Rules Determining Residential Status of an Individual

Introduction:

India being a democratic and welfare state has to implement various welfare programs in pursuance of ideals and goals enshrined in the constitution. Taxes are the main source of income of any government to implement the public welfare programs etc.,

Among all taxes levied by the Central Government, Income Tax contributes a lot to the economy of the nation. The law relating to Income Tax is governed by the Income Tax Act,1961.

All the taxable entities in the Income Tax Act, 1961 hereafter referred to as ‘the Act’ is categorized according to the residential and non-residential status of an individual in determining the tax liability. 

Scope

Income Tax rates are different from year to year based on the Finance Acts every year. Tax is levied upon the assessee basing on the previous year’s Income.

Section 5 of the Act explains the relationship between the residential status and incidence of tax. The incidence of tax also depends on the residential status along with the place and time of receipt of Income.

Section 6 of the Act narrates about the residential status and tax-liability.

Concept of the Residential Status

The residential status of an assessee is determined depending upon his residence period in India or his previous year, not as per the Assessment year. The concept of residential status for charging Income-tax is quite different from the concept of ‘citizenship’, ‘nationality’, and ‘domicile’.

Residential Status may be given to a foreigner, who resides in India and also gains income in India. Residential status is given to an assessee for charging Income Tax for all sources of Income. The Act provides certain restrictions and lays down principles in the residential status of the assessee.  

Taxable Entities (Sec. 6)

According to Sec 6, there are Five different taxable entities as

• An Individual
• A Hindu undivided family
• A Firm or an association of persons or a body of individuals
• A Company and
• Every Other Person

Categories of Residential Status

There are three categories of residential status for the purpose of charging Income Tax:

• Resident & ordinary resident in India
• Resident but not ordinarily resident in India; and
•  Non-resident

1. Resident & Ordinarily Resident in India: The residential status of the different taxable entities can be determined as Resident and ordinarily resident in India as follows:
   1. Individual: An individual is said to be resident in India :
      1. If he is in India in the previous year for 182 days or more.
      2. An individual who has been residing in India for 365 days or more during the 4 years preceding the Assessment (Previous) Year and for 60 days or more in that relevant previous year.[1]
         Exception: If a person is a member of the crew of an Indian ship who works on the seas for several months then the above conditions are relaxed and instead of 182 days, 60 days are sufficient in the first condition. Another exception is if an individual is a citizen of India/ Indian Origin under Sec 115-C clause (e).
   2. Hindu Undivided Family: A Hindu Undivided Family is said to be resident in India if it is controlled from India even partially. It means that the decision making power for vital affairs is situated in India.
   3. Firm or Association of Persons: A Firm or Other Association of persons is said to be resident in India if the control and management of its affairs is situated in India partly or completely. Here, control and management means the real control and management.
   4. Company:
      • A Company is said to be resident in India if the control and management of its affairs is situated in India partly or completely. Therefore, every company registered in India is treated as a “Resident Company”.
      • Similarly, non-Indian companies shall also be regarded as resident in India if its control and management is situated wholly in India.
      • The control and management of a company can be decided on the factor and place where the Directors’ meetings are held but not on the Shareholders’ meeting place.
      • The residential status of a company may change its residence and non-residence depending on its functioning in India in its previous year.
   5. Every Other Person: If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income is said to be a resident.
2. Resident but not Ordinarily Resident in India: A person is said to be Resident but not ordinarily resident in India under the following conditions:
   1. Individual: An individual is said to be resident but not ordinarily resident in India if he has not been a resident in India in 9 out of the 10 previous years before that year or has not been during the 7 previous years before that year or has not been for a period amounting a total of 729 days or less.
   2. Hindu Undivided Family: A Hindu Undivided Family whose Manger is said to be resident but not ordinarily resident in India if he has not been a resident in India in 9 out of the 10 previous years before that year or has not been during the 7 previous years before that year or has not been for a period amounting a total of 729 days or less.
3. Non-Resident: Sec 6 of the Act does not define “Non-residential status” but imposes certain restrictions. In case of failure to fulfill those conditions can be determined as Non-Resident.
   • A Hindu Undivided Family, a Firm or Other Association of persons is said to be non-resident in India if the control and management of its affairs is situated completely outside India.
   • A Company is said to be a non-resident in India if the control and management of its affairs is situated completely outside India. Similarly, non-Indian companies shall also be regarded as resident in India if its control and management is situated wholly in India.
   • If the affairs of the company are managed outside India in the previous year then it becomes a non-resident.

Tax Liability of Total Income

1. Resident and Ordinarily Resident: This is provided in Sec 5 of the Act. The tax liability of total income of any previous year of a person who is a resident is on that income which is obtained or said to be received in India in such a year by him/her or on his/her behalf, OR the income which arises or accrues to him/her in India in such a year; OR which arises or accrues to him/her outside India in such a year.
2. Resident but not Ordinarily Resident: The tax liability of a resident but not ordinarily resident is the same as in the case of resident and ordinarily resident. However, if the income arises to that person outside India shall not be included only if it is accrued from a business or profession situated in India.
3. Non-Resident: The tax liability of non-resident on the total income of any previous year is on that income which is obtained or said to be received in India in such a year by him or on his behalf, OR the income which arises or accrues to that person in India in such a year; OR which arises or accrues to that person outside India in such a year. Examples:
   • A person who is rendering Service in India receives a Salary from the World Health Organization. He is not liable to pay Income-Tax on his salary Income.
   • A person M, an Indian Citizen left India on appointment by the Government of Iran for the first time on 12^th September 1999 to join his duty. During the financial year 2000-01, he comes to India on a visit and stayed for 180 days. As he has stayed only for 180 days instead of 182 days M is non-resident.

Case Laws

Commissioner of Income-Tax, Madras vs Rn.  Ar.  Ar.  Veerappa Chettiar[2]

It was held that as long as the joint Hindu Family property is in the hands of the widows and continues even after the death of the male member then it is considered as the joint family continues.

Saraswati Holding Corporation vs Deputy Director of Income Tax ^[3]

Brief Facts:

• In this case, the assessee is a company incorporated in Mauritius carrying business and making investment in shares and securities etc., It holds the tax residence certificate of Mauritius. The investments are made by the assessee in the Indian capital market and income was derived in the form of short-term/long-term capital gains.
• As per the assessee, the said transactions come under provisions of the Double Taxation Avoidance Agreement (DTAA) which is an agreement between India and Mauritius.
• The return of income was filed by the assessee for the assessment year 2000-2001 mentioning as no income, as the capital gains are not taxable as per DTAA. AO objected to the return which was filed by the assessee. On appeal, the order of the AO was confirmed by CIT(A).

Judgment:

• It was held that on appeal that the funds sources are clear. The appellant does not need any explanation from the assessee. Hence, no question of income-tax.

Rachhpal Singh vs Income Tax Officer[4]

Brief Facts:

• In this case, the assessee left India in 1980 and joined employment in Germany and married a German person, and came to India in 1995. He again went abroad in July 2001. After a stay of about 15 days, returned to India.
•  An NRE account was opened and the assessee deposited amounts in FDs. Interest which was earned on that was to be exempted under Section 10(4) of the IT Act. He contended that the authorities have wrongly considered his residential status.

 Judgment:

• The court quashed the orders of AO and held that all the appeals filed by the assessee for the assessment years from 1997-98 to 2000-01 are allowed.

Joint Official Liquidator of Bank & Others vs Joint Cit[5]

Brief Facts:

• The appellant is a non-resident company in liquidation. In the previous year, the assessee has the FDs in FCNR accounts with the bank of Nova Scotia, Mumbai branch.
• During the Income-tax return for Assessment year 1998-99, the AO noticed the only source of income was the interest on fixed deposit and he paid tax at the rate of 20%.

Judgment:

• It was held that the acceptance of such deposits was approved by the RBI and the file has been restored to the AO for adjudication.

Conclusion

The residential status depends on how many days he has physically stayed in India. Thus, this concept plays a major role in determining tax liability.

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References:

[1] https://www.incometaxindia.gov.in/Documents/residential-status.htm

[2] 1970 76 ITR 467 SC

[3] (2007) 111 TTJ Delhi 334

[4] 2005 94 ITD 79 Asr, 2005 276 ITR 163 Asr, (2005) 93 TTJ Asr 283

[5] 2006 6 SOT 391 Mum