In a recent case, the Mumbai ITAT (Income Tax Appellate Tribunal) has made an important ruling regarding the applicability of Section 69 of the Income Tax Act. The tribunal held that Section 69, which deals with unexplained investments, cannot be applied to on-money paid by a non-resident from foreign sourced income.
The case involved a non-resident assessee who was a resident of Muscat. The assessee had purchased a flat in India for Rs. 1 crore. During a search operation conducted on a partner of the construction company, documents were seized indicating that on-money had been received from purchasers. Based on the partner’s statement, it was alleged that Rs. 47 lakh was received from the assessee. As a result, reassessment proceedings were initiated for the assessment years 2013-14 and 2014-15, leading to additions under Section 69 totaling Rs. 25 lakh and Rs. 22 lakh, respectively.
The ITAT noted that the entire consideration for the purchase of the flat was paid by the assessee through banking channels. The tribunal observed that the revenue authorities had failed to provide any evidence to substantiate that the assessee had a source of income in India used for the payment of alleged on-money in cash. Therefore, the ITAT concluded that “the only source of payment of on-money, if any, are the funds from Muscat.”
The ITAT referred to Section 5(2) of the Income Tax Act, which states that Section 69 would be triggered if the investment is made from unaccounted money with a source in India. In this case, since the funds used for on-money were from Muscat, the provisions of Section 69 were not applicable. The ITAT relied on a previous ruling by a coordinate bench in the case of ITO v. Rajiv Suresh Ghai, where an addition under Section 69 in respect of unaccounted money paid to a builder by a resident of the UAE was deleted based on Article 22(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA). The ITAT noted that Article 24 of the India-Oman DTAA was similar to Article 22 of the India-UAE DTAA. Consequently, the ITAT held that the addition made under Section 69 was unsustainable and should be deleted.
Regarding the validity of the reassessment proceedings, the ITAT examined the reasons provided by the revenue authorities for reopening the assessment. The tribunal observed that although the reassessment was initiated based on information received from the investigation wing, the revenue authorities had also gathered information through AIR (Annual Information Return). Therefore, the ITAT rejected the assessee’s contention that the reasons recorded for reopening were without proper application of mind.
In conclusion, the Mumbai ITAT ruled that Section 69 of the Income Tax Act cannot be applied to on-money paid by a non-resident from foreign sourced income. The tribunal held that the addition made under Section 69 was unsustainable and should be deleted. The ITAT also found the reassessment proceedings to be valid based on the reasons provided by the revenue authorities.
