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RESIDENTIAL STATUS

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of a person who is a resident, not ordinarily residents and non residents. However, it is important to firstly determine the residential status of the assessee because the scope of total  income varies with it.

Section 6(1) lays down the test for 'Resident',which should be determined in each previous year.The Individuals and HUF are divided into 3 categories:

(i)Resident(resident and ordinarily resident)

(ii)Resident but not ordinarily resident

(iii)Non Resident

All other assessee are either Resident or Non resident.

Test for Individual- Resident

For being a resident, an individual must satisfy either of the following two conditions:

(a)He must be physically present in India for 182 days or more; or

(b)He is physically present in India for 60 days or more during the previous year and for 365 days or more during the four years immediately preceeding the previous years.

For this purpose, "India" means the territory of India, its territorial waters, seabed and subsoil underlying such waters, exclusive economic zone and the air space above its territory.

The aforesaid rule of residence is subject to exceptions:

1. Indian citizen who leaves India as a member of a crew of an Indian ship,or for employment outside India.

2. Indian citizen being outside India comes to visit India.

In the above two cases, the period of 60 days shall be extended to 182 days.

3. Indian citizen and a member of the crew of a foreign bound ship leaving India the period of stay in respect of such voyage shall not include:

• Period beginning in respect of joining the ship, and

• Period ending in respect of signing off

Even if a man is in India, against his will, he will be deemed to be a resident if he satisfies condition of section 6.

Important Judicial Precedents & Board Circulars:

1. Indian crew members of a foreign going Indian ship, would be NRI, if they are on board such ship outside Indian territorial waters for 182 days or more.Accordingly, the seaman will be charged for earnings received in India or earnings for the period when they are working within Indian waters on coastal ships.

2. For checking the residential status of an assessee, both conditions of section 6 should be considered. Each of the two tests require physical presence in India.

   3. Merely because the contract was entered into in India, cannot be a basis to conclude whether employee was employed in India or outside India.The terms of the contract, nature of work,and other relevant facts should be considered.

    4. For calculating period of stay in India, both the day of arrival and departure have to be taken into account.

Test for Individual- Resident & Ordinarily Resident

An individual is classified as 'Resident and Ordinarily Resident' when in addition to any of the conditions in mentioned in section 6(1), both the following conditions are fulfilled:

1. He is a resident of India for at least two years out of ten years preceeding the previous year.

2. He is in India for at least 730 days out of seven years immediately preceeding the previous year.

If an individual satisfies only one of the above condition in addition to the conditions specified in section 6(1), he will be categorised as resident but not ordinarily resident.

Test for HUF/Firm/AOP- Resident

A HUF,firm, AOP is resident in India if the control and management of its affairs is situated wholly or partly in India. But if the control and management is situated wholly outside India,then it is to regarded as non-resident.

Test for HUF- Not Ordinarily Resident

In order to determine whether a HUF is 'resident but not ordinary resident', the residential status of the Karta of the family has to be considered.

Test for Company

A company is said to be a resident in India;if

1. it is an Indian company or,

2. its place of effective management (PoEM)is in India.

 Thus, every Indian company is deemed to be a resident even if its control and management is wholly or partly abroad while a non-Indian company is resident only if its POEM is in India.

POEM is the place where key management and commercial decisions necessary for the conduct of business is made.

Process of PoEM depends upon whether the company is engaged in active business outside India.

Active business outside India

A company is said to be engaged in active business outside India if

• Passive income is not more than 50% of its total income, and

• Less than 50% of its total assets are situated in India, and

• Less than 50% of total number of employees are resident in India.

• Payroll expenses on such employees is less than 50% of its payroll expenses.

Important Points-POeM

• Income by way of interest shall not be considered as passive income in case of a company engaged in the business of banking or public financial institution.

• If a company is engaged in active business outside India , PoeM will be outside India if majority of board meetings are held outside India.

• Where powers of management are exercised by holding company/other person resident in India ,PoeM shall be in India.

As mentioned in the beginning, Section 5 explains what income is to be included for calculation of tax, along with a the conditions mentioned below. 

According to the provisions of the act, income from previous years, of an individual who is a resident of India includes all the income;

1. Received or deemed to be received in India in the previous year by the individual or on his/her behalf.

2. Accrued or raised or deemed to be accrued during the period of such year in India.

3. Received or accrued or raised or deemed to be received/accrued outside of India.

Provided that, in case a person is non-ordinarily resident of India according to section 6(6), the income which is received or deemed to be received outside India shall not be included, unless income of that business is managed or set up in India. In case of a Non-Resident of India, income from the previous year includes;

1. Received or deemed to be received in India in the previous year by the individual or on his/her behalf.

2. Accrued or raised or deemed to be accrued/raised in India during such period.

Thus, it can be seen that income of an individual shall be determined depending upon two factors. They are:

1. Scope of Income u/s 5

2. Residential status u/s 6