A Study Of Residential Status of an Individual and Hindu Undivided Family (HUF) in Accordance To Income Tax Act
INTRODUCTION
A person’s tax liability in the Indian subcontinent regarding income is regulated by the income tax under the Income-tax Act. Additionally, it depends upon the residential status of an individual in the financial year in which the income arises or accrues to him or is received by him[1]. There are two types of taxpayers—residents in India and non-residents in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, the foreign income of a person is taxable in India only if such a person is a resident of India. The foreign income of a non-resident is not taxable in India[2].
The residential status may be subject to change from year to year, it must also be noted that the residential status of an individual under the Income Tax Act is different than that of under the Citizenship Act, FEMA, Aadhar Act and other acts, a person for instance may be a residential citizen in only one jurisdiction but maybe a resident in terms of taxes in more than one country depending upon the taxation laws of that country or countries[3].
RESIDENTIAL STATUS
As per the Income Tax Act Section 6(1) “an individual is said to be resident of India in any previous year if he-
- Is In India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
- 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.”[4]
Assessees are either (a) resident in India, or (b) non-residents in India. As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessees (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident[5].
Section 6 lays down the test of residence for (a)an individual, (b). a Hindu undivided family(c) a firm or an association of persons or a body of individuals (d) a company, and (e) every other person[6].
It must be known that the onus of proof is upon the individual, company or firm to prove his/her residential status, in the case of Rai Bahadur Seth Teomal v. CIT [7] it was held that Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities.
RESIDENTIAL STATUS OF AN INDIVIDUAL
Section 6(1) of the Income Tax Act states that whether an individual considers themselves to be a resident or not is determined by the length of time they have been in India over the preceding year.
As stated earlier, if a person meets the conditions enlisted in section 6(1) of the Act, then he is said to be a resident and people who do not fulfil the conditions are said to be non-residents, for the said purpose, the period of stay In India shall include the day on which the person arrives and leaves India.
For a better understanding let us assume the first condition is A1 and the second condition is A2 respectively i.e., Is In India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or 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 respectively.
Now a person is said to be a resident of India if he satisfies any one of the above conditions namely A1 & A2, now while comprehending the first condition is not a herculean task, when not satisfied we proceed towards the 2nd condition that is A2, it stipulates two further conditions, first we need to check whether the period of stay in India is 60 or more days during the year, now if this condition is fulfilled we need to check if the period of stay in India during the preceding 4yrs is 365 days or more. If both these conditions are fulfilled then he will be considered as the resident individual[8].
When both above conditions A1 & A2 are not met he shall be considered as a non-resident for that year, further, the Finance Act of 2020 has also provided that where an individual who is a citizen of India who is not liable to tax in any other country shall be deemed to be a resident of India. The condition regarding deemed residential status shall only be applicable only if the cumulative income exceeds 15lkhs and zero liability in taxes in other countries by reason of his residence or any other criteria of a similar nature[9].
Section 6 additionally explains the exception regarding the meeting of conditions A1 and A2, as per the exception only A1 will be applicable and A2 need not be checked to those-
- Who is a citizen of India, who leaves India in a previous year as a member of crew of an Indian Ship, or
- Citizen of India leaving India for the purposes of employment outside India, (However, after the amendment made by the Finance Act, 2020; in case of an individual whose Total Income exceeds 15 Lakh Rupees, 60 days shall be considered instead of 182 days. Citizen of India or a person of Indian origin, who is engaged in any employment or Business or profession outside India, and is visiting India during the previous year[10].
A resident is someone who meets all of the above conditions. Non-residents are those who do not meet both of the conditions. Both the date of departure and the date of arrival can be used to count the days spent in India. It was held in the case of Advance Ruling P. No.7 of 199 re [1997] 90 Taxman 62[11] it was stated that If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on which he leaves India shall be taken into account as a stay of the individual in India.
After being adjudged as Indian Resident, he is further divided into two parts-
A) Resident and Ordinarily Resident
B) Resident But Not Ordinarily Resident
If he meets both the additional conditions below, a Resident can be designated as a Resident and Ordinarily Reside (ROR), for a specific financial year. If He has been a resident of India for at least 2 years out of the 10 years immediately preceding that year, and He had stayed in India for a period of at least 730 days in 7 years immediately preceding that year. A person who meets all the conditions except the two additional ones will be considered Resident but not Ordinarily Resident if he or she fails to meet any of them[12].
RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY(HUF).
Under Hindu Law, an HUF is a family that consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters also HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by Hindu Law are treated as HUF under the said act. A Hindu Undivided Family, a HUF is treated as a ‘person’ under Section 2(31) of the Income Tax Act, 1961, it is treated as a separate entity for the purpose of assessment under the Act[13].
As per section 6(2) of the act “A Hindu undivided family is said to be a resident in India. Only if its control and management are wholly or partially situated in India. The residential status of the Karta in the previous years will be taken into consideration when determining whether a resident family has been ordinarily resident[14].
There lies a lot of importance in the phrase “control and management “and the same has been defined by various courts, In the case of CIT vs Nandlal Gandalal[15] the court laid down the term de facto control defining it as Control and management means de facto control and management and not merely the right to control or manage, additionally in the case of San Paulo (Brazilian) Railway Co. v. Carter[16] it was held that Control and management are situated at a place where the head, the seat and the directing power are situated. The head and brain are situated where vital decisions concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken.
In furtherance in the case of Annamalai Chettiar v. ITO,[17] it was held that “The mere fact that the family has a house in India, where some of its members reside or the Karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family unless the decisions concerning the affairs of the family are taken at that place. The mere fact of the absence of Karta from India does not make the family non-resident”[18]
The following propositions can be stated on the basis of the rulings given in Subbayya Chettiar v. CIT[19]and Narasimha Rao Bahadur v. CIT [20]—
1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs is situated wholly outside India.
2. HUF may be residing in one place and doing a great deal of business in another place.
3. Occasional visit of a non-resident Karta to the place of HUF’s business in India would be insufficient to make HUF ordinarily resident in India.
A resident Hindu Undivided Family is an ordinarily resident in India if the Karta or the manager of the family satisfies the following two additional conditions laid down: –
1) Karta has been a resident in India in at least 2 out of the 10 previous years immediately preceding the relevant previous year.
2) The Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
If the Karta or the manager of a resident Hindu Undivided Family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
To understand the situation regarding the status of an individual better we shall look into a factual scenario and determine the residential status.
Question— “The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since 1980) who has been resident in India in only 3 out of 10 years preceding the previous year 2021-22 and he has been present in India for more than 729 days during the last 7 years. Determine the residential status of the family for the assessment year 2022-23 if the affairs of the family’s business are (a) wholly controlled from Hong Kong, (b) partly controlled from India.
Solution — If the affairs of a Hindu undivided family are controlled from a place outside India, the family will be non-resident. Accordingly, XY Hindu’s undivided family is non-resident for the assessment year 2022-23 under situation (a). Under situation (b), affairs of the family’s business are partly controlled from India during the previous year 2021-22. Therefore, the family is resident in India. However, it would be ordinarily resident in India if Karta satisfies the following two conditions laid down by section 6(6)(b):
1. He has been a resident in India in at least 2 out of 10 years preceding the previous year.
2. He has been present in India for at least 730 days during the seven years preceding the previous year.
As the Karta is resident in India in 3 out of 10 years preceding the previous year, the family would be resident and ordinarily resident in India for the assessment year 2022-23 in situation (b).”[21]
Below is a table that represents the pictorial explanation of Section 6(2)[22].
However, it must be noted that in order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the Karta of the family during the previous year is not relevant. The residential status of the Karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”.
THE FINANCE ACT 2020.
The Finance Act, 2020 brought the following changes in the criteria for determining the residential status of an individual:
- “Currently, for an Indian Citizen or a Person of Indian Origin (PIO) being outside India and coming to India on visits, amongst other conditions, the period of stay in India to trigger residency, is extended from 60 to 182 days or more during the Financial Year (FY).”[23]
- “In continuation to the existing provisions of the Act, the Finance Act, 2020 now also provides that an Indian Citizen or PIO having total income, other than income from foreign sources, exceeding INR 1.5 million, would qualify as a Resident and Not Ordinary Resident in India if he is present in India for 120 days or more but less than 182 days during the relevant FY.”[24]
- “The Finance Act, 2020 provides that an Indian citizen would be deemed to be Resident and Not Ordinary Resident in India if such an individual is not liable to tax in any other country or territory by reason of residence or domicile (or any other prescribed criteria of similar nature) in that country and his total income, other than income from foreign sources*, exceeds INR 1.5 million in the relevant FY.”[25]
- “In the Finance Act, 2021 a new section 2(29A) has been added which defines “Liable to tax”, in relation to a person and with reference to a country, which means that there is an income-tax liability on such a person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.”[26]
CONCLUSION
The determination of the residential status of individuals and HUF revolves around the criteria outlined in Section 6(1) and Section 6(2) of the Income Tax Act. The length of stay in India over a specified period is a key factor. The Finance Act of 2020 introduced provisions regarding deemed residential status for certain individuals with cumulative income exceeding a specified threshold and zero tax liability in other countries. For individuals, meeting either of the conditions A1 or A2 defines their residential status. The responsibility of proving residential status rests with the individual, and the onus of proof is crucial in this regard. Additionally, exceptions are provided for specific categories of individuals, such as crew members of Indian ships or those leaving India for employment or business purposes.
Hindu Undivided Families are considered as a separate entity for tax assessment purposes. The residential status of an HUF is determined by the location of its control and management. The term “control and management” has been judicially interpreted, emphasizing de facto control and the location where vital decisions regarding business policies are made.
The distinction between “ordinarily resident” and “resident but not ordinarily resident” further refines the classification for both individuals and HUFs. The additional conditions, such as the number of years of residency and the days spent in India, play a crucial role in determining the residential status.
In essence, the residential status under the Income Tax Act is a nuanced and multifaceted aspect that requires a careful examination of various criteria. It is imperative for taxpayers to be aware of these provisions and seek professional guidance to ensure accurate compliance with the tax regulations in the Indian subcontinent.
Notes
[1] ‘Home – Central Board of Direct Taxes, Government of India’ (Determination of residential status.) https://incometaxindia.gov.in/Booklets%20%20Pamphlets/20__Determination-of-Residential-Status-English.pdf accessed 24 November 2023.
[2] Taxmann, ‘All-about the Residential Status under the Income-Tax Act’ (Taxmann Blog, 23 February 2023) https://taxmann.com/post/blog/all-about-the-residential-status-under-the-income-tax-act accessed 24 November 2023.
[3] Ibid. 1.
[4] Income Tax Act 1961, S 6(1).
[5] Ibid. 2.
[6] Income Tax Act 1961, S 6.
[7] [1963] 48 ITR 170 (Cal.).
[8] Neeraj Bhagat & Co., ‘Residential Status Of an Individual- Section 6’( Taxguru 1 August 2022) <https://taxguru.in/income-tax/residential-status-individual-section-6.html> accessed 24 November 2023.
[9] Finance Act 2020.
[10] Ibid. 6.
[11] [1997] 90 Taxman 62
[12] Pratibha Sain, ‘Residential status under Income Tax Act, 1961 in India’(Taxguru 1 September 2021) https://taxguru.in/income-tax/residential-status-income-tax-act-1961-india.html accessed 25 November 2023.
[13] Income Tax Act 1961, S 2(31).
[14] Income Tax Act 1961, S 6(2).
[15] [1960] 40 ITR 1 (SC)
[16] [1886] AC 31 (HL).
[17] [1958] 34 ITR 88 (Mad.).
[18] Id.
[19] [1951] 19 ITR 163 (SC
[20] [1950] 18 ITR 181 (Mad.)
[21] Income Tax Act 1961, S (6)(6) (b).
[22] Ibid. 2.
[23] Parizad Sirwalla, ‘Ascertain your likely residential status for Financial Year 2022-23’ ( KPMG)
<https://kpmg.com/in/en/home/services/tax/global-mobility-services/personal-tax-residency-calculators/residential-status.html> accessed 27 November 2023.
[24] Id.
[25] Ibid. 22
[26] Ibid. 22
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