ZACHARIA VARUGHESE,KOTTAYAM vs. ITO WARD 5, KOTTAYAM
Facts
The assessee, an employee and resident of India during FY 2014-15, claimed exemption for interest earned on an NRE account. The AO and CIT(A) rejected this claim, holding that the assessee, being a resident, was not eligible for such exemption. The appeal was filed against this dismissal.
Held
The Tribunal referred the matter to a Third Member due to a difference of opinion between the regular members. The Third Member decided Question 1 in favor of the Revenue and Question 2 against the Revenue. Consequently, the majority view was that the assessee is not entitled to the exemption.
Key Issues
Whether the interest earned on NRE account by a resident assessee is eligible for exemption under Section 10(4)(ii) of the Income Tax Act, 1961.
Sections Cited
10(4)(ii), 143(3), 69, 255(4)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH : COCHIN
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.
Per Prashant Maharishi, Vice President 1. This appeal for AY 2015-16 is filed by the assessee against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 27.9.2022 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Income-
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tax Act, 1961 [the Act] by the ITO, Ward 5, Kottayam [ The ld. AO], was dismissed.
The assessee preferred the appeal raising the following grounds:-
“1. The orders of the Hon'ble CIT (Appeals) and The Income Tax officer, Ward - 5, Kottayam is against law and facts of the case and hence unsustainable. 2. The learned officer erred in making an addition of Rs. 12,92,912/- , being interest income from fixed deposits maintained in NRE account, as income from other sources. 3. The learned officer failed to consider the fact that since the appellant is holding PR of Australia and has not returned to India with an intention to stay permanently in India, the interest on NRE fixed deposits ought to have been exempted. 4. The learned officer erred in ignoring the fact that as long as the appellant is authorized to maintain NRE deposit in India as per the FEMA and RBI guidelines, interest derived from NRE account is exempted u/s 10(4)(ii). 5. The learned officer erred in assessing Rs. 9,00,000 as unexplained investment under section 69. In the statement of source of funds the appellant had shown Rs.36.00 Lakhs and Rs.9.00 Lakhs separately. 6. The learned officer failed to consider the fact that the amount of Rs. 9,00,000 stated as unexplained is actually the amount out of Rs. 45,00,000 received from Mrs Annamma Mathai which was separately transferred to the account of Sri Tiju Varughese chacko. 7. And such other grounds, arguments or points that may be submitted, urged or enlarged at the time of hearing.” 3. This appeal was heard earlier and on the ground Nos. 5 & 6, the Bench agreed that the matter is required to be restored to the file of the ld. AO in terms of para 7 of the order of the ld. JM. The ld. AM agreed. In
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view of these facts, ground Nos. 5 & 6 of the appeal are allowed for statistical purposes.
Ground Nos. 2 to 4 are with respect to exemption of Rs.12,92,912 being interest earned by the assessee from the Fixed Deposit maintained in the Non-Resident External [NRE] account. The assessee is an employee during the FY 2014-15 and the residential status shown in the return of income was ‘Resident’. The assessee claimed exemption of this interest income as it is earned from NRE Account. The ld. AO rejected the claim of exemption holding that the assessee is a resident of India and therefore such exemption is not available to him. The ld. CIT(A) also confirmed the same.
On these grounds, there was a difference of opinion between the Members of the Bench wherein the ld. JM held that both the ld. lower authorities are not correct in rejecting the assessee’s claim of exemption u/s. 10(4)(ii) of Rs.12,92,112 and therefore he allowed these grounds.
The ld. AM differed from the views of the ld. JM and relying on the decision of the Chennai Bench in 111 taxmann.com 508 in the case of Baba Shankar Rajesh v. ACIT held that assessee is not entitled to such exemption with respect to the interest earned from the NRE Account after acquiring the status of resident in India. Thus, disagreeing with Ld. JM he dismissed these grounds.
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Therefore u/s. 255(4) of the Act a request to the Hon’ble President, ITAT was made for making reference to a Third Member on the following questions:-
“ 1. Whether, in the facts and circumstances of the case, the assessee's impugned exemption claim under section 10(4) (ii) read with Proviso thereto, deserves to be accepted or not? 2. Whether, in the facts and circumstances of the case, both the learned lower authorities have rightly disallowed assessee's exemption claim of his interest income derived from "NRE" account under section 10(4)(ii) of the Act on the ground that he is a "resident" in the relevant previous year, or not?” 8. The ld. Third Member passed his order u/s. 255(4) of the Act on 21.11.2025 wherein he decided the Q.No.1 in favour of the Revenue and Q.No.2 against the Revenue.
Based on this, the Order Giving Effect to the order of the ld. Third Member is to be passed. Accordingly as per the majority view, we hold that assessee is not entitled to the impugned exemption u/s. 10(4)(ii) of the Act and in view of this, ground no 2 to 4 are dismissed.
Thus, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on this 12th day of January, 2026.
Sd/- Sd/-
( SOUNDARARAJAN K. ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 12th January, 2026. /Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.
