This article is written by Namrata Singhal, pursuing from Certificate Course in Advanced Corporate Taxation from LawSikho.com.

Introduction

The determination of residential status is fundamental in ascertaining the tax liability of the taxpayer. It is regarded as the commencement point for calculating the tax accrued on the part of the taxpayer. The residential status of a taxpayer is the source of the income which will consequently determine the tax liability. It is essential to note that the determination of the residential status in the previous year will enable the ascertainment of tax liability of the taxpayer for the assessment year.

Due to this very reason, it is the residential status of the taxpayer which is taken into consideration irrespective of taxpayer’s citizenship. It is pertinent to understand that citizenship and residence are two different concepts. A person may be a citizen of one country and may not be a resident of the same country. The taxability of the taxpayer will depend upon the residential status and not its citizenship. 

Concept of residential status to determine whether the person is resident or non-resident

Section 6 Income Tax Act, 1961 (“Act”) defines the concept of residence in India. According to the act, an individual is considered to be a resident in India if it fulfils either of the following two conditions:

1. That, in the previous year the individual was in India for a period or periods amounting to 182 days or more;

OR

2. That, in 4 years immediately preceding the previous year, the individual was in India for 365 days or more and 60 or more during the previous year.

For individuals (Indian citizens) who left India as crew members of the Indian ship or in course of employment, section 6(1)(c) will be applicable where they will be treated as resident only if they were in India for 182 days or more. In addition to it, for individuals (Indian citizens or persons of Indian origin) who came to visit India and normally reside outside India, section 6(1)(c) will be applicable where they will be treated as residents only if they were in India for 182 days or more.

On the satisfaction of the either of the one above mentioned conditions, the individual will qualify in the capacity of a resident in India. If it does not qualify either of the conditions, then it will qualify in the capacity of a non-resident. In both cases, the income of both resident and the non-resident will be taxable accordingly. Their sources of other income will also be taxable as deemed to be resident for the previous year. Any person shall be deemed to be resident of India if he is on territorial waters of India i.e. within 12 nautical miles. It is to be noted that it is not important whether the stay of the taxpayer was continuous or not. 

The rule as per section 6(1) is applicable to Hindu undivided family (“HUF”), firm or other association of person except when the control and management of its affairs are situated wholly outside India during the previous year. 

A company is resident in the previous year if it is an Indian company and its place of effective management is in India. That is, key management and commercial decisions which are necessary for the conduct of business are substantially as a whole are made in India.

The rule as per section 6(1) is applicable to ‘other’ persons except where control and management of his affairs is situated wholly outside India during the previous year. 

Concept of residential status to determine whether the person is ordinarily resident or non-ordinarily resident

After the individual satisfies one condition of section 6(1) of the act, the individual is further subjected to test whether the individual is resident but ordinarily resident or resident but not ordinarily resident.

• For this purpose, if the individual who qualified as a ‘resident’ by the virtue of section 6(1) of the act satisfies both the following conditions, then it is a resident but ordinarily resident. 
• If it satisfies either one or none of the following conditions, then it is a resident but not ordinarily resident.

According to section 6(6)(a) of the act, the two conditions to further the classification of resident are:

1. That, the individual was resident in India in at least 2 out of 10 previous years immediately  preceding the relevant previous year; 
2. That, the individual was resident in India during the 7 immediately  preceding the relevant previous years for a period of 729 days or more.

As specified in section 6(6)(b), the same rule as elucidated in section 6(6)(a) of the act is applicable for the further classification of HUF whose manager or karta can be resident but ordinarily resident or resident but non ordinarily resident. 

However, as per the act, firm or other association of persons, company and other persons are not classified further into resident but ordinarily resident or resident but non ordinarily resident. 

The Supreme Court in Pradip J. Mehta v. Commissioner of Income Tax, overruled the judgement by Gujarat High Court where the status claimed by the assessee of ‘not ordinarily resident’ was not acceptable. In this case, the assessee during the course of the employment was appointed as engineer as was paid abroad. The assessee claimed the status of not ordinarily resident to exclude the income accrued and arise from outside India. The assessing officer refused to grant the status of not ordinarily resident because during the last 9 previous years, the assessee was non-resident for only three years and during the last seven previous years, he had stayed in India for a period of 1,402 days. It was subsequently affirmed by the Gujarat High Court. The High Court in this case ruled that, “the test is one of presence and not absence from India and the length of presence will determine when an individual is ‘not ordinarily resident’ in India.” However, the Supreme Court ruled that a person will become an ordinarily resident only if (a) he has been residing in nine out of ten preceding years; and (b) he has been in India for at least 730 days in the previous seven years.

In the case Jayram Rajgopal Poduval vs Assistant Commissioner Of Income, the Mumbai Bench of ITAT, signified the essence of section 6(6) of the act. The assessee in this case, claimed the status of ‘non ordinarily resident’ to enjoy the exemption of interest accrued from the fixed deposit of bank under section 10(15)(iv)(fa). The court ruled that, in order to acquire the status of resident not ordinarily resident, the individual should fulfil either of the conditions in Section 6(1) of the act and thereafter, either of the conditions enshrined in section 6(6) should be fulfilled.  In this case, as the assessee fulfilled both the conditions, he was granted the residential status of resident not ordinarily resident.

According to the residential status of the taxpayer as per section 6 of the act, the scope of the total income is implicated as given in section 5 of the act. 

(1) The total income of a resident includes all income derived from any source in any previous year which is either:

(a) received or deemed to be received by or on behalf of such person in India;

(b) accrues or arises or is deemed to accrue or arise to him in India;

(c) accrues or arises to him outside India.

The income which accrues or arises to him outside India is not included unless it is derived from a business controlled in or a profession set up in India for the person who is not ordinarily resident in India.

(2) The total income of a non-resident includes all income derived from any source in any previous year which is either:

(a) received or is deemed to be received in India by or on behalf of such person;

(b) accrues or arises or is deemed to accrue or arise to him in India.

Conclusion

It can be concluded that the determination of residential status is a critical aspect of tax planning. To ascertain the tax liability of a taxpayer, it is suggested to analyse the intricacies of the source of income. For such analysis, section 5 and 6 of the act should be harmonised to ascertain the tax implications of the taxpayer according to its residential status.  

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