The ITAT Ahmedabad has clarified a long-standing ambiguity in international taxation by holding that salary earned by a non-resident for services rendered outside India cannot be taxed in India merely because it is credited to a Non-Resident External (NRE) account. This ruling reinforces the principle that taxability hinges on where income is received in its character as income, not where it is subsequently deposited.
Background & Facts
The Dispute
The appellant, Kaushal Ganpatbhai Patel, is a non-resident under Section 6 of the Income Tax Act, 1961, employed by a company in Seychelles. He earned a salary of Rs. 44,24,000 for services rendered entirely outside India. The amount was credited to his NRE account in India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) treated this as income "received in India" under Section 5(2)(a), and made a corresponding addition to his taxable income.
Procedural History
- Assessment Year: 2019-20
- The AO issued a notice under Section 147 and completed assessment under Section 144C(13) following DRP directions
- The DRP upheld the addition of Rs. 44,24,000 as salary income
- The appellant filed an appeal before the ITAT Ahmedabad challenging the taxability of the salary
- Two additional additions (Rs. 42,81,762 for foreign currency purchase and Rs. 1,00,34,419 for unexplained bank credits) were made, contingent on the salary being deemed unexplained
Relief Sought
The appellant sought deletion of all three additions, arguing that the salary was neither accrued nor received in India. He contended that the credit to the NRE account was merely a subsequent application of income already received abroad, and therefore not taxable under Section 5(2)(a).
The Legal Issue
The central question was whether Section 5(2)(a) of the Income Tax Act, 1961, treats the credit of foreign-earned salary into an NRE account in India as "receipt" of income in India, thereby triggering tax liability for a non-resident.
Arguments Presented
For the Appellant
The appellant relied on multiple precedents, including Arvind Singh Chauhan v. Income Tax Officer (42 taxmann.com 285), to argue that "receipt" of income refers to the first occasion when the assessee gains control over the income, real or constructive. He emphasized that the salary was earned, accrued, and constructively received in Seychelles. The deposit into the NRE account was merely a convenience, not a new receipt. He cited CIT v. A.P. Kalyan Krishnan [1992] 195 ITR 534 (Madras HC) to show that remittance to India does not alter the place of receipt.
For the Respondent
The Revenue contended that since the salary was credited to an account in India, it satisfied the condition of "receipt in India" under Section 5(2)(a). It argued that the NRE account is a domestic financial instrument and any credit to it constitutes domestic receipt. It attempted to distinguish Arvind Singh Chauhan on the ground that it involved a seafarer, and cited CBDT Circular No. 13/2017 as a basis for treating such cases differently.
The Court's Analysis
The ITAT rejected the Revenue’s narrow interpretation of "receipt." It held that Section 5(2)(a) must be interpreted in light of the nature of income and the moment of its acquisition, not its subsequent movement. The Tribunal adopted the reasoning in Arvind Singh Chauhan, affirming that "the connotation of an income having been received and an amount having been received are qualitatively different."
"The salary amount is received in India in this case but the salary income is received outside India. It is elementary that an income cannot be taxed more than once but if, at each point of receipt, the income is to be taxed, it may have to be taxed on multiple occasions."
The Court emphasized that the assessee had lawful control over the salary at the place of employment - Seychelles - and the transfer to India was an exercise of his right to manage his funds. The NRE account, while located in India, does not alter the character or timing of receipt. The Revenue’s reliance on CBDT Circular No. 13/2017 was dismissed as inapplicable, since the ITAT’s decision was based on statutory interpretation, not administrative guidance. No higher court had held otherwise.
The Verdict
The appellant won. The ITAT held that salary earned outside India and credited to an NRE account does not constitute receipt of income in India under Section 5(2)(a). The addition of Rs. 44,24,000 was deleted. Consequently, the other two additions, which were contingent on the salary being unexplained, were also deleted.
What This Means For Similar Cases
Receipt of Income Is Determined by First Point of Control
- Practitioners must argue that taxability under Section 5(2)(a) turns on where the assessee first gains control over the income, not where it is later deposited
- NRE account credits alone cannot be used to establish "receipt in India" for non-residents earning abroad
- Evidence of employment contract, payroll location, and work location must be prioritized over bank transaction records
CBDT Circulars Cannot Override Statutory Interpretation
- Administrative circulars like CBDT Circular No. 13/2017 are not binding on courts or tribunals when interpreting statutory provisions
- Tax officers cannot rely on circulars to override judicial precedents on the meaning of "receipt"
- Practitioners should cite Arvind Singh Chauhan and CIT v. A.P. Kalyan Krishnan to counter mechanical application of circulars
Non-Resident Tax Planning Must Focus on Accrual and Control
- Non-residents working abroad should ensure salary is paid into foreign accounts first, even if later transferred to NRE
- Documentation proving work location, employer’s jurisdiction, and payment terms is critical
- The ITAT’s reasoning supports a global standard: income is taxed where it is earned, not where it is banked
