NR cannot be taxed under Section 69 unless it can be proved that the investments are made with income generated in India

S. 69 : Unexplained investments-Non-resident-On money-Foreign Resident cannot be taxed under section 69 of the Act-DTAA India -UAE. [S. 132(4), Art. 22]

Facts :

The assessee was a non-resident Indian who had spent the previous three decades in the United Arab Emirates (UAE). According to information obtained from the investigation wing, the Assessing Officer (AO) discovered that the assessee had paid cash sums totaling Rs 2,50,40,000 to Ahuja Builders as ‘on money.’

This sum was classified as a “unexplained investment” under Section 69. Dissatisfied, the assessee filed an appeal with the learned CIT (A). The CIT(A) removed the contested addition. The AO filed this appeal with the Mumbai Tribunal.

The Mumbai Tribunal ruled that the unexplained investment is not taxed under any of the heads specified in the Indo-UAE tax treaty. This brings up the residuary head of income, which deals with ‘other income,’ which is covered by Article 22.

The economic activity or the linkage of an income with that jurisdiction is the trigger for taxation of an income in a source jurisdiction. There can be no source taxation in the absence of such a link or economic activity nexus.

Judgment Held :

The assessee in this case was an Indian national who lived in the UAE. The taxing rights granted by Article 12 are the property of the residence jurisdiction. Even if the rights can only be transferred to the source jurisdiction, an unexplained investment cannot be taxed in India, which is neither a residence nor a source jurisdiction but is an investment jurisdiction.

Thus, unexplained investments could be taxed in India under section 69 only if the assessee made the unexplained investments with income earned in India.

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