NRE Account interest exempt u/s 10(4)(ii) only if assessee is resident outside India for the concerned fiscal year under FEMA
ABCAUS Case Law Citation:
ABCAUS 3169 (2019) (10) ITAT
Important case law relied upon by the parties:
Rachhpal Singh vs ITO reported in 94 ITD 79
In the instant case, the assessee had filed the appeal against the order of the Commissioner of Income Tax (Appeals) in confirming the denial of exemption u/s 10(4)(ii) of the Income Tax Act, 1961 (the Act) for interest on NRE Account Fixed Deposit.
The assessee had an NRE account in a Bank in India. Although, he was non-resident earlier, he became a ‘Resident and Ordinarily Resident’ in the relevant previous year. With respect to the interest income earned from NRE Fixed Deposit (FD) account, 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 for the following reasons:
(a) Although the assessee had claimed himself as a non-resident in the return of income, he was actually a resident. His contention that he was a person ‘resident outside India’ for the purpose of FEMA was not tenable even as per FEMA, as the assessee was a resident in India.
(b) As per section 2(v) of FEMA, the assessee was a resident as he was a partner in LLPs in India; The firms associated with the assessee had invested in India; further, the assessee had created a goodwill for his wife and partners in LLPs. These developments clearly proved 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 the bank, did not certify that the assessee was permitted by RBI to maintain NRE account when he was a resident in India. The said letter only referred to RBI circular dated 01-01-2016 in which it is mentioned that residents can maintain NRE account. Therefore, the letter from bank manager did not certify the fulfilment of condition prescribed under proviso to section 10(4)(ii).
For the above reasons, the interest earned by the assessee from NRE account was assessed by the Assessing Officer (AO) under head Other Sources as per section 56 of the Act.
Aggrieved, the assessee filed an appeal before the CIT(A) but the CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed the appeal.
Before the Tribunal, the assessee submitted that the CIT(A) had 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:
- Employment outside India or
- Carrying on business or vocation outside India or
- Circumstances as would indicate his intention to stay outside India for an uncertain period.
It was submitted that the CIT(A) had failed to appreciate the fact that the assessee was a director of an overseas company, also has an employment pass issued by the Foreign Government and ignored the fact that the assessee had been employed outside India during the year under appeal.
Further, it was submitted that the CIT(A) had 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 CIT(A) had 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 CIT(A) had summarily rejected the confirmation letter given by the Bank holding that NRE deposits held by the assessee was as per the norms specified in the said RBI directions.
It was submitted that the CIT(A) had 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.
Further it was submitted that the CIT(A) had misled himself on the wrong surmise that since the assessee along with his wife had created goodwill of his 10 LLPs and had created a goodwill for himself, had erroneously concluded that the intention of the assessee was to carry out business in India, had ignored the fact that the said 10 LLPs were predominantly managed by his wife and that the assessee held only about 2.2% of shares and no activity had been carried out in the said 10 LLPs from the date of incorporation of LLP till date. The CIT(A) had erroneously concluded that the assessee was a resident and taken up employment in India only based on the above fact that the assessee had created a goodwill in the business.
Thus, the issue before the Tribunal was as to whether the interest income from NRE account of the assessee was taxable in India or exempt u/s 10(4)(ii) as claimed by the assessee?
NRE Account interest exempt only if assessee is resident outside India
The Tribunal observed that in the case law relied upon by the assessee, also the CIT(A) had 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 will be exempt only if the assessee is a person “resident outside India” for the concerned fiscal year under FEMA.
The Tribunal noted that 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 had come to and stays in India during the relevant previous year for the purpose of taking up employment in India, etc.
In the instant case, since, the assessee had come and stays in India in the relevant financial year, the 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 was not eligible for exemption u/s 10(4)(ii) as he did not fulfil the condition required under proviso to the said section, that is, he was a resident outside India in the relevant previous year under FEMA.
The Tribunal opined that since the assessee had come and stayed in India during the financial year for 283 days, his residential status under FEMA was a ‘person resident in India’ only. Therefore, the assessee was not entitled for the deduction u/s. 10(4)(ii).
Accordingly, the Tribunal dismissed the appeal.
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