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Basis of Charge (Residential Status)

  1. Introduction

  2. Residential Status of an Individual

  3. Residential Status of H.U.F., Firm, A.O.P.

  4. Residential Status of a ‘Company’

  5. Residential Status of ‘Every’ other Person
 

3.0.      INTRODUCTION

All Taxable entities are divided in the following categories for the purpose of determining Residential Status :

  1. an individual
  2. a Hindu Undivided Family ( HUF)
  3. a Firm or an Association of Person (AOP)
  4. a joint stock company ; and
  5. every other person

Tax is levied on total income of assessee. Under the provisions of Income Tax Act, 1961 the total income on each person is based upon his Residential Status. Sec. 6 of the Act divides the assessable persons into Three Categories :

(i)  Resident ;    (ii)  Resident but Not ordinarily Resident ; and (iii)  Non-Resident.

Residential Status 

The concept of Residential Status has nothing to do with nationality or domestic of a person. An Indian, who is a citizen of India can be non-resident for Income Tax  purposes, whereas an American who is a citizen of America can be Resident of India for Income Tax purposes. Residential Status of a person depends upon the territorial connections of the person with this country , i.e. for how many days he has physically stayed in India.

The Residential Status of different types of persons is determined differently . Similarly, the Residential Status of the Assessee is to be determined each year with reference to the “Previous Year”. The Residential Status of the Assessee may change from Year to Year. What is essential is the Status during the Previous year and not in the assessment year.

3.1       RESIDENTIAL STATUS OF AN ‘INDIVIDUAL’

An individual may be …

(a) Resident and ordinarily Resident in India
(b)  Resident and not-ordinarily Resident in India;           
(c)  non-resident in India.

3.1.(a). Resident and Ordinary Resident [ Sec. 6 (1), 6(6)(a) ]

To determine the Residential Status of an Individual, Sec. 6 (1) prescribes Two Test. An individual who fulfils any one of the following Two Tests is called Resident under the provisions of this Act. These Tests are :

Test No. 1.      Stay in India for 182 days or more.

If an individual has to become Resend of India during any previous year, his / her personal stay in India during that year is a must although the number of days of stay differs in the two tests. It means that if an individual does not stay in India at all in any previous year , he cannot be Resident of India in that year. Stay in India means that the individual should have stayed in India territory and anywhere ( cities, villages, hills, even Indian territory waters ) for such number of days.

The period of 182 days need not be at a stretch. But physical presence for an aggregate of 182 days in the relevant previous is enough. The Status of Resident is not linked with any particular place or town or house.

The onus to prove the number of days of stay in India lies on the assessee. It is for him to prove, if he desires to be taxed as non-resident or not ordinarily resident.

Test No. 2.      Presence for 365 days during the Four preceding Previous Year and 60 days or more in that relevant Previous Year.  

A person may be frequent visitor to India. In his case, the residential status will be determined on the basis of his presence in India for 365 days in four years immediately preceding the relevant Previous year. Along with this his presence for 60 days during the relevant previous year is another  essential conditions to be fulfilled. The purpose, object or reason of visit to and stay in India has nothing to do with the determination of residential status.

Explanations :

For Indian Citizen going abroad on a Job or as a member of crew of an Indian ship [Explanation (a) ]

In case of Indian citizen who is going outside Indian for a  Job and his contact for such employment outside India has been approved by the Central Government or he is a member of crew of an Indian Ship, Test (a) u/s 6(1) remains same but in Test (b) words ‘60 days’ have been replaced to 182 days.

For Indian Citizens and Persons of Indian Origin  [Explanation (b) ]
For such person Test (a) remains the same but in Test (b) ) words ‘60 days’ have been replaced to 182 days.

( A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in India or undivided India .)

3.1.(b)  Resident but not Ordinarily Resident  [ Section 6(6) ]

An individual who is resident u/s 6(1) can claim the beneficial status of N.O.R. if he can prove that :

            (a) He was non resident in India for 9 previous years out of 10 previous years preceding the relevant previous year.

OR

(b) He was in India for a period or periods aggregating in all to 729 days or less during seven previous years preceeding the relevant previous year.

An individual who is Resident u/s 6(1) can be subdivided into two categories :

(a) Ordinary Resident ; or (b) Not ordinarily Resident

Ordinary Resident

Resident But Not Ordinarily Resident

(a) He was in India for a period or periods totaling in all to 182 days or more during relevant previous year.

OR

(b) He was in India for a period or periods totaling in all to 60 days or more during relevant previous year and 365 days or more during four previous years preceding the relevant previous year.

And

Must be resident of India (by fulfilling at least one of two above mentioned tests) in at least 2 out of 10 previous years preceding the relevant previous year.

And

Must have stayed in India for 730 days or more during 7 previous years preceding the relevant previous year.

(a)  He was in India for a period or periods totaling in all to 182 days or more during relevant previous year

OR

(b) He was in India for a period or periods totaling in all to 60 days or more during relevant previous. year and 365 days or more during four previous years preceding the relevant previous year.

And

Was non-resident in India in 9 or 10 previous years out of 10 previous years preceding the relevant previous year.


OR

Was in India for less than 730 days during 7 previous years preceding the relevant previous year.

To Summarise

Ordinary Resident =  Satisfying any one of two conditions given u/s 6(1) + Satisfying both the additional conditions of Sec. 6(6)(a)&(b)

Not Ordinarily Resident =  Satisfying any one of the two conditions u/s 6(1) + Satisfying none or any one of the additional conditions

3.1.(c)  Non- Resident [ Sec. 2 (30) ]

Under Sec. 2(30) of the Income Tax Act, 1961 an assessee who does not fulfill any of the two conditions given in Sec. 6(1) (a) or (b) would be regarded as “ Non-Resident” assessee during he relevant previous year for all purposes of this Act.

Rule of Residence for an Individual in brief :
The following Table given below summarize the Rule of residence for the assessment year 2009-2010.

In the case of an Indian Citizen who leaves  India during the previous year for the purpose of employment (as a member of the crew of an Indian Ship)

In the case of an Indian Citizen or a person of Indian origin ( who is  abroad) who comes on a visit to India during the previous year.

In the case of an individual [other than that mentioned in column (1) and (2)]

( 1 )

( 2 )

( 3 )

(a.)  Presence of at least 182 days in India during the previous year 2008-2009
(b)  Non-functional

(a)  Presence of at least 182 days in India during the previous year 2008-2009.
(b)  Non-functional

(a)  Presence of at least 182 days in India during the previous year 2008-2009.
(b)  Presence of at least 60 days in India during the precious year 2008-2009 and 365 days during 4 years immediately preceding the relevant previous year (i.e., during April 1, 2004 and March 31, 2008.)

ADDITIONAL CONDITIONS AT A GLANCE

  • Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [ or must satisfy at least one o f the basic conditions, in 2 out of 10 immediately preceding previous years ( i.e. 1998-99 to 2007-08].

  • Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year ( i.e. during April 1, 2001 and March 31, 208.)
  

3.2       RESIDENTIAL STATUS OF ‘H.U.F.’ , ‘FIRM’ , ‘ A.O.P.’

Section 6(2) of the Act provides that status of these persons shall be determined as per Tests given below :
1.       Resident [ Sec. 6 (2) ]
It means that if a H.U.F. , FIRM, AOP is controlled from India even partially it will be Resident assessee.

The Control and management of affairs refers to the controlling and directing power, the Head and the Brain. It means that decision making power for vital affairs is situated in India. The control and management means de facto control and management and not merely the right to control or manage.

In case of a Firm, it is said that the control and management of firm is saturated at a place where partners meet to decide the affairs of the firm. If such place is outside India , it will be said that the control and management is outside India.

2.       Non- Resident [ Sec. 2 (30) ]


a H.U.F. , FIRM, AOP shall be Non-Resident if the control and management affairs is situated wholly outside India.

3.       Not Ordinarily Resident  [ Sec. 6 (6) b ]


H.U.F. will be ‘Not Ordinarily Resident’ if :

(i)         its manager (Karta) has not been resident in India in 9 out of 10 previous year preceding the relevant accounting year ; or

(ii)        the manage had not , during the 7 previous year preceding the relevant accounting year been present in India for a period or periods amounting in all to 730 days.
While determining the Residential Status of a Firm or HUF Is should be noted that Residential Status of Partners or co-parceners of a  HUF is of immaterial consideration. What is important to note is that from where the business is being controlled. There may be a situation where all the partners of a Firm are Resident in India but even then that Firm may be Non-Resident if its full control and management lies outside India.


3.3       RESIDENTIAL STATUS OF A ‘COMPANY’ [Sec.6(3)]

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. Conversely, a Foreign Company is treated as Non-Resident if, during the previous year, Control and Management of its affairs is either wholly or partially situated out of India.

The Table given below highlights the same proposition ---

 

Place of Control

Residential Status

An Indian company

A Company other than an Indian Company

Control and Management of the affairs of a company is situated : -

  • Wholly in India
  • Wholly outside India
  • Partly in Indian and partly outside India

 

Resident
Resident
Resident

 

Resident
Non- Resident
Non- Resident

Not-Ordinarily Resident- Not Possible – A company can never be “ Ordinarily” or “ not Ordinarily Resident” in India.

3.4       RESIDENTIAL STATUS OF ‘ EVERY OTHER PERSON’  [Sec.6(4)]

Every other person is resident in India if Control and Management of his affairs is, wholly or partly, situated within India during the relevant previous year.

On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.
 
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