Direct tax imposed on the Income of assesses, is very significant source of revenue to the government. Government needs money to run various welfare and developmental programmes and to maintain law and order in the nation. Therefore, any person whose taxable income for the previous year exceeds the exemption limit is liable to pay Income Tax to Central Government during the current financial year at the rates applicable in force by the annual finance Act during the current year.
According to Section 5 “the scope of total income of an assessee is determined with reference to his residence in India in the previous year.” This means that the total income of each person is based upon his residential status. This article focuses on types of residential status of a person and how it is determined.
Before the article deal in much detail the author would like to mention few terms and definition used in the Act which are relevant for the purpose of our understanding.
- Assessee: In simple terms – Person who is liable to pay tax is an assessee. Here the person includes both, natural and artificial juridical person.
- Assessment Year: As per Section 2 (9) Assessment year means the period of 12 months commencing from April 01 every year and ending on March 31 of the next year. An assessee is liable to pay income tax for previous year in the following assessment year. For example, during the assessment year 2020-21, tax shall be paid for the previous year 2019-20.
- Previous Year: As per Section 3 – previous year means the financial year[1] immediately preceding the assessment year.
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Residence of Assessees
The residential status of an assessee is determined with reference to his residence in previous year. Residential status during the assessment year is immaterial. It is pertinent to note that residence and citizenship are two different concepts hence should not be mixed for the purpose of taxation. For the purpose for Taxation citizenship of a person does not matter. An India may be non-resident and a foreigner may be resident for the purpose of tax. The residence of a person may change from year to year but the citizenship remains constant or atleast does not change every year.
Types of Residents
On the basis of residence Section 6 divides the assesses into three categories:
i. “Persons who are ordinary resident in India;
ii. Persons who are not ordinary resident in India;
iii. Persons who are non-resident.”
Assessees are of different kinds they can be individuals, Hindu Undivided Family, firms, an association of persons, companies, local authorities, and artificial juridical person. Residence of a person may vary from year to year. He can be ordinary resident in one year, non-ordinary resident in the other and yet non-resident in the third year.
It is pertinent to note that a person may be resident in more than one country at the same time. He can be resident in India as well as other nation for the same previous year.
Determination of residential status of an Individual
Section 6 (1) lays down the rules for determination of residence of an individual. Section 6 (1) lays down two basic conditions for an individual to be knowns as resident in India, they are:
a) He is in India for the period of 182 days or more in the previous year, or
b) He has been in India for at least 365 days during the four years preceding the previous year and is in India for at least 60 days during the previous year.
If he satisfies any one of the basic condition then he will be resident in India.
There are exceptions to basic condition (b). They are:
- If an individual leaves India for purpose of Employment;
- He is member of the crew of an Indian ship.
In CIT v. O. Abdul Razak[2], it was held that ‘employment’ includes self-employment like business or profession taken up by an assessee abroad.
If an Individual falls under any of the above-mentioned exception then only basic condition (a) is to be satisfied to become resident in India.
Condition for Ordinary Resident in India
In order, for an Individual and Hindu Undivided Family (HUF) (on satisfaction of Karta), to become Ordinary resident in India following conditions have to satisfied along with any one of the basic conditions:
i. “He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous year,
ii. He has been in India for 730 days or more during 7 previous years immediately preceding the relevant previous year.”
Non-Ordinary Resident
If an individual satisfies any one of the above-mentioned basic conditions (a) or (b) but does not satisfy both the conditions for ordinary resident, he is said to be ‘Non-Ordinary Resident’.
Non-Resident
If an individual does not satisfies any of the above-mentioned basic conditions (a) and (b) as per Section 6 (1), he will be termed as Non-Resident.
Determination of residential status of Hindu Undivided Family, Firm or Association of Persons
As per Section 6 (2) A Hindu Undivided Family, Firm or Association of Persons are considered to be resident in India in any previous year if the control and management of its affairs is situated wholly or partly in India during the relevant previous year. The word partly broadens the ambit of resident in this case, meaning even a part of their control and management is situated in India during the previous year, they will be considered as resident in India.
Condition for Ordinary Resident in India
- Firm and association of persons cannot be ‘not ordinary resident.’
- A Hindu Undivided Family is ‘not ordinary resident’ in India, if its Karta/Manager is not ordinary resident in India.
Non-Resident
All three types of assesses (HUF, Firm or Association of Persons) are ‘non-resident’ only when the control and management of their affairs is situated wholly outside India.
NOTE: Resident of ‘every other person’ is determined in the same manner as of a firm or association of persons.
Determination of residential status of Companies
As per Section 6 (3) a company can be called as resident in India in any previous year, if:
i. It is an Indian company; or
ii. Its place of effective management, in that year is in India.
Place of Effective Management (POEM) means 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.
Note: An Indian company is always resident in India.
A foreign Company whose POEM is in india and turnover is less than Rs. 50 Crore – it is treated as Non-resident in India. Hence, a foreign company to be treateed as resident in India its turnover should be more than Rs. 50 Crore along with POEM in India.
Non-Resident
A company is said to be ‘non-resident’ if it does not satisfies both the conditions mentioned above to be resident.
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[1] Financial Year starts from April 01 every year, till March 31 of next year.
[2] CIT v. O. Abdul Razak (2011) 198 Taxman 1 (ker).
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