NRI Tax Relief: $2.28 Cr Addition Cut to $63,133 by ITAT

A recent ruling by the Income Tax Appellate Tribunal (ITAT), Ahmedabad, has brought significant relief and clarity for Non-Resident Indians (NRIs) facing scrutiny over bank account deposits. The Tribunal partly allowed an appeal, dramatically reducing an addition made under Section 69A of the Income Tax Act, 1961, from a staggering ₹2.28 Crore to a mere ₹63,133.

This decision is more than just a reduction in tax liability; it is a powerful reaffirmation of the principle that tax authorities cannot ignore evidence and official verification reports when assessing the source of funds, particularly those deposited in Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts. For many global Indian professionals, this ruling provides a vital precedent on the evidentiary value of documentation related to overseas employment and remittances.

The Core of the Dispute: Unexplained Deposits in NRI Accounts

The case centered on an individual who qualified as a non-resident for tax purposes and had not filed a return of income for the Assessment Year 2018-19. Based on information showing substantial financial activity, the Revenue initiated assessment proceedings.

Upon receiving the notice, the appellant filed a return. However, the Assessing Officer (AO) proceeded with a draft assessment order proposing a massive addition of ₹2,28,14,293 under Section 69A of the Act.

Understanding Section 69A

Section 69A deals with unexplained money, bullion, jewellery, or other valuable articles. It states that where the assessee is found to be the owner of any money or other assets, and the source of that asset is not satisfactorily explained, the amount may be treated as the income of the assessee for that financial year. Given that additions under this section are taxed at a high, non-deductible rate under Section 115BBE, the financial implications of such an addition are devastating.

The AO’s primary contention was that the substantial deposits made into the non-resident's bank accounts were unexplained money, and the taxpayer had failed to discharge the burden of proving the source of these funds.

The Journey Through the Dispute Resolution Mechanism

After the draft assessment order was issued, the appellant filed objections before the Dispute Resolution Panel (DRP). The DRP's role is to review objections raised by eligible taxpayers, especially in cases where a variation in income is proposed due to Transfer Pricing adjustments or, as in this case, a substantial proposed addition.

During this stage, two significant documents were generated: remand reports dated November 30, 2023, and December 21, 2023. These reports are crucial because they stem from the Revenue's internal process of verifying the taxpayer's submissions.

Despite the existence of these verification reports, the DRP ultimately ruled that the nature and source of the funds were still not adequately explained. Consequently, the AO passed the final assessment order, sustaining the full addition of ₹2,28,14,293.

The Appellant’s Key Arguments Before the Tribunal

In the appeal before the ITAT, the non-resident taxpayer, represented by their counsel, mounted a compelling argument focusing on the documentary evidence that had been previously submitted and, crucially, verified.

The key submissions were:

1. Exhaustive Documentation: The deposits were meticulously explained using supporting records, which included detailed bank statements from both foreign and domestic financial institutions, evidence of specific investments, and an official employment verification letter confirming the taxpayer’s non-resident status and source of income.

2. Internal Verification Ignored: The most powerful contention was that the two internal remand reports had already acknowledged the explanation of most entries and had confirmed their verification. The appellant argued that the subsequent decision by the DRP and the AO to ignore these internal verifications and treat the entirety of the deposits as unexplained was wholly unjustified and contradictory to the evidence on file.

3. Discharge of Burden of Proof: The submission emphasized that, by providing a detailed trail of bank transfers, employment income, and foreign account activity, the taxpayer had successfully discharged the initial burden of proving the source of the funds, shifting the onus back to the Revenue to provide reasons for disbelieving the verified evidence.

The Tribunal’s Decisive Observation and Ruling

The ITAT bench, comprising the Vice President and the Judicial Member, meticulously reviewed the facts and, most importantly, the contents of the official remand reports.

The Tribunal’s observation was critical and formed the basis of their ruling:

• The Bench observed that the remand reports themselves definitively recorded the verification of almost all transactions. The internal investigation had confirmed that the vast majority of the deposits were adequately substantiated through the provided bank statements and supporting documents.

• Upon thorough examination, the Tribunal identified only a single entry—a specific deposit amounting to ₹63,133—for which a satisfactory explanation and supporting evidence were found to be missing.

The Final Judgment

Based on these findings, the ITAT concluded that the Revenue was only justified in adding the amount that remained truly unexplained, which was the small residual amount flagged in the internal report.

The Tribunal ruled:

• The appeal was partly allowed.

• The majority of the addition of ₹2,28,14,293 was set aside.

• The only sustained addition under Section 69A was limited to the ₹63,133 that the appellant failed to satisfactorily explain.

  
  

The Takeaway for Taxpayers and Professionals

This ruling underscores several fundamental principles of tax law and compliance, especially for individuals who are subject to cross-border financial transactions:

• The Power of Documentation: The ultimate success of the taxpayer in this case was the ability to produce exhaustive, verifiable, and contemporaneous documentation, including bank records and employment evidence. For NRIs, maintaining clear records of foreign salary income, remittances, and the nature of NRE/NRO account deposits is paramount.

• Contradiction is Key: The decisive factor was the contradiction between the Revenue's final assessment order and its own internal verification (the remand reports). Taxpayers and their representatives must always review assessment records thoroughly and highlight instances where the Assessing Authority disregards its own verified facts.

• The Burden of Proof is Discharged: The ruling reinforces that the burden of proof on the taxpayer under Section 69A is not absolute. When a taxpayer provides plausible, verifiable evidence of the source (e.g., bank-to-bank transfers from foreign salary accounts), that burden is discharged, and the tax authority must then provide concrete reasons for rejection, not merely sustained suspicion.

In conclusion, this ITAT judgment serves as a significant safeguard against arbitrary additions, ensuring that additions under a stringent provision like Section 69A are based on substantive failure to explain the source of funds, rather than procedural inadequacies or the simple existence of large deposits. For non-resident taxpayers, the message is clear: meticulous financial record-keeping is your strongest defense.