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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Is deemed dividend taxable for a person who is not a registered shareholder but a beneficial owner?

Dividend basically refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. However, it is not obligatory for a company to pay dividend. Dividend is usually a part of the profit that the company shares with its shareholders. The dividend is the amount received by an investor, whether it’s an individual or HUF, on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders.

According to Section 2(22)(e) of the Income Tax Act, when a company in which the public are not substantially interested, extends a loan or an advance to:

any of its shareholders who has more than 10% voting power in the company or
to any concern in which such shareholder is substantially interested or
for the individual benefit of such shareholder or
on behalf of such shareholder

to the extent the company has accumulated profits, such payment would be deemed as a dividend under Section 2(22)(e).

A company in which public is not substantially interested is otherwise called a closely held company. In case of deemed dividend under section 2(22)(e), the tax is charged at the rate of 30%.

Let us refer to the case of Rameshwar Lal Sanwarmal vs Commissioner Of Income-Tax where the issue under consideration was whether deemed dividend is taxable for a person who is not a registered shareholder but a beneficial owner.

Facts of the Case:

The assessee, a Hindu Undivided Family (HUF), owned certain shares in a private limited company in which the public were not substantially interested.
Though the shares were beneficially owned by the HUF, they stood registered in the name of its Karta.
From out of its accumulated profits the company gave loans to three business concerns which were owned by the assessee.
Section 2(6)(e) of the Indian Income Tax Act, 1922 provided that where a private company in which public were not substantially interested gave loans to its shareholders from out of its accumulated profits such loan would be treated as “deemed dividend” in the hands of the shareholders.
The Income Tax officer treated the loans as “deemed dividend” in the hands of the assessee on the ground that though the shares stood in the name of the Karta, the assessee being the beneficial owner, the conditions of section 2(6A)-(e) were satisfied.

Proceedings of Appellate Authorities

The view of the Income Tax officer was upheld by the Appellate Assistant Commissioner.
The Appellate Tribunal rejected the contentions of the assessee that the loans could not be taxed as “deemed dividend” in its hands because it was not the registered owner of the shares
Assuming that they could be treated as “deemed dividend” they could be taxed only in the hands of the karta. The Tribunal referred some questions to the High Court.

Observations of the High Court (HC)

The High Court held that the loans could not be treated as “deemed dividend” in the assessee’s hands because the term shareholder used in the section meant only a person whose name is recorded in the company’s register of shareholders and even assuming that the loans were “deemed dividend” they could be taxed only in the hands of the registered shareholder (the Karta).
The assessment made by the Income Tax officer was accordingly set aside.

Proceedings of the Supreme Court (SC)

In appeal to this Court, instead of questioning the correctness of the answers returned by the High Court the Revenue attacked only that part of the High Court’s order which held that “deemed dividend” could be taxed only in the hands of the registered shareholder.
Therefore, the question before this Court was whether “deemed dividend” could be taxed in the hands of the beneficial owner of shares or could be brought to tax only in the hands of the registered shareholder.
SC answered that where shares are acquired with the funds of one person but are registered in the name of another it is the beneficial owner who should be taxed on the dividend on the shares and that this principle applies equally to “deemed dividend” under the section.
Even so, SC discharged the answer given by the HC in favour of the assessee and substituted an answer in favour of the Revenue.

Submissions by both the Parties

Placing reliance on the decision of this Court in CIT v. Sarathy Mudaliar where it was held that a loan advanced by a company to a beneficial owner did not fall within the mischief of section 2(6A)(e), the assessee contended that loans in this case could not be taxed as “deemed dividend” in its hands.
The Revenue on the other hand contended that since in the earlier case of Rameswarlal Sanwarmal this Court had answered the reference in favour of the Revenue and that decision was final the later decision in Sarathy Mudaliar’s case would not be available to the assessee
Although the present question was not specifically considered by this Court on the earlier occasion it must be held to have been impliedly decided against the assessee and that the decision in Sarathy Mudaliar’s case was incorrect and should be referred to a larger bench.

Observations of the SC

SC held that arguments of the Revenue were erroneous.
When the Revenue came in appeal to the SC in the earlier case of Rameswarlal Sanwarmal it challenged only the second part of the HC’s decision ignoring the first part.
The result was that the first part of the HC’s decision that loans advanced to the business concerns of a beneficial owner of shares could not be regarded as ‘deemed dividend” in his hands and that the loans in the sent case did not fall within the meaning of section 2(6A)(e) remained intact and unaffected by the decision of the SC.
This Court could not have answered the first question against the assessee without over-ruling the first part of the High Court’s decision.
However, SC set aside the High Court’s answer without considering whether this part of tile decision was right or wrong.
When no contention was raised on behalf of the Revenue that even if the assessee was not a registered shareholder loans advanced to its business concerns would be “deemed dividend” in its hands and there was no occasion for this Court to consider the question, from the mere fact that an answer was given in favour of the Revenue, it could not be said that this contention was impliedly decided in its favour

The proper Way of looking at the decision of this Court in Rameswarlal Sanwarmal would be to regard the answer given in favour of the Revenue to be confined only to the aspect considered and decided by this Court, namely, that “deemed dividend” did not stand on any different tooting from actual dividend and just as actual dividend is liable to be taxed in the hands of the beneficial 6 owner of the shares. so too “deemed dividend” must be held liable to be taxed ill the hands of the beneficial owner.
This Court did not consider whether a loan to a beneficial owner could be regarded as “deemed dividend”.
Therefore, this aspect of the question still remained to be answered and it was open to the assessee to contend that the loans advanced to its business concerns could not be regarded as “deemed dividend” within the meaning of the section since the assessee was not a! registered shareholder
The decision of SC in Sarathy Mudaliar’s case laid down the law correctly and there was no need to refer the case to a larger bench.
The question whether a loan advanced to beneficial owner of shares would be liable to be regarded as “deemed dividend” was neither raised nor considered by this Court in Rameswarlal Sanwarmal’s case but came up for consideration for the first time in Sarathy Mudaliar’s case only.
There was thus no conflict between the two decisions
It was only where a loan was advanced by a company to a registered shareholder the other conditions set out in the section are satisfied that the amount of the loan would be liable to be regarded as “deemed dividend”.

The amount of loan would not fall within the section if it is granted to a beneficial owner of the shares.
In the instant case the loans were advanced not to the registered shareholder but to the business concerns of the beneficial owner.
Hence, they could not be regarded loans advanced to a shareholder of the company within the meaning of the section.
SC, thus answered the first question in favour of the assessee

Therefore, when loans are advanced to the beneficial owner of the shares and not to the registered shareholder and hence they could not be regarded as loans advanced to a “shareholder” of the company within the meaning of section 2(6A)(e). Section 2(6A)(e) is accordingly not attracted and the amounts of the loans could not be taxed as deemed dividends in the hands of the assessee.

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