Foreign Employment Salary in NRE Account: ITAT Rules on Taxability for Non-Resident Indians Under Section 5(2)(a)
Case Overview
The Income Tax Appellate Tribunal, Ahmedabad Bench, delivered a significant ruling in Kaushal Ganpatbhai Patel Vs ITO concerning the taxability of foreign-sourced employment income for non-residents when such income is transferred to Non-Resident External (NRE) accounts maintained in India. The dispute centered on whether remuneration of ₹44.24 lakh earned abroad and subsequently deposited in an Indian NRE account constitutes "receipt of income in India" for taxation purposes.
Background and Facts of the Case
The case pertains to Assessment Year 2019-20, where the assessee held non-resident status as per the provisions of Section 6 of the Income Tax Act, 1961. During the relevant assessment year, the assessee was employed with VJP Company located in Seychelles and earned salary income from rendering services in that foreign jurisdiction.
The total remuneration earned amounting to ₹44.24 lakh was credited to the assessee's NRE account maintained with an Indian bank. The Assessing Officer took the position that since these funds were deposited in a bank account situated in India, the income should be characterized as "received in India" and consequently taxable under the provisions of Section 5(2)(a) of the Income Tax Act, 1961.
This interpretation by the tax authorities led to the addition of the entire salary amount to the assessee's taxable income. Furthermore, consequential additions were made:
- ₹42,81,762 towards alleged unexplained investment in purchasing foreign currency
- ₹1,00,34,419 towards unexplained cash deposits in bank accounts
The Revenue's position was that these subsequent additions were necessitated because the assessee failed to satisfactorily explain the source of salary income.
Grounds of Appeal
The assessee challenged the assessment order before the Dispute Resolution Panel, and subsequently approached the ITAT Ahmedabad with three primary grounds:
First Ground: The fundamental contention was that salary income derived from employment services rendered outside India should not attract Indian tax liability merely because a non-resident individual receives such income in an Indian bank account.
Second Ground: The addition concerning unexplained foreign currency purchases was contested on the basis that adequate explanation and documentation were provided regarding the source of funds.
Third Ground: The addition pertaining to bank credits totaling ₹1,00,34,419 was challenged as the assessee maintained that the source of these deposits was legitimate and properly explained.
Assessee's Contentions
During proceedings before the Tribunal, the assessee's counsel emphasized that the primary controversy requiring adjudication was whether foreign employment income becomes taxable in India solely on account of its transfer to an NRE account in India.
The legal representative argued that the other two additions made by the Assessing Officer were derivative in nature—stemming from the Revenue's position that the salary income itself was unexplained. Therefore, favorable determination on the main issue would automatically address the consequential additions.
Legal Precedents Cited
The assessee relied extensively on judicial precedents from various High Courts and ITAT Benches that had addressed similar fact patterns:
Smt. Sumana Bandyopadhyay & Anr. V/S. Deputy Director of Income Tax (International Taxation) [2017] 396 ITR 406 (Calcutta)
Director of Income-tax (International Taxation) V/s. Prahlad Vijendra Rao [2011] 10 taxmann.com 238 (Karnataka)
Arvind Singh Chauhan V/s. Income-tax Officer, Ward-1(2), Gwalior [2014] 42 taxmann.com 285 (Agra – Trib.)
The Income Tax Officer (International Taxation), Ward-1(3), Bangalore V/s. Mr. Lohitakshan Nambiar ITA No. 1045/Bang/2009 (Bangalore –Trib.)
Particular emphasis was placed on the decision in Arvind Singh Chauhan V/s. Income-tax Officer, Ward-1(2), Gwalior, where the Tribunal had comprehensively analyzed the concept of "receipt of income" in the context of Section 5(2)(a).
Interpretation of "Receipt of Income"
The counsel highlighted the Tribunal's elucidation in Arvind Singh Chauhan V/s. Income-tax Officer that the term "receipt of income" signifies the first instance when income comes within the assessee's control—whether actual or constructive. What matters is receiving income in its character as income, not subsequent transactions or movements of already-received income.
The ITAT Agra Bench in that case observed:
"The salary amount is received in India in this case but the salary income is received outside India. It is elementary that an income cannot be taxed more than once but if, at each point of receipt, the income is to be taxed, it may have to be taxed on multiple occasions."
The Tribunal in that precedent distinguished between receiving a "salary amount" versus receiving "salary income," emphasizing that the location of initial constructive receipt determines taxability, not the subsequent location of fund transfer.