CA Mehta’s new client, a UAE-based investment fund, was apprehensive. They had earned substantial interest income of nearly ₹4 crore from an Indian company, and while the full 12.5% tax was deducted at source, their leadership was worried about the compliance burden of filing an ITR in India.
Mr. Mehta smiled, recalling a recent ruling by the Delhi ITAT that turned conventional wisdom on its head. He reassured his client that, under specific conditions, their decision not to file might not just be acceptable—it could be the smartest move they never made.
This scenario is not just hypothetical; it mirrors a recent case where a UAE-based taxpayer, despite earning over ₹4 crore in interest income from India, successfully argued against a tax notice for not filing an ITR. The ruling was in the taxpayer’s favour, providing a significant precedent for tax professionals advising non-resident clients.
It clarifies that when a non-resident’s income consists solely of specific types like interest and dividends, and the requisite Tax Deducted at Source (TDS) has been applied, the failure to file an ITR cannot automatically be treated as income escapement.
The Technical Core of the Matter
The case revolved around the interpretation of Section 115A(5) of the Income-tax Act, 1961. This provision exempts certain non-residents from the mandatory filing of an ITR if two key conditions are met:
1 Their total assessable income in India consists only of specified incomes such as dividends, interest, royalties, or fees for technical services.
2 The tax has been deducted at source from such income at a rate not less than that prescribed by the Act.
In the decided case, the UAE-based entity had interest income from an Indian company, IFFCO. As per the India-UAE Double Taxation Avoidance Agreement (DTAA), this income was taxable at 12.5%, and IFFCO duly deducted the full TDS amount. The taxpayer, relying on Section 115A(5), did not file an ITR. However, the Assessing Officer (AO), flagged by the Non-Filer Monitoring System, initiated reassessment proceedings under Section 147, alleging that income had escaped assessment. Compounding the error, the AO incorrectly assessed the income at double the actual amount, a figure not supported by any evidence and contradicted by the taxpayer’s Form 26AS.
The ITAT quashed the entire reassessment, deeming it ‘bad in law.’ The tribunal held that since both conditions of Section 115A(5) were satisfied, the very basis for initiating the proceedings—the non-filing of the ITR—was invalid. The AO’s mechanical reliance on a system-generated flag without application of mind was a key factor in the tribunal’s decision.
Key Takeaways for Tax Professionals
This judgment offers several crucial insights for tax professionals advising non-resident clients on their Indian tax obligations.
• Statutory Exemption is a Valid Defence: For non-resident clients whose income from India is only from specified sources like interest and dividends, and where TDS has been fully deducted at the appropriate rate, Section 115A(5) provides a robust shield against non-filing allegations.
• Challenge Mechanical Reassessments: An AO cannot initiate reassessment proceedings under Section 147 merely because an ITR was not filed. There must be tangible evidence to form a ‘reason to believe’ that income has escaped assessment. A simple non-filer flag is not a sufficient ground.
• The Primacy of Form 26AS: This document remains a cornerstone for verifying income and TDS details. In this case, it was critical in proving the AO’s assessment of double the actual income was erroneous and without basis.
• Distinction Before and After 2020: It is important to note a subtle but critical amendment. While the Tribunal in this case referred to the current law, the case pertained to AY 2012-13. Experts have pointed out that the pre-2020 law was more liberal. Tax professionals must be mindful of the specific assessment year when advising, as the conditions for the exemption have evolved.
• Proactive Client Advisory: Tax professionals should proactively advise eligible non-resident clients that they may not need to file an ITR, saving them from unnecessary compliance costs. However, this advice must be caveated with a thorough check that all conditions of Section 115A(5) are unequivocally met.
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