Funds In NRE Account Not Taxable If Earned Abroad, ITAT Rules

In a case that offers some relief to Non-resident Indians (NRIs), an income tax tribunal recently passed a ruling clarifying that funds transferred to an NRE (Non-Resident External) account from genuine foreign income are not taxable in India.

The ruling by Income Tax Appellate Tribunal (ITAT) in Ahmedabad came in response to an appeal by the Income Tax Department against an earlier decision that had gone in favour of Madhav Vasant Dalvi, an NRI living in Lesotho.

The dispute was linked to the assessment year (AY) 2016–17, when Dalvi had declared an income of just over Rs 4 lakh but had also purchased a property in India for Rs 5,93,00,000 crore. That triggered scrutiny by the tax department, which took a closer look at large inward remittances, specifically four payments amounting to around Rs 3.11 crore that had been credited to Dalvi’s NRE account in Ahmedabad from a Mauritius-based bank.

The Assessing Officer, not satisfied with the explanations provided by Dalvi, marked the entire funds as ‘unexplained’ under Section 69A of the Income Tax Act. The tax officer also called out ‘insufficient documentation’ on the source of the funds. They claimed that the money could not be traced to verifiable income and, therefore, was being treated as taxable.

Aggrieved by this order, Dalvi took the case to the Commissioner of Income Tax (Appeals) and submitted a detailed set of documents that included:

• Foreign bank statements

• Certificate from the Bank of Baroda confirming the remittances originated from its Mauritius branch

• Swift transaction copies

• Commercial invoices

• Proof of NRI status, among others.

The NRI also explained the reason behind the ‘Mauritius route’ of funds, saying that due to restrictions in Lesotho on holding foreign currency accounts, his commission income was being routed through a Mauritius account before being sent to India.

The CIT(A) in its hearing had found Dalvi’s explanation and paperwork credible and reversed the 3.11 crore addition. But the department was not convinced, so it further escalated the matter to ITAT raising procedural concerns about new evidence and questioning the source of Dalvi’s funds.

ITAT, however, noted that under Indian tax law, particularly Section 5(2), only income that occurs or arises in India or is received directly in the country is taxable for non-residents. Money earned abroad by NRIs, it noted and brought into India through proper banking channels, will not fall under that category.

In short, if the income was not taxable at the source, the mere act of transferring it to an Indian account does not change that. The Tribunal cited earlier rulings in similar cases, including decisions from the Delhi and Kolkata benches, to reinforce its point.

It also reminded the Revenue that NRE accounts are specifically designated for foreign remittances and that money coming into them from abroad cannot be presumed as untaxed or undisclosed simply because the sums are large.

In the end, the ITAT upheld the CIT(A)’s decision and dismissed the tax department’s appeal. The Rs 3.11 crore will not be treated as unexplained income.

For NRIs with income abroad, the ruling underlines a basic but often misunderstood point: as long as the income is earned outside India and appropriately documented, routing it through an NRE account doesn’t make it taxable here.