Treaty protection for Nepali bank deposits overrides deeming income rules, and linked concealment penalty cannot survive.

A Nepali citizen's bank deposit was treated as falling within the beneficial treaty position under Article 21 of the India-Nepal Double Taxation Avoidance Agreement, which prevailed over the deeming fiction under section 69 of the Income-tax Act by virtue of section 90(2). On that basis, the deposit was not taxable in India on the facts stated. Because the assessment on unexplained investment did not survive, the foundation for alleging concealment also fell away, and the penalty under section 271(1)(c) could not be sustained independently. The penalty was therefore deleted as consequential to the unsustainable assessment.

---

---

Issues: Whether the bank deposit made by a Nepali citizen could be taxed in India in view of Article 21 of the Double Taxation Avoidance Agreement, and whether a penalty under section 271(1)(c) of the Income-tax Act, 1961 could survive when the assessment itself was unsustainable.

Analysis: The deposit was held to fall within the beneficial treaty position under Article 21 of the Double Taxation Avoidance Agreement, which prevailed over the deeming fiction under section 69 of the Income-tax Act, 1961 by virtue of section 90(2) of the Income-tax Act, 1961. Once the assessment on the basis of unexplained investment did not stand, the foundation for treating the amount as concealed income also disappeared. The penalty was therefore consequential to the assessment and could not be sustained independently.

Conclusion: The deposit was not taxable in India on the facts of the case, and the penalty under section 271(1)(c) of the Income-tax Act, 1961 was rightly deleted, in favour of the assessee.

---