INVESTMENTS FROM NRE ACCOUNT

[Mr. M. GOVINDARAJAN]

NRE full form is Non-Resident (External) Account, which allows only foreign credits from outside India into the account. On the other hand, NRO stands for Non-Resident (Ordinary) Account. Such accounts allow both foreign currency credits from outside India as well as rupee credits from within India.

NRE accounts, both the principal and interest, are exempt from income tax. The Principal and interest can be repatriated freely.  Funds can be transferred to a foreign account from an NRE account. These accounts are primarily used for making direct investment in India.  NRE account facilitates capital market transactions such as purchase and sale of shares through transfer of funds to and from an NRE Account. 

In NITIN MAVJI VEKARIYA VERSUS INCOME TAX OFFICER, WARD 4, GDHAM (BHUJ 2) OR HIS SUCCESSOR - 2023 (11) TMI 649 - GUJARAT HIGH COURT, the petitioners are family members. They are the residents and citizens of Republic of Uganda. The petitioner has been allotted PAN of India and is having NRE accounts.  He is having two NRI Accounts in ICICI bank, HDFC Bank and Kotak Mahindra Bank, Bhuj.

The Income Tax Department issued notices to the petitioner under Section 148A(b) on 16.03.2022 calling upon the petitioner to show cause as to why the notice u/s. 148 should not be issued, in view of the investment in time deposit and mutual fund aggregating to Rs.1,92,00,000/-.  The show cause notice further alleged that the petitioner did not file the income tax return for the said amount.  The petitioner was directed to file reply on or before 21.03.2022.  Another notice was issued on 21.03.2022 in which it was alleged that the petitioner had indulged in transaction of time deposits and mutual fund investment but did not file income tax return for the same.  There is allegation in the said notice that there is tax evasion.

The petitioner filed reply before the Authority on 22.03.2022 along with various details/document such as NRE SB documents, Uganda Citizenship and passport documents. The Assessing Officer held that the income of Rs.1.92 crore had escaped assessment for the assessment year under consideration and held it is a fit case for issuance of notice under Section 148 of the Act.

In the impugned order it is indicated that the assessee had furnished the following details-

• NRE time deposits to the tune of Rs.51 lakhs with Kotak Mahindra Bank out of his savings account with the said bank.  For the said purpose the assessee submitted the statement of savings bank account.
•  NRE time deposit to the tune of Rs.80 lakhs with HDFC bank out of his HDFC savings bank account.  In this regard the assessee submitted the certificate from the bank.
• Investment of Rs.47 lakhs in ICICI Prudential Mutual fund was made out of his NRE savings bank account of ICICI bank.  The assessee submitted copy of summary of ICICI Prudential Mutual Fund Statement and Statement of NRE account of ICICI bank. 
• Investment of Rs.14 lakh was made in HDFC Mutual Fund out of savings bank account of Kotak Mahindra Bank NRE account.
• Investment of Rs.14 lakh was made in Kotak Mahindra Fund Mutual Fund out of his savings bank account of Kotak Mahindra.
• Submitted copy of certificate of residence from Uganda issued to him.

The Assessing Officer duly considered the reply submitted by the assessee.  The assessee did not submit his passport.  The Assessing Officer held that without that residential status of the assessee cannot be ascertained during year under consideration which is required as per provision of section 6 of the Act. Therefore, the Assessing Officer held that the reply of the assessee has not been found satisfactory.

Against this order the assessee filed an appeal before the High Court.  The assessee submitted the following before the High Court-

• The order dated 29.03.2022 under section 148A(d) and the notice under section 148 dated 30.03.2022 are bad.
• The conclusion that the income had escaped assessment was bad.
• The investments in Time Deposits and Mutual Funds were out of foreign funds in the assessee’s NRE Accounts, the details of which were furnished in the reply to the notice.
• The passport and the bank account details were furnished to the Department.
• All investments were from respective NRE Accounts and therefore, could not be a subject of tax in accordance with the provisions of Section 10(d) of the Income Tax Act, 1961.

The Revenue submitted the following before the High Court-

• From the passport details, even if furnished, it was not clear to compute the residency period in India of the petitioner.
• The investments from the bank accounts were unexplained.

The High Court considered the submissions made by both parties. The High Court observed that the funds came from NRE Accounts and the source.  Therefore, it was beyond the reach of the authorities. According to Section 10(4) of the Act such incomes are exempt from being included in the total income. Therefore, the High Court held that the impugned orders dated 29.03.2022 are without jurisdiction and set aside the same. The High Court allowed the appeal.