2019 (10) TMI 195 - AT - Income Tax

Exemption u/s 10(4)(ii) - whether the interest income from NRE account of the assessee is taxable in India or exempt u/s 10(4)(ii) as claimed by the assessee? - HELD THAT - The assessee had an NRE account in Canara Bank in India. Although the assessee was non-resident earlier, he became a 'Resident and Ordinarily Resident' in the relevant previous year 2014-15. On the interest income earned from NRE FD account of ₹ 1.10 crore, the assessee claimed exemption u/s 10 (4)(ii) in the return of income. AO rejected the assessee's claim of exemption and brought to tax and the CIT(A) upheld it. CIT(A) held that the exemption of interest on Non-Resident (external) accounts - both NRE savings accounts and NRE fixed deposit accounts - is governed by the provisions of section 10 (4) (ii) of the Act. Under those provisions, the interest for the relevant financial year 2014-15 will be exempt only if the assessee is a person resident outside India for the concerned fiscal year under FEMA. FEMA defines a person resident outside India as somebody who is not a person resident in India . The assessee would be a person resident in India as per clause (v) of section 2 of FEMA as he has come to and stays in India in the FY 2014-15 for the purpose of taking up employment in India, etc. Since, the assessee has come and stays in India in the financial year 2014- 15, CIT(A) held that the assessee was a Resident and Ordinarily Resident in India for both income tax purpose and also under FEMA and therefore, he is not eligible for exemption u/s 10(4)(ii) as he does not fulfil the condition required under proviso to the said section, that is, he was a resident outside India in the relevant previous year 2014-15 under FEMA. Since the assessee has come and stays in India during the financial year 2014-15 for 283 days, his residential status under FEMA is a person resident in India only. Therefore, the assessee is not entitled for the deduction U/s.10(4)(ii). The assessee has also not placed any material to dislodge the findings recorded by the ld.CIT(A), before us, i.e., to prove that he is a Resident outside India in the relevant previous year 2014-15 within the scope of the FEMA as well as for income tax purpose, therefore we do not find any reason to interfere with the order of the ld.CIT(A) and hence the assessee s corresponding appeal grounds are dismissed.- Decided against assessee.

Summary

Issues:
1. Claim of exemption u/s 10(4)(ii) on interest income from NRE FD account.
2. Interpretation of FEMA provisions regarding residential status.
3. Assessment of interest income earned by the assessee from NRE account.
4. Consideration of tribunal decision in a similar case.

Issue 1: Claim of exemption u/s 10(4)(ii) on interest income from NRE FD account

The appellant, a former non-resident who became a 'Resident and Ordinarily Resident,' contested the rejection of exemption claim on interest income from an NRE FD account. The AO and CIT(A) disallowed the exemption, leading to the appeal. The appellant argued that employment outside India, directorship in an overseas company, and RBI's directions allowed exemption. The appellant also highlighted the non-activity of LLPs and misinterpretation of intentions by the CIT(A).

Issue 2: Interpretation of FEMA provisions regarding residential status

The dispute revolved around the appellant's residential status under FEMA. The appellant claimed to be a non-resident under FEMA, citing employment abroad and RBI's regulations on NRE accounts. However, the AO and CIT(A) deemed the appellant a resident based on LLP partnerships and business activities in India. The appellant's reliance on tribunal decisions and RBI's guidelines was countered by the respondent's argument that the interest income accrues in India, making it taxable.

Issue 3: Assessment of interest income earned by the assessee from NRE account

The primary contention was whether the interest income from the NRE account was taxable or exempt under section 10(4)(ii). The appellant's claim for exemption was based on FEMA provisions and RBI's guidelines, while the respondent argued that the appellant's activities in India made him a resident, rendering the income taxable. The CIT(A) upheld the taxability of the interest income, leading to the dismissal of the appeal by the tribunal.

Issue 4: Consideration of tribunal decision in a similar case

The tribunal referred to a previous decision regarding the interpretation of section 10(4) of the Income Tax Act and the relevance of residential status under FEMA for claiming exemptions on interest income from NRE accounts. The tribunal emphasized the need to assess the residential status under FEMA, irrespective of the status claimed under the Income Tax Act. This decision guided the tribunal's analysis of the present case and supported the rejection of the appellant's claim for exemption.

Overall, the tribunal dismissed the appeal, affirming the taxability of the interest income from the NRE account based on the appellant's residential status and activities in India during the relevant financial year. The decision highlighted the importance of complying with FEMA provisions and RBI guidelines for claiming exemptions on interest income from NRE accounts.