The recent ITAT Mumbai ruling on Section 69 vs Section 5(2) has become one of the most important decisions for taxpayers—especially Non-Resident Indians (NRIs). The judgment clarifies that the Income Tax Department cannot arbitrarily apply Section 69 (unexplained investments) without first examining the taxability of income under Section 5(2).

This ruling establishes a powerful principle: if income is not taxable in India under Section 5(2), Section 69 cannot be invoked to tax or penalize the taxpayer.

Background: Why This Ruling Matters

Tax authorities frequently issue notices to NRIs asking for explanations regarding foreign remittances, overseas bank balances, or investments. In many cases, when the taxpayer fails to provide satisfactory evidence, the Assessing Officer treats these amounts as unexplained investments or unexplained money under ITAT Mumbai ruling Section 69 vs Section 5(2).

However, the ITAT has made it clear that before making any such addition, officers must first check whether the income itself is taxable in India under Section 5(2).

Understanding the Key Sections

Section 5(2) – Scope of Total Income for NRIs

Under Section 5(2), an NRI is taxable in India only on:

  • Income received in India,

  • Income deemed to be received in India,

  • Income accrued or arising in India.

Foreign income earned and retained outside India is not taxable for NRIs.

Section 69 – Unexplained Investments

Section 69 allows the AO to treat investments or money as income if the taxpayer:

  • Cannot explain the source, or

  • Provides an unsatisfactory explanation.

It is generally used during scrutiny assessments where cash deposits, property purchases, or financial transactions seem unexplained.

What the ITAT Mumbai Held

The ITAT Mumbai observed that the tax department cannot bypass Section 5(2) and directly invoke Section 69. The main points of the ruling are:

1. First Determine Whether Income Is Taxable in India

If the amount represents:

  • Foreign salary

  • Foreign business income

  • Overseas investments

  • Remittances from abroad

…and is not received in India, then Section 5(2) does not allow taxation.
In such cases, Section 69 cannot create tax liability where none exists.

2. Burden of Proof Cannot Be Excessively Harsh

The tribunal emphasized that NRIs often have complex international transactions. As long as the taxpayer provides a reasonable explanation supported by documents, the AO cannot reject it merely on suspicion.

3. Foreign Bank Balances Alone Do Not Indicate Taxable Income

The decision clarified that:

  • High overseas bank balances

  • Foreign investments

  • International transfers

do not automatically mean undisclosed income in India.

4. Section 69 Is Not an Independent Charging Section

It can only apply after establishing that:

  • The income falls within the tax scope of Section 5(2).

  • The source of investment is taxable in India.

Impact of the Ruling on NRIs

1. Strong Protection Against Wrongful Additions

NRIs receiving notices for foreign investments now have a stronger defense. Officers must first establish taxability instead of assuming unexplained income.

2. Clear Guidance on Foreign Remittances

Funds remitted from abroad—if earned outside India—cannot be taxed under Section 69.

3. Reduced Risk of Penalty Proceedings

If Section 69 additions cannot be justified, penalty under Section 270A also fails.

4. Better Clarity for Tax Assessments

The ruling sets a precedent for handling:

  • Foreign salary deposits

  • Overseas savings

  • Gifts from abroad

  • Repatriated funds

  • NRE/NRO transfers

Common Situations Where This Ruling Helps NRIs

  • When an NRI transfers foreign savings to India

  • When an AO questions the source of overseas bank deposits

  • When foreign salary is credited abroad but later remitted to India

  • When property purchased in India is funded through overseas income

  • When AIS shows high-value foreign transactions

In all such cases, if the income is not taxable under Section 5(2), Section 69 cannot be used to create additions.

What NRIs Should Do After This Ruling

✔ Maintain documentation for foreign income

Employment contracts, foreign tax returns, bank statements, and salary slips become key evidence.

✔ Clearly establish residential status

This determines whether foreign income is taxable at all.

✔ Keep a trail of inward remittances

Avoid mixing foreign-earned income with Indian sources without clarity.

✔ Respond properly to notices

A well-drafted explanation backed by Section 5(2) can protect you from tax additions.

Conclusion

The ITAT Mumbai’s ruling on Section 69 vs Section 5(2) is a significant relief for NRIs. It reinforces a vital principle:
Income that is not taxable in India cannot be taxed indirectly through Section 69.

This ensures fair and lawful assessments, preventing the tax department from making arbitrary additions based solely on foreign bank balances or remittances.