JOHN JAMES D`SOUZA,MUMBAI vs. ACIT -26(1), MUMBAI

This appeal of assessee is arising out of the order of the Commissioner of Income Tax (Appeals)]-38, in short CIT(A), in appeal No. CIT(A)-38/ACIT-26(1)/IT.286/2015-16 dated 02.02.2018. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle 26(1), Mumbai (in short ACIT/ITO/ AO) for the A.Y. 2003-04 vide order dated 06.01.2015, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’). The penalty was levied by the AO under section 271(1)(c) of the Act vide order dated. 23.07.2015.

The only issue in this appeal of assessee is against the order of CIT(A) sustaining the penalty levied by AO under section 271(1)(c) of the Act on the addition of interest income from the HSBC Bank Account. For this assessee has raised the following ground: -

We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that fact that the assessee a senior citizen aged 82 years had been a banker by profession. The Saudi British Bank was a joint venture between the government of Saudi Arabia and The British Bank of the Middle East. The British Bank of the Middle East was offering certain investment products so the Assessee opened an account with The British Bank of the Middle East. During February 1993, The British Bank of the Middle East was taken over by the Hong Kong and Shanghai Banking Corporation (HSBC), which was based in Geneva, Switzerland and consequently the assessee’s account with The British Bank of the Middle East got converted into a bank account with HSBC. The point to appreciate is that the Assessee had no intention to open an account with HSBC, Geneva. The account with HSBC Geneva came in to existence on takeover of The British Bank of the Middle East in to HSBC. The Income Tax Department received a list of persons holding bank account with HSBC, Geneva, in which list, assessee’s name was included. Pursuant thereto notice under section 148 of the Act was issued to the assessee for Assessment Year 1996-97, 1997-98, 2001-02 to 2007-08 (nine years in all). During the course of an scrutiny assessment proceedings the assessee successfully proved that the bank account with HSBC, Geneva, was a bona fide and legal account opened by the assessee during the course of his status as Non Resident in India and that such account was closed within reasonable time of the assessee return to India, as permitted by the Foreign Exchange Management Act (FEMA).

The AO assessed the total income by adding 79,441/- being interest on HSBC Bank not offered to tax. But the assessee before the issue of notice under section 148 of the Act, revised its return (Assessee also paid off tax before filing revised return) offered to tax Rs. 65071/- (being USD 1639.32 @ Rs. 40). In the Assessment Order the Assessing Officer himself has admitted this fact. The only difference being that the AO took the exchange rate of Rs. 48.46 instead of Rs. 40 as taken by the assessee. The AO passed the penalty order disregarding the plea and arguments placed by the Assessee. In normal course minimum penalty @ 100% is levied but in Assessee's case maximum penalty @ 300% has been levied. The ClT(A) passed an order dated 02.02.2018 received by the assessee on 03.05.2018. In the said penalty order the CIT(A) confirmed the levy of penalty but reduce the quantum of penalty from 300% to 100% of tax evaded. Aggrieved, assessee preferred appeal before Tribunal.

Now, before us, the learned Counsel for the assessee stated the fact that on the same issue of interest on Foreign Bank Account the AO had made additions during AYs 2004-05 to 2007-08, in which case the ITAT held that interest on NRE / Foreign Currency Bank Account held by the assessee, would be exempt under section 10(4)(ii) of the Act even though the residential status of the assessee is that as a Resident in India. Accordingly, the additions toward interest on bank account with HSBC and Citi bank, made by the AO and confirmed by CIT(A) were deleted by the ITAT. When this point was pointed out before the CIT(A) as a ground for non-levy of penalty, the CIT(A) opined that since the assessee had not filed the quantum appeal on this issue for AY 2003-04 and that there was no similar finding by the ITAT in respect of AY 2003- 04, penalty cannot be dropped for AY 2003-04, though for AY 2004-05 penalty on the same issue was deleted on the ground that the ITAT had deleted the addition to income, hence penalty cannot sustain.

We noted that the ITAT in assessee’s own case has held that interest on NRE/ Foreign Currency Bank Accounts are exempt under section 10(4)(ii) of the Act, hence interest there on is not taxable. Also there is a specific proviso to section 5(1) of the Act which states that such income is not taxable in case of Not Ordinary Residents. Thus, penalty should not be levied. As the Tribunal has already held that the interest on NRE/ Foreign Currency Bank Account is exempt under section 10(4)(ii) of the Act, there is no question of levy of penalty under section 271(1)(c) of the Act, on this amount. Hence, we delete the penalty and set aside the orders of the lower authorities.

In the result, the appeal assessee is allowed.