2022 (12) TMI 738 - AT - Income Tax

Non-resident assessees win tax dispute over foreign bank interest income.

JCIT (OSD) (IT) -Circle 3 (3) (2) Versus Rahul Rajnikant Parikh and Kalpesh R. Jhaveri

The ITAT Mumbai ruled in favor of non-resident assessees in a tax dispute regarding interest income accrued in a foreign bank account. The court held that ... Income deemed to accrue or arise in India - interest income assessed in the hands of these assessees, being non residents, in all the three years cannot be brought to tax in India - HELD THAT:- Case of the assessing officer is that the interest income is “deemed to accrue or arise in India”. If any income is deemed to accrue or arise in India, then the same could be taxed in the hands of non residents also. There is no dispute on this proposition. However, the expression “deemed to accrue or arise in India” has been explained in Section 9 of the Act, which lists out the income, which are “deemed to accrue or arise in India”. It is a settled proposition of law that the deeming provisions are legal fiction created by the statute and hence they have to be construed strictly. There should not be any dispute that the issue in dispute in the hands of both these assessees has to be tested in terms of sec. 5(2) and sec. 9(1)(v) - No doubt that the income deemed to accrue or arise to a non resident in India is liable to be taxed in India. The question is whether the interest income accrued on a deposit kept in a foreign bank account can be considered as “deemed to accrue or arise in India”. Sec. 9(1)(v) of the Act lists out three situations in which an interest income could be “deemed to accrue or arise in India”. In these years, the interest income has accrued on the deposits kept by the assessees in HSBC bank, Geneva and hence the said interest income cannot be said to fall under the definition of “deemed to accrue or arise in India” as given in sec. 9(1)(v) i.e., the interest income has actually accrued outside India. Hence the said interest income cannot be assessed in the hands of the assessees, since they are non-residents. Accordingly, we do not find any infirmity in the decision rendered by CIT(A) in all the three years in the hands of both the assessees. Appeals filed by the revenue are dismissed. Issues:Challenging taxability of interest income in India for non-residents.Analysis:The appeals before the ITAT Mumbai concerned the taxability of interest income assessed in the hands of non-resident assessees for A.Y. 2006-07 to 2008-09. The Revenue contested the decision of the CIT(A) regarding the taxability of this interest income in India. The case involved joint bank accounts held by the assessees in HSBC Bank, Geneva, with deposits and interest credited during the relevant years. Previous assessments were challenged and subsequently set aside for further investigation into the source of deposits. The fresh assessment for A.Y. 2006-07 to 2008-09 included interest income accrued on the deposits, leading to the current dispute.The ITAT considered the provisions of the Income Tax Act, specifically Section 5(2) which defines the scope of total income for non-residents. The assessing officer argued that the interest income is deemed to accrue in India and thus taxable for non-residents. However, the ITAT highlighted the importance of interpreting deeming provisions strictly, as they are legal fictions. Section 9(1)(v) of the Act deals with interest income and outlines specific scenarios where interest is deemed to accrue in India, none of which applied to the present case.The ITAT concluded that the interest income accrued on deposits in a foreign bank account, such as HSBC Bank, Geneva, did not meet the criteria to be deemed to accrue or arise in India as per Section 9(1)(v) of the Act. Since the assessees were non-residents and the interest income actually accrued outside India, it could not be taxed in India. Therefore, the ITAT upheld the decision of the CIT(A) and dismissed all appeals filed by the Revenue, affirming that the interest income was not taxable in India for the non-resident assessees.In summary, the judgment clarified the taxability of interest income for non-residents in India, emphasizing the strict interpretation of deeming provisions and specific criteria outlined in the Income Tax Act. The decision highlighted that interest income accrued in a foreign bank account did not automatically fall under the purview of being deemed to accrue in India, leading to the dismissal of the Revenue's appeals.