By TIOL News Service

MUMBAI, DEC 05, 2017: THE issue before the Bench is - Whether exemption u/s 10(4)(ii) will be available to persons holding NRE accounts, as permitted by the RBI vide Notification No. FEMA 5 /2000-RB, even after permanently return back to India. And the ITAT verdict is YES.

Facts of the case

The Assessee, an individual and a senior citizen was working as a banker by profession and filed his return for the AY under consideration and assessment was completed. He started his career in the year 1965, when he was working for Central Bank of India and thereafter in the year 1981, he moved to Riyadh, Saudi Arabia and joined The Saudi British Bank. In the year 1992 he joined The Saudi Investment Bank from where he retired in the year 2003 and he returned back to India.

During Assessee's status as NRI, the Assessee had also opened a bank account with Citi Bank, Singapore. Upon his return to India during AY 2003-04, the Assessee stopped operating the said account. Shortly after return to India during FY 2002-03 the Assessee took up ill health and in the process forgot to close the said account, nevertheless the said account was not operated by the Assessee. Some stray transactions on account of bank charges and interest income was reflected in the interim period. The Assessee came to know about the fact that the said bank was not closed when the HSBC, Geneva bank account was investigated and therefore the bank account with Citi Bank closed on 21st December 2011, by which time the account had already become Nil by March 2007.

Income Tax Department received a list of persons holding bank account with HSBC, Geneva, in which list, Assessee's name was included. Thereafter, a notice u/s. 148 was issued to the Assessee for AY 1996-97, 1997-98, 2001-02 to 2004-05 (nine years in all). During the course of an intense scrutiny assessment proceedings the Assessee proved that the bank account with HSBC, Geneva, was a bona fide and legal account opened by the Assessee during the course of his status as NRI and that such account was closed within reasonable time of the Assessee's return to India, as permitted by the FEMA. There had been no addition to Assessee's assessed income on account of transactions with HSBC, Geneva. The Assessee explained all transactions in the said account to the satisfaction of the AO. In respect of the another foreign bank account namely City Bank, Singapore, which was also one of the basis of re-opening of the assessment, the AO observed that the such bank account was also in US Dollar Currency. On perusal of the transaction in the such account, the AO observed that the total earnings from that bank account was USD 1478.68. However the Assessee offered the USD 1448.83 (1478.68 - 29.85) i.e. after claiming the loss of USD 29.85 from HSBC. Since the loss from HSBC was ignored by the AO, the correct amount, of interest only was observed by the AO to be USD 1478.68 which was converted into Indian rupees at Rs.67,220/-and taxed in the hands of the Assessee. The Assessee had himself offered the interest for taxation in this revised return filed on 18.09.2014. 10. Further the AO observed that the Assessee had not declared the Short Term Capital Gains of Rs.92,041/-in the original return of income filed on 17.05.2004, which was subsequently declared by the Assessee in the revised return of income filed on 18.09.2014. Since the revised return was filed on 18.09.2014, it was held to be a belated revised return, the AO did not give cognizance to it and made the addition in the present assessment proceedings.

After reopening the assessment for A.Y.2004-05 AO made addition of Rs.29,861/- by declining deduction of bank charges against interest income. The Assessee had filed the original return of Income declaring total Income of Rs. 56,235/-. Pursuant to notice u/s. 148 the Assessee submitted that the original return itself should be treated as return in response to notice u/s. 148. The AO assessed the total Income at Rs. 235,931/-by making certain addition and not allowing deduction under Chapter VI-A i.e., deduction u/s. 80G towards donation of Rs.30,000/-, u/s.80D towards mediclaim insurance premium, deduction u/s.80L on account of interest earned from bank, deduction of rebate u/s.88 towards investment in equity linked saving scheme. On Assessee's appeal, the CIT(A) upheld the decision of the AO.

After hearing the parties, the Tribunal held that,

++ interest was accrued on NRE/FCNR deposits, which are exempt u/s.10(4)(ii). Section 10(4){ii) was inserted by Finance Act (Number 2) of 1991, with effect from 01.04.1991. The said section had been specifically substituted to alleviate the difficulties which arose till then in claiming exemption in respect of interest earned on NRE / FCNR deposits / accounts, which continued even after the return of an assessee to India. By substituting this specific provision, a need to issue a specific circular, on the lines similar to Circular No. 590dated 30.01.1991 has been eliminated and that the exemption would apply to all cases without any exception. The Notes to Clauses and Explanatory Memorandum specifically states that exemption under section 10(4)(ii) will be available to persons holding NRE accounts, as permitted by the Reserve Bank of India and that this is in addition to exemption available to individuals who are resident outside India;

++ prior to the amendment under Finance Act (No. 2) of 1991, no exemption was possible in respect of interest earned on NRE Deposits which continued to be held after returning to India. In the circumstances of the invasion of Kuwait by Iraq many NRI's faced hardship and to alleviate their problem the CBDT issued Circular No. 590 dated 30.01.1991. However, with a view to extend the benefit to all other persons, shortly after the issue of circular the such amendment to section 10(4)(ii) was made through Finance Act (No.2) of 1991, with effect from 01.04.1991, so that the benefit extends to all;

++ the Reserve Bank of India vide Notification No. FEMA 5 /2000-RB dated 3rd May 2000 (clause 10) specifically permits an NRI to continue to hold NRE/FCNR Deposits till maturity even after permanently return back to India. The RBI on its website http://www.rbi.org.in/scripts/FAQView.aspx?!d=52 has specifically opined that NRE Deposits can be held till maturity even after return to India. Section 10(4)(i) which exempts interest earned on notified government securities specifically uses the term "In case of non-resident...", but in case of section 10(4)(ii) the term used is "In case of an individual". This indicates that benefit of section 10(4)(ii) would not be restricted to residential status "Non-Resident" but would extend to all other residential statuses as well.

(See 2017-TIOL-1671-ITAT-MUM)