The Assessment of income under the Income-tax Act, 1961/Wealth-tax Act, 1957 is always based on the Residential Status of a Person.
The Residential status of a person under the Income-tax Act, 1961 is determined according to Section 6 of the Income-tax Act, 1961. ‘The Income-tax Act, 1961 recognises three types of status in respect of any person and they are:-
Not Ordinarily resident
The Residential Status of HUF is governed by Section 6(2) and 6(6) of the Income-tax Act, 1961 which reads as follows: -
A Hindu Undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
Thus, a HUF is deemed to be a resident of India unless the control and management of its affairs is situated wholly outside India. In relation to HUF, we have seen that the Control and management is vested with Karta and therefore if the Karta of the HUF stays outside India and controls and manages the affairs from outside India, the HUF would deemed to a Non-resident. The control and management has been defined by the Hon’ble Apex Court in the case of CIT vs Nandlal Gandalal (1960) 40 ITR 1 as defacto control and not merely the right to control the affairs in a general way.
There are several court cases, which have decided as to how a person can be deemed to have exercised the control and management from outside the country. In case, the Karta or the person who exercises the control and management, comes to the country and stays here for a considerable period and does nothing during this period which can generally be taken to be exercise of the control and management, the HUF would still be Non-resident for the purposes of the taxation. However, where the Karta stays for a considerable period of time, then the onus to proof that the control and management was situated wholly outside India would be upon the Karta as decided by the Apex Court in the case of Subbayya Chettiar vs CIT(1951) 19 ITR 168 where in the Apex Court was confronted with a case where the Karta had been levying in Ceylon with his wife, son and three daughters and for the puposes of attending to litigation and for attending to income-tax proceedings had visited the then British India on several occasions and the Assessing officer held that the IIUF was a resident as the control and management was not situated wholly outside India and thus the entire income including foreign income was liable to be taxed. The Apex Court made interesting reference to the very old English case as under:
This provision appears to be based very largely on the rule which has been applied in England to cases of corporations, in regard to which the law was stated thus by Lord Loreburn in De Beers v. Howe.
“A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business.... The decision of Chief Baron Kelly and Baron Huddleston in Calcutta Jute Mills v. Nicholson and Cesena Sulphur Company v. Nicholson now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.”
5. It is clear ‘that what is said in Section 4-A(b) of the Income Tax Act is what Lord Loreburn intended to convey by the words “where the central management and control actually abides”.
6. The principles which are now well-established in England and which will be found to have been very clearly enunciated in Swedish Central Railway Company Limited v. Thompson which is one of the leading cases on the subject, are:
- “(1) that the conception of residence in the case of a fictitious ‘person’, such as a company, is as artificial as the company itself, and the locality of the residence can only be determined by analogy, by asking where is the head and seat and directing power of the affairs of the company. What these words mean have been explained by Patanjali Sastri, J. with very great clarity in the following passage where he deals with the meaning of Section 4-A(b) of the Income Tax Act:
‘Control and management’ signifies, in the present context, the controlling and directive power, ‘the head and brain’ as it is sometimes called, and ‘situated’ implies the functioning of such power at a particular place with some degree of permanence, while ‘wholly’ would seem to recognize the possibility of the seat of such power being divided between two distinct and separated places.
As a general rule, the control and management of a business remains in the hand of a person or a group of persons, and the question to be asked is wherefrom the person or group of persons controls or directs the business.
- Mere activity by the company in a place does not create residence, with the result that a company may be “residing” in one place and doing a great deal of business in another.
- The central management and control of a company may be divided, and it may keep house and do business in more than one place, and, if so, it may have more than one residence.
- In case of dual residence, it is necessary to show that the company performs some of the vital organic functions incidental to its existence as such in both the places, so that in fact there are two centres of management.”
Lastly, the Apex Court made an important conclusion that the decision was rendered only in the context of the present assessment year and in the next assessment year based on the facts, the status may change and thus the status is liable to change year after year.
Not ordinarily Resident
The Income-tax Act, 1961 recognized another kind of status which is called “Not ordinarily Resident” or NOR. The status of a IJUF is NOR according to Section 6(6)(b) in case of a Hindu Undivided family whose manager has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty nine days or less.
The importance of determining the status of 1-JUP stems from the fact that not all types of income is taxable in the hands of 1-IUF. Only those types of Income which can be included within the scope of total income as defined in Section 5 of the Income-tax Act, 1961 can be included within the total income.
For the purpose of Section 5 of the Income-tax Act, 1961, the following is the position: -
- For the Non-resident HUF assessees only if the income is received or deemed to be received in India by or on behalf of I IUF or if the. income accrues or arises or is deemed to accrue or arise in India during the previous year is liable to be assessed under the Income-tax Act, 1961. If the income accrues or arises outside the Country or if it is received outside the country, such income is not liable to be taxed in the hands of HUF assessees in India.
- If the IIUF is NOR, only the following type of income is taxable in India:
- Income is received or deemed to be received in India.
- Income is accrued or deemed to be accrued in India.
- Income which accrues or arises outside India from a business which is being carried on by HUF from a place within India.
- If the HUF is resident, in addition to the above income, income which accrues or arises to HUF outside India during the relevant previous year is also taxable.
After determining the residential status as above, it is better to refer to the Double Taxation Avoidance Treaty between India and the respective Country of which the HUF is tax resident to derive the correct tax liability as applicable to the HUF assessee.
RESIDENTIAL STATUS UNDER THE WEALTH-TAX ACT, 1957
It has been provided in the Wealth-tax Act, 1957 that the Status which the 1-IUF in any previous year enjoys for the purpose of Income-tax Act, 1957 shall also be the status for the purposes of Wealth-tax Act, 1957.
In case of a Resident HUF under the Wealth-tax Act, 1957 all the assets wherever located throughout the word and which are ‘not exempted assets as per the Wealth-tax Act, 1957 are to be taken in the net wealth for the purposes of calculation of Net wealth. However, in case of NonResident and NOR HUFs, the assets which are located outside the country are not liable to be included in the Net wealth for the purposes of calculation of Net wealth.