In recent times, it has become increasingly common for the income tax department to send notices to Non-Resident Indians (NRIs) regarding their investments in fixed deposits and mutual funds. Typically, these notices begin with an inquiry under section 148A, aimed at verifying the source of income for transactions involving fixed deposits and mutual funds. If NRI fail to satisfy the assessing officer, proceedings under income tax law may be initiated, often resulting in the issuance of a notice under section 148.
Such inquiries are frequently received by NRIs, despite the underlying basis of the notices often being insubstantial. The income tax department typically obtains details of fixed deposits directly from banks, as banks are obligated to report high-value transactions to the department.
Recently, we have observed several cases where the income tax department has sent notices regarding investments made by NRIs using funds earned outside of India. These investments are often facilitated through the NRE (Non-Resident External) account of the NRI, with the primary intention being to earn returns on funds transferred through this account. However, the department tends to focus solely on the aspect of high-value transactions, overlooking the legitimate source and purpose of these investments.
In a recent incident, an NRI received an income tax notice under section 148. Throughout the year, a fixed deposit of Rs. 1 crore matured and was reinvested. This happens three times during the year since the period of FD was short. Consequently, in accordance with reporting requirements, the bank notified the department of a total FD amounting to Rs. 3 crore attributed to the NRI. However, the income tax department solely relied on the reported Rs. 3 crore figure without acknowledging the fact that the initial FD matured and was reinvested multiple times, resulting in the cumulative amount. These notices are founded on completely illogical and unfounded premises, leading to undue harassment for the NRI involved.
In a recent legal case involving NITIN MAVJI VEKARIYA vs INCOME TAX OFFICER [2024] 461 ITR 18 (Guj), the Gujarat High Court ruled that the order issued by the Assessing Officer (AO) lacked jurisdiction. It was undisputed that the funds originated from non-resident external accounts (NRE), placing the source of income beyond the authorities’ jurisdiction. Even upon scrutiny of the provisions outlined in section 10(4), it became evident that incomes of this nature are exempt from inclusion in the total income.
In the case being discussed, the petitioner is an NRI who holds NRE accounts with HDFC and Kotak Bank. The notice under section under section 148A(b) calling upon the NRI to show cause as to why the notice under section 148 should not be issued, in view of the investment in time deposit and mutual fund aggregating to Rs. 1,92,00,000 but he did not file his return of income. The notice under section 148A(b) points out that the information was received that the NRI had indulged in transactions of time deposits and mutual fund investment, but did not file return of income. The said information suggested that there is escapement of Income to that extent. NRI uploaded the reply along with various details/documents which included non-resident (external) savings bank statements, Uganda citizenship and passport documents, etc.
Upon considering the submission of NRI the AO passed the order under section 148A(d) holding that the income to the tune of Rs. 1,92,00,000 had escaped assessment for the year under consideration, and therefore, it was a fit case for issuance of notice under section 148 of the Act.
The NRI filed the petition against the order of the AO and that the income had escaped assessment was bad. NRI submitted that the transactions in question, namely, investments in time deposits and mutual funds were out of foreign funds in the assessee’s non-resident (external) accounts, details of which were furnished in response to the notice. A copy of the passport evidencing the fact that the petitioner was a citizen of the Republic of Uganda to substantiate this together with bank details were furnished. Drawing the court’s attention to the point-wise reply, NRI submit that all investments were from respective non-resident (external) accounts and therefore, could not be a subject of tax in accordance with the provisions of section 10(4) of the Income-tax Act, 1961.
The Gujrat High court held that undisputedly, the funds came from non-resident (external) accounts and the source therefore was beyond the reach of the authorities. Even on reading the provisions of section 10(4), it is apparent that such incomes are exempt from being included in the total income.
The impugned orders in all these petition are, therefore, without jurisdiction. The order passed by the AO under section 148A(d) is therefore quashed and set aside.
Conclusion: When NRIs receive notices from the income tax department, their first course of action should be to engage a professional well-versed in income tax proceedings. The submission made before the income tax office holds paramount importance, and professionals can provide legal and factual precision in drafting replies to the officer. Mere submission of factual details independently may not suffice; it is crucial to verify the legality of the notices. Furthermore, compliance with notices issued under section 148 is imperative, as non-compliance could lead to penalties.
