2012 (6) TMI 114 - AT - Income Tax

Validity of Revisionary order passed u/s 263 - order purported to bring into tax net capital gains earned on sale of house property in United Kingdom on 31.05.2005 by assessee who s residential status during the relevant previous year was resident but not ordinarily resident - Held that - The mere fact that assessee relocated to India on 29th May 2005 does not alter her residential status, so far Income Tax Act is concerned with effect from that date. In the cases of non-residents, as also in the cases of resident but not ordinarily resident , unless, at the time money is received in India, it is received as income from an outside source, such receipt will not be an income receipt. The income was received in United Kingdom and it is only subsequent remittance, which is wholly irrelevant for taxability purposes, which was received in India. Order of Commissioner thus stands vacated - Decided in favor of assessee.

Issues:
1. Whether the Commissioner was justified in invoking powers under section 263 of the Income Tax Act, 1961 to include capital gains earned by the assessee from the sale of her property in the UK in her total income for the assessment year 2006-07.

Analysis:
1. The appeal revolved around the question of whether the Commissioner was correct in directing the Assessing Officer to modify the total income of the assessee by including capital gains from the sale of her property in the UK. The assessee, a medical practitioner, was a 'resident but not ordinarily resident' for the relevant assessment year. The Commissioner contended that since the sale proceeds were received in India after the assessee returned from the UK, the income was taxable in India. However, the Tribunal noted that the place of first receipt of income is crucial for taxability. The income from the sale was first received in the UK and subsequently remitted to India, which does not make it taxable in India. Therefore, the Tribunal held that the Commissioner's order was unsustainable in law, and the revision order was set aside, leading to the appeal being allowed.

2. The Tribunal emphasized the legal principle that income is considered received where it is first received by the assessee in its income character. Merely transferring money between bank accounts does not constitute income receipt. The Tribunal found that the capital gains on the sale of the property in the UK were initially received in the UK and only later remitted to India, which does not establish taxability in India. The Tribunal examined the bank statements provided by the assessee, confirming that the income was first received in the UK. Therefore, the Tribunal concluded that the Commissioner's decision to tax the capital gains in India was erroneous, as the income's first receipt in the UK was the determining factor for taxability, not the subsequent remittance to India.

3. The Tribunal clarified that the assessee's residential status as a 'resident but not ordinarily resident' remained unchanged throughout the relevant previous year, even after relocating to India. The Commissioner's emphasis on the timing of the sale post-assessee's return to India was deemed irrelevant, as the residential status was the key factor for taxability. The Tribunal highlighted that for residents not ordinarily resident, only income accruing or arising outside India and received in India can be taxed in India. Since the capital gains were first received in the UK, the subsequent remittance to India did not alter the taxability status. The Tribunal's decision to set aside the Commissioner's order was based on the fundamental principle of income receipt location determining taxability, which was not met in this case.

4. In conclusion, the Tribunal upheld the appeal, ruling in favor of the assessee and vacating the Commissioner's revision order. The Tribunal's analysis focused on the legal position that the place of first income receipt is crucial for determining tax liability, emphasizing that subsequent transfers do not alter the taxability status established by the initial receipt location.

← Previous Next →