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Residential Status of an Individual under the Income Act,1961 as amended by Finance Bill 2020

Residential Status of an Individual determines the liability of an individual to tax in India according to the nature, source, accrual or receipt of Income.  Section 6 of the Income Tax Act, 1961 lays down the criteria for determining the residential status of an individual, HUF, Firm and Company.

As per the extant provisions, an Individual will fall in either of the following categories:

i) Resident; and

ii) Non Resident;

Resident are further categorised as Ordinary Resident and Not Ordinary Resident.

Amendments were made in section 6 of the Income Tax Act,1961 vide Finance Bill, 2020 which has introduced the concept of “deemed resident”.  This is basically targeted at Indian Citizen who do not qualify as “Resident” under the taxing statute of any country and thus are not liable to tax in either of the country.

Section 5 of the Income Tax Act,1961 provides for the scope of Income taxable according to the residential status. Broadly speaking, Income tax provisions lay that for an ordinary resident, all income is taxable in India including the income earned or arising outside India. For a not-ordinarily resident, in addition to income received or accrued in India, income of business controlled from India or profession set up in India is taxable. For a non-resident, the income received or accrued in India alone is taxable. Income received or accrued in India shall also mean to include income deemed to be received or deemed to accrue in India.

Residential status of an Individual is determined according to the number of days that individual stays in India during the year  (1st April to 31st March) and also in the previous few years. The day of arrival and day of exit shall be included for calculating the number of days of stay in India.

As per the provisions laid down under section 6 of the Income Tax Act,1961, an individual is considered to be Resident if one of the either two basic conditions are met:

The first condition being that If an individual, during the relevant year, stays in India for 182 days or more.  The second condition being that having been in India for three hundred and sixty five days or more during the preceding four years and his period of stay during the relevant year is sixty days or more.

Further, relaxation has been provided to Citizen of India who leaves India for taking up employment outside India in terms of second basic condition whereby in place of 60 days, 182 days shall be substituted meaning that even though the person may have stayed for a period exceeding 365 days during preceding four years but only if the said individual have stayed for 182 days or more during the relevant year that he would be considered Resident in India for tax purpose. Similar is the position in case of Indian Citizen who leaves India as a member of the crew of Indian Ship. Some courts have opined that this relaxation is only in the year of leaving the country and not in the subsequent years.

However, further relaxation is also provided to Citizen of India or to a person of Indian origin who visit India and in such case too 60 days is replaced with 182 days whereby meaning that any individual, being Indian citizen or Person of Indian Origin, who is on a visit to India will qualify as Resident only if his total stay during the year is 182 days or more.

Further, clause (a) of sub Section 6 provides an individual to be Not Ordinary Resident if 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.

Amendments have also been made vide Finance Bill 2020 for further extending the scope of Resident for visiting Indian Citizen or Person of Indian Origin whereby if such individuals have Income exceeding Rs. 1.5 million from sources in India and from business controlled from India or profession set up in India and the total stay in India during the year is 120 days or more but less than 182 days then such individuals would be considered as Not Ordinary Resident.

The Finance Bill 2020 has also introduced the concept of “deemed resident” whereby all such Citizens of India who are not taxable in any other country by reason of residence or domicile or any other criteria of similar nature and such individuals have income exceeding Rs. 1.5 million from sources in India and from business controlled from India or Profession set up in India.

Courts have differed in their opinion as to availability of treaty benefit to individuals who are not liable to tax in other country in the absence of tax statute. AAR in Abdul Razak A. Menon case (AAR nos. 637  638 AND 640 of 2004) that in the absence of any tax decree levying personal tax on individual, individuals residing in UAE will not fall within the definition of person as defined in the DTAA and hence cannot claim the benefit of DTAA between UAE and India. However, ITAT Mumbai in the case of ITO Vs. Shri Ramesh Kumar Goenka has later held that the benefits of treaty shall be available even if an individual is not liable to tax in UAE in the absence of tax statute. Thereafter, ITAT Nagpur has also opined that the benefits would be available to UAE resident and subsequently by ITAT Rajkot in the case of ITO Vs. Martrade Gulf Logistics FZCO.

However, as per clause (d) of Sub Section 6, deemed resident will be covered under Not Ordinary Resident and taxed accordingly. Although such “deemed resident” may not have immediate tax implication due to being considered as Not Ordinary Resident while they continue to visit India for less than 182 days but may stand to loose on the benefit of Not Ordinary Resident subsequently if their stay in India is for  182 days or more as the condition of being Non Resident for 9 years out of preceding 10 years may not be fulfilled.

Considering the unpleasant situation due to COVID-19 whereby some individuals may have been forced to stay back due to lockdown and travel restrictions, chances are that the residential status may change unintentionally and unwarranted. In such matter, recourse may be had to the judgement of hon’ble Delhi High Court in the matter of Commissioner of Income Tax (C)-I vs Shri Suresh Nanda [2015] 375 ITR 172 (Delhi HC)  wherein the Court held that the stay (to qualify as resident Indian) lacked volition and was compelled by external circumstances beyond the individual’s control, she or he cannot be treated as a resident Indian

Further, I  have also developed excel utility to determine the residential status in accordance with the provisions as laid down under Section 6 of the Income Tax Act,1961.

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June 2024