‘NRE’ DEPOSITS SOURCED FROM FOREIGN REMITTANCES ARE BEYOND INDIAN TAXATION

[DR.MARIAPPAN GOVINDARAJAN]

In RAJENDRA MAGANBHAI PATEL VERSUS THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE INTERNATIONAL TAXATION, VADODARA - 2025 (3) TMI 519 - ITAT AHMEDABAD, the appellant in the present appeal is a UK citizen and non-resident India (‘NRE’ for short).  The appellant did not file income tax returns for the Assessment years (‘AY’ for short) 2013-14 and 2015-16.   The Assessing Officer issued a notice under Section 148 of the Income Tax Act, 1961 (‘Act’ for short) based on the information available in the ‘Income Tax Business Application’ (‘ITBA’ for short) on 31.03.2021.  The appellant filed income tax returns for both the years on 30.04.2021 declaring the income for 2013 – 14 Rs. 5,79,019/- and for Rs.2014-15 – Rs.77421/-. 

Based on the information furnished by the appellant the Assessing Officer issued a draft assessment order proposing addition on account of unexplained credits to NRE accounts of the assessee. DRP directed the Assessing Officer to delete some additions as explained. Based on the directives of DRP, the  Assessing Officer confirmed some additions.  The Assessing Officer added Rs. 3,79,69,033/- for the AY 2013 – 14 and Rs. 3,67,60,000/- for the AY 2015-16. 

Against the said order the appellant filed two appeals before the ITAT vide No. ITA 105/Ahmd/2023 and ITA 106/Ahmd/2023.  The appellant contended in respect of ITA 105/Ahmd/2023 before the ITAT that the Assessing Officer has made addition of Rs. 3,79,69,033/- for the failure to prove source of funds received in NRE Bank accounts. The Assessing Officer as well as Disputes Resolution Panel (‘DRP’ for short) failed to appreciate the fact that source of fund along with source of source was properly explained. The Assessing Officer as well as the DRP failed to appreciate the fact that entire money was transfer from one account to other account and therefore source was very well explained. The action of the Assessing Officer is totally arbitrary and not in accordance with provisions of law.

In respect of ITA 106/Ahmd/2023, the appellant submitted the following before the ITAT-

• The Assessing Officer, while framing assessment order, derived extra territorial jurisdiction to tax money earned in any country outside India by NRI.  Such action of Assessing Officer is totally devoid of the provisions of Income Tax Law in India and therefore assessment order itself is bad in law.
• The Assessing Officer has made addition of Rs. 3,67,60,000/- for the funds received in NRE Bank accounts, which is introduced by appellant in his NRE account from his foreign bank account.
• The Assessing Officer failed to appreciate the fact that inward remittances in NRE account has to be necessarily from abroad and for non-residents, any funds brought into India into NRE account does not become taxable irrespective of the fact whether such NRI has filed its tax return in his country of residence.
• Since the Assessing Officer made the addition based on credits in the NRE account, such an addition is unsustainable as per Section 10(4) of the Act. 
• The Assessing Officer should have verified the credit entries in the NRO account from where certain transfers were made to the NRE account instead of directly taxing the NRE credits.
• If the Assessing Officer doubted the source of funds in the NRO account, the addition should have been made at that stage, not at the NRE account level, which is contrary to settled legal principles.

The Department submitted the following before the ITAT-

• The assessee had failed to establish the source of a credit entry of Rs. 1,80,00,000/- in the HDFC Bank NRE account on 06-02-2013.
• The DRP concluded that two additional credit entries remained unexplained—one for Rs. 1,50,00,000/- credited in Deutsche Bank on 16-09-2012 and another for Rs. 48,69,033/- credited in HSBC Bank on 13-09-2012.

The ITAT considered the submissions of the appellant and the Department.  The ITAT perused the documents on record and also analysed the provisions of the Act in respect of the present appeal. 

The ITAT considered the issue to be decided in this case is as to-

• Whether the various credits in the assessee’s NRE bank accounts during the year under consideration were correctly added as unexplained income by the Assessing Officer? or
• Whether the assessee has successfully explained those credits such that they are not liable to tax?

The ITAT verified the disputed credit in NRE accounts.  The ITAT observed that all the relevant bank statements are not available in the paper book.  The ITAT observed that the funds deposited in the NRE account were primarily sourced from-

• proceeds of pharmacy business sales in the UK between 1992 and 2006,
• redemptions of FCNR deposits and mutual funds previously invested in India,
• inter-account transfers within India from existing NRE accounts, and
• remittances from foreign bank accounts.

The ITAT further observed that the transfer amounting to Rs. 1,80,00,000/- from the NRO account to the NRE account maintained with HDFC Bank was sourced from the assessee’s NRO account, where two prior deposits of Rs. 1 crore on 03.12.2012 and Rs. 80 lakhs on 10.12.2012 were made. The ITAT considered that it becomes crucial to examine whether the initial credits in the NRO account were from taxable income or capital receipts.

The ITAT noted that the amount credited to the NRE account on 13-09- 2012, with the narration ‘HSBC INC FD-SH TRM PLN-R SOF NRE’, remained unexplained by the assessee during the assessment and DRP proceedings. However, both the Assessing Officer and DRP orders explicitly mention the narration from the bank statement, indicating that the credit represents proceeds from a short-term fixed deposit redemption. Given that an NRE FD redemption typically originates from previously tax-exempt foreign remittances, this entry is self-explanatory and can reasonably be treated as explained. Consequently, the addition made on this account appears unsustainable, as the source of funds is inherently linked to a legitimate financial transaction rather than unexplained income.

In respect of Rs.1.5 crore there was no supporting explanation or additional evidence has been provided by the assessee and the bank statement for Deutsche Bank is not available and therefore, the ITAT held that this transaction requires further verification by the Assessing Officer to determine the actual source of funds.

In respect of ITA 106/Ahmd/2023, the ITAT observed that based on the detailed explanation and supporting documents submitted before the DRP and given that the bank statement itself confirms the nature of the transaction, this inward remittance is adequately explained and does not require further verification.

The ITAT noted that Section 10(4) of the Act provides that income earned outside India and deposited into an NRE account remains free from Indian taxation.  The assessee in the present case is an NRI, and the additions made by the Assessing Officer pertain to credits in NRE accounts maintained with HDFC Bank, Deutsche Bank, and HSBC Bank. The assessee has claimed exemption under Section 10(4)(ii) of the Act, arguing that the credited funds originated from foreign sources and should not be taxed in India. The Assessing Officer made additions based on credits in the assessee’s NRE account, treating them as unexplained income. However, as per Section 10(4) of the Act, funds deposited in an NRE account are not subject to Indian taxation if they originate from foreign income. The assessee has provided documentation showing that the funds were either foreign remittances or redemptions of existing NRE deposits and hence should not be considered taxable under Indian law.

The ITAT held that considering the provisions of Section 10(4) the  funds remitted from foreign sources into NRE accounts are not taxable in India unless there is material to establish that they originate from taxable Indian income.  The ITAT held that-

• In AY 2013-14, the addition of Rs. 48,69,033/- credited on 13-09-2012 in HSBC Bank (NRE) is deleted, as it represents a redemption of an NRE fixed deposit, which qualifies for exemption under Section 10(4). 
• the addition of Rs. 1,80,00,000/- in HDFC Bank (NRE) and Rs. 1,50,00,000/- in Deutsche Bank (NRE) requires further verification by the Assessing Officer to ascertain whether the original source of funds in the NRO account was from taxable income or tax-free foreign remittances.
• For AY 2015-16, the addition of Rs. 3,67,60,000/- credited on 23-01-2015 in HDFC Bank (NRE) is deleted, as it is an inward remittance from JP Morgan Chase Bank, UK, and qualifies for exemption under Section 10(4) of the Act.
• Accordingly, the appeal for AY 2013-14 (ITA No. 105/Ahd/2023) is partly allowed for statistical purposes, with a direction to the Assessing O for further verification.
• Since there are no pending verifications or unresolved issues for this year, the appeal for AY 2015-16 (ITA No. 106/Ahd/2023) is allowed in full.