BORHAT TEA CO. LTD. Vs. INCOME TAX OFFICER.

JUDGEMENT

(1.) THIS appeal filed by the assessee is against the order of the Commissioner of Income Tax, West Bengal -I dated 14 -3 -1988 under Sec. 263 of the Income Tax Act, 1961.

(2.) THE assessment for the assessment year 1985 -86 was completed under Sec. 143(3) on 26 -12 -1985. The Commissioner found the said assessment order as erroneous in so far as it was prejudicial to the interest of revenue on the ground that the ITO had applied an incorrect rate of tax and that there had been an incorrect application of Article 12(2) of the D. T. A. Convention resulting in a total under charge of tax of Rs. 37,690. In that view he started proceedings under Sec. 263 by issue of notice dated 23 -2 -1988. The assessees counsel appeared before the Commissioner and filed written submissions. It had been stated therein that the rate of tax at 15% was correctly applied by the ITO on interest on short -term deposits with Banks and the Housing Development Finance Corporation and that the said interest satisfied the conditions necessary for applying in Article 12(2) of the Convention for Avoidance of Double Taxation between India and the United Kingdom. The Commissioner after referring to Article 12(2) held as under :

(3.) AT the time of hearing, the assessees counsel filed a paper book of 10 pages containing, inter alia, copies of notice under Sec. 263 dated 23 -2 -1988, assessees reply dated 9 -3 -1988, letter dated 12 -8 -1987 from Grindlays Bank P. L. C. to the Consolidated Tea and Lands Co. (India) Ltd. (a company under the group of James Finlay), copy of the Certificate of Deposit issued by Housing Development Finance Corporation Ltd. He also filed copy of letter dated 11 -4 -1985 addressed by the assessee to the ITO, A -Ward, foreign Companies Circle -I, Calcutta and also letter dated 15 -6 -1983 from Tata Tea Ltd. addressed to the Commissioner of Income Tax, West Bengal v/s. Calcutta and copy of letter dated 27 -1 -1984 addressed by James Finlay P.I.C. to the CIT, West Bengal -V, Calcutta. The arguments of the assessees counsel were to the following effect : The assessee is a non -resident company. The assessees derived interest of Rs. 68,375 from short -term deposits with banks and Housing Development Finance Corporation Ltd. (HDFC for short). It was offered for assessment. The ITO had applied the Income Tax rate of 15% on the said interest on the basis of Article 12(2) of the Convention between the Government of India and the Government of the U. K. of Great Britain and Northern Ireland for avoiding double taxation. The said Convention came into effect from 23 -11 -1981. It is published at pages 34 to 54 (Statues) of Vol. No. 133 of Income Tax Reports. Otherwise he would have taxed the said interest @ 70% as he had done in respect of other interest of Rs. 8,524. The Commissioner is not correct in saying that a renewal cannot be called to be a fresh deposit within the meaning of Article 12(2) of the aforesaid Convention. The said Article 12(2) speaks of interest paid in respect of a loan or debt first created after the date of entry into force of the said Convention. The question to be seen is what is meant by the words "first created". The Grindlays Bank vide their letter dated 12 -8 -1987 (placed at page 3 of the paper book) stated that a fresh contract of deposit is created when a matured deposit is discharged and renewed. A photo copy of the certificate of deposit with HDFC is given at pages 5 and 6 of the paper book. In the said certificate of deposit, under the terms and conditions of the Deposit Scheme, under the sub -heading "payment and renewal" it is mentioned that discharged deposits will not be accepted for renewal unless an application in the prescribed form is submitted. The terms and conditions of the Deposit Scheme with HDFC are given at pages 7 and 8 of the paper book. In it also the same condition appears that for renewal a fresh prescribed form of application has to be submitted. Thus, whenever a renewal is made it amounts to a fresh deposit. On the commentary contained at page 1014 to Sec. 370 of the Companies Act, 1956 by A. Ramaiya, 11th edition, it is mentioned that renewal of deposits after the expiry of the term will be deemed to be fresh deposit. The photostat copy of page 1014 from the said book is given at page 10 of the paper book. Further, the Commissioner has authorised the assessee to receive in India interest on deposit made with HDFC after October 1981 after deduction of tax @ 15% on the amount of interest. This authorisation is filed at page 9 of the paper book. In such circumstances the Commissioner in his order under Sec. 263 dated 14 -3 -1988 cannot re -trace his steps. Therefore, the impugned order should be annulled.