Treaty-based taxability under the India-Nepal DTAA barred section 69 addition for unexplained deposits in Nepali residents' names.

Unexplained bank deposits in the names of Nepali residents could not be taxed as deemed income under section 69 where the treaty framework with Nepal governed the taxability first. The analysis held that articles 6 to 21 of the Double Taxation Avoidance Agreement were the relevant provisions for determining whether income was taxable, while article 22 applied only after taxability had already been established. As there was no finding that the deposits belonged to Indian residents, the treaty excluded taxation in India at that stage, and the section 69 addition was not sustainable.

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Issues: Whether unexplained bank deposits standing in the names of Nepali citizens could be taxed as unexplained investment under section 69 of the Income-tax Act, 1961, in view of the Double Taxation Avoidance Agreement with Nepal.

Analysis: The assessment of the deposits as income under section 69 depended first on the taxability of the relevant income under the treaty provisions governing taxation of income. The applicable treaty framework was found in articles 6 to 21, while article 22 operated only at a later stage after the income had already been determined to be taxable under those provisions. There was no finding that the money actually belonged to residents of India, and the deposits stood in the names of Nepali residents. On those facts, the treaty provisions excluded taxation of the deemed income in India at the stage relied upon by the Department.

Conclusion: The addition under section 69 was not sustainable, and the Department's appeal failed.

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