itat: ‘Foreign funds invested in India can’t be taxed as unexplained income’ – Times of India
MUMBAI: In a recent order, the Income-Tax Appellate Tribunal (ITAT), Mumbai bench, has held that purchase of a flat by a non-resident using his overseas income is an act of investing or application of income. It is distinct from earning an income in India from immovable property and the sum invested cannot be subject to tax in the country.
The domestic tax provisions relating to unexplained investments or unexplained income would not apply in such cases and the individual would be governed by the tax treaty (which in this case was the Indo-UAE tax treaty), observed the ITAT. The tribunal’s order will benefit non-resident investors who have invested in India, using their overseas funds, but found themselves embroiled in tax litigation.
In this matter which was recently settled by the ITAT, Rajeev Ghai, a resident of the UAE for the last three decades, had invested Rs 8.5 crore in residential flats in Mumbai. He stated all these payments from overseas were made via official channels and he provided the required evidence.
Based on a search-and-seizure operation conducted on a builder group, the investigation wing of the income-tax (I-T) department provided information to the tax officer that Ghai had allegedly paid cash of Rs 2.5 crore as ‘on-money’ to the builder and also received Rs. 4.47 lakh as interest in cash. The I-T officer treated these sums as ‘unexplained investment’ and ‘unexplained income’, which would be taxable under sections 69 and 68 of the I-T Act. The basic tax rate under these sections is 60% with a surcharge of 25%. With cess and penalty, the aggregate tax rate is upwards of 80%.
The UAE resident was not given an opportunity to view incriminating material or cross-examine the builder.
Under tax treaties, the taxing right is vested with either the source country (country where the income arises) or the residence country (of which the individual is a tax resident). In this case, India was at best an investment jurisdiction, pointed out the ITAT bench comprising vice-president Pramod Kumar and judicial member Ravish Sood.
Unexplained investments could be taxed in India under Section 69, only if it can be proved that such investments were made out of income earned in India.
An economic activity or a linkage of an income with the source country (India) would trigger a tax incidence in India, but this was absent.
Even if the sum of Rs 2.5 crore was to be treated as an income, the right to tax the same would under Article 22 of the India-UAE treaty vest with the country of residence (which was UAE) and not India, the bench added. Accordingly, the ITAT bench upheld the order of the commissioner (appeals), which was in favour of the UAE resident.
As regards the alleged interest income of Rs 4.47 lakh, the I-T department failed to produce any concrete evidence, hence the ITAT dismissed its taxability in India.
The domestic tax provisions relating to unexplained investments or unexplained income would not apply in such cases and the individual would be governed by the tax treaty (which in this case was the Indo-UAE tax treaty), observed the ITAT. The tribunal’s order will benefit non-resident investors who have invested in India, using their overseas funds, but found themselves embroiled in tax litigation.
In this matter which was recently settled by the ITAT, Rajeev Ghai, a resident of the UAE for the last three decades, had invested Rs 8.5 crore in residential flats in Mumbai. He stated all these payments from overseas were made via official channels and he provided the required evidence.
Based on a search-and-seizure operation conducted on a builder group, the investigation wing of the income-tax (I-T) department provided information to the tax officer that Ghai had allegedly paid cash of Rs 2.5 crore as ‘on-money’ to the builder and also received Rs. 4.47 lakh as interest in cash. The I-T officer treated these sums as ‘unexplained investment’ and ‘unexplained income’, which would be taxable under sections 69 and 68 of the I-T Act. The basic tax rate under these sections is 60% with a surcharge of 25%. With cess and penalty, the aggregate tax rate is upwards of 80%.
The UAE resident was not given an opportunity to view incriminating material or cross-examine the builder.
Under tax treaties, the taxing right is vested with either the source country (country where the income arises) or the residence country (of which the individual is a tax resident). In this case, India was at best an investment jurisdiction, pointed out the ITAT bench comprising vice-president Pramod Kumar and judicial member Ravish Sood.
Unexplained investments could be taxed in India under Section 69, only if it can be proved that such investments were made out of income earned in India.
An economic activity or a linkage of an income with the source country (India) would trigger a tax incidence in India, but this was absent.
Even if the sum of Rs 2.5 crore was to be treated as an income, the right to tax the same would under Article 22 of the India-UAE treaty vest with the country of residence (which was UAE) and not India, the bench added. Accordingly, the ITAT bench upheld the order of the commissioner (appeals), which was in favour of the UAE resident.
As regards the alleged interest income of Rs 4.47 lakh, the I-T department failed to produce any concrete evidence, hence the ITAT dismissed its taxability in India.
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