ITAT Mumbai on Section 69 Addition for Jointly-Held Foreign PMS Portfolio

Background of the Dispute

The case of Ira Maulik Shah Vs ITO (ITAT Mumbai) concerns an addition of ₹25,05,81,504 made under Section 69 of the Income Tax Act 1961 in relation to foreign investments disclosed in Schedule FA for Assessment Year 2023-24.

The assessment was framed under Section 143(3) read with Section 144B after the case was picked up under CASS due to a risk flag regarding a new foreign asset in the nature of an account where the assessee was a signing authority.

The Assessing Officer (AO) treated a major portion of the foreign Portfolio Management Service (PMS) holdings as unexplained investment in the hands of the assessee, ignoring the assessee’s claim that the PMS portfolio was jointly owned and funded by her and her husband, Shri Maulik Jasubhai Shah.

The Income Tax Appellate Tribunal (ITAT) Mumbai ultimately set aside the addition, holding that the investment was a joint foreign asset funded through banking channels in earlier years, properly recorded in both co-holders’ financial statements and Schedule FA disclosures.

Assessment Proceedings and Basis of Addition

Selection of Case and Initial Enquiry

  • The assessee filed her return of income on 25.07.2023, declaring total income of ₹2,49,86,750.
  • The return was processed under Section 143(1).
  • The case was subsequently selected for scrutiny under CASS on the parameter:

    “New foreign asset in nature of account(s) in which taxpayer is a signing authority (Non-business ITR)”

Pursuant to this:

  1. Notice under Section 143(2) was issued on 19.06.2024.
  2. Several notices under Section 142(1) were also issued, calling for:
    • Details of foreign bank accounts
    • Foreign equity holdings and PMS portfolios
    • Foreign deposits (including those with Commerzbank, Germany)
    • Source of acquisition
    • Reconciliation with Schedule FA disclosures

AO’s Working of Foreign Assets and Alleged Difference

On examination of material gathered, the AO concluded that the assessee was associated with substantial foreign holdings, including:

  • Equity in overseas listed companies
  • Fixed deposits with Commerzbank, Germany
  • Balances in foreign bank accounts

The AO determined the aggregate foreign assets at ₹26,87,29,850, comprising:

  • Foreign equity investments – ₹24,48,46,351
  • Foreign deposits – ₹22,29,50,563
  • Foreign bank balances – ₹29,32,936

When cross-checked with Schedule FA filed with the return, the AO noted that the assessee had disclosed only ₹1,81,48,346, broken up as:

  • Foreign equity investments – ₹21,10,70,803
  • Foreign deposits – ₹2,69,54,069
  • Foreign bank balances – ₹21,23,474

Based on his comparison, the AO alleged an unexplained difference of ₹25,05,81,504, which he proposed to treat as unexplained investment under Section 69.

AO’s Concern on Acquisition Dates and Earlier Year Disclosures

The AO examined the acquisition dates mentioned in Schedule FA for AY 2023-24 and noticed that several foreign investments were stated to have been acquired as far back as March 2018 and other earlier years.

However, when he compared this with the return and Schedule FA filed for AY 2022-23, he found:

  • Those foreign assets were not reflected in the earlier year’s Schedule FA.

On that basis, the AO:

  • Cast doubt on:
    • The assessee’s claim that the investments were acquired in earlier years; and
    • Continuity of ownership over multiple years.
  • Held that in the absence of contemporaneous documentary evidence showing the actual dates of acquisition and ongoing ownership, the assessee’s explanation was not verifiable.

Assessee’s Explanation Before the AO

Claim of Joint PMS Ownership with Husband

In response to the show cause notice, the assessee asserted that:

  • The AO had incorrectly presumed that the entire foreign PMS and related holdings were exclusively hers.
  • The PMS portfolio in Germany was actually jointly owned by:
    • The assessee; and
    • Her husband, Shri Maulik Jasubhai Shah.

The assessee submitted that, as on 31.03.2023:

  • Total PMS value: ₹26,87,29,850
  • Assessee’s share: about ₹1,83,82,456
  • Husband’s share: ₹24,59,71,947

The assessee further pointed out: