal was confirmed (paragraphs 8, 10, 11 and 12). It arises in Residence & Treaty Benefit, Capital Gains Exemptions, Revision & Rectification and How Tax Law Is Read matters, on section 115H, section 115C, section 115C(b), section 115C(c), section 115C(f), section 115E, section 115-I, section 263, section 143(3), section 143(1) of the Income Tax Act 1961, and was decided by Chitra Venkataraman J and M. Jaichandren J (judgment delivered by Chitra Venkataraman J), High Court of Judicature at Madras. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If interest has already been rolled up for years, reconstruct the split from the bank's renewal advices before the assessment rather than after, because the burden of showing the nexus is on the assessee. Consider withdrawing interest and remitting fresh convertible foreign exchange if the client wants the new deposit to qualify — a re-deposit of Indian-source interest will not. Do not rely on the Reserve Bank of India's Circular No. 4 dated 11 February 1987 to bridge the gap; the Court held it has no relevance to interest on re-deposited interest. Expect section 263 rather than section 147 where an assessment under section 143(3) has accepted the claim; this case shows the Commissioner's revisional route being used and upheld. Remember the same 'derived from' reasoning cuts the other way in your favour where the officer tries to tax income that IS directly traceable to the foreign exchange asset — the test is nexus, not the label on the account.
Validity check could not be completed. Validity could not be established to a conclusion this pass and the label is used honestly. The words of section 115H that the Court construed are word for word the words on the current departmental page read this pass (incometaxindia.gov.in/w/section-115h-45, Year: 2026), so the section has not moved under the decision. But NO LATER TREATMENT OF THIS JUDGMENT WAS LOCATED and no check was made for an appeal to the Supreme Court; the indiankanoon queries run this pass are recorded in NOTES-B84.md and none was directed at citations of this judgment by name. The judgment reproduces section 115C(c) in its 2011 form, including the words 'other than dividends referred to in section 115-O', which were omitted with effect from 1 April 2021 — that omission does not touch the ratio, which turns on 'derived from'. Read alongside CIT v. Mathew (Kerala High Court, 19 May 2005), which construes section 115H liberally as a beneficial provision: the two decisions are not in conflict on their facts but they pull in different directions on how far the section is to be stretched, and a practitioner should cite both. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full from the plain document URL https://indiankanoon.org/doc/94313391/ and the sentence relied on was re-fetched independently through https://indiankanoon.org/docfragment/94313391/?formInput=%22unless%20and%20until%20interest%20income%20has%20a%20direct%20nexus%20with%20the%20foreign%20exchange%20asset%22, which returned it in the same words. PARAGRAPH STRUCTURE, established by transcribing the whole judgment and not by asking about it: numbered paragraphs 1 to 12 with no gaps, paragraph 12 ending 'The Tax Case Appeal is accordingly dismissed. No costs.' There is nothing after paragraph 12. CAUTION ON QUOTATION: the two numbered paragraphs '10' and '11' that appear INSIDE the Court's own paragraph 10 are the SUPREME COURT's paragraphs in CIT v. Sterling Foods [1999] 237 ITR 579, reproduced by the Madras High Court; citing them as paragraphs of this judgment would be a fabricated locator, and this judgment's own paragraphs 10 and 11 say something different. The Court reproduces section 115C(b), (c) and (f) at its paragraph 6 with clause (c) reading 'investment income means any income derived, other than dividends referred to in section 115-O from a foreign exchange asset' — that was the text current when the judgment was delivered in 2011, not the text applicable to AY 1996-97 (the section 115-O words were inserted with effect from 1 April 1998) and not the current text (those words were omitted with effect from 1 April 2021, per footnote 67 on incometaxindia.gov.in/w/section-115c-37, Year: 2021). The Court's one-line summary of section 115E at its paragraph 7 — 'concessional rate of income tax at 20% on the income earned from investment or income from long term capital gains of an asset other than a specified asset' — reproduces only clause (a) of the section and should not be treated as a complete statement of section 115E. The prayer clause in the source contains an evident error, describing the appeal as against a Tribunal order 'dated 18.3.2004 in I.T.A.No.109 of 2011', which cannot be right as printed; the appeal number of the Tax Case Appeal, 759 of 2004, and the date of judgment are not affected. The intermediate stage in this matter was a revision by the Commissioner under section 263, for which the controlled stage vocabulary (ao, cita, itat, hc, sc) has no value; 'stages' therefore records ao, itat and hc and this note supplies the missing step. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tax Case Appeal was dismissed with no costs. Section 115H does not allow such elasticity in interpretation. The section stipulates two conditions — that the assessee file a declaration along with his return for the assessment year in which he first becomes assessable as a resident seeking the benefit, and that the benefit continue only in respect of income derived from a foreign exchange asset falling within the definition of specified assets in section 115C(f)(ii) to (v) — so that so long as the asset retains its character as foreign and retains its status as a specified asset, the income derived from it continues to enjoy the concessional levy. The assessee could not get over the fact that unless and until the interest income has a direct nexus with the foreign exchange asset the benefit of section 115H cannot be extended to him, and, the section being clear and unambiguous that the concessional rate is available only to investment income derived from the foreign exchange asset, the order of the Tribunal was confirmed (paragraphs 8, 10, 11 and 12).
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