DCIT Vs. Sri Kumar Sanjeev Ranjan (ITAT Bangalore)
Under the Indian income tax law, the scope of taxable income depends upon the residential status of an assessee. In case of an individual, residential status depends on the number of days of stay in India in a given tax year.
As per Section 6 (1) of the Income Tax Act, 1961 (Act), an individual would be considered as a resident in India –
- If his stay during the previous year amounts to 182 days or more in aggregate or
- If his stay during the four years preceding to the previous year amounts to 365 days or more in aggregate and 60 days or more in the previous year
The Act distinguishes an individual as ‘ordinarily resident’ and ‘not-ordinarily resident’. An individual is considered to be an ‘ordinarily resident’ if he does not satisfy any of the additional conditions listed below –
- Non-resident for 9 out of 10 years prior to the relevant previous year
- Stay in India is 729 days or less in 7 years prior to the relevant previous year
So an Individual would be treated as ‘ordinarily resident’ in India if he satisfies any one of the basic conditions and does not satisfy any of the additional conditions. Consequently, would be liable to tax on the global income.
India does not contain any provisions to recognise split residency (resident for only part of the tax year) in its domestic tax law. Hence, even if a person stays in India for few months in a given tax year may be liable to tax on the global income for the entire tax year provided he qualifies as ‘ordinarily resident’ in India based on his stay during the past years.
An individual who frequently travels for business purposes outside India or leaves India for the purposes of employment abroad, may qualify as ‘resident’ in the other country as well due to no. of days of presence or citizenship or green card status etc. This is called dual residency i.e., an individual is considered as resident of two countries for same tax year and both countries would tax him on worldwide income for that year. Further, due to difference in taxing years (fiscal year vs calendar year) an individual may become a dual resident only for a part of the tax year in both the countries and not for the entire tax year.
This may cause hardship to the taxpayers especially US citizens and Green Card holders who are liable to tax on their global income in US as well for the entire tax year irrespective their stay in US. In other words, US do not go by the no. of days of stay in order to tax its citizens and green card holders. They are liable to be taxed in US on their worldwide income even if they do not have any presence in US during the tax year. So, how can a taxpayer mitigate the tax implications in these cases? Can he avail any treaty relief by invoking split residency provisions as per the tax treaty?
This interesting question arose before the Bangalore ITAT in the case of DCIT Vs Shri Kumar Sanjeev Ranjan (ITA No. 1655/Bang/2017). ITAT ruled that in case of an individual who is a dual resident, the residency has to be determined based on the provisions as contained in Article 4 of the DTAA. The Article 4 of the tax treaties prescribes various criteria to determine the residential status in case of a dual residency.
Criteria as per the DTAA
Permanent Home:
The first criteria of tie-breaker is the test of permanent home. As per this clause, a person would be considered as a resident of the country where he has a permanent home available to him. The OECD commentary indicates that the home may be in any form (house or apartment), need not be owned by the individual and could be a rented one. However, what is essential is that the ‘permanence’. This means that the home should be available to the individual for his dwelling at all times continuously and not occasionally or for a short duration.
Centre of Vital interest:
If the individual has a permanent home available to him in both the contracting states, his residency cannot be determined under the first criteria and hence the next criteria need to be looked into. Centre of vital interest means an individual’s personal and economic relations. Under this test the assessee would be considered as a resident of the state to which his personal and economic relations are closer. The factors which determine the personal and economic interests are family and social relations, investments, place of business/employment, political, cultural and other activities. In case social and economic interests are split between two states or are undeterminable, the subsequent test applies.
Habitual abode:
Habitual abode basically refers to the length of stay in a particular state. The individual would tie break to the state where he has stayed for a longer duration. In order to apply this test, the treaty does not specify over what length of time the comparison must be made. The OECD commentary states that the comparison must cover a sufficient length of time to determine whether the residence is habitual.
Nationality:
If the individual has a habitual abode in both the contracting states or neither of them, the next criteria to be looked into is his nationality. He would tie break to the state of which he is a national. If the individual is a national of both the contracting states or neither of them, the competent authorities of the contracting states need to resolve the conflict under mutual agreement procedure.
ITAT Ruling
In this case, the assessee was ‘resident and ordinarily resident’ in India due to no. of days of presence and was a resident of US due to his citizenship. Hence, he is a dual resident as per Article 4(1) of the India-US treaty. He completed his India assignment on 10 August 2012 and departed to US. He considered himself as a resident of India till the completion of Indian assignment i.e., from 01 April 2012 to 10 August 2012 based on the tie breaker and split residency concept recognised in the treaties. This was based on the test of ‘permanent home’. He had a house property in India as well as in US for the above period. The property in US was rented out till the period of Indian assignment and hence not available to him for his occupation. Accordingly, he tie broke to India till that period.
Post completion of the India assignment i.e., from 11 August 2012 to 31 March 2013, he moved back to US and was living in the US with his family. He also intended to settle down in US for the rest of his life span. During this period, he resided at his home in US and also had a rented property available in India. Since he had permanent home available in both the states, he had to move to the next criteria i.e., the centre of vital interest. The assessee’s spouse and 2 children are US citizens and were living with him. He had all his personal belongings and investments in the US. He is a US citizen, exercises voting rights in US and also held a US driving license. During this period, he exercised his employment in US and was contributing to the US social security. All these facts substantiated that his personal and economic relations are closer to the US. Hence, he considered himself as a resident of US from 11 August 2012 onwards (non-resident in India) and availed treaty exemption for the income earned in US post his departure from India.
The Assessing Officer was not satisfied with the above explanation and denied the above position taken by the assessee. According to him, personal and economic relations refer to a long and continuous relation an individual nurtures with a country and hence cannot be broken casually into bits and pieces. He further opined that the concept of ‘centre of vital interest’ needs to be seen in a holistic manner rather than being compartmentalised. AO concluded that, since the assessee was in India for whole of immediately preceding year, by moving to US on an assignment from 11 August 2012, he cannot claim his centre of vital interest to be US. Accordingly, AO brought to tax the entire income which the assessee had earned post his departure from India.
However, CIT (A) concluded that assessee’s centre of vital interest is closer to US for the period 11 August 2012 to 31 March 2013 and hence is a resident of US as per the treaty. He further concluded that the treaty exemption is also available to him with respect to income earned post his departure and hence cannot be brought to tax in India. The tribunal concurred with the conclusion of CIT (A) based on the facts submitted by the assessee.
The ruling recognises the following principles in understanding Article 4 of the tax treaties –
