2025 (3) TMI 519 - AT - Income Tax

AO cannot sustain additions on NRE bank account credits without proving taxable source under Section 10(4)

Rajendra Maganbhai Patel Versus The Asstt. Commissioner of Income Tax, Circle International Taxation, Vadodara

ITAT Ahmedabad ruled on additions made to assessee's NRE bank account credits. The tribunal held that AO cannot sustain additions based solely on NRE ... Addition made on account of credits in the assessee’s Non- Resident External (NRE) bank accounts - AR submitted that the additions made by the AO were solely on account of credits in the NRE account, which are not subject to tax as per the provisions of Section 10(4) - AR further emphasized that the assessee’s non-resident status is an admitted fact, and throughout the assessment and DRP proceedings, the assessee had duly explained all credits appearing in the NRE accounts. HELD THAT:- AO’s additions cannot be sustained merely on the basis of NRE credits without proving that the original source of funds was taxable in India. As held in judicial precedents like Nitin Mavji Vekariya 2023 (11) TMI 649 - GUJARAT HIGH COURT] and Bhavesh Chandrakantbhai Bhatt [2024 (6) TMI 1396 - GUJARAT HIGH COURT], NRE deposits sourced from foreign remittances are beyond Indian taxation. In the absence of material establishing that the credits were from an Indian taxable source, the additions are legally unsustainable. Considering all the facts, legal precedents, and provisions of Section 10(4) of the Act, it is evident that funds remitted from foreign sources into NRE accounts are not taxable in India unless there is material to establish that they originate from taxable Indian income. In AY 2013-14, the addition credited on 13-09-2012 in HSBC Bank (NRE) is deleted, as it represents a redemption of an NRE fixed deposit, which qualifies for exemption under Section 10(4). However, the addition in HDFC Bank (NRE) and in Deutsche Bank (NRE) requires further verification by the AO to ascertain whether the original source of funds in the NRO account was from taxable income or tax-free foreign remittances. For AY 2015-16, the addition credited on 23-01-2015 in HDFC Bank (NRE) is deleted, as it is an inward remittance from JP Morgan Chase Bank, UK, and qualifies for exemption under Section 10(4) of the Act. Accordingly, the appeal for AY 2013-14 is partly allowed for statistical purposes, with a direction to the AO for further verification. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:Whether the additions made by the Assessing Officer (AO) on account of credits in the Non-Resident External (NRE) bank accounts of the assessee for Assessment Years (AYs) 2013-14 and 2015-16 were justified.Whether the credits in the NRE accounts are exempt from taxation under Section 10(4) of the Income Tax Act, 1961, given the assessee's status as a Non-Resident Indian (NRI).Whether the procedural actions taken by the AO under Section 147 r.w.s. 144C(13) of the Act were legally sustainable.Whether additional evidence and explanations provided by the assessee were adequately considered.ISSUE-WISE DETAILED ANALYSISAddition of Credits in NRE AccountsRelevant Legal Framework and Precedents: The primary legal framework involved Section 10(4) of the Income Tax Act, which exempts income by way of interest on money standing to the credit in a Non-Resident (External) Account in any bank in India if it originates from foreign sources. Judicial precedents such as Nitin Mavji Vekariya vs. ITO and Bhavesh Chandrakantbhai Bhatt vs. ACIT were relied upon to argue that foreign remittances into NRE accounts are not taxable under Indian law.Court's Interpretation and Reasoning: The Tribunal noted that the assessee's NRI status was undisputed and that the NRE accounts in question were maintained in compliance with the Foreign Exchange Management Act (FEMA). The Tribunal emphasized that credits in NRE accounts sourced from foreign remittances or permissible transfers per FEMA regulations are typically exempt from Indian taxation.Key Evidence and Findings: The Tribunal reviewed the bank statements and remittance certificates provided by the assessee. It was noted that some credits were adequately explained as originating from foreign sources, such as the inward remittance of GBP 400,000 from JP Morgan Chase Bank, UK, credited in HDFC Bank (NRE) account on 23/01/2015.Application of Law to Facts: The Tribunal applied Section 10(4) to determine that certain credits, such as those directly from foreign remittances, were exempt from taxation. However, credits transferred from NRO accounts required further verification to ascertain their original source.Treatment of Competing Arguments: The Tribunal considered the Departmental Representative's argument that unexplained credits should be taxed but found that the AO failed to verify the original source of funds in the NRO accounts.Conclusions: The Tribunal concluded that the credits originating directly from foreign remittances were not taxable, while those transferred from NRO accounts needed further verification by the AO.Procedural Validity of AO's ActionsRelevant Legal Framework: The procedural actions were taken under Section 147 r.w.s. 144C(13) of the Act, which relates to reassessment proceedings and the role of the Dispute Resolution Panel (DRP).Court's Interpretation and Reasoning: The Tribunal noted that the procedural actions were completed after a full-fledged inquiry, distinguishing this case from precedents where reassessment proceedings were quashed.Conclusions: The Tribunal did not find procedural grounds to invalidate the AO's actions but emphasized the need for proper verification of the sources of credits.Rejection of Additional EvidenceRelevant Legal Framework: The Tribunal considered whether the AO and DRP adequately considered the additional evidence and explanations provided by the assessee.Court's Interpretation and Reasoning: The Tribunal found that the AO ignored certain remittance certificates and explanations provided by the assessee, which should have been considered to determine the taxability of the credits.Conclusions: The Tribunal directed the AO to reconsider the additional evidence during the verification process.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'Credits directly originating from foreign remittances into the NRE account are exempt from taxation under Section 10(4) of the Act.'Core Principles Established: The Tribunal reaffirmed that foreign remittances into NRE accounts are not taxable under Indian law unless they originate from taxable Indian income. It also emphasized the importance of verifying the original source of funds in NRO accounts when transferred to NRE accounts.Final Determinations on Each Issue: The appeal for AY 2013-14 was partly allowed for statistical purposes, with a direction for the AO to verify the original source of certain credits. The appeal for AY 2015-16 was allowed in full, with the Tribunal deleting the addition of Rs. 3,67,60,000/- credited on 23-01-2015 in HDFC Bank (NRE) as it was a foreign remittance.