2017 (11) TMI 567 - AT - Income Tax

Revision u/s 263 - accrual of income in India - CIT setting aside the assessment order to make afresh assessment after examining the issue of claim of deduction of salary earned by the assessee on his employment on deputation to foreign country - Held that - It is not the case that the assessee has received or deemed to have received any income in India because salary which has been received by the assessee is during his employment in Iraq as a Country Manager for the activities carried out in Iraq. No such income has been received by the assessee for carrying out any activity in India or source of income is from India which could be reckoned as income received or accrued in India. Thus, in terms of subsection (1) of section 6, salary income of the assessee for the previous year cannot be held to be taxable because he was not resident in India, as admittedly he was outside India for more than 182 days. Accordingly, salary of the assessee cannot be taxed in India and the same has rightly been claimed as deduction in the return of income. Thus, on merits we hold that the assessment order passed by the Assessing Officer is not prejudicial to the interest of the Revenue, albeit can be reckoned as erroneous in the absence of any proper enquiry. It is trite law that revisionary jurisdiction under section 263 on an assessment order can only be exercised once the said order is found to be erroneous insofar as it is prejudicial to the interest of the Revenue, i.e., both the conditions should fulfill simultaneously. Thus, even if one of the limbs of said expression used in section 263 is missing, then ostensibly the assessment order cannot be set aside within the scope of revision u/s 263. Hence, on merits we quash the order of the Ld. Pr. CIT and uphold the allowability of deduction of salary as claimed by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the Pr. CIT's action under section 263 of the Income Tax Act, 1961.
2. Examination of the claim of deduction of salary earned by the assessee during deputation to a foreign country.
3. Determination of the assessee's residential status under section 6 of the Income Tax Act, 1961.
4. Taxability of salary income received in India for services rendered abroad.

Detailed Analysis:

1. Validity of the Pr. CIT's Action under Section 263 of the Income Tax Act, 1961:
The primary issue revolves around the Pr. CIT invoking his revisionary jurisdiction under section 263, which allows for the revision of an assessment order if it is deemed "erroneous in so far as prejudicial to the interest of the Revenue." The Pr. CIT observed that the Assessing Officer (AO) had not adequately examined the assessee's claim for salary deduction earned during foreign deputation, making the assessment order prima facie erroneous and prejudicial to the Revenue's interest. The Tribunal examined whether the AO's lack of proper enquiry justified the Pr. CIT's intervention.

2. Examination of the Claim of Deduction of Salary Earned by the Assessee During Deputation to a Foreign Country:
The assessee, employed with M/s Reliance Industries Ltd., was deputed to Iraq and claimed a salary exemption of ?40,04,830/- on the grounds of being outside India for more than 182 days. The AO initially accepted this claim without detailed scrutiny. The Pr. CIT argued that the AO's failure to examine the substantial salary deduction claim rendered the assessment order erroneous. The Tribunal noted that the AO had indeed raised this issue during rectification proceedings, and the assessee had provided detailed submissions and a chart showing the number of days spent outside India.

3. Determination of the Assessee's Residential Status under Section 6 of the Income Tax Act, 1961:
The Tribunal emphasized the importance of determining the assessee's residential status, as it impacts the taxability of income earned abroad. According to section 6(1), an individual is considered a resident if they are in India for 182 days or more in a given year. The assessee provided evidence of staying outside India for 203 days, which was not disputed by the AO or the Pr. CIT. The Tribunal held that the assessee could not be considered a resident for the relevant year, thus affecting the taxability of the salary income.

4. Taxability of Salary Income Received in India for Services Rendered Abroad:
The Tribunal examined whether the salary earned for services rendered abroad, but received in India, should be taxed. Section 5(2) defines the scope of total income for non-residents, including income received or accrued in India. However, the Tribunal clarified that section 6 determines the residential status, which in turn affects taxability. Since the assessee was a non-resident, the salary earned abroad could not be taxed in India, even if credited to an Indian bank account and subject to TDS by the employer. The Tribunal concluded that the salary income was not taxable in India under the given circumstances.

Conclusion:
The Tribunal quashed the Pr. CIT's order under section 263, holding that although the AO's enquiry might have been inadequate, the assessment order was not prejudicial to the Revenue's interest. The assessee's salary income earned during foreign deputation was rightly claimed as exempt, given the non-resident status under section 6. The appeal was allowed, and the Tribunal upheld the allowability of the salary deduction as claimed by the assessee.