ITAT deletes addition for duly explained peak balance in HSBC accounts

Nagappan Arunachalam Vs ITO (ITAT Delhi)

The ld. CIT(A) has sustained an addition u/s 69A equal to 50% of the peak balance in HSBC accounts jointly held with the spouse. The Ld. CIT(A) erred in holding that the Appellant was not able to rebut the issues raised by the AO during remand proceedings as the Assessee has not filed narrations/nature of credit and not submitted computation of income tax filed in USA/UK to substantiate the credits were not taxable in India.

Before us it was submitted that the complete narration of each and every entry in the 3 accounts were produced before the learned CIT(A). Copy of the statement showing narrations has been perused by us. The original bank statement of all 3 accounts are examined. On examination it can be seen that almost all the credits were inter-account transfers including from wife’s account. Relevant parts of these bank accounts of the Appellant and that of his spouse is part of paperbook. There were no items in the nature of income save and except sale of securities for US$ 37,000 ( 13/4/16 – US$ 19,000 and 10/6/16 – US$ 18,000) which has only resulted in a loss of US$ 1,940 as evidenced by the E*Trade statement set out earlier. With regard to the US Tax returns the assessee filed his US Tax Returns and provided copies of the same. From submissions before us it can be observed that there are no entries in the nature of income.

In view of the explanations provided, backed by bank statement of all 3 banks along with narrations, as well as the US Returns, we hold that no part of the balance in the banks should be added u/s 69 or 69A.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee against the order of the ld CIT(A)-42, Delhi dated 11.10.2021 for Assessment Year 2017-18.

2. The assessee has raised the following grounds of appeal:-

“Addition u/s 69 of investments made in Capital Account of Limited Liability Company (LLC) – Rs. 86,18,932/-

a) The Learned Commissioner erred in observing that in respect of In vestment in M/s. KLU, LLC, the Appellant failed to substantiate that funds remitted by him from India to USA was actually invested in the said firm.

b) The Learned Commissioner failed to appreciate that the Appellant had substantiated through his personal bank statements in India of HDFC Bank, HSBC in USA and that of the limited liability Company in Union Bank (No. 346) that the sums were indeed transferred from HDFC to HSBC account and finally to Union bank account of the LLC.

c) Even on law, the Learned Commissioner misapplied Sec 69 in so far as he failed to appreciate that the opening balance of the Appellant’s capital account relates to investments made in prior years and that Sec 69 by the plain reading, can only deem as income, the value of investments made during the year – and not prior thereto. It is also urged that even if Sec 69A were to be examined in place of Sec 69, the former relates only to money, bullion, jewellery or other valuable article and does not cover In vestment in capital accounts.

2. Additions relating to Investments in Securities – Rs. 19,33,500/-

a) The Learned Commissioner failed to appreciate that any investment made in prior years cannot be considered as Income u/s 69 of the current year, as the provision deems as income, only investments made in the relevant financial year which could not be satisfactorily explained.

b) In so far as the sum mentioned in Sch FA of the ITR was demonstrated as relating to 31/12/2015 (and not 1/4/2016) with relevant documentary evidences in the form of Brokers’ Statement of Account and further this fact was not disputed, the Commissioner erred in bringing to tax an investment relating to the prior year as deemed income u/s 69. Commissioner erred in bringing to tax an investment relating to the prior year as deemed income u/s 69.

3. Additions relating to Peak Balances in Bank Accounts – Rs. 80,62, 092/-

a) The Learned Commissioner while observing that the Appellant could not rebut the claims of the AO that narration or nature of credit in the bank accounts were not filed, failed to take cognisance of the fact that detailed narration of the bank accounts ending with account number 807, 797 and 396 were very much available in the bank statements itself and further that these were also extracted and set out in the rejoinder to the remand report on 23 Jan 2021 before the learned Commissioner, all of which are on record.

b) In so far as every credit in the three bank accounts have been explained in detail, and none partakes the character of income, the learned Commissioner fell in error in holding that the peak balances in the accounts constituted income u/s 69A of the Income Tax Act.”

3. The assessee is a citizen of UK and currently residing in the United States of America as a Green Card Holder. Having been outside India for more than 40 years, he briefly came to India for employment for a little over 3 years and thereby he became a Resident of India for the tax purposes in the Assessment year 2017-18. Since the assessee owned foreign assets, he duly disclosed all his foreign assets in Schedule FA to the ITR. His assessment was done without the benefit of any explanations from the assessee as all the email notices sent by the department had purportedly landed in his spam folder and eventually auto-deleted by the software. The Assessment was completed with an addition of Rs. 14,30,65,720 being the total value of all his foreign assets, including assets jointly held with his spouse. In First Appeal, the assessee was granted a relief of Rs. 12,44,51,196, sustaining thereby an addition of Rs. 1,86,14,524.

4. The assessee is before the Tribunal against the additions sustained of Rs. 1,86,14,524/-.

5. Financial interest in an LLC in USA:-

Facts relevant to the adjudication of this issue are that the assessee along with his wife had formed an LLC in USA on 26 Oct 2015 with an initial combined capital of US$ 74,856. A further capital of US$ 91,730 each ( aggregating to US$ 183,460) was introduced in the previous year 2016-17 relevant to the AY 2017­18. This was sourced out of tax paid income earned in India. This amount of US$ 183,460 being the appellant’s share of capital introduced in AY 2017-18 was sustained u/s 69 as unexplained Investments for the reason the assessee failed to show that funds remitted from India was invested as capital in the firm.

6. The addition also includes 50% share of the opening balance of US$ 74,856 introduced in a prior year (on 26 Oct 2015). This is evidenced by the US IT return of the LLC in Annexure

7. Salary earned by the assessee in India were deposited in HDFC Bank. A sum of US$ 10,19,075 equivalent to INR 645 lacs was transferred from HDFC Bank to HSBC Bank ( account ending 807) till 31/3/2016. Bank Statements of HDFC Bank from where the following transfers were made to HSBC-807 reflects the transactions as under:-

8. The assessee transferred monies from time to time to Union Bank Account of the LLC. Bank Statement of Union Bank, US held by the LLC where credits from HSBC Bank can be traced have been enclosed which reflect that a sum of US$ 183,460 was transferred from HSBC to Union Bank belonging to the LLC.

9. The following table extracted from Union Bank is self explanatory:-

10. The assessee had earned tax-paid income in excess of Rs. 13.94 crores during his employment in India, which was transferred from time to time and was used to fund the capital. From the trail of funds emanating from HDFC India to HSBC bank account in US and in turn to the Union Bank account of the LLC that the capital invested into the LLC was from tax paid income earned in India as depicted by the above table and in view of the explanations provided supported by bank statements of all 3 banks, One-to-One correlation, and the ITR of the LLC, we hold that the investment in LLC cannot be considered as unexplained investments.

11. The appeal of the assessee on this ground is allowed.

12. Investment in Securities-Rs. 19,33,500

Your Appellant had disclosed in Sch FA to the ITR, a sum of Rs. 19,33,500 as cost of Securities held as on 1/4/2016. This cost actually represents the closing balance of Securities as of 31/12/2015 being the year-end in US.

13. The above addition was sustained u/s 69 for the following reasons:

a. The assessee has not submitted that taxability of such income/loss on such securities occurred during the year with documentary evidence;

b. It is not verifiable from the statement of E*Trade as to how the sum of Rs. 19,33,500 was arrived at; and

c. It is not proven from documentary evidence that the investment was made in a prior year, i.e., FY 2015-16.

14. Before us it was submitted that the tax year in US is the Calendar year and hence the year under consideration is CY 2016 (1/1/6 to 31/12/16) and the assessee incurred loss on Short term capital loss of US$ 641 as well as Long Term Capital loss of US$ 1,940. Evidences filed shows the date of purchase of each of the security from reflecting the investments were made in CY 2015. Hence, they are not amenable to tax/ evasion in the instant year.

15. Hence, appeal of the assessee on this ground is allowed.

16. Peak balance in Bank Accounts in HSBC Bank

The ld. CIT(A) has sustained an addition u/s 69A equal to 50% of the peak balance in the accounts jointly held with the spouse. The Ld. CIT(A) erred in holding that the Appellant was not able to rebut the issues raised by the AO during remand proceedings as the Assessee has not filed narrations/nature of credit and not submitted computation of income tax filed in USA/UK to substantiate the credits were not taxable in India.

17. Before us it was submitted that the complete narration of each and every entry in the 3 accounts were produced before the learned CIT(A). Copy of the statement showing narrations has been perused by us. The original bank statement of all 3 accounts are examined. On examination it can be seen that almost all the credits were inter-account transfers including from wife’s account. Relevant parts of these bank accounts of the Appellant and that of his spouse is part of paperbook. There were no items in the nature of income save and except sale of securities for US$ 37,000 ( 13/4/16 – US$ 19,000 and 10/6/16 – US$ 18,000) which has only resulted in a loss of US$ 1,940 as evidenced by the E*Trade statement set out earlier. With regard to the US Tax returns the assessee filed his US Tax Returns and provided copies of the same. From submissions before us it can be observed that there are no entries in the nature of income.

18. In view of the explanations provided, backed by bank statement of all 3 banks along with narrations, as well as the US Returns, we hold that no part of the balance in the banks should be added u/s 69 or 69A.

19. In the result, the appeal of the assessee is allowed.

Order Pronounced in the Open Court on 05/04/2023.