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December 26, 2020

Is foreign currency earned outside India, is chargeable to tax in India when it was brought to India through lawful means?

by CA Shivam Jaiswal in Income Tax

Is foreign currency earned outside India, is chargeable to tax in India when it was brought to India through lawful means?

Unexplained income simply means any income for which assessee do not have valid explanation about the nature or source or the assessing officer is not satisfied with the explanation provided by the assessee. Under the provisions of Income-tax Act, 1961 broadly, the term ‘unexplained income’ is dealt with sections 68, 69, 69A, 69B, 69C and 69D.

As per the aforesaid sections, these amounts of unexplained income are by a fiction of law to be charged to income-tax as income of the assessee of the previous year in which the credit is reflected, investment is made or expenditure incurred. Accordingly, one could take a position that these amounts would be part of total income of the assessee and would be taxed at the rate applicable to the taxpayer or depending on its legal status.

Let us refer to the case of Purshottam Khatri v. CIT (2019), where the issue under consideration was whether foreign currency earned outside India, would be chargeable to tax in India when it was brought to India through lawful means?

Facts of the Case:

  • The assessee left India in 1968 and was employed in Muscat and Dubai till AY 1992-93 and thereafter returned to India.
  • A search was carried out under Section 132 in the premises of the assessee.
  • Thereafter, an assessment was made under section 158BC read with section 143(3) by the AO determining the total undisclosed income for the block period 01.04.1986 to 18.10.1996 at Rs. 2,10,48,043.
  • AO found that the assessee during the previous year’s 1992-93 to 1997-98 was not an ordinarily resident in India and that the assessee had made number of deposits in foreign currency in his NRE accounts in different banks in India.
  • After having excluded the various items of foreign currency deposits in the NRE accounts of the assessee, the AO found that foreign currencies representing Rs. 1,03,50,020 ($3,14,534) were unexplained deposits and treated the same to be undisclosed income of the respondent.

Proceedings of Appellate Authorities

  • Aggrieved, the respondent filed an appeal before the Tribunal.
  • Tribunal deleted some of the additions made by the AO to the undisclosed income of the respondent and allowed the appeal in part.
  • Before the Tribunal, the assessee also made a grievance that for the remaining foreign currency deposited by him in the NRE accounts in India, although he could not produce declarations to show that such foreign currency was brought by him to India, he produced other materials such as exchange vouchers issued by the exchange centres abroad and certificates issued by the banks in India in support of his claim that such foreign currency deposited by him accrued or arose to him as income outside India.
  • The Tribunal found that the foreign currency exchange vouchers produced by the assessee were issued a few days prior to the date of visit of the assessee in India and hence the claim of the assessee that the foreign currency shown in the foreign currency exchange vouchers was in fact brought into India by him in his visits to India also appears to be plausible, but the AO while working out the unexplained deposits of foreign currency in the NRE accounts has totally ignored these foreign currency exchange vouchers.
  • The Tribunal further held that a visitor to India was required to surrender the declaration form at the time of his departure from India.
  • If he wished to carry any foreign currency with himself and in these circumstances, it was possible that the assessee might have brought some foreign currency with himself while leaving India and the possibility of his surrendering the declaration forms to the Customs authorities at the time of leaving India was not ruled out.
  • The Tribunal further held that a common man may not anticipate that in the years to come, he would be searched by the Income tax authorities and would be required to produce all the evidence through which he has brought the foreign currency which is not chargeable to tax in India and since the assessee had earned foreign currency outside India, which was not chargeable to tax in India the same should not have been viewed with an evil eye when it was brought to India through lawful means.

Proceedings of High Court (HC)

  • Revenue then filed an appeal before HC.
  • The question of law was answered by High court in favour of revenue/appellant, overruling the ITAT decision.
  • HC held that since the respondent (assessee) was not able to produce such evidence nor any other material before the Tribunal to clearly establish that the deposits made by him in his NRE accounts represent his income which had accrued or arose to him outside India, the finding of the Tribunal that the deposits made by the respondent in the NRE accounts in India is his income which he had earned as foreign currency outside India was without any evidence.
  • Aggrieved with the order of the HC, assessee filed an appeal before the Supreme Court (SC)

Observations of the Supreme Court (SC)

  • SC allowed the civil appeal of assessee.
  • SC held that the impugned judgment had added as unexplained income a sum of Rs.1.03 crores, as aforesaid, basically on the ground that the assessee was unable to present declaration forms that had been filled in by him at the time of his visits to India from abroad.
  • Keeping in mind the fact that the declaration forms were asked for long after such expenditure had, in fact, been incurred, it could not possibly be said that the Appellate Tribunal’s judgment and findings therein were perverse, which was the only entry on facts for the High Court exercising its appellate jurisdiction under section 260-A of the Income Tax Act, 1961.
  • SC was clearly of the view that the High Court ought not to have interfered with the Appellate Tribunal’s Judgment as no substantial question of law arose therefrom.
  • Accordingly, SC allowed the appeal and set aside the judgment of the High Court and reinstate that of the Appellate Tribunal

In conclusion, if a taxpayer had earned foreign currency outside India, which was not chargeable to tax in India the same should not have been viewed with an evil eye when it was brought to India through lawful means (the same will not be taxable in India).

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