Capital gain arises/accrued outside India can’t be clubbed in hands of NRI assessee

Brief of the case:

In case of Shri Rajendra Pathak Vs. ACIT Jaipur Bench of ITAT have held that sale proceeds cannot be clubbed in the hands of the assessee as capital asset/capital gain arises/accrued outside India. Assessee got shares on the basis of work performance by his employe in London. Which were registered in the name of wife of assessee. Assessee sold shares listed in London Stock Exchange by HSBC securities In London, remuneration of which was received in the joint bank account of assessee and his wife. AO held that the sale proceeds are to be taxed in the hands of assessee. After going through the facts of the case ITAT held that Capital gain arises/accrued outside India can’t be clubbed in hands of NRI assessee.

Facts of the case:

• Assesee is a non-resident and filed his income tax return for the year under consideration on 09.01.2009 declaring income of Rs. 6,88,582/-.
• The case was picked up for scrutiny and notice u/s 143 (2) was issued by ACIT, Circle-2, Udaipur.
• Subsequently the case was transferred to ACIT (International Transaction), Jaipur and fresh notice u/s 143 (2) was issued.
• Assessee challenged the jurisdiction of subsequent AO.
• During the assessment proceedings AO observed that the assessee had claimed exemption in respect of capital gain income arising out of sale proceeds of Rs.41,98,615/- on account of sale of shares of Vedanta Resources Plc in lieu of his non-resident status.
• AO further observed that through a letter dated 16.04.2004 of Vedanta Resources Plc the assessee was allotted 3500 shares of Vedanta Resources Plc under the Long Term Incentive Plan. However, from the copy of share certificate issued on 27.03.2007 by the company, it was observed that the registered holder of the shares was Mrs. Sunita Pathak.

• On record there is a sale instruction form dated 21.05.2007 signed by Smt. Sunita Pathak. The sale proceeds were credited in a joint account with first name of Smt. Sunita Pathak and second name Shri Rajendra Pathak.
• AO had choose to compute the entire proceeds of Rs. 41,98,615/- in the hands of the wife as short term capital gain which by virtue of section 64 of the Act is being clubbed in the taxable income of the assessee.

Contention of the revenue:

• The jurisdiction over the case of non-resident assessee vest with the Addl. DIT (Intl. Taxation), Jaipur in view of the Notification issued issued in exercise of powers conferred by the Central Board of Direct Taxes under sub-section (1) & (2) of section 120.
• The processing of issuing notice u/s 143 (2) was done by the clerical staff of ACIT, Circle-2, Udaipur. On realizing that the case of the appellant was that of a non-resident, the ACIT transferred the case of the appellant to ADIT (Intl. Tax), Jaipur.
• Since the jurisdiction over the non-resident cases lay with the ADIT (Intl. Tax.), Jaipur, there was no need to pass order u/s 127 of the I T Act.
• Appellant deliberately filed his return of income with ACIT, Circle-2, Udaipur to escape the scrutiny.
• When assessee has himself filed his return with a particular AO, he cannot challenge the issue of notice by that AO since the AO was not aware that he did not have jurisdiction over that case out of thousand of returns filed with his circle.
• Jurisdiction cannot be conferred on an Assessing Officer by the consent of the assessee.
• In view of section 124(5), the assessee was not entitled to call in question the Jurisdiction of the ACIT, Circle-2, Udaipur, as he ought to have raised the objection under clause (a) of sub-section (5) of section 124 within a period of one month from the date on which he filed the return under sub-section (1) of section 139 or after the completion of the assessment, whichever is earlier.
• Assessee had failed to furnish the necessary details of transactions as to how the shares allotted to the assessee were registered in the name of his wife.
• Earlier the assessee took the plea that the wife was made nominee of the shares but failed to answer the query how the nominee could be the registered owner of the shares and be able to sign the sale instruction form.
• The assessee had himself admitted that he had no evidence to show how the shares got transferred from his name to his wife’s name. No Gift Deed was signed.
• The assessee had also failed to declare whether any tax was paid in UK and if paid in whose name it was paid.
• The assessee had himself stressed that the provisions of section 64 are applicable to the transaction and the resultant capital gain earned by his wife.

Contention of assessee:

•  If transfer of case to ADIT (Intl. Taxation) is valid then such transfer of jurisdiction could have been only u/s 127 of Income Tax Act. Such transfer of jurisdiction is bad-in-law as no opportunity was provided as required u/s 127(2) of Income-tax Act, 1961.
• Relying upon the case of Ranjeet Singh vs. ACIT (2009), 120 TTJ 517 (Delhi) assessee argued that this was the transfer from one CCIT to another. Therefore, order under section 127 is to be passed.
• Irregularity in notice cannot be qured by section 292BB as three situations prescribed in this section has not been matched.
• The Assessee has been on employee of Vedanta Resources Plc., a London based company, and as a result of employment based on his performance the company granted him share options in the company with a lock in period.
• Assessee’s wife, Mrs. Sunita Pathak, has never been employed by any company and therefore question of performance bonus does not arise.
• The original shares had been issued in assessee’s name, since the value of shares subsequently increased, as a matter of caution the wife was made nominee since he did not know that he would be encashing the shares so early.
• Both the lower authorities have erred in deciding the issue against the assessee by misdirecting themselves about the real ownership of shares.

 Held by CIT (A):

•  CIT (A) dismissed the ground of jurisdiction in the light of judgement of the Supreme Court in the case of Central Potterries (AIR 1966 SC 932), while dealing with a case under the provisions of the C.P. and Bazar Sales Tax Act, 1947, held that when the taxing authorities derive their Jurisdiction to make assessment under the provisions of the Act and assessee voluntarily files the return under sections 3 and 10(1) of the Act on which the assessment has been made, it would be idle to contend that the proceedings taken on its own return are without Jurisdiction.
• The share certificate shows that 3500 shares of Vedanta Resources Plc were standing in the name of Smt. Sunita Pathak and she was the registered holder of these shares.
• The sale instruction form was also signed by Smt. Sunita Pathak and without this sale instruction form, the shares could not have been sold.
• The appellant has failed to explain as to how the alleged nominee being his wife i.e. Smt. Sunita Pathak had sold the shares, in what capacity she had instructed the broker to sell the shares and why the sale proceeds were credited in her bank account with ICICI Bank in Indian Rupee.
• As assessee failed to prove the sale proceeds, the addition of Rs. 41,98,615/- made by the AO is confirmed.

 Held by ITAT:

•  The jurisdiction of non-resident was decided by the Addl. DIT (International Taxation), Jaipur as per direction of the CBDT issued for non-resident assessee. Therefore, there is no need to pass order under section 127 of the IT Act as Additional DIT (International Taxation) Jaipur had passed the order in pursuance of direction of CBDT. Therefore order passed by CIT (A) is confirmed.
• The assessee was real owner of these shares although the shares were in the name of the wife of the assessee Smt. Sunita Pathak.
• The shares sold by the HSBC Securities, London on the instructions of the wife of the assessee. The sale proceeds were received outside India.Later on it was transferred by it in Indian Bank account.
• The capital gain arise or deemed to be arise outside India as assessee is a non-resident.
• It is clear from section 5 that in case of assessee non-resident and income accrues or arises outside India shall not be included in the income of the assessee.
• The shares were held by the assessee. The employer company issued these shares on the basis of Scheme and performance of the assessee. There was a restriction on this Award which proved that these shares were allotted to the assessee but on request same were issued in the name of his wife Smt. Sunita Pathak.
• It is further held that section 64 is also not applicable on this transaction because assessee is a non-resident and even if it is presumed that these shares were transferred without any consideration to the wife of the assessee who is non-resident being a capital asset not taxable in India on account of status of the assessee.
• Therefore, same cannot be clubbed in the hands of the assessee as capital asset/capital gain arises/accrued outside India.
• Therefore, same should be taxed in the hands of non-resident assessee but as per section 5(2), this income accrued or arise outside India. Thus there is no tax in the case of the assessee. We are of the considered view that CIT (A) was not right in upholding the share transaction as taxable in the hands of the assessee.