Section 115A(5) Return Filing Exemption for Non-Residents – Confirmed by ITAT Delhi

In a landmark ruling strengthening non-resident tax compliance protection in India, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that reassessment proceedings under Section 147 cannot be initiated solely because a non-resident did not file an income tax return in India, where Section 115A(5) specifically removes the return filing obligation.

The decision in Kisan International Trading FZE vs ACIT (ITA No. 6152/Del/2024) provides decisive clarity for:

• NRIs earning Indian-source interest income
• Foreign companies lending to Indian entities
• Overseas investors receiving DTAA-taxed income
• Entities relying on Section 115A(5) exemption

Case Background – UAE Company Receiving Interest Income from India

The assessee was a UAE tax-resident foreign company receiving interest income from an Indian borrower (IFFCO).

Key facts:

• Interest income: USD 7,48,401.66 (₹4.24 crore)
• Applicable law: Article 11 of India–UAE DTAA
• Tax rate: 12.5% withholding tax
• TDS deducted under Section 195
• Full TDS reflected in Form 26AS

Since the only Indian income was interest subject to DTAA withholding tax, the assessee invoked Section 115A(5), which states that no Indian income tax return is required when correct TDS is deducted on interest or dividend income of non-residents.

Why the Income Tax Department Issued a Section 148 Reopening Notice?

Despite clear compliance:

• The assessee was flagged by the Non-Filer Monitoring System (NMS)
• The Assessing Officer issued a Section 148 notice
• Reassessment under Section 147 was initiated

The AO alleged income escaping assessment solely due to non-filing of return, without examining:

• DTAA protection
• Section 115A(5) exemption
• Actual Form 26AS data

Worse, the AO incorrectly doubled the income and passed an erroneous reassessment order.

ITAT Delhi Judgment – Reopening under Section 147 Held Void Ab Initio

The ITAT categorically held:

1. No Return Filing Obligation under Section 115A(5)

Where:

• Non-resident earns only interest/dividend income from India
• Tax is withheld at DTAA rates
• No other Indian income exists

Filing an Indian income tax return is not required
Non-filing cannot be treated as income escaping assessment

2. Mechanical Reopening Based on Non-Filer Flag is Invalid

Reassessment triggered merely by the automated Non-Filer Monitoring System was held to be:

• Mechanical
• Without application of mind
• Without legal jurisdiction

3. Section 147 Reassessment Cannot Override DTAA Protection

The Tribunal reaffirmed:

• Section 90(2) gives DTAA overriding effect
• DTAA-taxed income with proper withholding cannot be reopened as escaped income

4. Binding Delhi High Court Precedents Followed

The ITAT relied on:

• Nestle SA vs DCIT (Delhi HC)
• TSYS Card Tech Services Ltd vs DCIT (Delhi HC)

Both judgments confirm:

• When Section 115A(5) applies, reassessment proceedings based solely on non-filing are invalid in law.

Final Outcome – Assessment Quashed

The Tribunal ruled:

• Reopening under Section 147 lacked jurisdiction
• Reassessment proceedings were void ab initio
• Entire assessment order was quashed
• Appeal allowed in favour of the non-resident assessee

Why This ITAT Ruling Matters for NRIs and Foreign Investors?

This judgment is a major relief for:

• NRIs earning interest income from India
• Foreign companies providing ECB loans to Indian entities
• Overseas lenders and investors
• DTAA-protected passive income earners

Key Compliance Takeaways

• Section 115A(5) removes Indian return filing obligation
• Proper DTAA withholding tax ensures full compliance
• Non-filer notices issued automatically can be legally challenged
• Section 147 reassessment cannot be initiated mechanically

FAQs:

Q.1 Do NRIs need to file tax return in India for interest income?
Ans: No, if Section 115A(5) conditions are satisfied.

Q.2 Can income tax reopen case if NRI did not file return?
Ans: Not when income is fully taxed via TDS under DTAA.

Q.3 Is Section 148 notice valid for DTAA interest income?
Ans: No, as held by ITAT Delhi in this ruling, as consistently advised by NRI consultants.

Q.4 Does DTAA override Indian reassessment law?
Ans: Yes, under Section 90(2).

How Dinesh Aarjav & Associates Can Help

At Dinesh Aarjav & Associates, we advise:

• NRI tax planning in India
• DTAA Consultancy and withholding compliance
• Responding to Section 148 / 147 notices
• Cross-border tax litigation support

With 25+ years of NRI and international tax experience, we help overseas clients stay compliant and protected through effective NRI tax planning.

Also Read:

Breaking NRI Tax Update: ITAT Delhi Cancels Penalty on NRI Because Income Tax Notice Was Never Served

Foreign Tax Credit for NRIs and RNORs: ITAT Delhi’s Landmark Ruling in Aditya Khanna vs ITO

ITAT Chennai Ruling on NRI Residential Status: Overseas Income Not Taxable in India for Non-Residents

ITAT Mumbai’s Landmark Ruling: Section 69 Cannot Override Section 5(2)