CYRUS FEROZE VAID,MUMBAI vs. DCIT, CIRCLE 42 2 1, MUMBAI

The substantive issue raised by the Assessee pertains to the disallowance of exemption claimed under section 10(4)(ii) of the Act qua interest income of Rs. 27,13,810/- earned on NRE deposits.

The relevant facts, in brief, are that the Assessee filed the return of income declaring total income of Rs. 58,27,340/- and exempt income of Rs. 38,22,174/-. Subsequently, proceedings under section 147 of the Act were initiated. During the assessment proceedings, the Assessing Officer noticed that the Assessee had claimed exemption under section 10(4)(ii) in respect of interest earned on NRE deposits.

The Assessee furnished explanations and supporting material and, inter alia, relied upon the applicable RBI regulations/circulars and the decision of the Coordinate Bench at Mumbai in John James D'Souza v. ACIT, ITA Nos. 6900 to 6903/Mum/2016, order dated 09.11.2017.

The Assessing Officer, however, rejected the claim on the ground that the Assessee was a resident during the relevant financial year and, therefore, according to him, the exemption under section 10(4)(ii) was not available. Reliance was also placed upon the decision of the Chennai Bench in Baba Shankar Rajesh v. ACIT [2020] 180 ITD 160 (Chennai-Trib.). Consequently, the interest income of Rs. 27,13,810/- was brought to tax under the head “Income from other sources” and the total income was determined at Rs. 85,41,150/- vide assessment order dated 20.12.2024 passed under section 147 read with section 144B of the Act.

The Ld. Commissioner, on appeal, affirmed the said addition.

Thus, the Assessee being aggrieved has preferred this appeal. Before us, the Ld. AR submitted that section 10(4)(ii) contains two alternative conditions and that the exemption is available not only to a person resident outside India under FEMA, but also to a person permitted by the Reserve Bank of India to maintain the NRE account. Reliance was placed upon John James D'Souza (supra).

On the contrary, the Ld. DR refuted the claim of the Assessee and relied upon the orders of the authorities below as well as the decision in Baba Shankar Rajesh (supra).

We have heard the parties, perused the material available on record and given thoughtful consideration to the rival claims of the parties. At the outset, it is observed that section 10(4)(ii) of the Act exempts interest on moneys standing to the credit of an individual in a Non-Resident (External) Account maintained in accordance with FEMA and the applicable rules and regulations. The proviso thereto contemplates two alternative conditions, namely, that the individual is either a person resident outside India under FEMA or a person permitted by the Reserve Bank of India to maintain the aforesaid account.

Thus, the residential status of the Assessee by itself is not conclusive, as the second limb of the proviso independently recognises the entitlement of a person, who is permitted by the Reserve Bank of India to maintain the concerned NRE account.

Coming to the merits of case, we observe that the Assessing Officer denied the exemption principally on the ground that the Assessee was a resident during F.Y. 2019-20. However, the Assessing Officer did not examine whether the Assessee satisfied the alternative condition relating to permission to maintain the NRE deposits under the applicable RBI/FEMA framework.

In this regard, we observe that Notification No. FEMA 5/2000-RB dated 03.05.2000, as relied upon in John James D'Souza (supra), earlier governed NRE and FCNR(B) deposits. Clause 10 of Schedule 2 thereof specifically permitted an FCNR(B) deposit, on the account-holder becoming resident in India, to continue till maturity at the contracted rate of interest. The said Regulations were subsequently superseded by the Foreign Exchange Management (Deposit) Regulations, 2016, which were applicable during the year under consideration. The applicable RBI framework also regulates the consequences arising on change in the residential status of an NRE account-holder.

In John James D'Souza (supra), the Coordinate Bench, while considering section 10(4)(ii), observed that the benefit thereof is not confined only to an individual having the status of a person resident outside India, as the proviso separately covers a person permitted by the Reserve Bank of India to maintain the concerned account. The Coordinate Bench, after considering the RBI framework and CBDT Circular No. 590 dated 30.01.1991, allowed the exemption in respect of interest on the concerned NRE/FCNR deposits.

We have also considered the decision in Baba Shankar Rajesh (supra). In the said case, the claim was rejected, inter alia, because the material produced therein did not establish that the Assessee had been permitted by RBI to maintain the NRE account after becoming resident. Thus, the said decision essentially turned upon the absence of material satisfying the second limb of the proviso.

In the present case, the Assessing Officer has treated the amount of Rs. 27,13,810/- as interest earned on NRE deposits. However, there is no clear factual finding as to whether, during the relevant period, the Assessee was permitted under the applicable RBI/FEMA framework to continue and maintain the concerned NRE deposits after the change in his residential status. This factual aspect goes to the root of the eligibility of the Assessee for exemption u/s 10(4)(ii) of the Act.

Thus, considering the peculiar facts and circumstances of the case, we deem it appropriate to restore this issue to the file of the Jurisdictional Assessing Officer for limited factual verification. The Assessing Officer shall verify, inter alia, the nature and status of the concerned deposits during the relevant previous year; whether the Assessee was permitted, under the applicable RBI/FEMA Regulations, to continue and maintain such deposits; and whether the conditions prescribed u/s 10(4)(ii) of the Act stood satisfied.

The Assessee shall be at liberty to furnish the relevant bank certificates, account-opening/continuation documents, RBI/FEMA permissions or regulations and any other material in support of the claim. The Assessing Officer shall examine the same in the light of the applicable RBI/FEMA framework and the provisions of section 10(4)(ii) of the Act, as well as the judicial precedents relied upon by the parties.

Accordingly, the impugned order qua this issue is set aside and the issue is restored to the file of the Jurisdictional Assessing Officer for adjudication afresh, strictly in accordance with law, after affording an reasonable opportunity of being heard to the Assessee and by passing a speaking order. We clarify that the remand is confined only to verification of the Assessee’s eligibility for exemption u/s 10(4)(ii) of the Act and no other concluded issue shall be reopened.

In view of the aforesaid restoration, the other grounds, including the ground challenging the validity of the reassessment proceedings, which are otherwise not emphasised by the Assessee specifically, are thus left open.

In the result, the Assessee’s appeal is allowed for statistical purposes.