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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-15, Chennai in dated 28.02.2019 for the assessment year 2015-16.
Shri Baba Shankar Rajesh, the assessee, had an NRE account in Canara Bank in India. Although, he was non-resident earlier, he became a 'Resident and Ordinarily Resident' in the relevant previous year 2014-15. On the interest income earned from NRE FD account of Rs.1.10 crore, he claimed exemption u/s 10 (4)(ii) in the return of income. The AO rejected the assessee's claim for exemption and brought it to tax. Aggrieved, the assessee filed an appeal before the CIT(A) and the ld.CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed this appeal.
The learned AR submitted that the learned CIT(A) has ignored the assessee’s submissions relating to the fact that the period of stay of 182 days outside India is not applicable if anyone of the following conditions are satisfied: a. Employment outside India or b. Carrying on business or vocation outside India or c. Circumstances as would indicate his intention to stay outside India for an uncertain period.
The ld.AR submitted that the ld.CIT(A) has failed to appreciate the fact that the assessee is a director of an overseas company, also has an employment pass issued by the Government of Singapore and :-3-: India during the year under appeal. Further, it is submitted that the ld.CIT(A) has failed to appreciate the provisions of the Act that in order to claim exemption u/s 10(4)(ii), even if a person is not a non- resident as per FEMA Act 1999, it is sufficient if the deposit is held in accordance with the rules framed by the Reserve Bank of India and the ld.CIT(A) has ignored the fact that since the individuals/ corporate are not allowed to approach the RBI directly, the powers of the RBI are delegated by the RBI to the other banks through various Master Circulars of the Bank which by itself is a Direction specified by the Reserve Bank of India. The Hon'ble CIT(A) has summarily rejected the confirmation letter given by Canara Bank holding that NRE deposits held by the assessee is as per the norms specified in the said RBI directions and invited our attention to the copies of them filed in the paper book. It was submitted that the Hon'ble CIT(A) has erred in his understanding that the assessee being a non-resident as per FEMA 1999 is required to convert the balance in NRE account to RFC (Resident Foreign Currency Account) only based on the period of stay in India without considering the provisos as detailed in Grounds 2 to 4.
:-4-: 3.1 Further it was submitted that the ld.CIT(A) has misled himself on the wrong surmise that since the assessee along with his wife has created goodwill of his 10 LLPs and has created a goodwill for himself a sum of Rs.62,62,000, had erroneously concluded that the intention of the assessee is to carry out business in India, had ignored the fact that the said 10 LLPs are predominantly managed by his wife and that the assessee holds only about 2.2% of shares and no activity has been carried out in the said 10 LLPs from the date of incorporation of LLP till date and the same is evident from the financials. The ld.CIT(A) has erroneously concluded that the assessee is a resident and taken up employment in India only based on the above fact that the assessee had created a goodwill in the business in India and he has failed to interpret the Judicial Pronouncements relied upon by the assessee and erroneously concluded on an incorrect belief that those case laws are not applicable and hence the ld AR pleaded to allow the appeal,
Per contra, the DR submitted that the AO rejected the assessee's claim for exemption and brought the impugned interest to tax for the following reasons:
:-5-: Although the assessee has claimed himself as a non-resident in the return of income, he is actually a resident. His contention that he was a person 'resident outside India' for the purpose of FEMA is not tenable even as per FEMA, as the assessee is a resident in India. b) As per section 2(v) of FEMA, the assessee is a resident as he is a partner in LLPs in India; The firms associated with the assessee have invested in India; further, the assessee has created a goodwill for his wife and partners in LLPs. These developments clearly prove that the assessee had intention to carry out business or vocation in India. c) As per section 2(v), the interest income is deemed to accrue or arise in India. d) The letter furnished by the assessee from Canara bank, does not certify that the assessee is permitted by RBI to maintain NRE account when he is a resident in India. The said letter only refers to RBI circular dated 01-01-2016 in which it is mentioned that residents can maintain NRE account. Therefore, this letter from Canara bank manager does not certify the fulfilment of condition prescribed under proviso to section 10(4)(ii). e) For the above reasons, the interest earned by the assessee from NRE account is to be assessed under head Other Sources as per section 56 of the Act.
:-6-: 4.1 On appeal against the order of the AO, the ld DR submitted that the ld CIT(A) has drawn the following inference: The exemption of interest on Non-Resident (external) accounts - both NRE savings accounts and NRE fixed deposit accounts - is governed by the provisions of section 10 (4) (ii) of the Act. Under those provisions, the interest for the relevant financial year 2014-15 will be exempt only if the assessee is a person "resident outside India" for the concerned fiscal year under FEMA. FEMA defines a "person resident outside India" as somebody who is not a "person resident in India": The assessee would be a "person resident in India" as per clause (v) of section 2 of FEMA as he has come to and stays in India in the FY 2014-15 for the purpose of taking up employment in India. It is absolutely clear that it is Reserve Bank of India (RBI)'s intention to treat such a person as 'resident in' India based on the provision made by it under regulation 7 of Schedule 1 to Foreign Exchange Management (Deposit) regulations 2000 dealing with Non-Resident (External) Rupee Account Scheme which clearly provides "NRE accounts should be redesignated as resident accounts, or the funds held in these accounts may be transferred to the RFC accounts (if the account holder is eligible for maintaining RFC account) at the option of the account holder immediately upon the return of the :-7-: India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period. Where the account holder, is only on a short visit to India, the account may continue to be, treated as NRE account even during his stay in India. This makes absolutely clear how RBI interprets this section. Under the Indian Income-tax law ‘interest' income from NRE accounts (savings and fixed deposits) earned by an individual is exempt from tax in India, provided the individual qualifies as a "person resident outside India" under the exchange control law i.e., FEMA. The rules for determination of residential status under the exchange control law are different from those under the Income Tax law. Under the exchange control law, when a person leaves India for another country for the purpose of employment or for carrying on business or' for any either purpose indicating his intention to stay outside India for an uncertain period, he may be considered as a "person resident outside India”. Further, when a person is returning to India permanently, he may be considered as a “person resident in India”. Therefore, the ld CIT(A) held that the assessee was a Resident and Ordinarily Resident in India for both income tax purpose and FEMA and he is not eligible for exemption u/s 10(4)(ii) as he does not fulfil the condition required :-8-: India in the relevant previous year 2014-15 and hence supported the orders of the lower authorities.
We have considered the rival submissions and gone through relevant material. The issue contested in this appeal is whether the interest income from NRE account of the assessee is taxable in India or exempt u/s 10(4)(ii) as claimed by the assessee. The assessee had an NRE account in Canara Bank in India. Although the assessee was non-resident earlier, he became a 'Resident and Ordinarily Resident' in the relevant previous year 2014-15. On the interest income earned from NRE FD account of Rs.1.10 crore, the assessee claimed exemption u/s 10 (4)(ii) in the return of income. The AO rejected the assessee's claim of exemption and brought to tax and the CIT(A) upheld it. The assessee relied on the tribunal decision in the case of Rachhpal Singh vs ITO reported in 94 ITD 79 and the relevant portion is extracted as under :
“6. I have heard both the parties at some length and given my thoughtful consideration to the rival submissions. I have also examined the facts, evidence and material on record. In fact, the assessment records were called for from the Income-tax Department and examined. In the returns of income filed assessee had claimed exemption in respect of interest on FDRs in non-resident (External) account under section 10(4) of the :-9-: Income-tax Act. In the returns the assessee had also shown the residential status as 'Resident'. Now the provisions of clause (ii) of sub-section (4) of section 10 read as under: "Clause (ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulations Act, 1973 (46 of 1973), and the rules made thereunder." Thus, from a plain reading of the aforesaid sub-section it is clear that income by way of interest on money standing to the credit in a Non-Resident (External) Account in any Bank in accordance with Foreign Exchange Regulations Act, 1973 would qualify for exemption subject to the condition such person is a resident outside India as defined in clause (q) of section 2 of FERA. Therefore, for the purpose of examining whether the person is entitled to exemption under section 10(4), one has to see the residential status under the FERA and not under the Income-tax Act. Even, if the person is a resident outside India as per FERA, such interest income would still qualify for exemption if he is permitted by the Reserve Bank of India to maintain the Non Resident (External) Account. Now the fact that assessee had shown residential status in the returns, as 'Resident' would not mean that assessee was also 'Resident' under the FERA.”
5.1 In this case also, the ld.CIT(A) held that the exemption of interest on Non-Resident (external) accounts - both NRE savings accounts and NRE fixed deposit accounts - is governed by the provisions of section 10 (4) (ii) of the Act. Under those provisions, the interest for the relevant financial year 2014-15 will be exempt only if the assessee is a person "resident outside India" for the concerned fiscal year under FEMA. FEMA defines a "person resident outside India" as somebody who is not a "person resident in India".
:-10-: The assessee would be a "person resident in India" as per clause (v) of section 2 of FEMA as he has come to and stays in India in the FY 2014-15 for the purpose of taking up employment in India, etc. Since, the assessee has come and stays in India in the financial year 2014- 15, the ld.CIT(A) held that the assessee was a Resident and Ordinarily Resident in India for both income tax purpose and also under FEMA and therefore, he is not eligible for exemption u/s 10(4)(ii) as he does not fulfil the condition required under proviso to the said section, that is, he was a resident outside India in the relevant previous year 2014-15 under FEMA. Since the assessee has come and stays in India during the financial year 2014-15 for 283 days, his residential status under FEMA is a ‘person resident in India’ only. Therefore, the assessee is not entitled for the deduction U/s.10(4)(ii). The assessee has also not placed any material to dislodge the findings recorded by the ld.CIT(A), before us, i.e., to prove that he is a Resident outside India in the relevant previous year 2014-15 within the scope of the FEMA as well as for income tax purpose, therefore we do not find any reason to interfere with the order of the ld.CIT(A) and hence the assessee’s corresponding appeal grounds are dismissed.
In the result, the assessee’s appeal is dismissed.
Order pronounced in the court on 1st October, 2019 at Chennai.