Investments from NRE Accounts not taxable under Section 10(d) of Income Tax

Nitin Mavji Vekariya Vs ITO (Gujarat High Court)

In the case of Nitin Mavji Vekariya versus the Income Tax Officer (ITO) before the Gujarat High Court, the court dealt with the challenge to an order issued under section 148A(d) of the Income Tax Act, 1961 for the Assessment Year 2018-19. Here’s a summary of the judgment:

1. The petitioners, who are family members and residents and citizens of the Republic of Uganda, sought to quash and set aside the order issued under section 148A(d) of the Income Tax Act, 1961.
2. Mr. Divatia, learned counsel for the petitioners, argued that all investments in Time Deposits and Mutual Funds were made from Non-Resident External (NRE) Accounts, and therefore, not subject to tax under Section 10(d) of the Income Tax Act. The petitioners furnished details and documents supporting their claim.
3. The Revenue, represented by Mr. Karan Sanghani, contended that the residency period in India of the petitioners was unclear from the passport details furnished, and the investments from the NRE Accounts were unexplained.
4. The court considered the submissions and noted that all investments were indeed made from NRE Accounts, which are exempt from taxation under Section 10(4) of the Income Tax Act.
5. The court observed that the impugned orders lacked jurisdiction as they failed to recognize that the funds originated from NRE Accounts, which are beyond the reach of taxation authorities. Additionally, Section 10(4) of the Income Tax Act exempts such incomes from inclusion in the total income.
6. Consequently, the court quashed and set aside the impugned orders dated 29.03.2022, ruling in favor of the petitioners.

In conclusion, the Gujarat High Court ruled that the orders issued by the Income Tax Officer were without jurisdiction and allowed the petitions.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Rule returnable forthwith. Mr. Karan Sanghani, learned Standing Counsel, waives service of notice of rule on behalf of the respondent – revenue. With consent of the learned advocates appearing for the respective parties, the matters are taken up for final hearing today.

2. All the petitioners are family members who as residents and citizens of the Republic of Uganda, have prayed for directions to quash and set aside the order dated 29.03.2022 issued under section 148A(d) of the Income Tax Act, 1961, for the Assessment Year 2018-19. Since notices issued and the consequential orders are challenged on the same grounds, facts of Special Civil Application No. 7636 of 2022 are considered.

2.1 Mr. Divatia, learned counsel for the petitioner would submit that the petitioner is a resident and citizen of Republic of Uganda. The petitioner has been allotted PAN: AJUPV7695R and he is having NRE Account No.008601017024 with ICICI Bank, Puja Complex, Bhuj and also NRI account No.008601076903 with the same branch. The petitioner is also having NRE account No.50100158161603 with HDFC Bank, Jubilee Circle, Bhuj. The petitioner is also having NRE account No. 6511210464 with Kotak Mahindra Bank, College Road, Bhuj.

2.2 Mr. Divatia, learned counsel, would further submit that recently, the respondent had issued notice u/s.148A(b) on 16.03.2022 calling upon the petitioner to show cause as to why the notice u/s. 148 should not be issued, in view of the investment in time deposit and mutual fund aggregating to Rs.1,92,00,000/- but he did not file his return of income. The petitioner was asked to furnish response on or before 21.03.2022. Mr. Divatia, learned counsel, would further submit that notice u/s.148A(b) dated 21.03.2022 points out that the information was received that the petitioner had indulged in transactions of time deposits and mutual fund investment, but did not file return of income. The said information suggested that there is escapement of income to that extent. On 21.03.2022, the petitioner uploaded the reply dated 20.03.2022 along with various details / documents which included NRE SB Statements, Uganda citizenship and passport documents etc.

2.3 It is submitted by Mr. Divatia, learned counsel, that the respondent has on 29.03.2022, passed the impugned order u/s.148A(d) holding that the income to the tune of Rs.1,92,00,000/- had escaped assessment for the year under consideration, and therefore, it was a fit case for issuance of notice u/s.148 of the Act.

2.4 Mr. S. N. Divatia, learned counsel, would submit that the order dated 29.03.2022 u/s. 148A(d) and the notice under section 148 dated 30.03.2022 are bad. Reading the reasons, Mr. Divatia, learned counsel, would submit that the conclusion that the income had escaped assessment was bad. That the transactions in question, namely, investments in Time Deposits and Mutual Funds were out of foreign funds in the assessee’s NRE Accounts, details of which were furnished in response to the notice. A copy of the passport evidencing the fact that the petitioner was a citizen of the Republic of Uganda to substantiate this together with bank details were furnished. Drawing the Court’s attention to the pointwise reply, Mr. Divatia, learned counsel, would submit that all investments were from respective NRE Accounts and therefore, could not be a subject of tax in accordance with the provisions of Section 10(d) of the Income Tax Act, 1961.

3. Mr. Karan Sanghani, learned Standing Counsel for the revenue would submit that from the passport details, even if furnished, it was not clear to compute the residency period in India of the petitioner. The investments from the bank accounts were unexplained.

4. Having considered the submissions made by the learned advocates appearing for respective parties, what is evident from the explanation tendered by the petitioner was that all the investments in Time Deposits and Mutual Funds were made from NRE Accounts. The order impugned indicates that the petitioner had furnished such details which read as under:

“i. Time deposits (NRE) of Rs.51,00,000/- with Kotak Mahindra Bank Limited were made out of his NRE Saving account number 6511210464 with Kotak Mahindra Bank Limited. Assessee submitted bank account statement of his NRE bank account with Kotak Mahindra Bank Limited.

ii. Time deposits (NRE) of Rs.80,00,000/- with HDFC Bank Ltd were made out of his NRE Saving account number 50100158161603 with HDFC Bank Ltd. Assessee submitted copy of certificate from Bank of Baroda in this regard.

iii. Investment of Rs.47,00,000/- in ICICI Prudential Mutual Fund was invested out of his NRE Saving bank account (A/c. No. 0086011017024) with ICICI Bank Ltd., Bhuj (Rs.8,50,000/- dated 08.08.2017 + Rs.8,50,000/- dated 08.08.2017 + Rs. 15,00,000/- dated 04.01.2018) and from NRE Saving account number 50100158161603 with HDFC Bank Ltd (Rs.15,00,000/- dated 09.08.2017). Assessee submitted copy of summary of ICICI Prudential Mutual Fund Statement and Statement of ICICI Bank NRE Account.

iv. Investment of Rs.14,00,000/- in HDFC Mutual Fund was invested out of his NRE saving bank account (A/c. No.7611617528) with Kotak Mahindra Bank Ltd., Bhuj (holding jointly with his wife Jasuben). Assessee submitted copy of statement of Kotak Mahindra Bank Ltd. NRE Account.

v. Investment of Rs.14,00,000/- (Rs.7,00,000/-each on 31.05.2017 and 28.09.2017) in Kotak Mahindra Mutual Fund was invested out of his NRE saving bank account (account number 6511210464) with Kotak Mahindra Bank Limited. Assessee submitted copy of statement of Kotak Mahindra Bank Ltd. NRE account.

vi. Assessee submitted copy of certificate of residence from Uganda, issued to him.

Above reply of assessee is duly considered. Assessee did not submit copy of his passport. Without that residential status of the assessee cannot be ascertained during year under consideration which is required as per provision of section 6 of the I.T. Act. Therefore, reply of the assessee has not been found satisfactory.”

5. Undisputedly, the funds came from NRE Accounts and the source therefore was beyond the reach of the authorities. Even on reading the provisions of section 10(4), it is apparent that such incomes are exempt from being included in the total income.

6. The impugned orders dated 29.03.2022 in all these petitions are, therefore, without jurisdiction. The orders dated 29.03.2022 in the respective petitions are therefore quashed and set aside. Petitions are allowed, accordingly. Rule is made absolute accordingly, with no orders as to costs.