2024 (10) TMI 485 - AT - Income Tax

Addition u/s 69A - unexplained credit - Treatment as a gift u/s 56(2)(x) - HELD THAT - Section 69A applies to unexplained money for which no satisfactory explanation is provided. However, the assessee has provided all necessary documentation, including a valid remittance receipt, bank statements, and a certificate from the employer. These documents conclusively demonstrate that the amount was earned outside India as part of Mrs. Aashita P. Pancholi s employment in the UAE, and the same was transferred to the NRO account from the NRE account. As important to note that section 69A of the Act does not require the assessee to prove the source of the source of the funds, particularly when the immediate source-the remittance from the employer- is well-documented and legitimate. Therefore, we find that the AO s addition u/s 69A is unsustainable and should be deleted. DRP took an alternative view that the amount should be treated as a gift under Section 56(2)(x) - This conclusion is based on the involvement of Mr. Shreekanth Shenoi, an employee of the company who facilitated the remittance. The DRP suggested that the amount might have been a gift from Mr. Shenoi rather than a salary remittance. We find this contention to be without merit. The evidence on record clearly shows that Mr. Shenoi was merely facilitating the withdrawal and transfer of the performance incentive from the company s account to the NRE account of Mrs. Aashita P. Pancholi. The remittance receipt and the certificate from the employer both confirm that the amount was a part of Mrs. Aashita s performance bonus, and there is no evidence to suggest that it was a gratuitous gift from Mr. Shenoi. The employer s statement that this was part of the company s usual practice for handling such remittances further supports the assessee s explanation. Section 56(2)(x) applies to gifts or transfers without consideration, but in this case, the remittance was part of the salary earned by Mrs. Aashita P. Pancholi for services rendered in the UAE. There is no element of a gift or gratuitous receipt involved, and hence, the DRP s alternative finding u/s 56(2)(x) of the Act is incorrect and is accordingly rejected. Both the assessee and his wife were non-residents during the relevant assessment year. The couple had been residing and working in the UAE for over 10 years, and during the financial year 2017-18, they were in India for only 77 days, well below the threshold for being considered residents under the provisions of the Act. As per Section 5(2) of the Act, the global income of a non-resident is taxable in India only if it is received or deemed to be received in India, or if it accrues or arises in India. In this case, the performance incentive of AED 145,000 (Rs. 25,60,654/-) was earned and accrued outside India and remitted to India through legitimate banking channels. This income does not fall within the purview of Section 5 and is not taxable in India. Therefore, the addition made by the AO is contrary to the provisions of the law and cannot be upheld. It is clear that the addition made u/s 69A is unwarranted as the source of the funds has been satisfactorily explained by the assessee. The alternative finding by the DRP, treating the amount as a gift u/s 56(2)(x) of the Act, is legally unsustainable and not supported by any evidence. The income in question was legitimately earned outside India by a non-resident and is not taxable under Indian law. Accordingly, the addition made by the AO is deleted - Appeal of the assessee is allowed.

Issues Involved:

1. Addition of Rs. 25,00,000/- as unexplained credit under Section 69A of the Income Tax Act.
2. Treatment of Rs. 25,00,000/- as a gift under Section 56(2)(x) of the Income Tax Act.
3. Taxability of income earned by a non-resident under Section 5 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 25,00,000/- as Unexplained Credit under Section 69A:

The core issue in this case was the addition of Rs. 25,00,000/- to the assessee's income as unexplained credit under Section 69A of the Income Tax Act. The Assessing Officer (AO) questioned the source of this amount, which was transferred from the joint NRE account to the NRO account. The assessee provided documentary evidence, including a remittance receipt and an employer's certificate, proving that the amount was part of a performance incentive earned by Mrs. Aashita P. Pancholi in the UAE. The remittance was made through the Economic Exchange Centre, Dubai, and was a part of the usual practice of the employer, Water Systems Speciality Chemicals DMCC. The AO initially accepted this explanation in the remand report, acknowledging the legitimacy of the source. The tribunal concluded that the assessee satisfactorily explained the source of the funds, and the addition under Section 69A was unfounded. Section 69A applies to unexplained money, but the assessee provided all necessary documentation to demonstrate the legitimacy of the funds. Therefore, the tribunal held that the addition was unsustainable and should be deleted.

2. Treatment of Rs. 25,00,000/- as a Gift under Section 56(2)(x):

The Dispute Resolution Panel (DRP) proposed an alternative view that the Rs. 25,00,000/- should be treated as a gift under Section 56(2)(x) of the Act. This was based on the involvement of Mr. Shreekanth Shenoi, an employee of the company, who facilitated the remittance. The DRP suggested that the amount might have been a gift from Mr. Shenoi rather than a salary remittance. However, the tribunal found this contention to be without merit. The evidence showed that Mr. Shenoi was merely facilitating the transfer of the performance incentive from the company's account to the NRE account of Mrs. Aashita P. Pancholi. The remittance receipt and the employer's certificate confirmed that the amount was part of Mrs. Aashita's performance bonus. There was no evidence to suggest it was a gratuitous gift from Mr. Shenoi. Section 56(2)(x) applies to gifts or transfers without consideration, but in this case, the remittance was part of the salary earned by Mrs. Aashita P. Pancholi for services rendered in the UAE. Hence, the DRP's alternative finding under Section 56(2)(x) was incorrect and rejected.

3. Taxability of Income Earned by a Non-Resident under Section 5:

The assessee and his wife were non-residents during the relevant assessment year, having resided and worked in the UAE for over 10 years. The couple was in India for only 77 days during the financial year 2017-18, which is below the threshold for being considered residents under the Act. As per Section 5(2) of the Act, the global income of a non-resident is taxable in India only if it is received or deemed to be received in India, or if it accrues or arises in India. The performance incentive of AED 145,000 (Rs. 25,60,654/-) was earned and accrued outside India and remitted to India through legitimate banking channels. This income does not fall within the purview of Section 5 and is not taxable in India. Therefore, the addition made by the AO was contrary to the provisions of the law and could not be upheld.

Conclusion:

In conclusion, the tribunal found that the addition of Rs. 25,00,000/- under Section 69A was unwarranted as the source of the funds was satisfactorily explained. The DRP's alternative view of treating the amount as a gift under Section 56(2)(x) was legally unsustainable and not supported by evidence. The income in question was legitimately earned outside India by a non-resident and was not taxable under Indian law. Consequently, the addition of Rs. 25,00,000/- made by the AO was deleted, and the appeal filed by the assessee was allowed in full.

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