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December 16, 2022

When assessee is a Non resident Interest Income is not to be assessed: ITAT Mumbai

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

When assessee is a Non resident Interest Income is not to be assessed: ITAT Mumbai

Fact and Issue of the Case

Facts relating to the cases are stated in brief. This is a second round of proceedings in the hands of both the assessees. It came to the notice of the Government that both the assessees are holding a bank account jointly in HSBC Bank, Geneva. It was noticed that some deposits have been made in this bank account during the years relevant to A.Y. 2003-04 & 2004-05. In the three years under consideration namely A.Y. 2006-07 to 2008-09 interest has been credited on the deposits so made in the above said bank account. In the first round, the deposit amounts as well as interest income accrued on the above said deposits were assessed in the hands of the assessees dividing the same equally. The above said assessments were challenged by filing appeals before the learned CIT(A), who deleted the additions. Hence, the Revenue preferred the appeals before the ITAT and the Tribunal, vide its order dated 1.6.2018 passed in A.Y. 2003-04, 2004-05, 2006-07 to 2008-09, set aside the orders passed by the learned CIT(A) and restored the matter back to the file of the Assessing Officer with the direction to make further investigation into the source of deposits made into the bank account. Accordingly the Assessing Officer passed fresh assessment orders in all the above said year. However, the present appeals are related to A.Y. 2006-07 to 2008-09. Addition made in these years relate to interest income accrued on the deposits kept with the HSBC Bank.

The Assessing Officer assessed the above said interest income equally in the hands of both the assessees respectively in these three years on the reasoning that interest income shall be “deemed to have accrued” to the assessees in India since the corresponding deposit amount has been assessed in the hands of these assessees in A.Y. 2003-04 & 2004-05. The Ld CIT(A) deleted the additions of interest income made in AY 2006-07 to 2009- 10 on the reasoning that the same cannot be brought to tax in India.

Observation of the Tribunal

The tribunal heard the parties and perused the record. There is no dispute with regard to the fact that the status of both the assessees under the Income tax Act is “Non Resident”. Section 5(2) of the Income tax Act defines the scope of total income, i.e., the income which can be taxed in India in the hands of “non residents”. The case of the assessing officer is that the interest income is “deemed to accrue or arise in India”. If any income is deemed to accrue or arise in India, then the same could be taxed in the hands of non residents also. There is no dispute on this proposition. However, the expression “deemed to accrue or arise in India” has been explained in Section 9 of the Act, which lists out the income, which are “deemed to accrue or arise in India”. It is a settled proposition of law that the deeming provisions are legal fiction created by the statute and hence they have to be construed strictly. Section 9(1)(v) of the Act deals with “interest income”

There should not be any dispute that the issue in dispute in the hands of both these assessees has to be tested in terms of sec. 5(2) and sec. 9(1)(v) of the Income tax Act. No doubt that the income deemed to accrue or arise to a non resident in India is liable to be taxed in India. However, the question is whether the interest income accrued on a deposit kept in a foreign bank account can be considered as “deemed to accrue or arise in India”. Sec. 9(1)(v) of the Act lists out three situations in which an interest income could be “deemed to accrue or arise in India”.

In these years, the interest income has accrued on the deposits kept by the assessees in HSBC bank, Geneva and hence the said interest income cannot be said to fall under the definition of “deemed to accrue or arise in India” as given in sec. 9(1)(v) of the Act, i.e., the interest income has actually accrued outside India. Hence the said interest income cannot be assessed in the hands of the assessees, since they are non-residents. Accordingly, we do not find any infirmity in the decision rendered by Ld CIT(A) in all the three years in the hands of both the assessees.

Conclusion

The tribunal ruled in favour of the assessee stating that the interest income has accrued on the deposits kept by the assessees in HSBC bank, Geneva and hence the said interest income cannot be said to fall under the definition of “deemed to accrue or arise in India” as given in sec. 9(1)(v) of the Act, i.e., the interest income has actually accrued outside India.

JCIT-Vs-Rahul-Rajnikant-Parikh-ITAT-Mumbai-1-1

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