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Issues: (i) Whether unexplained deposits in NRE bank accounts were taxable where the assessee claimed that the funds represented foreign income brought into India; (ii) Whether interest earned on such NRE deposits was exempt under the Income-tax Act; (iii) Whether the addition for unexplained investment in shares was justified; (iv) Whether the deletion of the addition relating to undisclosed income for certain assessment years under block assessment was in accordance with law.
Issue (i): Whether unexplained deposits in NRE bank accounts were taxable where the assessee claimed that the funds represented foreign income brought into India
Analysis: The proviso to section 5(1)(c) excludes from total income the income of a person not ordinarily resident in India that accrues or arises outside India, but the assessee must establish that the receipts relied upon for exemption actually accrued or arose outside India. The Tribunal's acceptance of deposits supported by declarations made at the time of entry into India was sustained, but the material consisting only of foreign exchange vouchers and vague bank certificates did not prove that the corresponding currency was brought into India and deposited in the NRE accounts.
Conclusion: The deletion was justified only to the extent of deposits supported by declarations. The further deletion relating to deposits supported merely by exchange vouchers was not justified and stood in favour of Revenue.
Issue (ii): Whether interest earned on such NRE deposits was exempt under the Income-tax Act
Analysis: Exemption under section 10(4)(ii) applies only to interest on moneys standing to the credit of an individual in a non-resident external account maintained in accordance with the Foreign Exchange Regulation Act, 1973 and the rules made thereunder. Where the underlying foreign currency deposits were not shown by declarations to have been brought in accordance with the applicable foreign exchange regime, the corresponding interest could not claim the statutory exemption.
Conclusion: The exemption was unavailable for the deposits not proved to be in accordance with the foreign exchange requirements, and the deletion of interest on that part was against the assessee.
Issue (iii): Whether the addition for unexplained investment in shares was justified
Analysis: The Tribunal found from the record that the shares were originally allotted, the investment was explained by the assessee's books and balance-sheets, and the material did not support the Assessing Officer's assumption of secondary market purchase at a premium. On those facts, the source of investment stood explained.
Conclusion: The deletion of the addition for unexplained investment in shares was justified and was in favour of the assessee.
Issue (iv): Whether the deletion of the addition relating to undisclosed income for certain assessment years under block assessment was in accordance with law
Analysis: For block assessment, the income of years where returns were not filed before search has to be computed in accordance with the statutory scheme, and the Tribunal's direction to apply the deduction framework while determining whether the income fell below the taxable limit was consistent with the amended block assessment provisions.
Conclusion: The Tribunal's approach on the block assessment computation was upheld.
Final Conclusion: The appeal succeeded only in part. The additions relating to certain NRE deposits and the related interest were restored to the extent indicated, while the deletion of the addition for unexplained share investment and the block assessment computation issue were sustained.
Ratio Decidendi: A claim of exemption for foreign income credited to an NRE account must be proved by cogent evidence that the income accrued or arose outside India and that the deposit was made in accordance with the foreign exchange law; interest exemption follows only when that statutory condition is satisfied.
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