2021 (8) TMI 743 - AT - Income Tax

Assessability of the interest income accruing/arising from the funds that were deposited in the foreign bank account - unexplained funds invested in foreign bank account - claim of the assessee that the entire funds in the aforesaid foreign bank account were deposited by her mother, and thus, she only being a nominee - HELD THAT - Tribunal while disposing off the appeals in the case of the assessee‟s mother, viz. Mrs. Pushpa N. Khimji 2019 (4) TMI 2003 - ITAT MUMBAI , had observed, that the amounts deposited in the bank account with HSBC Bank, Zurich, belonged to Mrs. Pushpa N. Khimji (supra), and the same were received by her by way of inheritance on the death of her husband on 15.07.1988 Now when the deposits lying in the foreign bank account in question are undisputedly held to be belonging to and owned by Mrs. Pushpa N. Khimji, then, the interest income arising therefrom without any choice have to be brought to tax in her hands only. In case the interest income accruing/arising on the funds lying in the aforesaid bank account are divorced from the person who owns the said funds, then, the same, in our considered view would lead to incongruous results that would had never been intended by the legislature. Our aforesaid conviction is in fact fortified by the fact that the legislature in all its wisdom had in order to plug any diversion of income without there being any transfer of income yielding asset/source had specifically in Chapter V Sec. 60 to 65 of the Act provided for circumstances wherein income from revocable transfers would be related back and clubbed in the hands of the transferor. Deposits lying in the bank account in question with HSBC bank, Zurich undisputedly belong to and are owned by the assessee‟s mother, viz. Mrs. Pushpa N. Khimji. Although, it is a matter of fact borne from the record that the assessee as a joint holder of the aforesaid foreign bank account had all the rights of functional operations of the said account, but the same would by no means justify relating of any part of the interest income on such funds/deposits lying in the said foreign bank account in the hands of any other person except for the owner of said funds, viz. Mrs. Pushpa N. Khimji. Accordingly, in the backdrop of our aforesaid deliberations not being able to persuade ourselves to accept the view taken by the CIT(A) that 50% of the interest income i.e an amount of ₹ 93,528/- (50% of ₹ 1,87,056/-) was liable to be brought to tax in the hands of the assessee, we, thus, set-aside his order to the said extent and vacate the addition of ₹ 93,528/- that was sustained by him. The Grounds of appeal is allowed.

Issues Involved:
1. Validity of reopening the assessment beyond six years.
2. Taxability of interest income from a foreign bank account.
3. Ownership and control over the foreign bank account funds.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment Beyond Six Years:
The assessee contested the reopening of her assessment beyond the six-year period, arguing that the reopening under Section 148 was invalid. The CIT(A) upheld the reopening based on Section 149(1)(c) of the Income Tax Act, which allows reopening within sixteen years if the asset is located outside India. The assessee argued that she was merely a nominee and not the owner of the foreign account, thus Section 149(1)(c) should not apply. The Tribunal noted that the amendment extending the limitation period to sixteen years was effective from 01.07.2012 and should not apply retrospectively to cases where the limitation had already expired.

2. Taxability of Interest Income from a Foreign Bank Account:
The primary issue was whether the interest income from the foreign bank account should be taxed in the hands of the assessee. The CIT(A) concluded that the funds in the HSBC bank account belonged to the assessee's mother, Mrs. Pushpa N. Khimji, and deleted the addition of ?3,19,30,169 made by the AO. However, the CIT(A) upheld the addition of 50% of the interest income, amounting to ?93,528, on the grounds that the assessee had control over the account and operational rights.

3. Ownership and Control Over the Foreign Bank Account Funds:
The AO argued that the assessee was not merely a nominee but had full ownership and control rights over the funds in the HSBC bank account. The AO observed that the assessee had signed various documents, applied for a travel cash card, and made withdrawals from the account. Despite the assessee's claims and supporting affidavit from her mother, the AO concluded that the funds were unexplained and added the deposits and interest income to the assessee's income. The CIT(A) agreed that the funds belonged to Mrs. Pushpa N. Khimji but held that the assessee, as a joint account holder, had rights over the funds, justifying the taxation of 50% of the interest income in her hands.

Tribunal's Judgment:
The Tribunal found that the interest income should be taxed in the hands of the person who owns the funds. Since the deposits in the HSBC account were owned by Mrs. Pushpa N. Khimji, the interest income arising from these deposits should be taxed in her hands, not the assessee's. The Tribunal emphasized that the source of income and its taxation are interlinked and should not be separated. Therefore, the Tribunal vacated the addition of ?93,528 made by the CIT(A) and allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s order to the extent it upheld the addition of 50% of the interest income. The Tribunal concluded that the interest income should be taxed in the hands of Mrs. Pushpa N. Khimji, the owner of the funds, and not the assessee. Consequently, the Tribunal did not address the validity of the reopening of the assessment, leaving it open. The appeals for subsequent years (2006-07 to 2013-14) were also allowed on similar grounds, vacating the additions made by the CIT(A) regarding the interest income from the foreign bank account.

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