Background of the Case

The Appellant, Priya Kapil Todarwal filed her return of income for the assessment year 2019–20 declaring a total income of Rs. 98,36,940. The return included a business loss of Rs. 11,60,579 from derivative transactions, a long-term capital gain of Rs. 1,02,45,891, a short-term capital gain of Rs. 6,164, and income from other sources amounting to Rs. 9,38,459. The appellant also claimed deductions under Chapter VI-A totaling Rs. 1,93,000, comprising sections 80C, 80D, 80G, and 80TTA. However, while processing the return under Section 143(1), the Centralized Processing Centre (CPC) disallowed these Chapter VI-A deductions on the ground that they constituted an “incorrect claim.” The appellant’s rectification application was also rejected, and the first appellate authority, the CIT(A), upheld the CPC’s position, leading the appellant to file an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.

Arguments by the Appellant

The appellant argued that the disallowance of Chapter VI-A deductions was erroneous and contrary to the scheme of the Income Tax Act. The appellant submitted that the Act does not prescribe any specific sequence for the set-off of losses under Section 71(2), and that appellant had correctly and deliberately chosen to first set off a part of her business loss against income from other sources in order to maintain a positive gross total income and preserve her eligibility to claim Chapter VI-A deductions. The remaining portion of the business loss was set off against long-term capital gains. The appellant emphasized that the set-off method chosen was tax-neutral and within the boundaries of the law.

The appellant also cited decisions including Coated Fabrics Pvt. Ltd. vs. JCIT and Opus Realty Development Ltd. vs. ACIT, where similar bifurcated treatment of losses was allowed.

Respondent’s Response

The Respondent, Revenue defended by asserting that the set-off adopted by the appellant was not consistent with the automated processing logic and hence resulted in an “incorrect claim.” The respondent maintained that once losses are set off against gross total income, the net result should automatically determine eligibility for deductions. Since the CPC system, on its automated computation, did not find sufficient gross total income after loss set-off, it rejected the Chapter VI-A deductions. The respondent did not substantially counter the legal precedents or the circular cited by the appellant but relied on the justification that the system-based processing reflected a correct application of the law.

Court Findings and Decision

The ITAT Mumbai found merit in the appellant’s arguments and held that there was nothing in law to restrict the appellant from setting off part of the business loss against income from other sources in order to keep her gross total income positive. The Tribunal emphasized that Section 71(2) does not prescribe any rigid order for set-off, and thus, in the absence of statutory restrictions, the appellant’s computation must be accepted. The Tribunal noted that the set-off method did not lead to any tax avoidance or undue benefit, and the Chapter VI-A deductions were otherwise allowable. It also reiterated the binding nature of Circular No. 26 of 1955 and the consistent view of earlier judicial decisions that permitted flexible and strategic loss set-off.

Accordingly, the Tribunal directed the CPC to allow the deductions claimed under Chapter VI-A and deleted the disallowance made in the intimation under Section 143(1). The appeal was allowed in favour of the appellant.

Smart Tax Planning Isn’t Tax Evasion:

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Yogesh Kotiyal vs ACIT (ITA No. 391/Del/2023 AY 2020-21)

The assessee, Yogesh Kotiyal, fulfilled the criteria stated in Section 6(1) of the Act for classification as a Non-Resident in India, owing to his limited stay in India during FY 2019-20. The assessee, an employee of Nokia Solutions and Networks India Private Limited (Nokia India), was on a foreign assignment in Australia during FY 2019–20. He performed employment and rendered services to Nokia Australia from August 23, 2017, to March 10, 2020, when he was relocated to Australia.

Throughout the Financial Year 2019–20, the assessee was physically present in Australia and engaged in employment while on assignment with Nokia Australia.

The assessee’s payroll remained in India for administrative convenience during his assignment to Australia, so he continued to receive salary and benefits while on his overseas assignment in India.

The assessee has claimed exemption of Rs.55,37,591/- on salary income received in India for the F.Y. 2019-20 for services rendered/ employment exercised in Australia under Article 15(1) of the India-Australia DTAA, read with Section 90 of the Act as he was Resident of Australia under Article 4(1) of the India- Australia DTAA.

According to section 90(2) of the Act, the Act’s provisions will apply to the assessee to the extent that they are more advantageous to them if a DTAA between India and the nation where the assessee’s income is subject to double taxation exists.

As a result, to assert exemption under Article 15(1) of the India-Australia DTAA, the following requirements must be met:

The candidate must meet two requirements: firstly, they must be an Australian resident; and secondly, the compensation must be earned through work performed in Australia.

According to Article 15(1) of the India-Australia DTAA read with Section 90 of the Act, the assessee’s salary of R s.55,37,591/-for work performed, or services rendered in Australia has been claimed as exempt from tax in India because the assessee was a resident of Australia and worked for Nokia Australia in Australia during the relevant Financial Year. Copies of the assignment agreement were produced by the assessee. Passport and Australian tax return attesting to the timely payment of taxes in Australia for the salary he received in India for work he performed in Australia. Additionally, the TRC was provided

during the DRP proceedings as additional evidence in support of the claim for exemption of Salary income under India- Australia DTAA.

The exemption of Rs. 55,37,591/-claimed by the assessee under Article 15(1) of the India-Australia DTAA read with Section 90 of the Act in relation to employment exercised and services rendered in Australia to Nokia Australia be allowed, based on the aforementioned rulings. The India-Australia DTAA’s Article 15(1) exemption has been denied by the AO on the grounds that the TRC has not been provided, despite the fact that other supporting documentation for tax residency in Australia has been properly provided. For example, an Australian tax return serves as proof of residency in Australia and of having paid taxes on time.

The undisputed facts are that:

1. The assessee is an NRI.
2. The assessee received salary for services rendered outside India.
3. The assessee has paid taxes in Australia.
4. Copy of the tax return filed Australian tax authority are filed before the revenue authorities.
5. Assessee had a valid TRC.

Given these circumstances, the Income Tax Act of 1961’s Sections 5, 9, and 15 are examined to determine whether the salary paid by the Indian company to a non-resident is taxable. This section deals with the scope of total income and subjected to the other provisions of this Act. The taxable income includes income from all sources received, deemed to be received accrues and deemed to have accrued is taxable in India in case of a non-resident. Hence, it is imperative to examine the provisions of taxability of salary received by non-resident from an Indian company as per the provisions of section 9 of the Income Tax Act.

As per the provision of Section 9 (1)(ii), the income earned under head “Salaries” is taxable in India ” if it is earned” in India. The explanation issued for removal of doubts declares that ‘salaries if it is earned’ meets services rendered in India.

In the instant case the assessee neither had any rest period nor leave period which is preceded and succeeded by the services rendered outside India. Since, the assessee has rendered services outside India, the salary cannot be taxable in India.

As per the definition the salary paid or the advances received are to be included in the total income of the person when the salary becomes due. From the concurrent reading of Section 5 dealing with scope of total income, Section 15 dealing with computation of total income under the head salary and charge ability thereof and Section 9 dealing with income arising or accruing in India with reference to the

salaries and the services rendered in India, we hold that no taxability arises on the salary/allowances received by the assessee since the assessee is a non-resident and has rendered services outside India.

Thus, the assessee is eligible for exemption on his salary for services rendered in Australia employment exercised in Australia during his Australia assignment period.

Non-Residents Salaries Earned For Services Provided Outside India

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The Assessee received a lump sum after termination from service and a certain amount for purchasing a new car.
The assessing officer treated the amount received by assessee as compensation amount as part of salary and money received for purchase as perquisites.
The commissioner (appeals) held that the receipt of the amount due to the out of court settlement as well as the value of the perquisite was to be deleted.

If the compensation was voluntary and there was no obligation on the employer to pay additional amount to claimant in accordance with any service rule, it would not constitute compensation in accordance with section 17(3)(I).

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Shri Shanker Nebhumal Uttamchandani vs A.C.I.T., Central Circle-4, Surat. [ITA No. 321/SRT/2022 (AY: 2020-21)]
The Hon’ble ITAT Surat carefully reviewed the details of the case, where additions were made based on WhatsApp images found on an iPhone. It was observed that the Assessing Officer did not mention in the assessment order whether the images were received by the assessee or sent by them. Furthermore, the source of the images was not investigated by the Assessing Officer. There was no mention of whether the images were shown to the assessee during the search action or if their statement was recorded regarding the images. Due to the lack of supporting evidence, the ITAT found no valid reason for the additional amounts. The Hon’ble Supreme Court, in the case of Common Cause v. Union of India (2017) 394 ITR 220 SC, also stated that loose sheets of papers are irrelevant as evidence and not admissible under section 34. Therefore, they uphold the CIT(A)’s order, which deleted the demand, as valid.

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