2019 (10) TMI 247 - AT - Income Tax

Revision u/s 263 - Assessment of interest income on FCNR-B deposits - joint FCNR(B) Bank account with the assessee s non-resident - HELD THAT - AO cannot remain passive in the face of a claim, which calls for further enquiry to know the genuineness of it. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. AO was statutorily required to make the assessment u/s 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. AO is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. AO should protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. AO is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return. The order passed by the AO becomes erroneous when an enquiry has not been made before accepting the genuineness of the claim which resulted in loss of revenue. In the present case. there was a joint FCNR(B) Bank account with the assessee s non-resident daughter with State Bank of India, NRI Branch. The parties concerned with the Bank Account had not changed it as per notification by Reserve Bank of India in FEMA 5/2000-RB dated 03/05/2000 Being so, resident in India cannot have FCNR(B) bank accounts jointly with non-resident which was relaxed by the Reserve Bank of India vide notification RBI/201M2/174, A.P(DIR series) Circular No.13 dated 15.09.2011 which was not retrospectively applicable to assessments relating to F.Y. prior to 2011-12. Hence, in our opinion, the PCIT is justified in giving direction to the Assessing Officer to verify, re-quantify and tax the interest amounts accrued which were wrongly not taxed in the earlier assessment order after giving appropriate opportunity of being heard. However, the Assessing Officer shall determine in whose hands the interest income is to be assessed and decide the same independently without being influenced by the directions of PCIT. Thus, the grounds of appeals of the assessee are dismissed.

Issues Involved:

1. Legality of the Principal Commissioner of Income Tax's (PCIT) order under Section 263 of the Income Tax Act.
2. Whether the Assessing Officer (AO) completed the assessment without proper verification and application of mind.
3. The taxability of interest on FCNR-B deposits held by the appellant's daughter.
4. Jurisdiction of the PCIT to revise an issue already considered by the Commissioner (Appeals).
5. The authority of the PCIT to direct the AO to complete the assessment in a specific manner.

Detailed Analysis:

1. Legality of the PCIT's Order under Section 263:
The appeals by the assessee challenge the order of the PCIT, Trivandrum, dated 11/12/2018, passed under Section 263 of the Income Tax Act for the assessment years 2006-07 to 2010-11. The PCIT invoked Section 263, contending that the AO's assessment order was erroneous and prejudicial to the interests of the revenue, as it failed to properly assess the taxability of interest on FCNR-B deposits.

2. Verification and Application of Mind by the AO:
The PCIT concluded that the AO completed the assessment without adequate verification and application of mind. The AO had accepted the assessee's claim regarding the non-taxability of interest on FCNR-B deposits based on a statement from the State Bank of India. However, the PCIT noted that the AO did not sufficiently investigate the applicability of FEMA regulations, which prohibit joint FCNR-B accounts between residents and non-residents.

3. Taxability of Interest on FCNR-B Deposits:
The core issue was whether the interest on FCNR-B deposits held by the appellant's daughter was taxable in the appellant's hands. The PCIT observed that, according to FEMA regulations, when one joint account holder becomes a resident, the account should either be redesignated as a resident account or the resident's name should be deleted. Since these actions were not taken, the PCIT argued that the interest should be taxed in the appellant's hands. The PCIT also noted that the relevant RBI notification allowing joint accounts between residents and non-residents was not applicable retrospectively for the periods in question.

4. Jurisdiction of the PCIT to Revise an Issue Already Considered by the Commissioner (Appeals):
The assessee contended that the issue of taxability of interest on FCNR-B deposits had already been considered by the Commissioner (Appeals) and thus, the PCIT had no jurisdiction to revise this issue under Section 263. The PCIT, however, argued that the AO's order was erroneous and prejudicial to the revenue, as it did not adequately address the taxability of the interest income.

5. Authority of the PCIT to Direct the AO:
The PCIT directed the AO to verify, re-quantify, and tax the interest amounts accrued, which were wrongly not taxed in the earlier assessment order. The PCIT relied on various judicial precedents to assert that the AO should have made further inquiries before accepting the assessee's claims. The Tribunal upheld the PCIT's direction, emphasizing that the AO must conduct a thorough investigation and act judiciously to protect the revenue's interests.

Conclusion:
The Tribunal dismissed the assessee's appeals, affirming the PCIT's order under Section 263. It held that the AO's failure to adequately verify the taxability of interest on FCNR-B deposits rendered the assessment order erroneous and prejudicial to the revenue. The Tribunal directed the AO to reassess the interest income independently, without being influenced by the PCIT's directions, and to determine the appropriate tax liability.

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