2017 (7) TMI 503 - HC - Income Tax

Income received from outside India in foreign currency - taxabaility in India - sum received from two employers in a Non-Resident (external) bank account, as NRE account - Held that - The interpretation be given to sub Section (b) of Section 5(2) of the Act would also apply to Section 5(2)(a) of the Act. The Circular is clarificatory in nature and is applicable for construing the aforesaid provision for the relevant assessment year. In our opinion the authorities under the Income Tax Act did not properly apply the provisions of law to the case of the assessee. We are of the view that the Assessing Officer was wrong in adding the aforesaid sum to the income chargeable to tax of the assessee for the relevant assessment year. We accordingly allow the appeal and answer the question framed by us in favour of the assessee.

Issues: Taxability of income earned by a non-resident in India and received in NRE account.

Analysis:
1. Facts: The appellants, legal heirs of the original assessee, challenged the taxability of a substantial portion of income earned during the previous year relevant to the assessment year 2010-11. The total sum involved was received by the appellant as salary from two employers in a Non-Resident (external) bank account (NRE account).

2. Revenue's Stand: The Revenue included the sum in the income chargeable to tax, arguing that the amount was received in the NRE account, constituting receipt in India under Section 5(2)(a) of the Income Tax Act, 1961. The Commissioner of Income Tax and the Income Tax Appellate Tribunal upheld this decision.

3. Question Admitted: The High Court admitted the appeal to decide whether income by way of salary earned by a non-resident for services rendered outside India, and received in the NRE account, should be taxed on the "receipt" basis. The appellant contended that earning outside India while being an NRI exempts the income from tax under the Act.

4. Legal Precedent: The appellant relied on a Karnataka High Court decision stating that salary earned by a non-resident for services rendered outside India is not taxable in India. The court emphasized that income earned in India for services rendered in India would be taxable, not otherwise.

5. Ministry of Finance Circular: A circular clarified that salary accrued to a non-resident seafarer for services outside India on a foreign ship should not be taxed in India merely because it was credited to the NRE account in India.

6. High Court Decision: The High Court concurred with the Karnataka High Court decision, stating that income earned outside India by a non-resident should not be included in total income if received in the NRE account. The court found the Assessing Officer's decision to add the sum to the taxable income of the assessee incorrect and allowed the appeal in favor of the assessee.

7. Conclusion: The High Court ruled in favor of the assessee, holding that income earned outside India by a non-resident and received in the NRE account should not be taxed in India. The court emphasized the distinction between income earned in India and income earned outside India for tax purposes.

This judgment clarifies the tax treatment of income earned by non-residents outside India and received in NRE accounts, providing guidance on the interpretation of relevant provisions of the Income Tax Act.

← Previous Next →