2021 (4) TMI 252 - AT - Income Tax

Addition u/s 69 - undisclosed foreign bank account - addition being the peak balance of the alleged foreign bank account maintained with HSBC Bank Switzerland - AO computed interest @ 4% on the peak balance of the alleged foreign bank account and in subsequent years, such addition was made on the basis of such premises - HELD THAT - A perusal of the table reproduced by the AO shows that the notional interest computed by the AO contains the name of the profile client which are ASPREY WORLDWIDE S.A. . RONDERBERG LTD. and TAIRA FOUNDATION. These names claimed match with the names mentioned in the assessment order for the AY 2006-07, wherein, the addition was made on account of peak balance appearing in these bank accounts. It is also mentioned in the said order that the bank accounts are closed in FY 2005-06 on different dates. Find merit in the arguments of the learned counsel for the assessee that if these accounts were closed in FY 2005-06, then the question of computing any notional interest for the impugned assessment year does not arise - no interest income can be earned on a bank account during AY 2016-17 which stand closed in AY 2006-07. However, considering the totality of the facts of the case and in interest of justice, we deem it proper to restore the matter back to the file of the AO for adjudication of the issue afresh stating that the addition towards interest on outstanding credit balance in foreign bank account can only be made on the basis of some evidence/material. Addition cannot be simply made on the basis of presumption and surmises - Grounds raised allowed for statistical purpose.

Summary

Issues Involved:

1. Addition of ?9,98,649/- as undisclosed interest income.
2. Validity of the addition under Section 69 of the Income Tax Act.
3. Presumption of interest income on foreign bank accounts.
4. Evidence of existence and closure of foreign bank accounts.

Issue-wise Detailed Analysis:

1. Addition of ?9,98,649/- as undisclosed interest income:

The Assessing Officer (AO) noted that the assessee had not disclosed interest income of ?9,98,649/- earned from foreign bank accounts for the Assessment Year (AY) 2016-17. This was based on a calculation of 4% interest on the closing balance of the foreign bank accounts from the previous year. The AO added this amount as undisclosed income under Section 69 of the Income Tax Act.

2. Validity of the addition under Section 69 of the Income Tax Act:

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, referencing a previous order for AY 2013-14 where a similar addition was made and subsequently deleted. The CIT(A) observed that the addition was based on an alleged undisclosed foreign investment and that the same issue had been resolved in favor of the assessee in earlier years.

3. Presumption of interest income on foreign bank accounts:

The Revenue argued that the AO was justified in presuming that the assessee must have earned interest on the outstanding credit balance in the foreign bank accounts. However, the assessee's counsel contended that the addition was based on mere presumption and surmises without any concrete evidence of actual interest earned. The counsel highlighted that the AO's presumption was based on the Indian banking system's interest rates, which may not apply to foreign bank accounts.

4. Evidence of existence and closure of foreign bank accounts:

The assessee's counsel provided evidence that the foreign bank accounts in question were closed in the financial year 2005-06. This was corroborated by the AO's own findings in the assessment order for AY 2006-07. The Tribunal noted that if the accounts were indeed closed in FY 2005-06, no interest income could be earned for AY 2016-17. The Tribunal directed the AO to verify if the accounts were closed and, if so, not to make any addition. If any undisclosed bank accounts were found, only then could an addition be justified based on reasonable interest rates.

Conclusion:

The Tribunal set aside the order of the CIT(A) and remanded the matter back to the AO for fresh adjudication. The AO was instructed to verify the closure of the foreign bank accounts and ensure that any addition made was based on concrete evidence rather than presumption. The appeal of the Revenue was allowed for statistical purposes.

Order Pronouncement:

The order was pronounced in the open court on 31.03.2021.