How Technical Grounds Helped an Indian Engineer Save ₹39 Lakh in Tax Demand
- Farheen Mukadam
- Aug 6
- 12 min read
An Indian engineer living and working in Dubai found himself in a tax dispute in 2025, an experience that really highlighted how small oversights can sometimes lead to big trouble. This engineer had purchased a property in Kerala for ₹39 lakh and put ₹30 lakh into Fixed Deposits (FDs) back in the 2014-15 tax year. He'd used his Dubai salary to make both investments. Then, in 2022, he got a notice from the Income Tax Department. They claimed these were "unexplained investments" and added ₹69 lakh to his income, kicking off penalty proceedings.
What initially looked like a standard tax inquiry quickly escalated into a lengthy legal battle. The engineer wasn't vindicated because his investments were necessarily questionable; rather, he won because the tax authorities made a significant procedural error. This situation serves as a crucial reminder for Non-Resident Indians (NRIs): it's not only about proving that your investments are legitimate, but also about ensuring the correct tax authorities are handling your case and that they're following all the right procedures.
Table of Contents
The Investment That Sparked the Tax Notice
This engineer had been living and working in Dubai since way back in 1997. During the 2014-15 financial year, he decided to make two significant investments back in India. He purchased some property in Kerala for about ₹39 lakh and also put ₹30 lakh into Fixed Deposits (FDs). Both of these investments came from his savings earned in Dubai, money that had already been taxed according to Dubai's laws.
Things were smooth sailing until April 2022 rolled around. That's when the Income Tax Department sent him a notice. They basically said that the total of ₹69 lakh he had invested couldn't be properly explained and, as a result, should be considered as income and taxed accordingly. They wanted to include this amount under Section 69 of the Income Tax Act, which deals with unexplained sums.
Now, the engineer knew full well that these investments were completely legitimate since they were funded by his legitimate earnings from Dubai. However, he suddenly found himself needing to prove this to the tax authorities. This notice marked the beginning of a rather challenging battle with the tax department.
Understanding Section 148: Reassessment and Its Challenges
Section 148 of the Income Tax Act gives the Income Tax Department the authority to reopen a taxpayer's financial assessment if they suspect that some income has not been reported accurately or completely. This procedure is known as reassessment. Essentially, it means the tax authorities can take another look at your tax return if they have reasons to believe that certain income has been escaped or not properly accounted for.
For instance, if the department observes that you have made significant investments or received income from a source that was not mentioned in your tax return, they can invoke Section 148 to reopen your case and conduct a review. The goal is to ensure that all income has been correctly reported and taxed.
In the engineer's situation, the Income Tax Department suspected that his investments in property (₹39 lakh) and Fixed Deposits (₹30 lakh) were not properly disclosed when he submitted his earlier tax returns. The department felt that the engineer had not explained the origin of the funds used for these investments, which prompted them to issue a Section 148 notice. This notice serves as the official method for the department to reopen the engineer's tax file and reassess whether these investments should be considered part of his taxable income.
Although Section 148 is a standard tool used by the tax department to uncover undeclared income, the core issue in this particular case wasn't about the legitimacy of the engineer's investments. The real challenge here was whether the tax department followed the correct procedure in issuing the notice. Specifically, the tax authorities had made an error regarding jurisdiction, which means the wrong tax officer issued the notice, and that mistake would later play a major role in the case.
How the Engineer Defended the ₹69 Lakh Allegation
The Fixed Deposits (FDs) Explanation
The engineer started by explaining the ₹30 lakh he had put into Fixed Deposits. He clarified that this was not new income, but rather money he had rolled over from Fixed Deposits that had reached maturity in previous years. In simple terms, the ₹30 lakh came from funds he had originally invested a while back, which had now matured and were reinvested.
To back up this story, he submitted various documents like bank statements and records of those matured Fixed Deposits from earlier years. These papers showed that the money used for these new deposits came from a legitimate source and lined up with his income, which he'd earned and kept outside of India.
The Dispute Resolution Panel (DRP) initially accepted his explanation. They acknowledged that the Fixed Deposits looked legitimate and seemed to be funded by his overseas earnings. However, things got more complicated when they looked into the purchase of the property.
The Property Purchase Argument
The engineer's second defense centered on the property he bought in Kerala. He explained that the funds used for this purchase came entirely from his salary, which he had earned while working in Dubai. Because this income was generated outside of India, he maintained that buying the property wasn't subject to Indian tax laws. Essentially, he argued that the money used to buy the property was earned abroad and thus should not be taxed in India.
This line of reasoning was very important, as it formed the core of his case. The engineer showed that the property was bought with money that had already been taxed in Dubai, and therefore, it shouldn't be considered income that originated or was earned within India.
The Role of Procedural Jurisdiction in Tax Cases
Tax matters for Non-Resident Indians (NRIs) can definitely be complex, especially when things get bogged down in procedure. Take the case of the engineer, for instance. The tax officials questioned his investments, a ₹39 lakh property in Kerala and ₹30 lakh in Fixed Deposits, suggesting they couldn't be easily explained. However, the actual key point in his situation wasn't whether the investments were legitimate or not. It was a procedural error that ended up making the tax notice invalid.
Timeline of Events:
FY 2014-15: The engineer, working in Dubai since 1997, made two significant investments: purchasing a property in Kerala for ₹39,62,714 and booking an FD worth ₹30,36,720. The money for both investments came from his salary earned in Dubai, and he believed these funds were fully compliant with both Indian and international tax regulations.
April 20, 2022: The tax assessing officer (AO) issued a notice under Section 148, reopening the engineer’s tax file. The notice claimed that the total amount of ₹69 lakh in investments, comprising the property and the FDs, were unexplained and should be treated as income, potentially subject to penalty under Section 69 of the Income Tax Act.
May 11, 2022: In response, the engineer filed an income tax return (ITR) declaring an income of ₹5,85,620, trying to clarify the nature of the investments. His defense was based on the fact that both the FD and the property purchase were funded by his earnings from Dubai, and therefore, they were not liable to tax in India.
March 11, 2023 to April 21, 2024: During this period, the tax department issued several statutory tax notices under Section 142(1) of the Income Tax Act, seeking further details and explanations. Despite receiving these notices, the engineer did not respond in a timely or comprehensive manner.
March 15, 2024: The engineer filed a partial reply to these notices. As a result, a show cause notice was issued to him, requesting further submissions and explanations. Unfortunately, he did not seize the opportunity to file his full response or submit the necessary documentation.
March 31, 2024: As the case approached its time limit, the engineer’s failure to properly defend his case led to a best judgment order being passed under Section 144, imposing a ₹69 lakh addition to his income as unexplained investments under Section 69. This was accompanied by penalty proceedings.
April 2024: In response to the best judgment order, the engineer filed an appeal with the Dispute Resolution Panel (DRP), challenging the penalty and the addition to his income, focusing primarily on the procedural errors made by the tax authorities.
Why the Notice Was Void Ab Initio
The engineer certainly had good reasons behind his investments. However, the core problem here wasn't about the investments themselves, but rather the tax official who sent the notice under Section 148. For Non-Resident Indians (NRIs) like him, these notices must come from a specific international tax officer who has authority over income earned abroad. In this situation, though, the notice was issued by a regular domestic tax official, meaning it came from the wrong person entirely.
The Income Tax Appellate Tribunal (ITAT) in Mumbai really stressed this point, saying that getting the jurisdiction wrong isn't just a small oversight; it's a fundamental error that makes the notice invalid right from the start. So, essentially, because of this procedural slip-up, the whole reassessment process was flawed, and the engineer wasn't actually required to respond to that invalid notice.
Section 292BB and Its Limitations
In tax matters, Section 292BB could have allowed the tax authorities to validate the procedural defect if the engineer failed to object to the jurisdictional issue in a timely manner. However, the ITAT ruled that this was not applicable in this case. The jurisdictional error was too significant to be cured by default, meaning the tax department could not rely on Section 292BB to correct their mistake.
This reinforced the idea that some procedural issues, particularly regarding jurisdiction, cannot simply be overlooked, even if they are pointed out later in the process. The case highlighted that such errors are too serious to be remedied by Section 292BB or any other procedural workaround.
ITAT Mumbai’s Ruling: Quashing the Tax Notice
Ultimately, the Mumbai ITAT sided with the engineer, setting aside the Section 148 notice and the reassessment order that followed. The tribunal zeroed in on a procedural mistake, determining the tax notice was invalid because it had been issued by the wrong officer. The ITAT didn't examine whether the property purchase or fixed deposits were genuinely unexplained; instead, it stressed that the jurisdictional error alone made the whole process invalid.
The Importance of Jurisdictional Correctness
This decision highlights a crucial point for NRIs: making mistakes about which tax officer should be handling a case can lead to serious problems. Tax notices sent out by the incorrect tax official, even if they relate to legitimate issues, can be declared completely void if they aren't issued by the right person with the proper legal authority.
The Legal Significance of the ITAT Ruling
The ITAT's ruling establishes an important precedent for NRIs and tax professionals. It strongly emphasizes that the correct tax officer must issue notices in international tax situations. This ruling makes it clear that even if the tax department has good reasons to question a taxpayer's investments, the process only holds up if the procedural and jurisdictional rules are followed correctly.
Key Takeaways for NRIs on Tax Notices and Procedures
This situation highlights some important points for NRIs who might run into similar tax problems:
Location Matters: Always make sure that any tax notices about your income from abroad are sent by the right international tax official.
Timing Is Everything: Ignoring notices or taking too long to reply can result in the tax authority making their own assessment, which can have serious financial consequences.
Keep Detailed Records: Having good proof of your investments and income, including bank statements and receipts, is crucial if you ever end up in a tax dispute.
Legal Challenge Can Help: Don’t be afraid to question tax notices, particularly if you think there were mistakes in how they were issued. This engineer’s experience shows that challenging things legally can actually lead to a good outcome.
Conclusion
In the end, the ITAT Mumbai ruling was a victory for the engineer, based not on the merits of his investments, but on a procedural flaw made by the tax authorities. The key takeaway from this case is clear: jurisdiction matters. For NRIs, it's crucial to ensure that tax notices are issued by the right authority, an international tax officer, who has jurisdiction over foreign income. This case serves as a reminder that tax proceedings are not just about proving the legitimacy of investments but also about following the correct procedural steps.
FAQs
Q1. What is Section 148 of the Income Tax Act and why is it important in tax reassessments?
Section 148 allows the Income Tax Department to reopen a taxpayer's assessment if they believe that income has been either underreported or hidden. This provision is commonly used when there is a suspicion of undeclared income or unexplained investments. For example, in the engineer’s case, Section 148 was invoked to reassess his investments in property and Fixed Deposits (FDs) which the tax authorities suspected were not fully disclosed.
Q2. How can the jurisdiction of the tax officer affect the validity of a tax notice?
Jurisdiction refers to the authority of the tax officer to issue a notice. In this engineer's case, the notice was issued by a domestic tax officer, but since he was an NRI (Non-Resident Indian), the tax notice should have been issued by an international tax officer. When a notice is issued by the wrong officer, the notice becomes invalid, and this was the main reason the ITAT Mumbai quashed the tax notice.
Q3. What is the significance of Section 69 in the Income Tax Act in relation to unexplained investments?
Section 69 deals with unexplained investments. If a taxpayer’s investments are more than their declared income and the source of the funds cannot be explained, the tax authorities may treat that as income and tax it. In the engineer’s case, the Income Tax Department initially invoked Section 69, accusing him of not explaining the source of his ₹69 lakh in investments.
Q4. What should an NRI do if they receive a tax notice from the wrong tax officer?
If an NRI receives a tax notice from a domestic officer, they should immediately check the jurisdiction. The notice should be issued by an international tax officer who handles foreign income cases for NRIs. If the wrong officer issues the notice, the NRI can challenge the notice in court based on jurisdictional error, as was done in the engineer's case.
Q5. What is the process for challenging a tax notice based on jurisdictional errors?
To challenge a tax notice based on jurisdictional errors, the taxpayer should first verify if the notice was issued by the correct tax officer. If the notice was issued by the wrong officer, they can file an appeal with the Dispute Resolution Panel (DRP) or Income Tax Appellate Tribunal (ITAT), as the engineer did. The appeal should highlight the jurisdictional mistake, and the case can be quashed if the court agrees that the wrong officer issued the notice.
Q6. What role does Section 292BB play in the validation of a tax notice?
Section 292BB allows the tax authorities to validate procedural defects, such as an incorrect officer issuing a notice, if the taxpayer fails to object in a timely manner. However, this section cannot fix fundamental errors like incorrect jurisdiction. In the engineer’s case, the ITAT ruled that the jurisdictional error could not be cured by Section 292BB, as it was too significant to overlook.
Q7. How does the ITAT determine whether a tax notice is valid or not?
The ITAT examines whether the tax notice was issued correctly, focusing on procedural issues like the jurisdiction of the officer, the timeliness of the notice, and whether it meets the requirements of the law. In the engineer’s case, the ITAT ruled that the tax notice was invalid due to jurisdictional issues, and therefore, the case was dismissed without addressing the substance of the investments.
Q8. Can an NRI challenge a tax notice if they missed the deadline to respond?
Yes, an NRI can still challenge a tax notice if they missed the deadline to respond, but the challenge would be based on procedural or jurisdictional errors rather than the substance of the case. In the engineer’s case, the issue wasn’t about missing deadlines but about the wrong tax officer issuing the notice, which was successfully challenged.
Q9. What happens if the wrong tax officer issues a notice under Section 148?
If the wrong tax officer issues a notice under Section 148, it can be challenged in court on the grounds of jurisdictional error. In the engineer’s case, the tax officer was from the domestic department, which did not have jurisdiction over NRIs. The ITAT ruled that this error invalidated the entire process, and as a result, the tax notice was quashed.
Q10. How can NRIs ensure their tax filings are handled correctly by the right tax officer?
NRIs can ensure their tax filings are handled correctly by double-checking that their tax matters are being managed by the international tax officer assigned to handle foreign income. NRIs should keep records of their income and investments and make sure all documentation is submitted to the correct authorities. Using services like TaxBuddy can also help in ensuring that the right processes are followed for international tax filings.
Q11. How can an NRI prove that their foreign income is exempt from Indian tax?
An NRI can prove that their foreign income is exempt from Indian tax by providing documents such as bank statements, foreign employment contracts, and remittance receipts showing that the income was earned and taxed outside India. Additionally, NRIs may benefit from the Double Taxation Avoidance Agreement (DTAA) between India and other countries, which helps prevent double taxation of the same income.
Q12. What are the time limits for reopening a tax assessment under Section 148?
The time limits for reopening an assessment under Section 148 depend on the amount of income involved. The time limit is 3 years for cases involving income below ₹50 lakh, and for cases involving income above ₹50 lakh, the tax department can reopen assessments for up to 10 years (though recent changes have reduced this limit to 5 years and 3 months in certain cases). This time limit is crucial, as missing it could prevent the department from reassessing a taxpayer’s case.
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