Circular No. 156

What it does

Holds that the foreign exchange entitlement certificate fee payable under the Ceylon Exchange Control Law is not deductible under section 57(iii) against the interest on a non-resident blocked account. Indians repatriated from Ceylon could bring only a limited part of their savings and had to leave the balance in a blocked account, and the interest is remitted to them after deduction of that fee. The Board's view is that the interest has already been earned before the fee is deducted, so the expenditure is not laid out for the purpose of making or earning that income; the gross interest is therefore assessable in India.

Why it was issued

A question had arisen whether the gross interest was assessable or whether the fee could first be deducted under section 57(iii).

Who it reaches

Persons repatriated from Ceylon with blocked account balances there
Assessees offering remitted interest net of the fee
Assessing Officers computing income from other sources

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.57	s.93

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 57 l DEDUCTIONS FROM INCOME FROM OTHER SOURCES
460. Foreign exchange entitlement certificate fee under Ceylon Exchange Control Law - Whether deductible expense under clause (iii)
1. Indians, who have been and are being repatriated from Ceylon under the Ceylon Government’s repatriation policy, cannot bring with them more than a very limited amount of their savings. The balance has to be left in Ceylon in a bank to the credit of a non-resident blocked account.
2. According to the Ceylon Exchange Control Law, a fee called "foreign exchange entitlement certificate fee" is to be paid before any amount could be remitted outside Ceylon. Thus the interest on the non-resident blocked account is remitted to the assessees who are repatriates from Ceylon after deducting the foreign exchange entitlement certificate fee. A question has arisen as to whether, for the purpose of income-tax in India, the gross interest income is assessable or whether it could be assessed only after allowing the deduction of the "foreign exchange entitlement certificate fee", under section 57(iii).
3. The matter has been examined and the Board are advised that the interest on the blocked account has already been earned before the fee under the Ceylon Exchange Control Law is deducted. It could not, therefore, be said that the expenditure in question is for the purpose of making or earning the said income. Hence, the fee under the Ceylon Exchange Control Law is not a deductible expense under section 57(iii).
Circular : No. 156 [F. No. 173/96/72-IT(A-I)], dated 23-12-1974.

What to watch

The reasoning is that the fee is a cost of remittance and not of earning, so it fails the test in section 57(iii).
The assessee is taxed on the gross interest even though he receives less.
The circular addresses only the fee under the Ceylon Exchange Control Law and only the deduction under section 57(iii); double taxation relief on the same interest is a separate question.

Where you meet it

In an assessment where interest offered net of the remittance fee is enhanced to the gross figure.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 169 — Income-tax (Fourth Amendment) Rules, 2007 14 May 2007

← Circular No. 157 · Circular No. 155 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is