The Ahmedabad ITAT recently deleted a ₹5.52 lakh tax addition for a Kuwait-based NRI, ruling that verified foreign salary remittances cannot be taxed as unexplained money. The tribunal also sent a ₹2.50 crore addition back for fresh verification. This order highlights the importance of maintaining a clear audit trail for foreign funds transferred to NRE accounts to avoid tax scrutiny under Section 69A.
The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has provided relief to a Non-Resident Indian (NRI) employed in Kuwait, setting an important precedent for how foreign earnings remitted to India are treated by tax authorities.
The dispute began when the Income Tax Department identified high-value credits in the taxpayer's Indian bank accounts, specifically with HDFC Bank and ICICI Bank. These transactions were flagged through the Specified Financial Transactions (SFT) system. Because the taxpayer had not filed an original income tax return and had not initially produced comprehensive documentation, the assessing officer treated the deposits as "unexplained money" under Section 69A of the Income Tax Act. Consequently, the entire amount was subject to tax under Section 115BBE, which typically carries a higher tax burden.
Upon appeal, the taxpayer produced evidence including records from the National Bank of Kuwait, salary documents, and Indian bank statements. These records created a clear link showing that the overseas salary had been credited in Kuwait before being transferred to NRE accounts in India. After reviewing this evidence, the ITAT deleted the ₹5.52 lakh addition, ruling that foreign salary remittances credited to an NRE account cannot be categorized as unexplained money when the source is verified.
The tribunal, however, did not grant full relief on a separate addition of approximately ₹2.50 crore linked to the HDFC Bank account. The ITAT directed the Assessing Officer to conduct a fresh examination of this amount. The tribunal noted that while the taxpayer claimed these were also legitimate remittances, a complete one-to-one reconciliation with transaction-level details had not been furnished. The case was remanded to ensure the tax department verifies whether this money represented foreign income or the redeployment of previously verified funds.
This case offers a practical lesson for NRIs managing money between overseas accounts and Indian NRE or NRO accounts. When the SFT system flags large transactions, the tax department expects a clear paper trail connecting the income source—such as overseas salary or business income—to the bank deposit in India. Failing to provide this audit trail during the initial assessment stage can lead to tax additions that later require lengthy appeals to resolve.
For taxpayers, the key monitorable remains the maintenance of organized financial records. The immediate next step for the parties involved in this specific case will be the fresh verification of the ₹2.50 crore amount by the Assessing Officer, where the taxpayer must present precise transaction-level reconciliation to substantiate the claims.