2015 (3) TMI 755 - AT - Income Tax

Addition made u/s.68 / 69 / 69A / 69C - CIT(A) deleted the addition accepting additional evidence under Rule 46A(1) - assessee is a non-resident Indian generally resident of Dubai - Held that - We are unable to understand how Assessing Officer can consider inward remittance of moneys into NRI A/c of a non-resident Indian as income of assessee as unexplained. Assessee in the course of assessment proceedings furnished enough evidences in support of inward remittance of funds including a certificate from M/s.Vitrual International Ltd. about the source of funds being loan. If Assessing Officer has any doubt about the said company in Mauritius he cannot reject the genuineness of the said company without making necessary enquiries either through the internal mechanism of foreign tax division of CBDT or by any other means. Just because the certificate furnished does not have any seal the same cannot be rejected outright. However the matter did not end there. Assessing Officer took pains to verify from the internet and also from the website of the SEBI and came to the conclusion that the said company is one of the group companies of assessee listed as persons constituting group under Monopolies and Restrictive Trade Practices Act 1969 and further noticed from the red herring prospectus of M/s.Lanco Infratech Limited wherein this company was shown as single shareholder company of assessee as on 29-07-2006. This means the existence of the company is accepted by the authorities not only by SEBI and other statutory authorities but even by the Assessing Officer as can be seen from the enquiries conducted. We are unable to understand how the Revenue could raise ground on existence of the above company in Ground No.7 about the identity of the company when Assessing Officer himself acknowledged the same in the assessment order. Coming to the creditworthiness of the amount assessee s explanation is that the amounts were transferred from his own bank account in Mauritius to the NRI account in India. Therefore the immediate source of funds is his own account from Mauritius which is not disputed. If funds are received into Mauritius account then that becomes source of the source which cannot be examined by Assessing Officer unless there is any incriminating evidence. Except presumptions and allegations virtually there is no evidence against assessee that these funds received into his bank account in Mauritius are his own incomes from India or round trip funds of assessee as alleged. Therefore all the grounds raised on this issue particularly Ground No.10 11 does not require any consideration on the facts of the case. Coming to the issue of creditworthiness of the above said company there is no dispute with reference to the funds. It has its own funds and Ld.CIT(A) took pains to examine and hold that it is creditworthy. Nothing was brought on record to counter the findings of Ld.CIT(A) except contending that the order of the CIT(A) is not correct. Therefore the ground regarding creditworthiness of the company particularly from Ground No.6 to 10 also does not require any consideration. It is not assessee who furnished the additional evidence. Therefore it cannot be strictly considered as additional evidence under Rule 46A. CIT has co-terminus powers as that of Assessing Officer as far as appeals before him are concerned. In fact he even had enhancement powers if Assessing Officer has missed out bringing into tax any amounts. He also has powers of enquiry and investigation. Therefore the CIT(A) if exercises his powers as an Assessing Officer there is no need to give an opportunity to the Assessing Officer who passed the assessment order under Rule 46A. The action of the CIT(A) is completely justified Thus merely on suspicions or doubts conjectures or surmises no inference can be drawn against the assessee. The assessee who is a non resident brought money into India through banking channel and the manner in which this money was utilized in India is described in the Annexure. It has been observed that because of the mode of banking channel admittedly used for the remittance in this case the onus on the assessee under section 69 stood discharged and therefore it was not taxable in India under section 5(2)(b). In view of these facts of the case we are of the opinion that various case laws relied by the Revenue does not apply and they are clearly distinguishable. In view of this we have no hesitation in upholding the order of the CIT(A) and rejecting the Revenue s grounds. - Decided in favour of assessee.

Summary

The core legal question considered in this appeal is whether an addition of Rs. 78,04,58,374/- made under sections 68, 69, 69A, and 69C of the Income Tax Act (the Act) to the income of a non-resident Indian (the assessee) is justified, where the amount represents foreign inward remittances credited to the assessee's NRI account in India. The appeal challenges the deletion of this addition by the Commissioner of Income Tax (Appeals) (CIT(A)), who accepted the assessee's explanation and evidence regarding the source and genuineness of the funds.

Additional issues raised by the Revenue include the admissibility and verification of additional evidence furnished during appellate proceedings, the identity and creditworthiness of the creditor company in Mauritius (M/s. Vitrual International Ltd.), the nature of the transaction (loan or own funds), the applicability of relevant provisions of the Act and Board Circular No. 5 dated 20-02-1969, and the interplay between sections 5(2), 68, and 69 of the Act in the context of income tax liability of non-residents.

Issue-wise Detailed Analysis:

1. Legitimacy of Addition under Sections 68, 69, 69A, and 69C of the Act

The Assessing Officer (AO) made an addition of Rs. 78,04,58,374/- on the ground that the assessee failed to satisfactorily explain the nature and source of this credit in the NRI ledger account. The AO treated the amount as unexplained cash credit and income of the assessee, relying on the fact that the creditor company in Mauritius was a single-shareholder entity wholly owned by the assessee, thus an alter ego, and the loan certificate submitted was not original and lacked essential details.

The AO's legal reasoning was that since the company was effectively controlled by the assessee, the loan transaction did not explain the source of the funds in the hands of the assessee, invoking sections 68, 69, 69A, and 69C to treat the amount as income.

The CIT(A), however, conducted an independent inquiry, directing the assessee to produce additional evidence including the certificate of incorporation, audited financial statements of the creditor company, loan confirmation, and shareholding documents. Upon examination, the CIT(A) found that:

• The identity of M/s. Vitrual International Ltd. was established through incorporation documents and its listing as a group entity in the annual reports and SEBI filings.
• The creditworthiness of the company was demonstrated by its financial statements showing substantial capital and reserves.
• The genuineness of the loan transaction was supported by confirmation letters and bank statements showing the flow of funds from the creditor company to the assessee's bank account in Mauritius and subsequently to the NRI account in India.

The CIT(A) concluded that the transaction was genuine, the source of funds was satisfactorily explained, and thus the addition under the cited sections was not warranted.

In applying the law to facts, the CIT(A) distinguished the AO's reliance on the company being an alter ego of the assessee by emphasizing that the existence and financial standing of the company were proved, and the flow of funds was transparently demonstrated. The CIT(A) also rejected the AO's objections regarding the nature of the certificate and lack of certain details, considering the totality of evidence.

The Revenue's competing argument that the loan was a sham and that the funds were essentially the assessee's own money was addressed by the CIT(A) by recognizing the creditor company as a separate legal entity with its own financial position, thereby validating the loan transaction.

2. Admissibility and Verification of Additional Evidence under Rule 46A of the Income Tax Rules

The Revenue challenged the CIT(A)'s admission of additional evidence, arguing that the conditions under Rule 46A(1) were not satisfied and that the Assessing Officer was not given an opportunity to examine or rebut this evidence, violating procedural safeguards.

The Tribunal examined the scope of Rule 46A and relevant judicial precedents, which clarify that Rule 46A restricts the appellant's right to produce fresh evidence but does not fetter the appellate authority's power to call for evidence on its own motion under section 250(4) of the Act. The CIT(A) is empowered to make further inquiries and direct production of documents to properly adjudicate the appeal.

Since the additional evidence was summoned by the CIT(A) suo motu for proper disposal of the appeal, the procedural requirements of Rule 46A regarding admission of fresh evidence by the appellant do not apply. The CIT(A) was not obliged to provide the AO an opportunity to rebut this evidence in such circumstances. The Tribunal upheld the CIT(A)'s action as lawful and justified.

3. Applicability of Section 5(2) of the Act and Board Circular No. 5 dated 20-02-1969

Section 5(2) of the Act defines the total income of a non-resident to include income received or deemed to be received in India or accruing or arising or deemed to accrue or arise in India. Explanation 1 clarifies that income accruing outside India shall not be deemed received in India merely because it is accounted for in India.

Board Circular No. 5 addresses the tax treatment of money/assets brought into India by persons migrating from certain countries, clarifying that money brought in by non-residents for investment or other purposes is not liable to Indian income tax unless there is no evidence to show the amount represents such remittance.

The CIT(A) and Tribunal held that the remittance of Rs. 78,04,58,374/- from the assessee's own bank account in Mauritius to his NRI account in India through normal banking channels does not constitute income taxable in India under section 5(2). The amount was not income accruing or arising in India but a transfer of funds already held abroad by the assessee.

The Tribunal emphasized that mere remittance of own funds into India does not create a taxable event and that the onus on the Revenue to prove that the amount represents income accruing or arising in India was not discharged. The Tribunal further noted that the provisions of sections 68 and 69 cannot override the clear scope of section 5(2) regarding non-resident income.

4. Interpretation of Sections 68, 69, 69A, and 69C in the Context of Non-Resident Taxation

The Tribunal analyzed the applicability of these sections, which deal with unexplained cash credits, unexplained investments, unexplained money, and unexplained expenditure, respectively. It held that these provisions have limited application to non-residents in respect of amounts whose origin is outside India and which do not represent income accruing or arising in India.

Since the assessee transferred his own money from a foreign bank account to his NRI account in India, the amount is neither an unexplained credit nor an unexplained investment or expenditure. The Tribunal rejected the Revenue's argument that the amount should have been shown as a loan in the statement of affairs, noting that the transaction was properly accounted for as a credit in the capital account, consistent with the nature of the funds.

5. Treatment of the "Alter Ego" Argument and Round-Tripping Allegations

The Revenue contended that M/s. Vitrual International Ltd., being a single shareholder company wholly owned by the assessee, is the assessee's alter ego, and thus the loan transaction does not explain the source of funds. It also alleged round-tripping of funds via capital infusion into the company and fresh borrowings.

The Tribunal and CIT(A) rejected this argument, holding that the existence and creditworthiness of the company were established and that the flow of funds was transparent. The Tribunal noted that mere ownership does not negate the genuineness of the transaction, especially when supported by audited financial statements and confirmations. The allegation of round-tripping was not substantiated by any evidence beyond suspicion and conjecture, which is insufficient to draw adverse inferences.

6. Reliance on Judicial Precedents

The Tribunal relied on authoritative decisions to support its conclusions, including:

• The decision that income of non-residents is taxable only as per section 5(2) and that sections 68 and 69 cannot enlarge its scope.
• The principle that money remitted by a non-resident into India through banking channels is not taxable as income in India if it represents funds already held abroad.
• The requirement that the onus is on the assessee to prove that credits are not income or are exempt, which in this case was discharged by the assessee through evidence of inward remittances and loan confirmations.

These precedents were distinguished from cases cited by the Revenue, where facts involved unsubstantiated cash credits or income arising in India.

7. Conclusion on Grounds Raised by Revenue

The Tribunal dismissed the Revenue's grounds challenging the CIT(A)'s order, including objections to the admission of additional evidence, the identity and creditworthiness of the creditor company, the nature of the transaction, and the legal interpretations of the relevant sections. It held that the CIT(A) acted within his jurisdiction and powers, and that the AO's addition was not sustainable on facts or law.

Significant Holdings:

"The assessee who is a high net worth individual and who has significant business interest in India, as can be seen from the Statement of Affairs, has failed to furnish sufficient evidence with regard to nature and source of Rs. 78,04,58,374/- credited in the NRI Ledger. The assessee has merely relied on a copy of a certificate of loan from a company in Mauritius in which assessee has 100% ownership and claimed that to be sufficient explanation for the purpose of Sec.68 / 69 / 69A /and Sec.5(2)(b) of the I.T.Act, 1961. In such circumstances, a fair analysis of factual evidences and legal position was done by the undersigned and accordingly, I am of the considered view that Rs. 78,04,58,374/- credited in the NRI Ledger Account of the assessee shall be treated as the income of the assessee for AY.2011-12 as per Sec.68 / 69 / 69A / 69C of the I.T.Act, 1961." (Assessment Order)

"Since the appellant has proved the Identity, creditworthiness of the creditor and the genuineness of the transaction, the addition made u/s. 68/69/69A/69C of the Act for Rs. 78,04,58,374/- is not warranted." (CIT(A) Order)

"What is not taxable under section 5(2) cannot be taxed under the provisions of section 68 or section 69. Under section 5(2) the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought in India by way of remittances." (Tribunal's reasoning)

"The first appellate authority has wide powers over the order of assessment appealed against before him. In the course of exercise of such power the first appellate authority can direct the assessee to produce any evidence, information or material that was not produced before or was not considered by the Assessing Officer." (Tribunal on Rule 46A and additional evidence)

Core principles established include:

• Remittance of own funds by a non-resident into India through banking channels does not constitute taxable income in India under section 5(2) of the Act.
• Sections 68, 69, 69A, and 69C have limited applicability to non-residents in respect of amounts originating outside India and properly explained.
• The identity and creditworthiness of a creditor company wholly owned by the assessee can be established through incorporation documents and audited financials, and mere ownership does not negate genuineness.
• The appellate authority has broad powers to summon evidence and is not bound by procedural restrictions applicable to appellants producing additional evidence.
• Suspicion or conjecture without evidence is insufficient to treat remittances as unexplained income.

In final determinations, the Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 78,04,58,374/-, dismissed the Revenue's appeal, and confirmed that the remittance of funds by the non-resident assessee from his own foreign bank account to his NRI account in India is not taxable income under the Act.