Module- IV

RESIDENTIAL STATUS AND TAX INCIDENCE

INTRODUCTION

Tax incidence on an assessee depends on his residential status. For instance, whether an
income, accrued to an individual outside India, is taxable in India depends upon the
residential status of the individual in India. Similarly, whether an income earned by a
foreign national in India (or outside India) is taxable in India depends on the residential
status of the individual, rather than on his citizenship. Therefore, the determination of the
residential status of a person is very significant in order to find out his tax liability.

CONCEPT OF RESIDENTIAL STATUS

The following norms one has to keep in mind while deciding the residential status of an
assessee:

1. Different taxable entities - All taxable entities are divided in the following categories
for the purpose of determining residential status:

a. An individual;
b. A Hindu undivided family;
c. A firm or an association of persons;
d. A joint stock company; and
e. Every other person.

2. Different residential status - An assessee is either: (a) resident in India, or (b) non-
resident in India.

An individual and a Hindu undivided family can either be:

a. resident and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or
c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company
and every other person) can either be:
a. resident in India; or
b. non-resident in India.

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The table given below highlights these points,

3. Residential status for each previous year - Residential status of an assessee is to be

determined in respect of each previous year as it may vary from previous year to previous
year.

4. Different residential status for different assessment years - An assessee may enjoy
different residential status for different assessment years. For instance, an individual who
has been regularly assessed as resident and ordinarily resident has to be treated as non-
resident in a particular assessment year if he satisfies none of the conditions of section
6(1).

5. Resident in India and abroad - It is not necessary that a person, who is “resident” in
India, cannot become “resident” in any other country for the same assessment year. A
person may be resident in two (or more) countries at the same time. It is, therefore, not
necessary that a person who is resident in India will be non-resident in all other countries
for the same assessment year.

RESIDENTIAL STATUS OF AN INDIVIDUAL

As per section 6, 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.

RESIDENT AND ORDINARILY RESIDENT

As per section 6(1), in order to find out whether an individual is “resident and ordinarily
resident” in India, one has to proceed as follows—

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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—

Note: In the following two cases, an individual needs to be present in India for a
minimum of 182 days or more in order to become resident in India:

1. An Indian citizen who leaves India during the previous year for the purpose of taking
employment outside India or an Indian citizen leaving India during the previous year as a
member of the crew of an Indian ship.

2. An Indian citizen or a person of Indian origin who comes on visit to India during the
previous year (a person is said to be of Indian origin if either he or any of his parents or
any of his grand parents was born in undivided India).

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 —

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 [i.e., (a) or (b)] and the two additional
conditions [i.e., (i) and (ii)].

It will be worthwhile to note the following propositions:

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1. It is not essential that the stay should be at the same place. It is equally not necessary
that the stay should be continuous. Similarly, the place of stay or the purpose of stay is
not material.

2. 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.

If, however, data 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.

RESIDENT BUT NOT ORDINARILY RESIDENT

As per section 6(1), an individual who satisfies at least one of the basic conditions [i.e.,
condition (a) or (b) mentioned above but does not satisfy the two additional conditions
[i.e., conditions (i) and (ii) mentioned above , is treated as a resident but not ordinarily
resident in India. In other words, an individual becomes resident but not ordinarily
resident in India in any of the following circumstances:

Read Para as ‘above mentioned’

NON-RESIDENT
An individual is a non-resident in India if he satisfies none of the basic conditions [i.e.,
condition (a) or (b) of above]. In the case of non-resident, additional conditions [i.e., (i)
and (ii) of Para 12.1-2] are not relevant.

Illustration :

X left India for the first time on May 20, 2003. During the financial year 2005-06, he
came to India once on May 27 for a period of 53 days.
Determine his residential status for the assessment year 2006-07.

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Since X comes to India only for 53 days in the previous year 2005-06, he does not satisfy
any of the basic conditions laid down in section 6(1). He is, therefore, nonresident in
India for the assessment year 2006-07.

Illustration
X comes to India, for the first time, on April 16, 2003. During his stay in India up to
October 5, 2005, he stays at Delhi up to April 10, 2005 and thereafter remains in Chennai
till his departure from India. Determine his residential status for the assessment year
2006-07.
During the previous year 2005-06, X was in India for 188 days (i.e., April 2005 :
30 days ; May 2005 : 31 days; June 2005 : 30 days ; July 2005 : 31 days ; August 2005 :
31 days ; September 2005 : 30 days and October 2005 : 5 days).

He is in India for more than 182 days during the previous year and, thus, he satisfies
condition (a) mentioned in above. Consequently, he becomes resident in
India. A resident individual is either ordinarily resident or not ordinarily resident.
To determine whether X is ordinarily resident or not, one has to test the two additional
conditions as laid down by section 6(6) (a) [see conditions (i) and (ii), above ].
Condition (i) - This condition requires that X should be resident in India in at least 2
years out of 10 years preceding the relevant previous year. X is resident in India for the
previous years 2003-04 and 2004-05.

Condition (ii) - This condition requires that X should be in India for at least 730 days
during 7 years immediately preceding the previous year. X is in India from April 16,
2003 to March 31, 2005 (i.e., 716 days).

X satisfies one of the basic conditions and only one of the two additional conditions. X is,
therefore, resident but not ordinarily resident in India for the assessment year 2006-07.

Note: In order to determine the residential status, it is not necessary that a person should
continuously stay in India at the same place. Therefore, the information that X is in Delhi
up to April 10, 2005 is irrelevant.

Check Your Progress

Activity A - X, a foreign citizen comes to India, for the first time in the last 30 years on
March 20, 2005. On September 1, 2005, he leaves India for Nepal on a business trip. He
comes back on February 26, 2006.
Determine the residential status of X for the assessment year 2006-07.

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Activity B - X, an Italian citizen, comes to India for the first time (after 20 years)
on May 28, 2005. Determine his residential status for the assessment year 2006- 07.
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RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY

As per section 6(2), 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.

HUF- Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and management of its
affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in
India if control and management of its affairs is wholly situated outside India.

Control and management means de facto control and management and not merely the
right to control or manage. Control and management is situated at a place where the head,
the seat and the directing power are situated.

HUF- When ordinarily resident in India

A resident Hindu undivided family is an ordinarily resident in India if the karta or

manager of the family (including successive kartas) satisfies the following two additional
conditions as laid down by section 6(6)(b):
Additional condition (i) Karta has been resident in India in at least 2 out of 10
previous years [according to the basic condition mentioned above ] immediately
preceding the relevant previous year

Additional condition (ii) Karta has been present in India for a period of 730 days or more
during 7 years immediately preceding the previous Year

If the 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.

RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS

As per section 6(2), 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.

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RESIDENTIAL STATUS OF A COMPANY

As per section 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. 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.

RESIDENTIAL STATUS OF EVERY OTHER PERSON

As per section 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.

RESIDENTIAL STATUS AND INCIDENCE OF TAX

As per section 5, incidence of tax on a taxpayer depends on his residential status

and also on the place and time of accrual or receipt of income.

INDIAN AND FOREIGN INCOME

In order to understand the relationship between residential status and tax liability, one
must understand the meaning of “Indian income” and “foreign income”.

“INDIAN INCOME” - Any of the following three is an Indian income —

1. If income is received (or deemed to be received) in India during the previous
year and at the same time it accrues (or arises or is deemed to accrue or arise) in India
during the previous year.
2. If income is received (or deemed to be received) in India during the previous
year but it accrues (or arises) outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or
arises or is deemed to accrue or arise) in India during the previous year.

FOREIGN INCOME - If the following two conditions are satisfied, then such
income is “foreign income” —
a. Income is not received (or not deemed to be received) in India; and
b. Income does not accrue or arise (or does not deemed to accrue or arise) in
India.

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INCIDENCE OF TAX FOR DIFFERENT TAXPAYERS

The following broad conclusions can be drawn —

1. Indian income - Indian] is always taxable in India irrespective of the residential status
of the taxpayer.
2. Foreign income - Foreign income is taxable in the hands of resident (in case of a firm,
an association of persons, a joint stock company and every other person) or resident and
ordinarily resident (in case of an individual and a Hindu undivided family) in India.
Foreign income is not taxable in the hands of non-resident in India.

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In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable
only if it is (a) business income and business is controlled from India, or (b) professional
income from a profession which is set up in India. In any other case, foreign income is
not taxable in the hands of resident but not ordinarily resident taxpayers.

Activity C: Determine whether the following is true or false:

1. The business income received by X Ltd. an Indian company in New York is foreign
income of X.

2. The dividend received from a foreign company in India is Indian company.

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MEANING OF RECEIPT OF INCOME

Income received in India is taxable in all cases irrespective of the residential status of an
assessee. The following points are worth mentioning in this respect:

RECEIPT vs. REMITTANCE

The “receipt” of income refers to the first occasion when the recipient gets the money
under his control. Once an amount is received as income, any remittance
or transmission of the amount to another place does not result in “receipt” at the other
place.

ACTUAL RECEIPT vs. DEEMED RECEIPT

It is not necessary that an income should be actually received in India in order to attract
tax liability. An income deemed to be received in India in the previous year is also
included in the taxable income of the assessee. The Act enumerates the following as
income deemed to be received in India:

 Interest credited to recognized provident fund account of an employee in excess

of 9.5 per cent.
 Excess contribution of employer in the case of recognized provident fund (i.e., the
amount contributed in excess of 12 per cent of salary).
 Transfer balance.
 Contribution by the Central Government to the account of an employee under a
pension scheme referred to in section 80CCD.
 Tax deducted at source.
 Deemed profit under section 41.

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MEANING OF ACCRUAL OF INCOME

Income accrued in India is chargeable to tax in all cases irrespective of residential status
of an assessee. The words “accrue” and “arise” are used in contradistinction to the word
“receive”. Income is said to be received when it reaches the assessee; when the right to
receive the income becomes vested in the assessee, it is said to accrue or arise.

MEANING OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

In some cases, income is deemed to accrue or arise in India under Section 9 Even
though it may actually accrue or arise outside India. Section 9 applies to all assessees
irrespective of their residential status and place of business. The categories of income
which are deemed to accrue or arise in India are as under:

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Illustration - For the assessment year 2006-07 (previous year 2005-06), X is employed
in India and receives Rs. 24,000 as salary. His income from other sources includes:

Dividend received in London on June 3, 2005: Rs. 31,000 from a foreign

company; share of profit received in London on December 15, 2005 from a
business situated in Sri Lanka but controlled from India:
Rs. 60,000; remittance from London on January 15, 2006 out of past untaxed profit of
2003-04 earned and received there: Rs. 30,000 and interest earned and received in India
on May 11, 2006: Rs. 76,000. Find out his gross total income, if he is (a) resident and
ordinarily resident, (b) resident but not ordinarily resident, and (c) non-resident for the
assessment year 2006-07.

If X is resident and ordinarily resident, his gross total income will be Rs. 1, 15,000 (i.e.,
Rs. 24,000 + Rs. 31,000 + Rs. 60,000). If X is resident but not ordinarily resident, his
gross total income will work out to be Rs. 84,000 (i.e., Rs. 24,000 + Rs. 60,000). If X is
non-resident, his gross total income will come to Rs. 24,000.

Notes:
1. The remittance from London of Rs. 30,000 is not taxable in the previous year 2005-06
because it does not amount to “receipt” of income.
2. Although the interest of Rs. 76,000 earned and received in India is taxable, it is not
included in the total income of the assessment year 2006-07, as it is not earned or
received in the previous year 2005-06. It will, therefore, be included in the total income
of X for the assessment year 2007-08.

SELF ASSESSMENT QUESTIONS

1. How is residential status determined?

2. What are the different categories of residential status? Explain how these categories are
determined and affect the tax liability of an assessee?
3. “The incidence of income-tax depends upon the residential status of an assessee”.
Discuss fully.
4. Write short notes on the following:
a. Income received in India
b. Income deemed to accrue or arise in India
c. Control and management of a business
5. X, an Indian citizen, leaves India on May 22, 2005 for vacation to Uganda and returns
on April 9, 2006. Determine the residential status of X for the assessment year 2006-07?
6. X, a foreign citizen, visits India since 1985 every year for a period of 100 days.
Determine the residential status of X for the assessment year 2006-07?

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