Invocation of Sec 68/69 in case of transfer from abroad to NRE Accounts:

Issue:

It is common for NRIs to remit funds from foreign earnings into their NRE accounts in India for investment purposes.

However, sometimes Assessing Officers (AO) question the source of such credits during scrutiny, particularly in high-value investment cases, and may threaten to invoke Section 69 (Unexplained Investments) or Section 68 (Unexplained Credits).

Is such a stance of the AO sustainable?

Our reply:

1.  Section 5(2) of the Income Tax Act clearly defines the scope of total income for non-residents:

“…income which is received or is deemed to be received in India, or accrues or arises or is deemed to accrue or arise in India, is taxable.”

2.  So, foreign income received and retained abroad is outside the scope of Indian taxation. A mere remittance of such income into India does not make it taxable.

3.  In the case of Finlay Corporation Ltd. (86 ITD 626, Delhi ITAT), it was held that:

a.  Section 68 or 69 cannot expand the taxability beyond Section 5(2) in the case of a non-resident.

b.  If the credit arises from a foreign source – salary, business income, investment income, etc. – then even if the Indian officer is not fully satisfied about the source, the amount cannot be brought to tax under section 68 or 69.

3.  The origin of the source must be located in India for sections 68/69 to apply meaningfully.