Tuesday, March 27, 2012

Residential Status and Scope of Total Income - Income tax act 1961

Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year.
Residential Status of An individual
Ø  Resident in India: Satisfying any one of two BASIC conditions given u/s 6(1). Further classified into two parts:
a)      Resident and Ordinarily Resident: Satisfying One of the Basic Conditions [6(1] + Both the Additional Conditions [6(6)(a)&(b)

b)      Resident but not Ordinarily Resident: Satisfying One of the Basic Conditions [6(1] + Not satisfying any of the Additional Conditions [6(6)(a)&(b)

Ø  Non – Resident [Sec. 2(30)]: Not satisfying any of the Basic Conditions mentioned in [6(1)].
Remember: Ordinarily Resident and Resident but not ordinarily residential status is Applicable to individual and HUF Only

Basic Conditions Under section 6(1):
a)      182 days or more during P/Y, or
b)      At least 60 days during the relevant P/Y  + 365 days during the four years preceding that P/Y subject to following exceptions:
Ø  Individual + Citizen of India + Leaving India during P/Y + For Employment
Ø  Individual + Citizen of India + Leaving India during P/Y + As Crew member of India Ship
Ø  Individual + Citizen of India or Person of India Origin + Visit India during P/Y
Here, Person of Indian Origin: Himself + Parents + Grandparents (maternal and paternal grandparents) Born in Undivided India

Additional Conditions section 6(6):
a)      Resident in India in at least 2 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year;
b)      In India for a period of at least 730 days during 7 years proceeding the relevant previous year.

Residential Status of Firm [Sec. 6(2)]
Ø  Resident in India: Any Part of control and management of its affairs is in India during P/Y.
a)      Resident and Ordinarily Resident: Must be Resident in India + Both the Additional Conditions [6(6) (a) & (b) must be satisfied by KARTA or MANAGER.

b)      Resident but not Ordinarily Resident: Must be Resident in India + Not Satisfying any of the Additional Conditions [6(6) (a) & (b) by KARTA or MANAGER.

Ø  Non – Resident [Sec. 2(30)]: NO Part of control and management of its affairs is in India during P/Y.(Wholly Outside India)

Residential Status of Firm and AOP, or BOI [Sec. 6(2)]
Ø  Resident in India: Any Part of control and management of its affairs is in India during P/Y.
Ø  Non – Resident [Sec. 2(30)]: NO Part of control and management of its affairs is in India during P/Y. (Wholly Outside India)

Residential Status of Company [Sec. 6(3)]
Indian Company:
Ø  Resident in India: Registered in India + Deemed Company under any law of our country.
Foreign Company:
Ø  Resident In India: 100% Control and Management of its affairs in India.
Ø  Non Resident in India: Any part of Control and Management of its affairs outside India.

Residential Status of Local Authority and Artificial Judicial Person [Sec. 6(4)]
Ø  Resident in India: Any Part of control and management of its affairs is in India during P/Y.
Ø  Non – Resident [Sec. 2(30)]: NO Part of control and management of its affairs is in India during P/Y. (Wholly Outside India)

The following points are very important in determining the residential status of an assessee:-
a)      The residential status may change from year to year.
b)      Residential status must not be confused with the nationality or citizenship of the assessee.
c)       A person can become a resident in two countries.
d)      Physical presents in India in respect of broken period should be made on an hourly basis.
e)      If hours of stay are not available 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.
f)       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.
g)      Any allowance paid by Government of India outside India such allowance to government servant is fully exempted.
h)      Maintaining dwelling house is irrelevant, but physical presence in India is important.

Scope of total income (Section 5)
Sr.no.
Income
Ordinarily Resident
Not Ordinarily Resident
Non-Resident
1.
Income received or deemed to be received in India, Whether accrue or arise  in or outside India
YES
YES
YES
2.
Income accrue or arise or deemed to accrue or arise in India, whether received in or outside India
YES
YES
YES
3.
Income accrue or arise and received outside India from business controlled or profession set up in India
YES
YES
NO
4.
Income accrue or arise and received outside India from any other source
YES
NO
NO
5.
Income which accrues or arises outside India and Received outside India during the years preceding the previous years and remitted to India during the previous year
NO
NO
NO

Income Received in India
The receipt of income refers to the first occasion when the recipient gets the money. Transmission of amount after receipt to other place does not result in receipt.
Income deemed to be received in India [Section 7]
Ø  Contribution by employer to RFP in excess of 12% of the salary.
Ø  Interest credited to RPF in excess of 9.5% of salary.
Ø  Transferred balance from URPF to RPF.
Ø  Contribution to notified pension scheme under sec. 80CCD.
Income which are deemed to accrue or arise in India [Section 9]
a)      Income from a business connection in India. [Sec-9(1) (i)]. In case of a NRI the following shall not be treated as business connection in India:
ü  Purchase of goods for the purpose of export.
ü  Collection of news and views for transmission outside India.
ü  Shooting of cinematograph films in India if such nonresident is not a citizen of India.
b)     Any income accrue or arise to an assessee through or from any property , asset or source of income in India[Sec-9(1)(i)]
c)      Any income accrues or arises to an assessee through transfer of capital asset situated in India. [Sec-9(1)(i)]
d)     Income from Salaries earned in India or which is payable by the government to  citizen of India for service rendered outside India  [Sec-9(1)(ii) & (iii)]
e)      Dividend paid by Indian Company outside India. [Sec-9(1)(iv)]
f)       Interest payable by:
ü  Government
ü  A person who is a resident in India except where payment is made on money borrowed for business or profession carried on outside India.
ü  A person who is a non resident in India provided where payment in made on money borrowed for business or profession carried in India.
g)      Royalty Payment fees for technical services by government or resident person[Sec-9(1)(vi)]
ü  Government
ü  A person who is a resident in India except where payment is made for business or profession carried on outside India.
ü  A person who is a non resident in India provided where payment is made for business or profession carried in India.
h)     Fees for technical services by government or resident person[Sec-9(1)(vii)]
ü  Government
ü  A person who is a resident in India except where payment is made for business or profession carried on outside India.
ü  A person who is a non resident in India provided where payment is made for business or profession carried in India.