CHENNAI, OCT 17, 2014: THE issue before the Bench is - Whether penalty is warranted when assessee was under bonafide impression that he was a 'person resident outside India' as defined under FEMA and has not offered interest income for tax due to wrong interpretations of law. NO is the answer.
Facts of the case
The assessee is an employee of Cognizant Technology Solutions as Sr. Software professional. During the course of scrutiny assessment, the AO observed that the assessee had opened a bank account in ICICI Bank. The amount in this savings account was transferred to NRE Fixed Deposit account in 2002. During that period, the assessee was sent on a particular assignment by the employer company to US. The Fixed Deposits in NRE account were made in the year 2002 that had matured in the year 2009. The interest received by the assessee was not offered to tax in the return of income filed by the assessee for the relevant period. The assessee during the course of assessment proceedings gave explanation that u/s.10(4) of the Act, interest income in the NRE A/c is exempt from tax. It was submitted that the assessee was under a bonafide impression that he was a resident outside India in terms of the definition of 'persons resident outside India' defined in section 2(q) of the Foreign Exchange Regulation Act [FERA], 1973. However, the AO was not satisfied with the explanation furnished by the assessee and taxed the interest received on Fixed Deposits from the said account. The assessee accepted the assessment order. Thereafter, penalty proceedings were initiated against assessee u/s.271(c). The ACIT while imposing penalty held that exemption u/s.10(14) of the Act in respect of interest on NRE deposits is available only to non-resident Indians; whereas, the assessee is resident. He further held that ignorance of law cannot be excused and the non-disclosure of income is deliberate on the part of the assessee. On appeal, the CIT(A) upheld the findings of AO and confirmed levy of penalty u/s.271(1)(c). Hence, this appeal.
The counsel of the assessee contended that assessee was under bonafide impression that since the investment has been made from NRE A/c, the interest income thereon is exempt from tax u/s.10(4) of the Act. The belief of the assessee was further fortified by the fact when the bank also did not deduct tax at source on the maturity value of the Fixed Deposits. It was submitted that it was not a case where the assessee has concealed any material facts, but a case of misinterpretation of legal provisions. The Counsel further contended that the assessee was sent on deputation to US by the company. After the completion of project, the assessee was called back to India. Due to specialized nature of job, the assessee was uncertain, whether he would continue to stay in India or would be sent to some other project abroad. The assessee had not returned to India with the intention to permanently settle down in India on his own will. Therefore, the assessee was under bonafide belief that the assessee is 'a resident outside India' within the meaning of FEMA.
On the other hand, the DR submitted that the lapse on the part of assessee to file correct income as not on account of any inadvertent mistake or negligence but was purely a deliberate act of furnishing inaccurate particulars.
Having heard the parties, the Tribunal held that,
++ as per the contentions of Counsel for the assessee, after returning back from USA, the assessee was not sure, whether he would stay in India or would be sent to another assignment abroad. Therefore, the assessee was allowed to retain NRE A/c till maturity. It is an admitted fact that the assessee was in the status of non-resident as per the provisions of FEMA (erstwhile FERA) during the years 2000-01, 2001-02 & 2002-03. The assessee returned to India in April, 2003. The investment was made by the assessee in NRE Fixed Deposit A/c during January, February & March, 2002. The bank also did not deduct tax at source on such interest income. This further gave impetus to the belief of the assessee that the interest income earned by the assessee is not taxable in view of the provisions of section 10(4) of the Act. It is equally un-denying the fact that ignorance of law is no excuse and the assessee cannot escape from tax liability if the deductor has failed to deduct tax at source;
++ in the present case, we find that the assessee has not offered interest income for tax due to wrong interpretations of the provisions of the Act and not on account of deliberate concealment of income or furnishing inaccurate particulars of such income. The assessee was under bonafide impression that he is a 'person resident outside India' as defined under FEMA. The explanation furnished by the assessee in not disclosing the interest income in the return appears to be quite genuine. We do not agree with the findings of the authorities below that the explanation furnished by the assessee is not covered by Clause(B) of Explanation-1 to Section 271(1)(c) of the Act. After examining chronology of events and documents on record, we are satisfied that the explanation furnished by assessee is bonafide and acceptable.
Regards
Prarthana Jalan
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