NRE/FCNR Interest Exemption Continues Until Maturity, While Notional Foreign Income Requires Evidence of Actual Accrual or Receipt
Interest on NRE/FCNR deposits retained by a returning non-resident until maturity remains exempt where retention is permitted under the foreign-exchange regime; the exemption is not confined to continuing non-residents. Presumptive interest on foreign investments cannot be taxed without evidence of actual receipt or accrual, and disputed foreign-currency bank credits require bank verification before being treated as unexplained income. Chapter VI-A deductions, along with consequential deduction and rebate claims, were allowable in the stated circumstances. Reassessment reopening based on information concerning foreign bank accounts remained valid, while the related income additions required correction or fresh factual determination.
Issues: (i) Whether interest accrued on NRE/FCNR deposits retained after the assessee's return to India was exempt; (ii) Whether notional interest could be assessed on foreign investments without proof of actual accrual or receipt; (iii) Whether foreign-currency credits in the resident bank account could be treated as unexplained without bank verification; (iv) Whether deductions and rebates claimed in the return filed in response to reassessment notice were allowable; (v) Whether the reassessments were validly reopened.
Issue (i): Whether interest accrued on NRE/FCNR deposits retained after the assessee's return to India was exempt.
Analysis: Section 10(4)(ii) extends exemption to interest on money standing to an individual's credit in an NRE account maintained as permitted under the foreign-exchange regime. The applicable RBI notification permitted a returning non-resident to retain NRE/FCNR deposits until maturity. The provision was not confined solely to a person continuing to be non-resident.
Conclusion: Interest on the NRE/FCNR deposits was exempt and the additions on that account were directed to be deleted, in favour of the assessee.
Issue (ii): Whether notional interest could be assessed on foreign investments without proof of actual accrual or receipt.
Analysis: The assessment proceeded on an assumption that the foreign investment remained outstanding and continued to yield interest, despite no evidence of maturity, encashment or actual subsequent interest receipts. Tax could be levied only on genuine income received or accrued, unless a statutory provision authorises taxation of notional income.
Conclusion: The additions of presumptive interest were set aside for fresh determination restricted to genuine income received or accrued, in favour of the assessee.
Issue (iii): Whether foreign-currency credits in the resident bank account could be treated as unexplained without bank verification.
Analysis: The credits were old foreign-currency transfers and the assessee was unable to obtain supporting details after substantial lapse of time. The requested verification from the bank had not been undertaken. Verification from the bank was necessary before deciding whether the credits represented taxable unexplained income.
Conclusion: The additions for the disputed bank credits were restored for bank verification and fresh adjudication after giving the assessee an opportunity, in favour of the assessee.
Issue (iv): Whether deductions and rebates claimed in the return filed in response to reassessment notice were allowable.
Analysis: The deductions were disallowed for absence of evidence, although the original manual return had been filed long earlier with original supporting documents. Given the nature of the claims and the peculiar circumstances, the deductions under Chapter VI-A were to be allowed; the deduction under Section 80L and rebate under Section 88B were consequential and required no evidence.
Conclusion: The claimed deductions and applicable rebates were directed to be allowed, in favour of the assessee.
Issue (v): Whether the reassessments were validly reopened.
Analysis: The reassessment notices were issued after recording reasons based on information regarding foreign bank accounts, and the reopening had been sustained with reasons at the first appellate stage.
Conclusion: The reopening of assessments was upheld, against the assessee.
Final Conclusion: The tax treatment of exempt NRE/FCNR interest and deductions was corrected in the assessee's favour, while the disputed interest and bank-credit additions require fresh factual determination; the jurisdictional challenge to reassessment fails.