Commissioner Of Income-Tax v. Borhat Tea Co. Ltd. — 1991 DIGILAW 491 (CAL)

Judgment Ajit K. Sengupta, J. 1. IN this reference made by the Tribunal under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, the following question calls for determination : "Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that there was no error in the assessment order of the Income-tax Officer and so the Commissioner of Income-tax was not justified in annulling the order of the Income-tax Officer under Section 263 of the Act ?" 2. SHORTLY stated, the facts leading to the reference are that the assessment for the assessment year 1985-86 was completed under Section 143(3) on November 26, 1985. The Commissioner of Income-tax was of the view that the said assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue on the ground that the Income-tax Officer had applied an incorrect rate of tax and that there had been an incorrect application of Article 12(2) of the Convention for Avoidance of Double Taxation resulting in a total undercharge of tax of Rs. 37,690. In that view, he started proceedings under Section 263 by issue of a notice dated February 23, 1988. The assessee's counsel appeared before the Commissioner of Income-tax and submitted that the rate of tax at 15 per cent. was correctly applied by the Income-tax Officer on interest on short-term deposits with banks and the Housing Development Finance Corporation (in short, "the H. F. D. C.") and that the said interest satisfied the conditions necessary for applying Article 12(2) of the Convention for avoidance of Double Taxation between India and the United Kingdom. The Commissioner of Income-tax, after referring to Article 12(2), held as under : "It is seen from records that the rate of 15 per cent. was not to be applied to interest on dividend arising from investments made prior to October 21, 1981, which is the date of entry into force of the Avoidance of Double Taxation Convention between India and the U. K. It is further noticed from records that the deposits were all along kept with banks and other organisations even before the convention came into force. It is also seen that old deposits were renewed from time to time with the permission of the Reserve Bank of India, which shows that the deposits were old which were being renewed from time to time. A renewal cannot be called fresh deposit within the meaning of Article 12(2) of the aforesaid convention. Hence, the correct rate of tax applicable in this case was not 15 per cent. in Article 12(2) of the convention but the rate prescribed by the relevant Finance Act. Since it was not done by the Income-tax Officer, who framed the assessment, the order passed by him is erroneous being prejudicial to the interests of the Revenue." Accordingly, the Commissioner of Income-tax set aside the assessment order and directed the Income-tax Officer to frame a fresh assessment keeping in view his discussions in the order under Section 263 and after allowing the assessee a reasonable opportunity of being heard. 3. THE assessee appealed before the Tribunal. THE Tribunal held that when a deposit is renewed on the basis of a fresh application, a new contract comes into existence and so the deposits renewed by the assessee with the Housing Development Finance Corporation after November 23, 1981, have to be interpreted as loans "first created" and so the tax to be charged was only at 15 per cent. Accordingly, the Tribunal held that there was no error in the assessment order of the Income-tax Officer and that the Commissioner of Income-tax was not justified in setting aside the said assessment order. In that view, the Tribunal annulled the order of the Commissioner of Income-tax. 4. AT the hearing, the contentions raised before the Tribunal have been reiterated. The contentions have to be examined in the light of the convention between the Government of India and the Government of U. K. which came into force with effect from November 23, 1981. Therefore, Article 12(2) of the said convention will be applicable, if the loan or the debt is first created after March 23, 1981 (sic). The question, therefore, arises as to whether the renewal of a deposit is a fresh deposit. Clauses (1) and (2) of Article 12 of the said convention dealing with interest read as under : "1. Interest arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State. 2. The question, therefore, arises as to whether the renewal of a deposit is a fresh deposit. Clauses (1) and (2) of Article 12 of the said convention dealing with interest read as under : "1. Interest arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the contracting State in which it arises and according to the law of that State, provided that where the resident of the other contracting State is the beneficial owner of the interest and it is paid in respect of a loan or debt first created after the date of entry into force of this convention, the tax so charged shall not exceed 15 per cent. of the gross amount of the interest." 5. IT is clear that Clause (2) of Article 12 enjoins the charging of tax at a rate not exceeding 15 per cent. in respect of interest paid on a loan or debt first created after the date of entry into force of the said convention. The question that arises for consideration in this reference is the interpretation of the words "first created". According to the Revenue, the deposits by the assessee with the Housing Development Finance Corporation Ltd. (H. D. F. C.) were renewed. Therefore, it is, according to him, erroneous to treat such renewed deposits as fresh deposits as contemplated in Article 12(2) of the convention. 6. UNDER the terms and conditions of deposits with the Housing Development Finance Corporation, the discharged deposits will not be accepted for renewal unless an application for deposit in the prescribed form is submitted de novo by the depositor. In this case, the depositor, i.e., the assessee, submitted a fresh application as prescribed by the deposited (H.D.F. C.) and had it accepted by the Housing Development Finance Corporation while renewing the deposit and the renewal was, to all intents and purposes, a fresh contract culminating in a fresh deposit. The Commissioner in his revision order has, however, heedless of this aspect, treated the renewal of the deposit as not falling within the description in Clause (2) of Article 12 of the Convention, viz., "interest paid in respect of loan or debt first created after the date of entry into force of this convention". The Commissioner in his revision order has, however, heedless of this aspect, treated the renewal of the deposit as not falling within the description in Clause (2) of Article 12 of the Convention, viz., "interest paid in respect of loan or debt first created after the date of entry into force of this convention". Therefore, the concessional rate of taxation at a rate not exceeding 15 per cent. as per the said clause is, according to him, not available to the assessee. The words "renew" and "renewal" mean the creation of a new asset in the context of the terms and conditions of deposits as prescribed by the Housing Development Finance Corporation. The word "renew" or "renewal" implies a fresh contract of deposits. The following passage occurs in "Words and Phrases" Edition, Volume 86A. The word "renew" or "renewal" as applied to promissory notes in commercial and legal parlance means something more than the substitution of another obligation for the old one. It means to re-establish a particular contract for another period of time, to restore to its former condition, an obligation on which the time of payment has been extended. (Kedey v. Petty, 54 N. E. 798, 800; 153 Ind. 179). 7. A deposit is repayable either on the maturity date fixed therefor or according to the terms of the agreement relating to the demands on the making of which the deposit will become repayable. It, therefore, logically follows that the renewal of a deposit is a fresh contract of deposit because the first deposit falling repayable has to be construed as having been repaid and renewal is recycling the fund in a fresh deposit. It cannot be said that renewal is a continuation of the contract of the first deposit. It is more so when the renewal is effected by execution of a fresh contract under the terms and conditions of the deposit rules of the depositee, the Housing Development Finance Corporation in the instant case. The whole question depends on the meaning of the words "renewed" and "renewal". The words are clearly not words of art. They must be interpreted in their popular sense. In common parlance, renewal does not mean extension, it means repetition of the earlier contract. In that sense, every repeat deposit is a new deposit. 8. THE words wherever used need not necessarily carry the same meaning in all cases. The words are clearly not words of art. They must be interpreted in their popular sense. In common parlance, renewal does not mean extension, it means repetition of the earlier contract. In that sense, every repeat deposit is a new deposit. 8. THE words wherever used need not necessarily carry the same meaning in all cases. THE meaning will largely depend on the context. This variety of the shades of meaning of a word is best illustrated by a judgment under the Motor Vehicles Act, 1939, in relation to renewal of permit, delivered by the High Court of Andhra Pradesh in Ch. Anjaiah v. Regional Transport Officer, AIR 1957 AP 470 . In that case, the question was whether a renewal permit is really a continuation of the old permit and whether breach of a condition in the old permit can be punished by an order of suspension enforceable against the renewal permit. There the Division Bench of the Andhra Pradesh High Court held as follows (at page 471) : "When Section 58(2) deals with the renewal of a permit, it thus deals not only with a permit relating to a stage-carriage but also with other kinds of transport vehicles, such as, for instance, a motor cab. Thus there is a stage-carriage permit, a public carrier's permit, etc. Section 58(2), therefore, includes not only the stage-carriage permits in regard to which there may be competition every time when an application is made for renewal but also other permits which are almost automatically renewed, such as one in the case of a motor cab or one authorising an owner to use a vehicle as a private carrier. The words "renewed" and "renewal" need not therefore, necessarily carry the same meaning in all cases. An applicant for renewal of a stage carriage permit along a particular route will generally have to survive competition along with other applicants when he applies for renewal and all that he can claim is a preference over others if other conditions are equal. Where, therefore, a permit is granted to him once more, it cannot, in our opinion, be treated as the old permit extended for a fresh period. In fact, as pointed out above, the language of Section 58 is, in our opinion, wide enough to cover both the cases of almost automatic renewal and cases where the old permit-holder will have to stand fresh competition. In fact, as pointed out above, the language of Section 58 is, in our opinion, wide enough to cover both the cases of almost automatic renewal and cases where the old permit-holder will have to stand fresh competition. While in the case of a renewal of a permit of a motor cab, it may not be inappropriate to describe the new permit as an old permit with an extended period, the same cannot be said of a stage-carriage permit granted to the holder of a previous permit. In a case, therefore, like the present one, we are of the opinion that what is granted is in essence a new permit and that it is not a mere continuation of the old one. A renewal, therefore, in this sense would only mean a permit which is granted for a fresh period or which replaces the old one by a new one. We hold accordingly that the suspension order passed for breach of one of the conditions of the old permit cannot be enforced against the permit now in force." 9. WE may also usefully refer to the observation of Lord Bramwell in Susannah Sharp v. Wakefield [1891] AC 173 (HL), which is as follows (at page 183) : "The licence is a renewal. That word has been criticised. It may be misleading, but is, I think, correct. It is a 'renewal' i.e., a new licence, as we talk of a new lease being a renewal, though parties and terms may be wholly different." 10. THUS the expression "renewal", depending on the context and in the perspective may, therefore, open a new transaction or grant of a new permit. In this context as we have already indicated the renewal was by way of fresh application for deposit as required by the terms and conditions of the deposits, the same has to be treated as fresh deposit. Despite the use of the word "renewal", the renewed deposit is really a fresh deposit and such renewal would have to be considered as a fresh deposit each time. Our attention has also been drawn to two decisions, one of the Madras High Court and the other of the Bombay High Court in Sujani Textiles Pvt. Ltd. v. Assistant Registrar of Companies (1980] 50 Comp Cas 276, and in Jagjivan Hiralal Doshi v. Registrar of Companies [1989] 65 Comp Cas 553, respectively. Our attention has also been drawn to two decisions, one of the Madras High Court and the other of the Bombay High Court in Sujani Textiles Pvt. Ltd. v. Assistant Registrar of Companies (1980] 50 Comp Cas 276, and in Jagjivan Hiralal Doshi v. Registrar of Companies [1989] 65 Comp Cas 553, respectively. There the word "renew" in the context of Section 58A of the Companies Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975, was interpreted. It has been held that in the context of the said provisions, "renewal amounts to receiving fresh deposits. The word 'renew' also means to acquire again". 11. IN our view, when a matured deposit is discharged or renewed, a fresh contract or deposit is created. IN the certificate of deposit, as we have already observed, it has been specifically made clear that the discharged certificate of deposit will not be accepted for renewal unless an application in the prescribed form of the Housing Development Finance Corporation filled in properly and completed in all respects is submitted along with the old certificate of deposit. Thus it is only on the fresh application that a new contract of deposit is created. IN our opinion, on a true and proper interpretation of Article 12(2) of the said convention when the deposits have been renewed after the coming into force of the aforesaid convention, such renewal amounted to a fresh deposit and, therefore, the deposit was first created after the coming into effect of the Convention of Double Taxation Avoidance Agreement and accordingly the provisions of Article 12(2) will apply. 12. FOR the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.