The Punjab and Haryana High Courts has upheld an order of the Income Tax Appellate Tribunal that ruled in favour of the assessee having unexplained deposits in a foreign bank account.

The assessee had declared an income of ₹9,500 and ₹11,500 for assessment years 2006-07 and 2007-08 as well as agricultural income, which was exempt from tax. The assessee was later subjected to reassessment proceedings for unexplained deposits totalling ₹11.13 crore and ₹1 crore for these years in an HSBC Bank account in Geneva.

Following which, the assessee filed an affidavit stating that the bank account did not belong to him and its ultimate beneficiary was his nephew who had taken his signature on some papers in India. The assessee had visited the UK in 1985, 2006 and 2012, but had not opened any bank account there or any other country.

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The revenue department rejected the affidavit and held that the bank account belonged to the assessee. What’s more, since the assessee had failed to offer any explanation about the nature and source of investment of the deposits, addition was made under section 69 of the IT Act. The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal after verifying that the latter was maintaining a bank account and was unable to produce his nephew or any other evidence to prove the source of deposits. The CIT(A) said that the cash and investments were transferred through M/s Sauvingnon Holdings to the Indian Trust whose settler is the assessee.

The ITAT allowed the assessee’s appeal and held that the ultimate beneficiary of the HSBC Bank account is the nephew of assessee residing in the UK. The nephew had made the payment of taxes against the deposits in HSBC Bank account which was certified by his chartered accountant and confirmed by HMRC authority of the UK. The name of the assessee as the beneficial owner was closed in the bank account in 2004, following which Sauvignon Holdings was introduced as the beneficial owner.

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The High Court stated that there was no material on record to show that the amounts were deposited by the assessee as the account was opened in 2003 and did not match with the three visits made by the assessee. The court observed that the assessee was not based aboard for long periods and had a small holding of land in India, and could not hold such high amounts in foreign currency. No substantial question of law arose for consideration against the ITAT order, the court concluded.

“This is a positive High Court ruling upholding that the taxpayer has given a reason as to why his name appeared against an offshore asset as well as provided an explanation as regards the source of the funds. It is settled law that tax could arise in the hands of a taxpayer only in case of a contribution or receipt of a distribution. The High Court also considered multiple circumstantial evidences like profile of the tax payer, timing of removal, travel history, nephew’s tax filings and noted that tax department had brought nothing on record to show there was any Indian tax that was evaded,” said Ashish Mehta, Partner at Khaitan & Co.