A recent ruling by the Income Tax Appellate Tribunal (ITAT) in India involving Bollywood actor Shah Rukh Khan has shed light on a significant aspect of Indian tax law—the taxation of income from overseas properties.

The ITAT held that notional rental income from Khan’s luxury villa in Dubai is taxable in India. The decision provides a clear reminder to Indian residents that global income is not outside the purview of Indian tax authorities, and merely owning a property abroad does not shield one from Indian income tax obligations.

Let’s break down what happened in the case and explore the broader legal and practical implications.

🔍 Background of the Case

Shah Rukh Khan was gifted a villa in Dubai’s Palm Jumeirah in 2007 by Nakheel PJSC, a government-owned developer in the UAE. The property remained unoccupied and was not rented out. However, the Indian tax authorities added a notional rental value to Khan’s income, arguing that income should be imputed from ownership even if no rent was actually received.

Khan contested the addition, arguing that:

1. The property was a gift, not an income-generating asset.
2. No income accrued to him, as the property was not let out.
3. Under the India–UAE Double Taxation Avoidance Agreement (DTAA), the UAE had the taxing rights over the property.

The ITAT, however, ruled in favor of the Indian tax department.

🧾 Key Legal Principles Applied

1. Residential Status Determines Global Taxability

Under the Indian Income Tax Act, the taxability of income depends significantly on the residential status of the individual:

• Resident and Ordinarily Resident (ROR): Taxed on global income, including income from foreign sources.
• Resident but Not Ordinarily Resident (RNOR) and Non-Resident (NR): Taxed only on income that is received in India or accrues/arises in India.

In this case, Shah Rukh Khan was held to be a Resident and Ordinarily Resident in India during the assessment year. Hence, his global income—including notional income from property located abroad—was taxable in India.

2. Deemed or Notional Rent

The concept of deemed rental income means that a property—whether occupied, vacant, or not generating rent—may still be considered as yielding income under Indian tax law, specifically under Section 23(1)(a) of the Income Tax Act.

This applies even more stringently to vacant foreign properties owned by Indian residents. If not occupied for business or self-residence, a notional rental value may be added to income.

3. DTAA Interpretation

Article 6 of the India–UAE DTAA states that income from immovable property may be taxed in the country where the property is located. Shah Rukh Khan’s legal team argued that this article provides exclusive taxing rights to the UAE.

However, the CBDT Circular No. 789 (2000) and subsequent judicial precedents have clarified that the term “may be taxed” does not grant exclusive taxing rights to the other country. Instead, it gives both countries the right to tax. In the absence of any personal income tax in the UAE, India’s right to tax prevails.

💡 Key Takeaways for Indian Taxpayers

This case offers several important lessons, especially for Indian residents with overseas assets:

✅ 1. Disclose Foreign Assets and Income

Indian residents are mandated to disclose foreign assets and income in their Income Tax Return (ITR), specifically in Schedule FA (Foreign Assets). Non-disclosure can attract penalties under the Black Money Act, 2015, and other enforcement actions.

✅ 2. Notional Rent Is Not Just Domestic

Even if your overseas property is vacant, the Indian tax department may impute notional rental income if you’re a ROR. The assumption is that the property has an income potential that should be taxed unless valid exceptions apply.

✅ 3. DTAAs Have Limits

Many individuals incorrectly assume that a DTAA provides a blanket exemption. However, most DTAAs allow for shared taxing rights. If the foreign country doesn’t levy income tax, India has the right to do so as the resident country.

✅ 4. Gifted Properties Are Not Automatically Exempt

Even if a property is received as a gift, any future income or deemed income from it may be taxed. Gift tax exemptions are distinct from ongoing income tax obligations.

📌 Final Thoughts

The Shah Rukh Khan ruling serves as a wake-up call for many Indian residents with properties or investments abroad, specially countries with lower tax rates than India or nil taxation implications. 

Indian tax residents must now factor in not only actual foreign income but also notional income from properties, and evaluate the applicability of DTAAs in detail – especially when those countries, like the UAE, do not have personal income tax.

 

By 

Global Tax Team 

Anbac Advisors