Delhi ITAT ruling: How relative’s airline job cleared businessman of tax penalty on foreign currency found in raid

A Delhi taxpayer has secured relief from the Income Tax Department after the Income Tax Appellate Tribunal (ITAT), Delhi, ruled in his favour in a case involving cash and foreign currency discovered during a tax search.

The case dates back to March 21, 2017, a few months after demonetisation. The Income Tax Department conducted a search at the property of a businessman named Gupta in G.K. Enclave-1, Delhi. During the search, officials found ₹1.12 crore in Indian currency and foreign currency worth ₹4.34 lakh.

Gupta was subsequently questioned by the tax authorities about the substantial amount of cash found at his residence.

Taxpayer’s explanation for cash found during search

Gupta told the tax authorities that he was a director of a company and that the company had withdrawn cash from 11 of its bank accounts because it feared further action in the aftermath of demonetisation.

According to Gupta, the withdrawn money was subsequently kept at his residence.

He also provided an explanation for the foreign currency discovered during the search. Gupta said the foreign exchange belonged to his sister-in-law, Kemp, who was employed with Jet Airways and was living with him at his G.K. Enclave-1 residence.

Kemp subsequently submitted a written statement to the Income Tax Investigation Officers confirming that the foreign currency found at Gupta’s residence belonged to her and had been handed over to him for safekeeping.

Sister-in-law’s statement supported foreign currency claim

Kemp explained that her employment with Jet Airways involved frequent international travel, because of which she regularly carried foreign currency. She said she had given her unused foreign exchange to her brother-in-law for safekeeping.

The explanation was accepted by the Income Tax Investigation Team during the search. The officials were sufficiently satisfied with Kemp’s statement that they did not seize the foreign currency.

The matter, however, did not end there.

Assessing officer treats currency as unexplained

Although the investigation team accepted the explanation, the Assessing Officer (AO) subsequently took a different view.

The AO treated both the cash and foreign currency found during the search as unexplained money under Section 69A of the Income Tax Act. The amount was also subjected to tax under Section 115BBE, which provides for a higher tax rate on certain types of unexplained income.

Gupta challenged the treatment of the money as unexplained.

Why did the taxpayer receive relief from ITAT Delhi?

The taxpayer’s explanation ultimately found favour with the appellate authorities.

A key factor was that Kemp herself had provided a written confirmation establishing her ownership of the foreign currency. Her statement was also consistent with the fact that she worked for an airline and frequently travelled abroad.

More importantly, the Income Tax Investigation Team had considered her explanation at the time of the search and had decided not to seize the foreign currency.

The Assessing Officer, however, did not provide contrary evidence sufficient to disprove or dislodge the explanation.

The Commissioner of Income Tax (Appeals), therefore, granted relief to Gupta. The ITAT Delhi subsequently found no reason to interfere with the CIT(A)’s decision.

The case highlights the importance of establishing the ownership and source of cash or foreign currency found during an income-tax search through credible and corroborated evidence.

How much foreign currency can Indians keep at home?

Indian residents are permitted to possess a limited amount of foreign currency notes and traveller’s cheques under the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015.

Under Regulation 3, a person resident in India can retain foreign currency notes, bank notes and traveller’s cheques up to USD 2,000, or its equivalent in aggregate, without a specific time limit, subject to the conditions prescribed under the regulations.

The foreign exchange must have been legitimately acquired. This can include unspent foreign currency brought back after an overseas trip or foreign currency received as a gift or honorarium from a person visiting India.

Interestingly, the USD 2,000 limit applies to foreign currency notes, bank notes and traveller’s cheques. The regulations do not prescribe the same limit for foreign coins.