Rise of American Accounts. "Hollywood ".

Direct Tax

.Residential Status and Tax Liability.

Tax is levied on total income of assessee. Under the provisions of Income-tax Act, 1961 the total income of each person is based upon his residential status. Section 6 of the Act divides the assessable persons into three categories :

1. Ordinary Resident, 2. Resident but Not Ordinarily Resident, and 3. Non - Resident.

.Meaning of Residential Status.

Residential status is a term coined under Income Tax Act and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non - resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India.

The residential status of different types of persons is determined differently. Similarly, the residential status of the assessee is to be determined each year with reference to the " previous year " . The residential status of the assessee may change from year to year. What is essential is the status during the previous year and not in the assessment year.

.Important points.

1. Residential Status in a previous year. Residential status is to be determined for each previous year.

It implies that -

a. Residential status of assessment year is not important.

b. A person may be resident in one previous year and a non-resident in India in another previous year.

2. Duty of Assessee. It is assessee's duty to place relevent facts, evidence and material before the Income Tax Authorities supporting the determination of Residential status.

3. Dual Residential Status is possible. A person may be resident of one or more countries in a relevant previous year. The emergence of such a situation depends upon the following :

a. the existence of the Residential status in countries under considerations.

b. the different set of rules having laid down for determination of residential status.

4. Same Residential Status for all Sources of Income. If an individual becomes resident of India for one source of income, then he will be deemed to be resident of India for all other sources of income in that previous year. [ Sec .6 (5) ]

.Determination of Residential status of different ' Persons '.

As we know that Income tax is charged on every person. The term ' Person ' has defined under section 2(31) includes :

1. An individual, 2. Hindu Undivided Family

3. Firm, 4. Company, 5. AOP / BOI, 6. Local authority, 7. Every other artificial juridical person not falling in proceeding six sub-classes.

Therefore, it is essential to determine the residential status of above various types of persons and now we shall learn the calculation of residential status of each type of person.

1. Residential Status of an Individual.

1.Resident ( Ordinary Resident) [ Section 6 (1) ].

To determine the residential status of an individual, section 6(1) prescribes two tests. An individual who fulfils any one of the following two tests is called Resident under the provisions of this Act. These tests are :

(a). If he is India during the relevant previous year for a period amounting in all 182 days or more, or

(b). If he was in India for a period or periods amounting in all to 365 days or more during the four years preceding the relevant previous year and he was in India for a period or periods amounting in all to 60 days or more in that relevant previous year.

.Tests explained.

Test No. 1. Stay in India for 182 days or more.

If an individual is to become resident of India during any previous year, his/her personal stay in India during that year is a must although the number of days of stay differs in the two tests. It means that if an individual does not stay in India at all in any previous year, he cannot be resident of India in that year. Stay in India means that the individual should have stayed in Indian territory and anywhere ( cities, villages, hills, even Indian territorial waters) for such number of days.

The period of 182 days need not be at a stretch. But physical presence for an aggregate of 182 days in the relevant previous year is enough. The status of resident is not linked with any particular place or town or house.

The onus to prove the number of days of stay in India lies on the assessee. It is for him to prove, if he desires to be taxed as non-resident or not ordinarily resident.

.Test No. 2. Presence for 365 days during the four preceding years.

A person may be a frequent visitor to India. In his case, the residential status will be determined on the basis of his presence in India for 365 days in four years immediately preceding the relevant previous year. Along with this his presence for 60 days during the relevant previous year is another essential condition to be fulfilled. The purpose, object or reason of visit to and stay in India has nothing to do with the determination of residential status.

.For Indian citizen going abroad on a job or as a member of crew of an Indian ship [Explanation (a) ]

In case of an Indian citizen :

(a). Who is going outside India for a job and his contract for such employment outside India has been approved by the Central Government : or

(b) He is a member of crew of an Indian ship :

test (a) u/s 6(1) remains the same but in test (b) 60 days have been replaced by 182 days.

The practical effect of this explanation is that in case of persons of Indian citizenship going abroad on a job approved by the Central Government only test (a) is to be applied during the year he is leaving India.

.For Indian citizens and persons of Indian origin [ Explanation (b) ]

For such persons test (a) remains the same but in test (b) words '60 days' have been replaced by 182 days.

The practical effect of this provision is that those persons who are Indian citizens or persons of Indian origin living outside India and when they come to visit India only test (a) of6(1) is to be applied.

A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in India or undivided India [ Section 115 (c) explanation to clause (c) ].

2. Resident but not Ordinarily Resident [ Section 6(6) ]

An individual who is resident u/s 6(1) can claim the beneficial status of N. O. R. if he can prove that :

(a). He was non resident in India for 9 previous year out of 10 previous years preceding the relevant previous year. OR

(b). He was in India for a period or periods aggregating in all to 729 days or less during seven previous years proceeding the relevant previous year.

An individual who is Resident u/s 6(1) can be subdivided into two categories :

(a) Ordinary Resident, (b) Not ordinarily resident.

(a) Ordinary Resident, He was in India for a period or periods totaling in all to 182 days or more during relevant previous year. Resident but Not Ordinarily Resident, He was in India for a period or periods totaling in all to 182 days or more during relevant previous year.

(b) Ordinary Resident, He was in India for a period or periods totaling in all to 60 days or more during relevant previous year and 365 days or more during four previous year preceding three relevant previous year. And must be resident of India ( by fulfilling atleast one of two above mentioned tests) in atleast 2 out of 10 previous years preceding the relevant previous year.And must have stayed in India for 730 days or more during 7 previous years preceding the relevant previous year. Resident But Not Ordinarily Resident, he was in India for a period or periods totaling in all to 60 days or more during relevant previous year and 365 days or more during four previous years preceding the relevant previous year. And was non-resident in India in 9 or 10 previous years preceding the relevant year. Or was in India for less than 730 days during 7 previous years preceding the relevant previous year.

3. Non-resident [Section 2(30) ]

Under section 2(30) of the Income - tax Act, 1961 an assessee, who does not fulfil any of the two conditions given in section 6(1)(a) or (b) would be regarded as ' Non-resident ' assessee during the relevant previous year for all purposes of this Act.

Non-resident = Not satisfying any one of the basic condition given u/s 6(1) .

.Important Points

(1). Meaning of Stay in India.

It means stay any where within Indian geographical territory, i.e., any where in Indian villages, towns, cities, waters or mountains.

(2). Stay may be continuous or intermittant.

Stay in India for specified days should not necessarily be continuous. It means a person is not required to stay 182 days at a stretch as per Sec. 6(1), i.e., a person stays in India in the months of April, May and June and then left India and stayed for 5 months in a foreign country and then came back and stayed in India upto 31st March. In such a case the stay in India will be counted by adding stay in India on each different occasion .

(3).Stay need not be at one place.

A person must stay within Indian territory and where he stays is not an important consideration.

(4). Object of stay is not important.

It is immaterial whether he stays in India for business purposes or on a personal purposes visits India as a tourists.

(5). Calculation of 'period of stay' in India.

The ' period of stay' in India is to be calculated on the basis of actual stay of an individual in India during the relevant previous year. Thus, if a person stays in India for a part of the day (i.e., for certain hours etc. only) then period of stay in India is to be calculated on hourly basis. Thus, a stay of 24 hours will be taken as stay of one day and total hourly stay in India will be converted into days.

However, if detail of hourly stay in India is not available then period of stay in India is to be calculated in days. It is important to note that while calculating the period of stay in India ( in days), both the day of departure from India and the day of arrival in India are to be counted as stay in India. [ As per the decision of Authority for Advance Rulings - P. No. 7 of 1995).

2. Residential Status Of HUF.

1. Ordinary Resident [ Section 6(2)]

HUF, is said to be resident in every case except where during that year the control and management of its affairs is situated wholly outside India. It means that if a HUF is controlled from India even partially it will be resident assessee.

The control and management of affairs refers to the controlling and directing power, the head and the brain. It means that decision making power for vital affairs is situated in India. The control and management means de-facto control and management and not merely the right to control or manage.

A resident Hindu Undivided Family is said to be ordinary resident if the Karta fulfils both of the following additional conditions :

1. Karta has been resident in India for at least 2 previous years out of immediate proceeding 10 previous years relevant to the previous year in question : and

2. Karta has been in India for atleast 730 days or more during 7 previous years preceeding the relevant previous year.

.Ordinary Resident = Control and management in India ( wholly or partly) ADD Fulfilment of both additional conditions by Karta.

.2. Not Ordinarily Resident [ Section 6(6)]

It is only HUF besides individual, which can claim the advantageous status of Not Ordinarily Resident. A HUF will be ' Not Ordinarily Resident ' if :

1. its manager ( Karta) has not been resident in India in at least 2 previous years out of ten previous years preceding the relevant accounting year : or

2. the manager had not, during the seven previous years preceding the relevant previous year been present in India for a period or periods amounting in all to 730 days. [ Section 6(6)(b) ]

Those two tests have to be applied in case of manager ( Karta) of such HUF. In case the Karta has been succeeded by some other man, for computing the presence in India, the length of presence in India of each succeeding Karta will be added.

While determining the residential status of a HUF it should be noted that residential status of co-parceners of a HUF is of immaterial consideration. What is important to note is that from where the business of HUF is being controlled.

Not ordinarily resident status of HUF is linked with the status of its Karta . So if Karta taken as an individual is not ordinarily resident then the status of his HUF shall also be not ordinarily resident.

Non-ordinary resident = Control and management in India ( wholly or partly ) ADD Non-fulfilment of any one or both additional conditions by Karta.

3. Non-Resident [ Section 2(30) ]

HUF, shall be non-resident in India if the control and management of affairs is situated wholly outside India.

.Ordinary Resident, if control or management of such HUF was wholly or partially in India during relevant the previous year. Not Ordinarily Resident, this status is allowed only to HUF along with individuals. HUF shall be NOR if its Karta can fulfill any one of the two tests given u/s 6(6) for an individual. Non-Resident, if control or management of such HUF was wholly outside India during relevant the previous year.

.3. All other persons

3A. Residential status of firm and AOP, or BOI :

1. Ordinary Resident [ Section 6(2) ]

A firm, an Association of persons (AOP) or body of individuals ( BOI) is said to be resident in every case where during that year the control and management of its affairs is situated wholly outside India. It means that if A firm, an association of persons (AOP) or body of individuals (BOI) is controlled from India even partially it will be resident assesseee.

The control and management of affairs refers to the controlling and directing power, the head and the brain. It means that decision - making power for vital affairs is situated in India. The control and management means de-facto control and management and not merely the right to control or manage.

In case of a firm, it is said that the control and management of firm is situated at a place where partners meet to decide the affairs of the firm. If such place is outside India, it will be said that the control and management is outside India.

There may be a situation where all the partners of a firm are resident in India but even then that firm may be non-resident if it's full control and management lies outside India.

2. Not Ordinarily Resident.

A firm, an Association of Persons (AOP) or body of individuals ( BOI) cannot claim the status of Not Ordinarily Resident. All these assessees shall be either resident in India or non-resident in India.

3. Non-Resident [ Section 2(30) ]

A firm, or association of persons shall be non-resident if the control and management of affairs is situated wholly outside India.

.Ordinary Resident, if control or management of such a firm, an Association of Persons (AOP) or body of individuals (BOI) was wholly or partially in India during the relevant previous year. Not Ordinarily Resident, A firm, an Association of Persons (AOP) or body of individuals ( BOI) cannot claim this status. Non-Resident, if control or management of such a firm, an Association of Persons(AOP) or body of individuals (BOI) was wholly outside India during relevant previous year.

3B. Residential Status of a Company

The residential status of a company is to be determined on the basis of its incorporation registration. Section 6(3) provides the following tests in this connection.

1.Resident [ Section 6(3) ]

A company shall be said to be resident in India, in any previous year, if -

a. it is an Indian company : or

b. its place of effective management in that year, is in India.

For this purpose, the expression " place of effective management " shall mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

2. Not Ordinarily Resident.

A company cannot have this status. It can either be resident or non-resident.

3. Non-resident [ Section 2(30) ]

A company shall be 'non-resident ' if it is not resident in India during the relevant accounting year.

It means that, a company whose place of effective management is situated wholly or partially outside India, will be non-resident company.

3C. Residential Status of Every Other Person [ Section 6(4) ]

Every other person includes body of individuals, a local authority and an artificial juridical person. They are either ' Resident ' or "Non-Resident " but they cannot be Not Ordinarily resident.

The test to be applied shall be the of control and management. If it is situated wholly outside India, the assessee will be non-resident. If the control and management is wholly or partially situated in India, the status will be that of ' Resident '.

.COMPANY. Ordinary Resident, Every Indian company [ i.e., which is incorporated under Indian Law or is deemed as company under any law of the country ] is Resident company. In case of any other company, which is incorporated outside India but has its control or management in India during relevant previous year it is also a resident company. Not Ordinary Resident, A company cannot enjoy this status. Non-Resident, Any company, which is incorporated outside India and has its control or management outside India during relevant previous year is non-resident company.

.IN CASE OF EVERY OTHER PERSON. Ordinary Resident, In case of every other person, which has its control or management wholly in India during relevant previous year is resident. Not Ordinary Resident, Any other person cannot enjoy this status. Non-Resident, Any other person, who has its control or management wholly outside India during relevant previous year is non-resident.

.Some Important Rules.

1. Whether an assessee is Resident or non-Resident, it is a question of fact. The onus to prove all the facts before the requisite authorities lies on the assessee.

2. An assessee cannot have different residential status for different sources of income. If a person is resident in India for one source of income in a particular previous year, he shall be deemed to be resident in that particular previous year in respect of all of his other sources of incomes. [ Section 6(5) ]

3. The residential status of a company would change with change in place of control and management of its affairs. A company can be resident in one year and non-resident in another.

RESIDENTIAL STATUS IN NUTSHELL

.INDIVIDUAL. Ordinary Resident, He was in India for a period or periods totaling in all to 182 days or more during relevant previous year. OR, He was in India for a period or periods totaling in all to 60 days or more during relevant previous year and 365 days or more during four previous years preceding the relevant previous year. And, must be Resident in India in 2 out of 10 previous years preceding the relevant previous year, And must be in India for 730 days or more during 7 previous years preceding the relevant previous year. Resident But Not Ordinary Resident, he was in India for a period or periods totaling in all to 182 days or more during relevant previous year. OR, He was in India for a period or periods totaling in all to 60 days or more during relevant previous year and 365 days or more during four previous years preceding the relevant previous year, And U/s 6(6) was non resident in 9 or 10 previous years preceding relevant previous year :OR was in India for less than 730 days during 7 previous years preceding the relevant previous year. Non-Resident, He fails to fulfill both the tests of section 6(1).

.HUF, FIRM, AOP, BOI. Ordinary Resident, if control or management of HUF, FIRM, AOP, BOI was wholly or partially in India during relevant previous year. Resident But Not Ordinary Resident, This status is allowed only to HUF and others cannot claim it. HUF shall be NOR if it's Karta can fulfill any one of the two tests given u/s6(6) for an individual. Non-Resident, if control or management of such HUF, FIRM, AOP, boi was wholly outside India during relevant previous year.

.COMPANY. Ordinary Resident, Every Indian company [ i. e., which is incorporated under Indian Law or is deemed as company under any law of the country ] is Resident company. In case of any other company, which is incorporated outside India but has its control or management in India during relevant previous year is also a resident company. Resident but Not Ordinary Resident, A company cannot enjoy this status. Non-Resident, Any company, which is incorporated outside India and has its control or management outside India during relevant previous year is non-resident company.

.IN CASE OF EVERY OTHER PERSON. Ordinary Resident, In case of every other person, which has its control or management wholly in India during relevant previous year is resident. Resident But Not Ordinary Resident, Any other person cannot enjoy this status. Non-Resident, Any other person, which has its control or management wholly outside India during relevant previous year is non-resident.

INCIDENCE OF TAX ( SCOPE OF TOTAL INCOME)

The tax is levied on total income of a person. The total income is based upon the residential status of an assessee. Section 5 provides the scope of total income which varies on the basis of status. Section 5 provides :

1. Subject to the provisions of this Act, the total income for any previous year of a person who is resident includes all incomes from whatever source derived, which,

(a). is received or is deemed to be received in India in such year by or on behalf of such person : or

(b). accrues or arises or is deemed to accrue or arise to him in India during such year :or

(c). accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6 the income which accrues or arises to him outside India shall not be included unless it is derived from business controlled in or a profession set up in India.

2. Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all incomes from whatever source derived, which,

(a). is received or is deemed to be received in India in such year by or on behalf of such person : or

(b). accrues or arises or is deemed to accrue or arise to him in India.

The above provisions of section 5 can be expressed in following manner :

1. Scope of total income of 'a Resident ' [ Section 5(1) ].

(a). Income received or deemed to be received in India during the relevant accounting year. The place and date of accrual is immaterial.

(b). Income which accrues or arises or is deemed to accrue or arise in India during the relevant accounting year irrespective of the date and place of its receipt.

(c). Income accruing during the relevant accounting year outside India whether it is brought or not in India during the year .

Scope of Total income = Indian income ADD Foreign Income.

2. Scope of total income of ' Not Ordinarily Resident ' [ Section 5(1) ]

(a). Income received or deemed to be received in India during the relevant accounting year. The date and place of accrual is immaterial.

(b). Income which accrues or arises or is deemed to accrue or arise in India during the relevant accounting year is irrespective of the date and place of its receipt.

(c). Income accruing or deemed to accrue or deemed to be received outside India during the relevant accounting year from a business set up in and controlled from India.

Scope of Total Income = Indian Income ADD One particular type of foreign income.

3. Scope of total income of ' Non-Resident ' [ Section 5(2) ].

(a). Income received or deemed to be received in India during the relevant accounting year. The date and place of accrual is immaterial.

(b). Income which accrues or arises or is deemed to accrue or arise in India during the relevant accounting year irrespective of the date and place of its receipt.

Scope of Total Income = Indian Income.

.TYPES OF INCOMES.

Broadly income can be divided into two categories :

(a) Indian Income.

(b) Foreign Income.

A. Indian Income.

Indian income is called by various words and names. These are :

1. Income earned in India.

2. Income accrues and arises in India.

3. Income received or deemed to be received in India.

4. Income payable in India. Income may have been earned in a foreign country but it is payable in India.

5. Income earned ( or accrues) in India but is received or payable outside India.

B. Foreign Income.

Following types of incomes are called foreign incomes :

1. Income earned (or accrues) outside India and also received outside India.

2. Any income which is not earned or accrues or arises in India.

(A). Income received in India.

Receipt of a particular income in India attracts tax liability. The essential fact is that a person must receive income in India during the relevant previous year. The income may be received by the assessee himself or by his agent, banker or broker on his behalf in India. For Income tax purposes, the receipt of income implies the first occasion of receipt either by the assessee himself or by his agent. It is not essential that a person must receive income either from business or salary. Assessee may receive income from any source.

If an income is first received outside India and is then transfered /sent/brought/remitted to India afterwards, it is called as remittance of income to India and such income shall not be treated as income received in India.

All persons are assessable on income received in India during the relevant previous year irrespective of the residential status.

Income received in money or money's worth is taxable. Only thing essential is that it must be certain that the receipt in the form of money's worth must be income.

(B). Income deemed to be received in India