2025 (8) TMI 1174 - AT - Income Tax

Non-resident taxpayer wins deletion of foreign bank credit additions; Indian address alone insufficient to create taxable nexus

Pratab Gulabrai Tulsiani, Naraindas Gulabrai Tulsiani, Sham Gulabrai Tulsyani and Jawaharlal Gulabrai Tulsiani Versus ACIT, Int. Tax. Circle-4 (2) (1), Mumbai

Pratab Gulabrai Tulsiani, Naraindas Gulabrai Tulsiani, Sham Gulabrai Tulsyani and Jawaharlal Gulabrai Tulsiani Versus ACIT, Int. Tax. Circle-4 (2) (1), ... ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessments under section 147/148 was justified where reasons relied on a foreign 'Base Note' and the assessee was a non-resident who had furnished foreign bank statements and cooperation forms. 2. Whether amounts/peak balances shown in foreign bank accounts (HSBC Geneva) could be taxed in India in the hands of a non-resident under section 5(2) read with section 9 - i.e., whether such amounts were received or deemed received in India or accrued/arose or deemed to accrue/arise in India. 3. Whether the assessing officer properly discharged the burden of proof to establish nexus between deposits in foreign accounts and Indian-source income (or business connection in India), and whether it was permissible to shift/onward the burden to the assessee to disprove Indian sourcing. 4. Admissibility and evidentiary weight of bank statements supplied by the assessee (digital copies/pen drive) where the bank declined to directly furnish authenticated records to the revenue despite consent waivers, and the consequence of the bank's non-cooperation. 5. Whether circumstantial indicia relied upon by revenue (e.g. Indian address in bank 'Base Note', earlier family/ancestral ties to India) suffice to establish business connection or source in India for taxing a non-resident's foreign account balances. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Reopening under section 147/148 Legal framework: Section 147/148 requires the AO to have a 'reason to believe' that income has escaped assessment; extended limitation under section 149(1)(c) applies in specified circumstances (notably directed at residents required to disclose foreign assets). Precedent treatment: Coordinate-Bench decisions cited hold that section 149(1)(c)'s extended period is applicable to residents obligated to disclose foreign assets and not to non-residents; vague or general reasons without application of mind do not confer jurisdiction to reopen. Interpretation and reasoning: The Court examined the recorded reasons and found them not to demonstrate how foreign account balances represented income received or accruing in India. The reopening relied on the Base Note but omitted particulars showing how taxability in India arose; the AO also accepted non-resident status in records. The Tribunal emphasized that acquisition of jurisdiction under section 147 requires tangible material to form a reasonable belief, not mere general information. Ratio vs. Obiter: Ratio - reopening on vague/unspecified grounds (Base Note alone) without demonstrating how income falls within Indian taxing provisions is impermissible; extended limitation cannot be invoked for non-residents who had no obligation to disclose foreign assets. Conclusion: Reopening based solely on general information in the Base Note and without showing how income escaped assessment vis-à-vis section 5/9 is unsustainable where the assessee is a non-resident; jurisdictional defect in reasons recorded invalidates reopening in such circumstances. Issue 2 - Taxability of foreign account balances of a non-resident under sections 5(2) and 9 Legal framework: Section 5(2) limits a non-resident's taxable income to amounts received/ deemed received in India or accruing/arising/ deemed to accrue or arise in India; section 9 enumerates deeming situations for accrual/arising in India (business connection, property/asset/source in India, transfer of capital asset situated in India). Precedent treatment: Multiple Coordinate-Bench decisions (cited and applied) hold that foreign balances of bona fide non-residents are taxable in India only if the department proves nexus to India under section 5(2)/9; mere holding of foreign accounts does not suffice. Government statements and later legislative schemes also reflect that NRIs' foreign accounts are not automatically taxable. Interpretation and reasoning: The Tribunal found undisputed record evidence that the assessee was non-resident (passport, travel records, earlier files), and that the AO/DRP failed to demonstrate that credited amounts were received in India or arose from Indian sources. The DRP's reliance on the presence of an Indian address in bank records as proof of business connection was rejected as insufficient without evidence of activities in India contributing to income (R.D. Aggarwal test). Where bank statements (allegedly showing opening credits from pre-1994 transfers and no fresh deposits in the relevant year) were on record and not discredited by tangible contrary material, taxability could not be fastened merely by suspicion. Ratio vs. Obiter: Ratio - for a non-resident, the department must establish the statutory tests in section 5(2)/9; absent evidence of receipt/accrual in India or a real, operative business connection, foreign account balances are not taxable in India. Obiter - policy/contextual references to government press notes and black money legislation emphasise non-taxation of NRI foreign assets absent residency. Conclusion: Amounts/peak balances in the foreign HSBC accounts could not be brought to tax in India in the hands of the non-resident assessee for the impugned years where the AO failed to establish the requisite nexus under sections 5(2)/9; the additions were set aside. Issue 3 - Burden of proof and onus of the department vs. assessee Legal framework: Civil standard (preponderance of probabilities) applies in income-tax proceedings; burden to show that an amount falls within the charging provisions lies on the revenue. Section 147 reopening requires the AO to have material forming a prima facie belief. Precedent treatment: Supreme Court and Coordinate Bench authorities reaffirm that the department bears the onus to prove taxable nexus; it is impermissible to place the burden of proving a negative (that funds are not sourced from India) wholly on the assessee. Interpretation and reasoning: The Tribunal stressed that the AO shifted onus to the assessee to disprove Indian source, without establishing a prima facie case. Where the AO had not procured authenticated bank records from the bank, nor shown transfers from Indian accounts or Indian-source activities, the Department had not discharged its burden. Ratio vs. Obiter: Ratio - AO must prove the elements of taxability; the assessee is not required to prove a negative or absolute provenance absent a prima facie case by revenue. Conclusion: The AO erred in shifting the evidentiary burden to the assessee; without revenue proving nexus to India, additions could not be sustained. Issue 4 - Evidentiary weight of bank statements supplied via assessee vs. bank non-cooperation Legal framework: Third-party authenticated bank records have higher evidentiary value; however, where the assessee furnishes bank statements and there is no demonstrable reason to reject them, AO must examine and test those records; counsel/consent waivers and DTT channels may be necessary where bank refuses direct disclosure. Precedent treatment: Tribunals have accepted that non-cooperation by foreign banks complicates verification, but lack of direct bank authentication does not automatically render assessee-supplied records worthless if the department fails to seek international assistance or to point to specific defects. Interpretation and reasoning: The Tribunal noted that consent waiver forms were submitted in the AO's format, HSBC declined to furnish records to revenue and suggested DTT channels. The AO did not demonstrate use of DTT channels or other steps; the assessee provided digital statements purportedly from HSBC showing opening credits and absence of fresh deposits in the relevant year, but the AO declined to consider them solely because they were not bank-authenticated. The Tribunal found that the AO's refusal to examine the documents placed on record, absent any independent contradictory material, was unsustainable. Ratio vs. Obiter: Ratio - revenue must take available reasonable steps (including DTT/MLAT routes) to verify bank records; mere non-cooperation by a bank does not license rejection of assessees' documented evidence without inquiry. Conclusion: The AO's blanket non-acceptance of digital bank statements without pursuing international channels or and without identifying concrete deficiencies was not justified; the facts favoured the assessee where no contrary verified material existed. Issue 5 - Use of circumstantial indicia (Indian address, ancestral ties) to establish business connection/source Legal framework: Section 9 jurisprudence requires a real, substantive nexus (business connection) involving activity in India that contributes to earnings; circumstantial evidence may be relied on but must be conclusive and connected to the income-producing activity. Precedent treatment: Courts require more than tenuous indicia; presence of an Indian address or ancestral ties, without evidence of business activity or transfers from India, is insufficient to prove that foreign account balances arose from Indian-source income. Interpretation and reasoning: The DRP emphasised Indian address in the Base Note as material; the Tribunal accepted that the address merited explanation but found that the assessee had provided a plausible explanation (ancestral flat, regulatory domicile entry) supported by bank correspondence and affidavits. The Tribunal held that mere address or property ownership in India does not establish the kind of continuing relation or activity constituting a 'business connection' that would render foreign income taxable under section 9. Ratio vs. Obiter: Ratio - circumstantial indicia must conclusively connect the foreign funds to Indian-source income or business activity; mere address or ancestral link does not satisfy the statutory test for deeming accrual/arising in India. Conclusion: Reliance solely on the Indian address or ancestral ties to establish taxability was inadequate; such circumstantial evidence did not meet the legal threshold to sustain additions. Overall Conclusion The Tribunal held that (i) the assessees were non-residents for the impugned years; (ii) the AO failed to establish that foreign HSBC Geneva balances were received or accrued in India under section 5(2)/9; (iii) the revenue improperly shifted the burden of proof to the assessee and relied on insufficient circumstantial indicia (Indian address) and unauthenticated Base Note material; and (iv) in absence of verified contrary material and proper exercise of reassessment jurisdiction, additions based on peak foreign balances were deleted and the appeals were allowed.