Residential Status

How to determine the residential status under the Income Tax Act, 1961 and tax implication for Resident and Non-Resident assessee.

1. Analysis of legal position

1. Section 5 and section 6 of the Act comes under the Chapter II of the Act titled “Basis of Charges”.  Section 5 of the Act defines the “Scope of total income” which will be chargeable to tax in India based on the residential status as determined under provision of section 6 of the Act. It reads as under-

Section 6: Residence in India

6. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or

(b)  [* * *]

(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

 [Explanation .—In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

(3) A company is said to be resident in India in any previous year, if—

(i) it is an Indian company ; or

(ii) during that year, the control and management of its affairs is situated wholly in India.

Following clause (3) shall be substituted for the existing clause (3) of section 6 by the Finance Act, 2015, w.e.f. 1-4-2016 :

(3) A company is said to be 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.

Explanation.—For the purposes of this clause “place of effective management” 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.

(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

Note: Amendment Made in explanation to section 6(1) by Finance Act, 2015 w.e.f. 01.04.2015 has not be considered here, as matter under consideration relates to FY 2014-15.

Section 5: Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income 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 so included unless it is derived from a 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 income 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.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

1. The incidence of taxation varies with the factor of residence, the first inquiry in every case must be as to the residential status of the assessee given u/s 6 of the Act. All taxable entities are divided into two categories viz:

1. Resident; and

2. Non-resident

Resident has been further categorized into two being:

1. Resident and ordinarily resident; and

2. Resident but not ordinarily resident

1. A bare reading of the text shows that for an individual, Section 6(1) read with explanation “a” and section 6(6) is applicable for determination of residential status in the instant case. It may also be emphasized that section 6(6) which has defined “not ordinarily resident” is applicable only when an assessee is resident as per section 6(1) of the Act and as differentiated in Para 3(ii) above.

2. For individual, resident in India has been defined in clause 1 of section 6 and accordingly all those who do not fall under section 6(1) are non-resident in terms of section 2(30) of the Act. For determining the residential status of an Individual, two alternative tests are provided u/s 6(1)(a) and 6(1)(c) of the Act. The tests are artificial. Stay for a day more or less may make all the differences but they make for precision and certainty, and they were held valid and intra virus  as decided in “Wallace v CIT 16 ITR 240, 246 (PC).

3. An individual will be resident in India if either of two conditions given under section 6(1) of the Act is satisfied. It may also be observed that where Section 6(1)(a) is having one condition of being in India for 182 days or more whereas section 6(1)(c) is having two conditions, which needs to be satisfied simultaneously to be covered under section 6(1)(c) viz:

1. Have been in India for 365 days or more in 4 years preceding that year i.e. 365 days or more in FY 2010-11 to 2013-14, more precisely from 01.04.2010 to 31.03.2014; AND

2. Have been in India for 60 days or more in that year i.e. 60 days or more in FY 2014-15, more precisely from 01.04.2014 to 31.03.2015.

1. Explanation to section 6(1) has clarified that if a citizen of India being an individual leaves India in any previous year for the purpose of employment outside India, the provision of sub-clause (c) shall apply as if the 60 days period has been substituted for 182 days. This section emphasizes the physical presence of the person in India, refer CIT v Avtar Singh 247 ITR 260.

2. It may also be emphasized that for attracting the explanation to section 6(1), the condition is that individual leaves India for purpose of employment outside India. There is no bar that such employment can’t be given outside India by an India company. Even employment confers the self employment or business, etc. outside India.

3. View above, for an individual being treated as resident in India, he must have been in India for 182 days or more in the previous year under both the conditions given u/s 6(1)(a) and 6(1)(c) if he leaves India for purpose of employment.

2. The Outcome

View above, the positions can be summarized based on the legal position as under:

  • Residential status will be determined as per section 2(30) and test of resident in India u/s 6(1). Section 6(6) does not have any role once the status has been determined as non-resident and no conditions given under 6(6) needs to be checked further.
  • If resident, global income will be taxable.
  • If non-resident, the income of non-resident chargeable to tax has been provided under section 5(2) of the Act. As per said provision only the income which has been received or is deemed to be received in India or accrues or arise or is deemed to accrue or arise to him in India will be taxable in India. Accordingly, the income accrues or arise to him outside India during such period will not be taxable in India. Explanation 1 to section 5(2) provides that Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.”

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Qualification: CA in Practice
Company: S P A R K S & Associates
Location: Noida, Uttar Pradesh, IN
Member Since: 27 Aug 2017 | Total Posts: 1

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One response to “How to determine residential status under Income Tax Act. 1961?”

  1. vswami says:

    OFFHAND

    The write-up is seen to have fairly summed up the Indian tax consequences depending upon the commonly called ‘residential’ status of a person / assessed; besides with reference to certain recent amendments of the law. Even so, for a proper understanding of the implications , from all angles, the applicable provisions of the comprehensive tax treaties the country has entered into and in force have to to be necessarily borne in mind, and consciously taken into consideration, Further, for such purpose, there is no gainsaying that, CAs and other practicing professionals, acting in advisory and/or other capacities, need to have a clear-cut understanding and grip of the numerous areas of controversies, and largely obtaining but mutually conflicting experts’ opinions, and the judicial views taken in decided court cases.

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