Definitions
Q. 1. Write a short notes on:
(a) Assessment year
(b) Person
(c) Income
(d) Amalgamation
(e) Gross Total Income
(f) Accounting Method
(g) Previous year
(h) Assessce
(i) Agricultural Income
(j) Demerger
(k) Revenue and Capital Receipts
(l) Charitable purpose
Ans. (a) Assessment year-Assessment year means the period starting from April 1 and ending on March 31 of the next year. For instance, the assessment year 2003-04 which will commence on April 1, 2003, will end on March 31, 2004. Income of previous-year [see ‘b’] of an assessee is taxed during the next following assessment year at the rate prescribed by the relevant Finance Act [Sec. 2(9)]
(b) Previous year- Income earned in a year is taxable in the next year The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.
From the assessment year 1989-90 onwards, all assessees are required to follow financial year (le., April 1 to March 31) as the previous year. This uniform previous year has to be followed for all sources of income. [Sec. 3]
(c) Person- The term person includes:
(a) an individual;
(b) a Hindu Undivided family:
(c) a company,
(d) a firm;
(e) an association of persons or a body of individuals whether incorporated or not,
(f) a local authority, and
(g) every artificial judicial person not falling within any of the preceding categories.
These are seven categories of person chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore any person not falling in the above mentioned seven categories, may still fall in the four corners of the term ‘person’ and accordingly may liable to tax under section 4 [Sec 2(31)]
(d) Assessee- “Assessee” means a person by whom income-tax or any other sum of money is payable under the Act. It includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him. It also includes a person who is assessable in respect of income or loss of another person or who is deemed to be an assessee, or an assessee in default under any provision of the Act.[Sec 2(7)]
(e) Income- The definition of the term “income” in section 2(24) is inclusive and not exhaustive. Therefore, the term “income” not only includes those things which are included in section 2(24) but also includes such things which the term signifies, according to its general and natural meaning. As per definition of section 2(24), the term “income” includes:
(a) profits and gains,
(b) dividend,
(c) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust;
(d) the value of perquisites or profits in lieu of salary,
(e) any special allowance or benefit specifically granted to the assessee to meet his expenses wholly, necessarily and exclusively for the performance of his duties,
(f) any allowance granted to the assessee either to meet his personal expenses at the place where he performs his duties or to compensate him for the increased cost of living,
(g) the value of any benefit or perquisite obtained from a company by a director or a person who has substantial interest in the company or by relative of a director or such person;
(h) the value of any benefit or perquisite (whether convertible into money or not) obtained by any representative assessee [sec. 160(1)(iii), (iv)] or beneficiary, or any amount paid by the representative assessee for the benefit of the beneficiary (which the beneficiary would have ordinarily been required to pay);
(i) any sum chargeable under section 28(ii), (iii), (iiib), (iiic), (v), 41 or 59,
(j) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
(k) any capital gains,
(l) insurance profit computed under section 44.
(m) winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort,
(n) any sum received by any taxpayer from his employees as contribution to any fund for the welfare of such employees;
(o) any sum received under a Keyman Insurance Policy including bonus;
(p) any sum referred to in section 28(va), applicable from the assessment year 2003-04 (i.e. any sum received for not carrying out any activity in relation to a business).
The aforesaid definition does not define the term “income” but merely describes various receipts as income. It, therefore, follows that in addition to the aforesaid receipts, any other receipt is taxable under the Act if it comes within the general and natural meaning of the term “income”
(f) Agricultural Income- Section 10(1) exempts agricultural income from income tax. By virtue of section 2(1A) the expression agricultural income means:
RENT OR REVENUE DERIVED FROM LAND-According to section 2(1A)(a), if the following three conditions are satisfied, income derived from land can be termed as “agricultural income”
(a) rent or revenue should be derived from land (may be in cash or in kind);
(b) the land is one which is situated in India (if the land is situated in a foreign country, this condition is not satisfied); and
(c) the land is used for agricultural purpose.
Land used for agricultural purposes-The primary condition to claim exemption as “agricultural income” is that the land in question should be used for agricultural purposes whether exemption is sought under sub-clause (a) or (b) or (c) of section 2(1A).
The term “agriculture” and “agricultural purposes” have not been defined in the Act; one has, therefore, to depend upon ordinary meaning and decided cases.
In CIT vs Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC), Bhagwati, J. laid down certain principles to serve as a guide in the determina- tion of the scope of the terms “agriculture” and “agricultural purposes”,
Basic operations Prior to germination, some basic operations are essential to constitute agriculture. The basic operations would involve expenditure of human skill and labour upon the land itself and not merely on the growth from the land. Some illustrative instances of basic operations are tilling of land, sowing of the seeds, planting, and similar kind of operations on the land.
Subsequent operations- Besides the basic operations, there are certain subsequent operations which are performed after the produce sprouts from the land. Illustrative instances of subsequent operations are weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same, not only from insects and pests but also from degradation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. Mere performance of these subsequent operations on the products of the land (where such products have not been raised on the land by the performance of the basic operations described above)) would not be enough to characterise them as agricultural operations. Where, however, the subsequent operations are performed in conjunction with and in continuation of the basic operations, the subsequent operations would also constitute part of the integrated activity of agriculture.
Agriculture not merely includes food and grains- Agriculture does not merely imply raising of food and grains for the consumption of men and animals; it also includes all products from the performance of basic as well as subsequent operations on land. These products, for instance, may be grain or vegetable or fruits including plantation and groves or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, etc., or commercial crops like cotton, flax, jute, hemp, indigo, etc. All these are products raised from the land and the term “agriculture” cannot be confined merely to the production of food and grains products for human beings but must be understood as comprising all the products of the land which have some utility either for consumption or for trade and commercial asset and would also include forest products such as timber, sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc.
Some connection with land not sufficient The mere fact that an activity has some connection with or is in some way dependent on land is not sufficient to bring it within the scope of the term “agriculture”. For instance, breeding and rearing of livestock, dairy farming, cheese and butter-making and poultry farming would not by themselves be agricultural purposes.
INCOME DERIVED FROM AGRICULTURAL LAND BY AGRICULTURAL OPERATIONS-Section 2(1A)(b) gives the following three instances of agricultural income.
(a) Any income derived by agriculture from land situated in India and used for agricultural purposes;
(b) Any income derived by a cultivator or receiver of rent-in-kind of any process ordinarily employed to render the produce raised or received by him to make it fit to be taken to market; or
(c) Any income derived by such land by sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect of which no process has been performed other than a process of the nature described in (b).
The aforesaid income are agricultural income, if such income are derived from land which is situated in India and is used for agricultural purposes[Sec. 2(1A)(b)]
Section 2(1A)(b) does not contemplate sale of commodity different from what is cultivated and processed and where the assessee was growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons would not be agricultural income [K Lakshman Co. vs CIT (1999) 239 ITR 597 (SC)]
Profits arising from sale of agricultural land amount to capital gains hence liable to capital gain tax and not exempt from income tax.
INCOME FROM FARM BUILDING-Bonafide annual value of house property is taxable under section 22. However, income from a house property which satisfies the following cumulative conditions would be treated as agricultural income and consequently it would be exempt from tax by virtue of section 10(1):
(a) the building should be occupied by the cultivator (as a landlord or as a tenant) or receiver of rent-in-kind (as a landlord);
(b) it should be on or in the immediate vicinity of land, situated in India and used for agricultural purposes;
(c) the cultivator or receiver of rent-in-kind should by reason of his connection with the agricultural land require the building as a dwelling house or as a store house or other outbuilding; and
(d) the land is assessed to land revenue or local rate or, alternatively, the land (though not assessed to land revenue or local rate), is situated outside “urban area”, ie, any area which is comprised within the jurisdiction of any municipality/cantonment board having a population of not less than 10,000 persons or within notified distance (up to a maximum of 8 kilometers) from the limits of any such municipality or cantonment board. [Sec. 2(1A)(c)]
If all the aforesaid conditions are satisfied, income from a farm building is exempt from tax under section 2(1A)(c).
Use of building or land for any purpose other than agriculture-With effect from the assessment year 2001-02 an Explanation has been inserted to clarify that any income from such building or land arising from the use of the building or land for any purpose other than agriculture, shall not be included in the definition of “agricultural income”. For example, if a person has income from using such building or land for purposes such as letting it out for residential purposes of any business or profession, then, such income shall not be treated as agricultural income.
(g) Amalgamation – For a merger to qualify as an “amalgamation” for the purpose of the Income-tax Act, it has to satisfy the following conditions:
(a) all the properties of the amalgamating company immediately before the amalgamation should become the property of the amalgamated company by virtue of the amalgamation:
(b) all liabilities of the amalgamating company immediately before the amalgamation should become the liabilities of the amalgamated company by virtue of the amalgamation, and
(c) shareholders holding not less than three-fourths in value of the shares in the amalgamating company (other than shares already held by the amalgamated company or by its nominee) should become shareholders of the amalgamated company by virtue of the amalgamation.[Sec. 2(1B)]
To illustrate the aforesaid condition (c), where A Ltd. merges with X Ltd., in a scheme of amalgamation, and immediately before the amalgamation, X Ltd. held 20 per cent of the shares in A Ltd., the abovementioned condition will be satisfied if shareholders holding not less than 3/4th in value of the remaining 80 per cent of the shares in A Ltd., ie, 60 per cent thereof (3/4×80), become shareholders of X Ltd., by virtue of the amalgamation. Where, however, the whole of the share capital of a company is held by another company, the merger of the two companies will qualify as an amalgamation within section 2(1B), if all other conditions are fulfilled.
(h) Demerger- Demerger, in relation to the companies, means transfer, pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertaking to the resulting company in the following manner-
(a) All the property of the undertaking, being transferred by the demerged company, becomes the property of the resulting company.
(b) All the liabilities relatable to the undertakings being transferred by the demerged company, become the liabilities of the resulting company.
(c) The property and the liabilities of the undertaking being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger. For this purpose, any change in the value of assets consequent to their revaluation shall be ignored.
(d) The resulting company issues shares to the shareholders of the demerged company on a proportionate basis as a consideration for demerger.
(e) The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than the shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company.
(f)The transfer of the undertaking is on a going concern basis.
(g) The demerger is in accordance with the conditions, if any, notified under section 72A(5).[Sec 2(19AA)
(i) Gross Total Income and Total Income- As per section 14, income of a person is computed under the following five heads:
(a) Salaries
(b) Income from house property
(c) Profits and gains of business or profession
(d) Capital gains
(e) Income from other sources
The income under these heads is termed as ‘gross total income. In other words, gross total income means total income computed in accordance with the provisions of the Act before making any deduction under section 80CCC to 80U After these deductions, it is known as ‘Total Income’ on which tax is calculated as prescribed rates.
(j) Revenue and Capital Receipts- Receipts are of two types-capital receipts and revenue receipts. The distinction between the two is vital because capital receipts are exempt from tax unless they are expressly taxable (for instance, capital gains are taxable under section 45 even if they are capital receipts), whereas revenue receipts are taxable, unless they are expressly exempt from tax (for instance, income exempt under section 10). As the Act does not define the terms “capital receipts” and “revenue receipts”, one has to depend upon natural meaning of the concepts as well as decided cases.
Circulating capital and fixed capital-A receipt on account of circulating capital is a revenue receipt, whereas a receipt on account of fixed capital is a capital receipt [CIT vs Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC)]
Receipt in the hands of recipient is material-In order to determine whether a receipt is capital or revenue in nature, one has to go by its nature in the hands of the recipient. The source from which the payment is made, has no bearing on the question [CIT vs Kamal Behari Lal Singha (1971) 82 ITR 460 (SC)]. It, therefore, follows that even if the amount is paid wholly or partly out of the capital it may partake of the character of a revenue receipt in the hands of the recipient.
Payer’s motive irrelevant- The motive of payer is not relevant while deciding whether a particular receipt is revenue or capital in nature [PH. Divecha vs CIT (1963) 48 ITR 222 (SC)].
Receipt in lieu of source of income A receipt in lieu of source of income is a capital receipt. A receipt in lieu of income is a revenue receipt. For instance, compensation for loss of employment is a capital receipt, whereas compensation for temporary disablement is a revenue receipt.
Lump sum payment-In order to determine whether a receipt is capital or revenue in nature the fact that it is a lump sum payment, large payment or periodic payment is not relevant. It is not necessary that a revenue receipt should be recurring or a capital receipt should be a single receipt.
Nature of receipt under company law irrelevant- Treatment of a receipt under company law is not relevant while deciding whether a receipt is capital or revenue in nature under tax laws.
Compensation measured by estimated profits-The mere fact that a compensation is measured by estimated annual profits, it cannot make the receipt as revenue receipt. There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test [Glenboig Union Fireclay Co. Ltd. vs IRC (1922) 12 TC 427]. It is the quality of payment that is decisive of the character of the payment and not the method of payment or its measure [Sevairam Doongarmall vs CIT (1961) 42 ITR 392 (SC)]
Income of wasting assets-Profits from a capital which is exhausted or consumed during the process of realisation is chargeable to tax. Therefore, income from mines and quarries is not realisation of capital consumed but is chargeable to tax as revenue receipt.
Disallowance to person making payment The fact that the amount paid is not allowed as permissible deduction in the assessment of a person making payment, cannot determine the character of receipt in the hands of the recipient.
Insurance receipt- A receipt under a general insurance policy may be a capital receipt, if the policy relates to capital asset or may be a revenue receipt if the policy relates to circulating asset.
Changes in rate of exchange of currency If by virtue of change in exchange rate of currency, excess amount is realised by an assessee engaged in the business of exporting goods, the excess amount is treated as revenue receipt. On the other hand, if foreign currency is kept as investment or to acquire a capital asset, the profit made due to change in the rate of exchange of currency is capital receipt [CIT vs Canara Bank Ltd. (1967) 63 ITR 328 (SC)]
Subsidies If the purpose is to help the assessee to set up its business or complete a project, the money must be treated as having been received for capital purpose. But if money is given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidy must be treated as assistance for the purpose of the trade and is a revenue receipt [SahneySteel & Press Works Ltd vs CIT (1997) 94 Taxman 368/228 ITR 253 (SC)].
These are a few principles which one has to follow while deciding nature of a receipt. It is, however, difficult to state any specific test for determining true nature of a receipt. Though the dividing line between a capital and revenue receipt is real, yet sometimes it becomes difficult to draw Therefore, a decision will have to be taken in each case in the light of its facts and surrounding circumstances (CIT vs Manna Ramji & Co. (1972) 86 ITR 29 (SC) The onus of proving that a particular receipt is of capital or revenue nature is normally on the Income-tax Department. Where, however, the assessee in the normal circumstances is in a position to prove his contention, the onus will be on him to produce the necessary evidence [CIT vs S. Krishnaswamy Reddiar (1978) 115 ITR 505 (Mad.))
(k) Accounting Method- Income chargeable under the head “Profits and gains of business or profession” or “Income from other source” is to be computed in accordance with the method of accounting regularly employed by the assessee.
Mainly there are two types of accounting methods mercantile system and cash system.
Mercantile system- Under mercantile system, income and expenditure are recorded at the time of occurrence during the previous year. For instance, income accrued during the previous year is recorded whether it is received during the previous year or during a year preceding or following the previous year. Similarly, expenditure is recorded if it becomes due during the previous year, irrespective of the fact whether it is paid during the previous year or not. The profit calculated under mercantile system is, thus, profit actually earned during the previous year, though not necessarily realised in cash
Cash system- Under cash system of accounting, revenue and expenses are recorded only when received or paid. For instance, income received during the previous year is included in taxable income whether it is earned during the previous year or it is earned during a year preceding or following the previous year. Similarly, expenditure is deductible from the taxable income only if it is paid during the previous year, irrespective of the fact whether it relates to the previous year or not. Income under cash system of accounting is, therefore, excess of the receipts over disbursements during the previous year.
METHOD OF ACCOUNTING AND ACCOUNTING STANDARDS FOR COMPUTING INCOME Section 145 provides the following-
1. Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed only in accordance with either the cash or the mercantile system of accounting. regularly employed by an assessee.
2. The Central Government has been empowered to prescribe by notification in the official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head “Profits and gains of business or profession” or “Income from other sources”. The Government would consult expert bodies like the Institute of Chartered Accountants of India while laying down such standards.
Vide Notification No. 9949, dated January 25, 1996, the Government has notified Accounting Standard I relating to disclosure of accounting policies and Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies.
(1) Charitable purpose [Sec. 2(15)]- It is defined to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility.
Promotion of sports and games is considered to be a charitable purpose within the meaning of section 2(15). Therefore, an association or institution engaged in the promotion of sports and games can claim exemption under section 11, even if it is not approved under section 10(23)-Circular No. 395, dated September 24, 1984.
Tax exemption Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The trust should be one established in accordance with law and its objects should fall within the definition of the term “charitable purposes”
Essential conditions for exemption (Sec. 11/-The compliance of the following main conditions is essential for claiming exemption under section 11-
1. The property from which income is derived should be held under a trust or other legal obligation.
2. The property should be held for charitable or religious purposes. In the case of a charitable trust created on or after April 1, 1962, the further conditions are-
(a) the trust should not be created for the benefit of any particular religious community or caste;
(b) no part of the income should enure, directly or indirectly, for the benefit of the settlor or other specified persons, and
(c) the property should be held wholly for charitable purposes. The conditions mentioned at
(b) and (c) also apply to religious trusts created on or after April 1, 1962.
3. The exemption is confined to only such portion of the trust’s income which is applied to charitable or religious purposes or is accumulated for applying to such purposes within the limits of accumulation permitted under section 11(1) and (2).
4. The exemption is restricted to such portion of the income as is applied to charitable or religious purposes in India except in the cases covered by section 11(1)(c).
5. Where trust property comprises a business undertaking, the income shown in the books of account should not be less than the income determined by the Assessing Officer according to the provisions of the Act. Moreover, the trust or institution can carry out business activities if business activities are incidental to the attainment of its objectives and separate books of account are maintained
6. The trust shall apply for registration with the Commissioner.
7. The accounts of the trust should be audited for such accounting year in which its income (without giving effect to the provisions of sections 11 and 112) exceeds Rs. 50,000.
8. The funds of the trust should be invested or deposited in any one or more of modes or forms mentioned in section 11(5).
Q. 2. “All incomes for the purposes of charge of income tax and computation of total income are classified under the several heads.” Mention them.
Ans. Head of Income- Sec 14 provides that save as otherwise provided by the income-tax Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income-
(i) Salaries,
(ii) Income from house property,
(iii) Profits and gains of business or profession,
(iv) Capital gains
(v) Income from other sources.
In order to be chargeable to income-tax an income has to be brought under one of the heads, stated above. The words “save as otherwise provided under the Income-tax Act” refer to the exemptions available under the Income- tax Act.
Income-tax is levied on total taxable income of a person and the tax levied is a single tax on the aggregate taxable receipts from all the sources. It is not a collection of taxes levied separately on distinct heads of income. The tax is always one, but it may arise from different sources to which different rules of computation have been applied.
In short, the following points must be remembered in this context.
(i) A person is to be charged on his total income and not on his income under the different heads separately. This means that a person would have to pay income-tax, although his income under such head may be below the taxable limit.
(ii) Charge under specific head of income is obligatory. In other words, income which is chargeable under a specific head cannot be charged under a different head in lieu of or in addition to, being charged under its specific head. In the case of United Commercial Bank Ltd. vs CIT., (1957) 32 I.T.R. 688, the Supreme Court has held that since “Interest on securities” is a specific head of charge, income which represents interest on securities cannot be charged as profits of business, even if securities are held as business assets.
(iii) The expression “Head of income” and “sources of income” do not have the same meaning. “Source” indicates the specific source from which a particular income sprang or arose, it does not indicate the head of income. There may be more than one source of income under the same head.
(iv) The income is to be charged under the appropriate head of income and it is imperative on the part of the department to charge the income under the specific head under which it falls since the law leaves no option. [Bihar State Co-operative Bank Ltd. vs C.I.T., (1960) 39 1.T.R. 114).
(v) If income cannot be included in clauses (i) to (iv) mentioned above, it shall be charged under clause (v), ie. income from other sources. [Mrs Roma Bose vs I.T.O., (1974) 95 I.T.R. 299].
(vi) Where a particular item of income falls under two heads, the assessee has the right to choose the head which subjects him to lesser tax.
Residence of Assessee
Q. 3. When an individual shall be treated as a ‘resident’, ‘non- resident’ and ‘not-ordinarily resident’ in the Income Tax Act?
Ans. Residential Status of an Individual- An individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident in India, or (c) non-resident in India. [Sec 6]
Resident and ordinarily resident- To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows-
(i) First find out whether such individual is “resident” in India
(ii) If such individual is “resident” in India, then find out whether he is “ordinarily resident” in India. However if such individual is a “non-resident” in India, then no further investigation is necessary.
Basic Conditions to Test as to when an Individual is Resident in India- Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions-
(i) he is in India in the previous year for a period of 182 days or more, or
(ii) he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.
Additional Conditions to Test as to when a resident Individual is Ordinarily Resident in India- Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions-
(a) he has been resident in India in at least 9 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year; and
(b) he has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions and the two additional conditions.[Sec. 6(1), 6(6)(a)]
It is not essential that the stay should be at the same place [Kinloch vs IRC 14 TC 736] It is equally not necessary that the stay should be continuous. Similarly, the place of stay or the purpose of stay is not material.
Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the stay of one day-[Wilkie vs IRC 1952 1 AER 92) If, however, date 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 stay of the individual in India-[In re (1997) 90 Taxman 62 (AAR- New Delhi)
A stay by an individual on a yacht moored in the territorial waters of India would be treated as presence in India for the purpose of this section.
Resident but not ordinarily resident- An individual who satisfies at least one of the basic conditions but does not satisfy the two additional conditions is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in any of the following circumstances:
If he satisfies at least one of the basic conditions but none of the additional conditions.
If he satisfies at least one of the basic conditions and one of the two additional conditions.[Sec. 6(1), (6)(a)]
Non-resident-An individual is a non-resident in India if he satisfies none of the basic conditions. In the case of non-resident additional conditions are not relevant.
Q. 4. “The tax liability of an assessee is determined with reference to his residential status.” Explain.
Ans. Incidence of tax in the case of a resident and ordinarily resident assessee- A resident and ordinarily resident in India is assessable to tax in respect of:
(a) income which is received or deemed to be received in India in the previous year by him or on his behalf;
(b) income which accrues or arises or is deemed to accrue or arise to him in India during the previous year, and
(c) income which accrues or arises to him outside India during the relevant previous year. [Sec. 5(1)]
Incidence of tax in the case of a resident but not ordinarily resident assessee – The liability to tax of a resident but not ordinarily resident is the same as in the case of a resident and ordinarily resident. However, in the case of a resident but not ordinarily resident, income is not liable to tax in India unless (a) income is received or deemed to be received in India, (b) income is accrued or deemed to be accrued in India, or (c) income is from a business which is controlled from a place within India or income is from a profession which is set up in India.
It, therefore, follows that in the case of a resident and not ordinarily resident assessee, income is not chargeable to tax if it satisfies all the following conditions.
(a) income is neither received nor deemed to be received in India
(b) it is neither accrued nor deemed to be accrued in India, and
(c) it is derived from a business controlled or profession set up outside India [Sec. 5(1)]
Incidence of Tax in case of Non Resident- Non-resident is liable to tax in respect of income received or deemed to be received in India by or on his behalf and accrues or arises or is deemed to accrue or arise in India during the previous year.[Sec 5(2)]
Other points relating to Tax Incidence -The following points merit consideration in order to understand tax incidence explained above:
1. Total income of an assessee is to be computed in accordance with the provisions of the Income Tax Act, for instance, a receipt may be income in a commercial sense but may not be taxable if it is exempt under section 10 or if it is deductible under section 80CCC to 80U.
2. The source of income is not relevant in order to determine its chargeability
Q. 5. What are the provisions in the Income Tax Act, 1961 regarding the residential status of Hindu undivided Family, firm, association of persons and a company.
Ans. Residential Status of Hindu Undivided Family- A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or party situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.[Sec 6(2)]
Control and management Control and management means de facto control and management and not merely the right to control or manage[CIT vs Nandlal Gandalal (1960) 40 ITR 1 (SC)) Control and management is situated at place where the head, the seat and the directing power are situated [San Paulo Brazilian Railway Co. vs Carter 3 TC 407 (HL)]. 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 decision concerning the affairs of the family are taken at that place. Although, it is karta who normally has control and management of the affairs of a Hindu undivided family yet any other coparcener can control and manage the affairs. Therefore, the mere fact of absence of karta in India does not make the family non-resident-[RM.AL.ST. Annamalai Chettiar vs ITO (1958) 34 ITR 88 (Mad))
Ordinarily resident in India-A resident Hindu undivided family is an ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b):
(a) he has been resident in India in at least 9 out of 10 previous years immediately preceding the relevant previous year; and
(b) he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.
If karta or 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.
If karta does not satisfy these additional conditions, a resident Hindu undivided family is treated as resident but not ordinarily resident in India. Similarly, if a resident individual does not satisfy the aforesaid additional conditions the individual is treated as a resident but not ordinarily resident in India.
Residential status of firm and Association of persons- A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
Control and management-While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in principal officer. Control and management means de facto control and management and not merely the right to control or management. Control and management is usually situated at a place where the head, the seat and the [Sec. 6(4)] directing power are situated.
Residential Status of a company- An Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.
Control and management The term “control and management” refers to “head and brain” which directs the affairs of policy, finance, disposal of profits and vital things concerning the management of a company. Usually control and management of a company’s affairs is situated at the place where meetings of its board of directors are held. In the case of a subsidiary company managed by its local board of directors, it is difficult to establish that control and management of its affairs vests at the place where the parent company resides.