Case Law Details
1. This appeal by the assessee is directed against the order of CIT(A) dated 21.02.2007 for AY 1995-96.
2. It is seen that there was a delay of eighteen days in filing of this appeal by the- assessee, and an application for condonation of the delay was filed supported by an affidavit. After hearing both the parties the request for condonation of delay was allowed.
3. The grounds raised by the assessee in this appeal are as under.
1. The CIT(Appeals) erred, both in law and on the facts of the case, in sustaining the addition of Rs.4,68,85,840 to the income returned.
2. Having been admitted – as facts – that (i) the appellant was a non- resident, and (ii) the remittances had actually come from foreign countries, he should have held that no part of the income had accrued to the appellant in India.
3. He overlooked that only income that had accrued or arose or received in India alone is taxable in the case of non-resident.
4. He overlooked that, under Malaysian Law, foreign income of a Malayalam resident is not taxable under Malaysian Tax Laws and, therefore, erred in holding that these have not been disclosed to them.
5. He also overlooked that any omission to disclose to Malaysian Tax Authorities cannot automatically convert it as an income accrued in India.
6. He erred in relying on pieces of evidence obtained behind the back of the appellant and using them against the appellant without giving any opportunity for rebutting this evidence.
7. He had no material to dispute the genuineness of the certificate or the letters produced by the appellant.
8. He should have also appreciated that there was no allegation or finding by any Authority that the appellant had violated any of the provisions of Foreign Exchange Regulation Act.
9. He overlooked to consider various pieces of evidences produced before him by the appellant.
10. Without prejudice to the above, the appellant submits that, even assuming that she had omitted to disclose to Malaysian Tax Authorities, it cannot be considered as income taxable in India.
11. The appellant, therefore, prays that the addition of Rs.4,68,85,840 may be deleted.
4. The facts of the case, in brief, are that the assessee is a Non-Resident Indian, holding an Indian passport, and was residing in Malaysia. During the assessment proceeding in the case of the company, M/s.Bharani Beach Resorts Pvt.Ltd., it was noticed that the assessee Smt. Susila Ramasamy had made substantial NRNR (Non-Resident Non-Repatriable) , FCNR (Foreign Currency Non-resident) , and NRO SB deposits with Indian Bank Abiramapuram and State Bank of India Cheyyur aggregating to Rs.4,68,85,844. Therefore, the AO initiated proceedings u/s 147 for AY 1995-96, and issued notice u/s 148 on 15.03.2002. The assessee filed a return in Form No. 2D showing total income as nil.
4.1 In the assessment order passed by the AO u/s 147 on 28.03.2003 the aforesaid deposits aggregating to Rs. 4,68,85,844 were assessed as the income of the assessee u/s 69 of the Act. The CIT(A) confirmed the AO’s action and his order has been challenged by the assessee in the present appeal.
5. Shri G.Narayanasamy, the learned AR reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him before us are summarized below.
that the assessee is a resident of Malaysia and is, admittedly, a non-resident for the purpose of Income Tax Act 1961,
that, admittedly, the remittances aggregating to Rs. 4,68,85,540 came from abroad in NRNR and FCNR accounts,
that these remittances could not have come from ‘local sources’,
that in terms of the CBDT Circular No. 5 dated 20.02.1969, the remittances by an NRI through banking channel are not subjected to income-tax,
that even u/s 5(2) (b) it could not be subjected to income-tax,
that reliance was placed on the decision of ITAT Delhi, in the case of DCIT vs. Finlay Corporation Ltd. (2004) 84 TTJ (Del) 788.
6. Shri K. Subramaniam, the learned Standing Counsel for the department supported the orders of the AO and the CIT(A). He filed written submissions dated 11.12.2008 and supplementary submissions dated 02.04.2009. The submissions made by him before us are summarized below.
that the impugned deposits aggregating to Rs. 4,68,85,540 were taxable u/s 5(2) (b) of the Act,
that the deposits represented deemed income of the assessee and were taxable u/s 69 of the Act,
that the provision of section 9 was inclusive in its scope and was not exhaustive,
that the CBDT Circular No. 5 dated 20.02.1969 did not help the assessee in view of paragraph 4 thereof,
that the Board would not have issued the said circular if there was to be absolute immunity for funds coming through banking channel,
that the situs of investment was India,
that India has a DTAA with Malaysia, and cannot be powerless to question the source of money brought into Indian territory, just because the medium was the banking channel,
that the Indian authorities are empowered under the Indian law to question as to how the assessee earned the money outside Malaysia,
that the department’s stand got indirect support from the decisions in the following cases,
i. ACIT vs. Rajeev Tandon [2007] 294 ITR (AT) 219 (Delhi) )
ii. Sandeep Kumar (HUF) vs. CIT [2007] 293 ITR 294 (Delhi))
iii. Ashok Mahindru and Sons (HUF) vs. CIT 173 Taxman 178
iv. ITO vs. Tirathram Gupta [2006] 6 SOT 703(Chand.)
that heavy reliance was placed on the facts stated in the Annexure to the assessment order,
7. We have considered the rival submissions in the light of material on record and the precedents cited. The undisputed facts of this case are that the assessee is a non-resident and that she brought funds from abroad through banking channels. The AO, while treating the said deposits as deemed income of the assessee u/s 69 of the Act observed in paragraphs 16 and 17 of his order as under.
“16. Even if the assessee is a NRI if there are deposits made in India and are not satisfactorily explained the value of investments will be deemed to be the income of the assessee. The fact that the assessee had not been doing any business in India does not come to the rescue of the assessee. Where there is an unexplained investment, it has been left to the Assessing Officer to hold that it is the income of the assessee and no further burden lies on the Assessing Officer to show that the income is from any particular sources. It is for the assessee to prove that the unexplained income is out of the source which has already been taxed. In the present case the assessee has failed to do so. The Assessing Officer is not required to specify or prove what is the sources of the unexplained investment.
17. To put it in a netshell Smt. Sushila Ramasamy has made deposits to the tune of Rs.4,65,85,844 in various banks in Chennai during the period relevant to the assessment year 95-96. The explanation given by Smt. Sushila Ramasamy regarding the sources for investment is not satisfactory. There is no evidence on records to show that neither she nor her husband had earned such substantial income abroad. The documents furnished by the assessee do not have any evidentiary value on account of various contradiction found in these records. From the above, it is clear that Smt.Sushila Ramasamy has no ostensible sources to make these deposits and hence these are to be assessed as income under Section 69 of the Income tax Act. The assessment is completed as under:”
8. The CIT(A), while upholding the AO’s action has made some general and sweeping observations in paragraph 3.2 of his order such as: i. The AO has been able to establish that the assessee was not having any source of income in UAE or Singapore,
ii. There is no evidence to support the assessee’s claim that the money brought into India was earned abroad and its source was explained abroad.
iii. The fund whose source was unexplained abroad does not become explained in India.
iv. An undisclosed income does not become disclosed just for the reason that no source of income in India is disclosed by the assessee.
v. Since the sources of bank deposits in India are unexplained, they are within the jurisdiction of section 69.
vi. The provisions of section 69 are applicable to all assesses, whether resident or non-resident.
vii. One of the main purpose of Double Tax Avoidance Agreement is to prevent evasion of tax.
9. During the hearing of this appeal one question which was repeatedly put by the bench to the learned Standing Counsel was under which provision of the Income Tax Act 1961, money brought by an NRI into the country through banking channel, is taxable in India. His very clear reply was that the impugned amount was taxable in India u/s 5(2) (b) read with section 69 of the Act.
10. Before proceeding to examine the arguments of the learned AR and of the learned Standing Counsel relating to the above issue, it appears worthwhile to have a ‘birds eye view’ of the general scheme of the Income Tax Act 1961 in this regard.
11. The section 4 of the Income Tax Act, 1961 is the charging section, and it reads as under.
“Charge of income-tax.
4.(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year [* * *] of every person :
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.”
11.1 The section 4 imposes income-tax upon a person in respect of his income. The tax is not made a charge on the income upon which it is levied. It is a tax on a person in relation to his income. The principles emerging from this section are:
i. Income-tax is to be charged at the rate fixed for the year by the annual Finance Act.
ii. This charge is on every person including those enumerated in section 2(31).
iii. The income which is to be taxed is of the previous year and not of the year of assessment,
iv. The levy is on the ‘total income’ of the assessee computed in accordance with and subject to the provisions of the Act.
11.2 The ‘total income’, referred to in section 4(1) is defined in section 2(45) as under.
“2. In this Act, unless the context otherwise requires,-
———— ——— —
(45) “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;”
11.3 The scope of the ‘total income’, referred to in section 4 and in section 2(45) is dealt with in section 5 of the Act, which reads as under.
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
11.4 The principle underlying section 5 is to make the charge ability of income depend upon the locality’ of accrual or receipt. The sub-section (1) of section 5 applies to ‘a person who is a resident’ and sub-section (2) applies to ‘a person who is a non-resident’ . The assessees are divided into three categories.
i. resident and ordinarily resident
ii. resident but not ordinarily resident
iii. non- resident.
11.5 The section 6 defines ‘residence’ and ‘ordinarily residence’. The incidence of tax on the three categories of tax-payers, can be summarized as under.
Residents and ordinarily residents
Residents but not ordinarily residents
Non-residents
(a) income received or deemed to be received in India by or on behalf of the assessee.
(a) income received or deemed to be received in India by or on behalf of the assessee.
(a) income received or deemed to be received in India by or on behalf of he assessee.
(b) income which accrues or arises or is deemed to accrue or arise to him in India
(b) income which accrues or arises or is deemed to accrue or arise to him in India
(b) income which accrues or arises or is deemed to accrue or arise to him in India
(c) income which accrues or arises to him outside India
(c) income which accrues or arises to him outside India, only in case if it is derived from a business controlled in or a profession set up in India.
….. ……
11.6 The charging section 4 as well as section 5 are expressly made ‘subject to the provisions of the Act’, which means that these are subject to the provisions of the Act including section 69.
12. The CBDT Circular No.5 in F.No. 73A/2(69)-IT (A-II) dated 20.02.1969, heavily relied upon by both the parties, reads as under.
“Migrant assesses-Money remitted to India through banks – Inquiries by Income-tax Officers regarding origin of money- Instructions regarding.
It has been represented to the Board that persons of Indian origin residing abroad but intending to return to India and settle here permanently, apprehend that the money brought in or remitted from abroad by such persons might be subjected to income-tax in India. The apprehension appears to be due to lack of information regarding the correct legal position about the tax ability of the remittances of money from abroad. The general position, in this regard, is clarified below:
2. Money brought into India by non-residents for investments or other purposes is not liable to Indian income-tax. Therefore, there is no question of a remittance into the country being subjected to income-tax in India. The question of assessment to tax arises only when there is no evidence to show that the amount, in question, in fact represents such remittance. In other words, in the absence of proper supporting evidence, the tax payers’ story that the money has been brought into India from outside may be disbelieved by the Income tax Officer who may then proceed to hold that the money had in fact been earned in India.
3. If the money has been brought into India through banking channels or in the form of assets like plant and machinery or stock-in-trade, for which the necessary import permits had been obtained, no questions at all are asked by the Income-tax Officers as to the origin of the money or assets brought in. It is only in cases where the money is claimed to have been brought from outside otherwise than through banking channels and there is no evidence regarding the transfer of money, that the department has to make inquiries about the source thereof. Even in these cases, having regard to the difficulties experienced by persons migrating from Pakistan, Burma and East African countries, instructions have been issued to the Income-tax Officers that such claims should be freely admitted up to the limit of Rs.50,000 in each case provided the following conditions are satisfied:-
(a) The assessee migrated to India on or after the dates mentioned below from the countries shown against each and had no source of income in India:
(i) 30-07-1962 Mozambique (vide Min. of Finance Press Note dated 22-5-1967).
(ii) 1-11-1963 (Sic.) Zanzibar, Kenya, Tanzania and Uganda (vide Min. of Finance Press Note dated 22- 05-1967).
(iii) 1-1-1964 East Pakistan and Burma (vide Min. of Finance Press Note dated 25-6-1964 /22-5-1965).
(iv) 1-10-1965 West Pakistan (vide Min. of Finance Press Note dated 3-2-1969).
(b) He had sufficient resources in the foreign country.
(c) He had no source of income either in India or in any foreign country, other than the country from which he migrated, prior to migration, and he was not assessed as ‘Resident’ in India, either for the assessment year preceding the year in which he migrated or for earlier years; and
(d) The amount brought in has been duly introduced in the books regularly maintained in India and an intimation of such introduction is given to the Income-tax Officer within two months of the migrant’s arrival.
4. Cases not covered by the preceding paragraph, namely,
(a) where the money (in the case of Mozambique, Zanzibar, Kenya, Tanzania, Uganda, East Pakistan and Burma) and money and / or the personal jewellery (in the case of West Pakistan) claimed to have been brought exceeds Rs.50,000; or
(b) where the assessee had some sources of income either in India or in any foreign country, other than the one from which he had migrated, prior to migration; or
(c) where the assessee was assessed as Resident in India either for the assessment year preceding the year of his/ her migration or in the earlier years,
will not be entitled to any special concession. Thus any claim by such migrants that the funds or the jewellery have been brought from the above mentioned countries, will be accepted only if the persons concerned produce adequate evidence to show that they had sufficient funds/ wealth in those countries and that the transfer of the cash / jewellery to India, can directly be linked with the said funds or wealth. In other words, these migrants will have to lead proper evidence like any other assessees, about the source of the cash/ jewellery alleged to have been brought by them from these countries. In support of the claim that they had sufficient funds in those countries, they might produce before the Income-tax authorities in India their bank accounts in those countries as also copies of the assessment orders passed in their cases by the Income-tax authorities of those countries. The migrants would also then be required to prove that the amounts brought into India can directly be linked with the funds which they had possessed in those countries.”
13. We, now, proceed to examine the above issue in the light of the following.
i. the provisions of the section 5(2) (b),
ii. the provisions of section 69,
iii. the CBDT Circular No.5 in F.No. 73A/2(69)-IT (A-II) dated 20.02.1969.
14. It is seen from sub-section (2) of section 5 of the Act that a person, who is a ‘non-resident’ , has to pay tax only on that income which is either received by him in India, or is deemed to be received by him in India, or accrues to him in India, or arises to him in India, or is deemed to accrue to him in India, or is deemed to arise to him in India, during the year. The words ‘in India’ appearing in sub-section (2) of section 5 are crucial. The principle underlying section 5 makes the charge ability of income depend upon the ‘locality’ of accrual or receipt.
14.1 Now, let us examine a question “whether a (non-resident) person, having money in a foreign country, could be called upon to pay income-tax on that money in India”. The answer is ‘NO’, and the reason is obvious because in respect of that money it will not be possible for the AO to say that it was either received by him in India, or it was deemed to be received by him in India, or it accrued to him in India, or it arose to him in India, or it is deemed to accrue to him in India, or it is deemed to arise to him in India.
14.2 Let us now move to the next stage. If a (non-resident) person, having money in a foreign country, brings that money to India, through a banking channel, he cannot be called upon to pay income-tax on that money in India, firstly, for the reasons stated above and secondly, because the remittance of money into India through banking channel will make, the onus on the assessee u/s 69, discharged.
14.3 It is necessary to note that once an amount is ‘received’ as income, any remittance or transmission of that amount to another place does not result in ‘receipt’ once again at the other place, within the meaning of section 5 of the Act. Therefore, if certain income, profits or gains was ‘received’ by the assessee outside India it does not become chargeable to income-tax in India by reason of that money having been brought into India. This is because what is chargeable is the first receipt’ of the money and not a subsequent dealing by the assessee with the said money. In that event the money is brought by the assessee as his own money which he had already ‘received’ and had control over it and it does not take the character of income, profits and gains after being brought in India.
14.4 There could, of course, be a situation where a non-resident has money in India, transmits it to a foreign country and then brings it back to India through a banking channel. If this circular motion of the money is conclusively proved with evidence then the non-resident will surely do the explaining u/s 69 of the Act, despite the money having been brought into India through banking channel. But merely on suspicions or doubts, conjectures or surmises, no inference can be drawn against the assessee. It is trite law that there can be no presumption in favour of any illegality of a transaction. In fact the presumption is the other way about. [A.S.Sivan Pillai vs. CIT, Madras [34 ITR 328 (Mad.)].
14.5 Let us now examine the applicability of section 69 of the Act, which was relied upon by the learned Standing Counsel. It reads as under.
69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.
14.6 Therefore, in the cases of remittances through banking channel the nature and source of the funds get explained and the onus on the assessee u/s 69 gets discharged, and consequently such remittances cannot be taxed u/s 5(2)(b) of the Act. Therefore, the argument of the learned Standing Counsel that, in the present case, the impugned money was taxable u/s 5(2)(b) read with section 69 of the Act, on the facts stated above, has no merit and cannot be accepted.
14.7 But, the position will be entirely different if the money has been brought into India otherwise than through banking channel, because in that case the onus on the assessee u/s 69 will not stand discharged. In such a case the provisions of section 5(2)(b), read with section 69 will surely be attracted.
15. We now proceed to examine and discuss the CBDT Circular No.5 dated 20.02.1969 (supra) which was relied upon by both the parties. It is seen that this Circular talks of two situations: one, where the fact, that money or assets were brought from abroad, is conclusively proved, and two, where the fact, that money or assets were brought from abroad, cannot be conclusively proved by the nonresident. In paragraph 2 and in first part of paragraph 3, it talks about the first situation.
15.1 In paragraph 2 it says, “Money brought into India by non-residents for investment or other purposes is not liable to Indian income-tax. Therefore, there is no question of a remittance into the country being subjected to income-tax. The question of assessment of tax arises only when there is no evidence to show no in that the amount, in question, in fact represents such remittance.- —-“. We see no ambiguity in what the circular says in paragraph (2). The obvious logic is that in the case of remittances by banking channel the onus on the assessee u/s 69 stands discharged, and therefore section 5(2)(b) does not apply. The above clarification given in the Circular is obvious from a plain reading of the provisions of the Act.
15.2 And in the first part of paragraph 3 the scope of what is stated in paragraph (2) is expanded to include assets brought into India. It says, “If the money has been brought into India through banking channels or in the form of assets like plant and machinery or stock-in-trade, for which the necessary import permits had been obtained, no questions at all are asked by the ITO’s as to the origin of the money or assets brought in.——“.
15.3 The second part of paragraph (3) and of paragraph (4) talk about the second situation where the fact, that money or assets were brought from abroad cannot be conclusively proved by the non-resident. In cases of ‘no evidence’ for transfer of money, some concessions have been allowed in the Circular subject to conditions specified therein.
15.4 It is seen that, in the present case, the AO while relying on the CBDT Circular (supra), has committed an error of reproducing in his order from paragraph 4 of the Circular, which does not apply to the remittances through banking channels. He should have applied the paragraph (2) and the first part of paragraph (3) of the Circular. In the circumstances, therefore, his order has no merit and cannot be sustained.
16. The learned Standing Counsel invited our attention to the Annexure of the assessment order, and he placed heavy reliance on the facts stated therein. Therefore, we proceed to have a quick look at what is stated in the Annexure.
16.1 It is seen that the Annexure to the assessment order represents extracts taken from the assessment order in the case of M/s Bharani Beach Resort (P) Ltd. for AY 1995-96. The facts and circumstances narrated therein are summarized below.
the balance sheet of M/s Bharani Beach Resort (P) Ltd, showed credit of Rs. 3 crores as secured loan taken from the Indian Bank, Abhiramapuram,
that the bank had advanced the above amount on the security of NRNR deposits lying in the name of Mrs. Susila Ramasamy,
that the deposits were made between July 94 and Jan 95 in the bank name of Mrs. Susila Ramasamy of Penang, Malayasia as NRNR and FCNR deposits, aggregating to Rs. 5,44,09,129,
that similar deposits were made in State Bank of India, Cheyyur,
that the company M/s Bharani Beach Resort (P) Ltd was incorporated in 1991, and Mrs. Chitra became its Director,
that the deposits were adjusted and closed without any request from the company, and without the knowledge of its Director Mrs. Chitra, that subsequently the money representing said loan was passed on by Mrs. Chitra to one Mrs. N. Sassikala,
16.2 The assessee, who is a non-resident, brought money into India through banking channel and the manner in which this money was utilized in India is described in the Annexure. We have observed in the above paragraphs that because of the mode of banking channel, admittedly, used for the remittance in this case, the onus on the assessee u/s 69 stood discharged, and therefore it was not taxable in India u/s 5(2)(b) of the Act. The CBDT Circular (supra) squarely supports the case of the assessee. The fact that the transactions and events narrated in the Annexure look curious and suspicious makes no difference to the conclusions that we have drawn in this case, as per law, in the above paragraphs.
17. The decisions relied upon by the learned Standing Counsel are distinguishable on facts and do not help the case of the department.
18. Therefore, in view of the facts and circumstances of the case, and the position of law discussed in the above paragraphs, we are of the considered opinion that order of the CIT(A), confirming the AO’s action, cannot be sustained. The impugned addition made by the AO is, accordingly, deleted.
