Residential Status and Tax Incidence

Question 1

Residential status –General norms

Answer 1

Section 6(5) - If a person is resident in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income. V.VR.N.M Subbayya Chettiar v. CIT – the Supreme Court held that section 6(2), makes a presumption that Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them. However, the burden of proving that an individual or a company is resident in India lies on the Dept – Moosa S Madha & Adam S Madha v. CIT

Question 2

Who is resident and ordinarily resident in India?

Answer 2

He must satisfy at least one of the basic conditions. At the same time, he should satisfy the 2 additional conditions.

Question 3

What are the 2 basic conditions?

Answer 3

Present for at least 182 days in India during the previous year 20011 – 2012 Present in India for at least 60 days during the previous year 2011 – 2012 and 365 days during 4 years immediately preceding the previous year.

Question 4

What are the 2 additional conditions?

Answer 4

Resident in India at least 2/10 years immediately preceding the previous year. Present in India for at least 730 days during 7 years immediately preceding the previous year.

Question 5

What are the 2 special cases mentioned in which basic condition 2 this not relevant?

Answer 5

Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian ship. Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous year.

Question 6

What are the special points to be remembered in the case of special case one?

Answer 6

1. In case of British Gas India Private Ltd – the individual need not be an unemployed person. 2. The individual may be employed in India and leave India during the previous year on a foreign assignment of his employer company.

Question 7

Who is the person of Indian origin?

Answer 7

A person is deemed to be of Indian origin if he , or either of his parents, or any of his grandparents, was born in undivided India. It may be noted that grandparents include both maternal and paternal grandparents.

Question 8

What are the other points to be remembered?

Answer 8

Stay in territorial waters should be treated as presence in India for the purpose of this section - Baryard Brown vs. Burt If a person is present in India, for a part of a day, the calculation should be made on the basis of hours. A total of 24 hours should be counted as a day. If data is not available in terms of hours, then the date on which he enters India as well as the day on which he leaves India, should be taken into account as stay in India.

Question 9

When is a Hindu undivided family considered a resident?

Answer 9

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

Question 10

Annamalai Chettiar vs. ITO

Answer 10

The mere fact that (i) the family has a house in India, where some of its members reside or (ii) the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family, unless the decision’s concerning the affairs of the family are taken at that place. (i) The mere fact of the absence of the karta from India does not make the family non-resident.

Question 11

When he is the resident Hindu undivided family ordinarily resident in India?

Answer 11

A resident Hindu undivided family is ordinarily resident in India the karta or manager of the family (including successive karta) satisfies the 2 additional conditions for individuals as laid down by section 6 (6) (b).

Question 12

Hindu undivided family is carrying on business outside India. A member comes to India to start a partnership business in India. Capital for this business contributed by the member comes from the Hindu undivided family. The assessing officer wants to treat the family as resident in India because its members are partners in the firm financed out of family funds. Is the assessing officer correct?

Answer 12

CIT vs. Nandlal Gandalal – the Hindu undivided family can exercise no control over the firm in which its members are partners even though the capital contributed by members were found to have come from the family. The partnerships is between members individually and other partners and not between the family and other partners. Thus control and management over the firms business lies with the individual members and not the hindu undivided family. The AO is thus not justified in treating the HUF as resident in India.

Question 13

When is a firm/AOP considered a resident?

Answer 13

The firm/AOP is said to be resident in India if control and management of its affairs is wholly or partly situated in India (section 6(2)).

Question 14

What is control and management?

Answer 14

Control and management mean de facto control and management and not merely the right to control and manage.

Question 15

Who controls and manages an AOP?

Answer 15

Principal officer.

Question 16

Where is control and management situated?

Answer 16

Control and management is situated where the head, the seat and the directing power are situated. In the case of a firm, if the partners are resident in India, the presumption is that the firm is resident in India. But this presumption can be rebutted by showing that the control and management is situated wholly outside India. The onus of proof is on the assessee.

Question 17

How is the residential status of a company determined?

Answer 17

An Indian company is always resident in India. A foreign company is resident in India only if, during the PY, it’s C&M is situated wholly in India(section6(3)).

Question 18

What are the important points to be remembered for determining the residential status of companies?

Answer 18

1. Unit Construction Co Ltd. Vs. Bullock a. Control is not necessarily situated in the country in which a company is registered. b. Under tax laws a company may have more than one residence. The mere fact that the company also resident in a foreign country will not displace its residence in India. 2. Vodafone International Holdings B.V. v. Union of India a. The mere fact that the parent company exercises its influence as shareholder on its subsidiaries does not imply that the subsidiaries are to be deemed residents of the state in which the parent company resides. 3. Narottam Pereira Lts. V. CIT a. C&M of a companies affairs are situated where the meetings of the board of directors are held. b. C&M means central C&M and not carrying on of day to day business by servants, employees and agents.

Question 19

When is “every other person” considered a resident?

Answer 19

The “every other person” is said to be resident in India if control and management of its affairs is wholly or partly situated in India.(section6(4)).

Question 20

Receipt vs. remittance case law?

Answer 20

The “receipt” of income refers to the first occassion when the recepient gets the money under his control. Once the money is received as income, any remittance or teansmission of the amount to another place does not result in receipt at the other place. - Kesav Mills Ltd. vs. CIT An assessee, after receiving money o/s India may remit the money to India. Same applies if an agent of the assessee (e.g. a bank) receives the money o/s India and remits to India. The same income cannot be recieved by the same person twice, once o/s India and once within India.

Question 21

What does the act enumerate as income deemed to be received in India?

Answer 21

1. Income in excess of 9.5% to the credit of an employee in the case of a recognized provident fund. 2. Contribution in excess of 12% of salary in the case of a recognized provident fund. 3. Transfer balance. 4. Contribution made by the central government or any other employer to the a/c of an employee under a pension scheme notified u/s 80CCD 5. TDS 6. Deemed profit u/s 41.

Question 22

Receipt of Income by agent case law?

Answer 22

CIT v. P.M. Rathod & Co. 1. Goods sent by VPP - income is received when it is collected by the Post Office. 2. Goods sent by railway - income is received when it is paid to the bank for collecting the railway receipt.

Question 23

Receipt of income in case of advance money (case law)?

Answer 23

36.6 Receipt of income in the case of advance money - In CIT v. Mysore Chromite Ltd 1955. The Madras branch of Eastern Bank Ltd. used to advance to the assessee, in Madras, 80 per cent of the amount of provisional invoice consigned by the assessee and sale proceeds were received from the foreign buyers on behalf of the asscssce by Eastern Bank Ltd. in London, which adjusted against the sale consideration. The Supreme Court held that the entire price was received in London. The payrnent of 80 per cent of the amount of provisional invoice by the Madras branch of Eastern Bank Ltd, was not a payment on account of price, but was an advance made them to their own customer on security of goods covered by the bill of lading. The Court further observed that the price was first received by the Eastern Bank Ltd. London, on behalf of the assessee. Accordingly the Court held that the entire price was received outside India.

Question 24

Receipt in the case of sale by commission agent and consignment agent (case law)?

Answer 24

1. Commission agent - CIT v.S.K.F Ball Bearing Co. Ltd.
2. Consignment agent - Turner Morrison & co. Ltd. v. CIT

In the cases above, sale proceeds were received in India by the commission agent and the consignment agent on behalf of the foreign seller. It was held that the profits and income from the sale was received in India.

Question 25

Receipt by cheque (case law)?

Answer 25

Raja Mohan Raja Bahadur v. CIT - date of receipt is the date the cheque is received and not the date when the cheque is encashed. This applicable even when the cheque was accepted conditionally, provided that the cheque was not later dishonoured.

Question 26

Posting of cheques (case law)?

Answer 26

Azamjahi Mills ltd. v CIT

1. There is no express or implied agreement between the creditor and debtor - post office is not an agent of the creditor - receipt is at the place where the cheque is delivered to the creditor.
2. There is express or implied agreement between the creditor and debtor - post office is an agent of the creditor -receipt is at the place where the cheque is posted.

Question 27

When sale proceeds are received in kind - immovable property, movable property and shares (case law)?

Answer 27

Immovable property - sale proceeds are considered to be received on the date when conveyance is executed - CIT v. kameshwar Singh

Movebale property - sale proceeds are considered to be received on the date when the movable property is received.

Shares - sale proceeds are considered to be received on the date when the shares are alloted - Gold Coast Selection Trust Ltd. v. Humphrey

Question 28

Where does income accrue in the case of -

1. Sale of goods
2. Selling agents commission
3. Commission payable for other services - e.g. Managing director,
4. Interest
5. Dividends
6. Share of profit from a resident firm
7. Forward contract

Answer 28

1. The place where property in goods passes decides accrual of profit in the case of sale of goods.
   
   1. CIT v. Mysore Chromite Ltd. - where seller retains control over the goods until destination and the property in goods only passes at the destination (i.e. o/s India), the profits arise o/s India.
   2. Place of contract of sale and place of sale are different and profits should be apportioned
   3. Ascertained goods - in the case of specific goods in a deliverable state, whose sale is unconditional the property in the goods passes to the buyer at the place where the contract of sale is made.
   4. Unascertained goods - The place where the property in the goods passes needs to be determined based on agreement between the buyer and the seller, and where there is no such agreement, based on the sale of goods act.
2. Selling agent’s commission accrues at the place where sales are effected. If place of sale and place of contract of sale are different places, then the commission needs to be apportioned.
3. Commission payable for other services accrues at the place where services are rendered
4. Interest accrues where money is lent. Place where the money came from and the place where the money is used are not relevant.
5. Dividends
   
   1. Non-Indian company - at the place where register of members is kept.
   2. Indian company - Deemed to accrue in India by virtue of section 9(1)(iv)
6. Share of profit from a resident firm arises in India
7. At the place where the contract is made - Rupajee Ratnachand v.CIT

Question 29

Elaborate on the below in the context of accrual of income.

Accrual should be unconditional.

Income is said to accrue when it is due

It is incorrect to state that profits do not accrue until actualy computed

If income is taxable at the time of accrual

Composite business

Answer 29

1. Accrual should be unconditional. Where it is dependant on a contingency, it does not accure until the contingency happens.
2. Income is said to accrue when it is due - posponement of payment does not have a bearing on accrual and a mere claim to a profit is not sufficient to make the profit accrue.
3. It is incorrect to state that profits do not accrue until actualy computed - Profits accrue if there is a right to receive. Unless there is a right to profits, there is not accrual of profits.
4. If income is taxable at the time of accrual, the AO cannot ignore this fact and choose to tax the income in another year based on receipt.
5. If the assessee carries on composite business (e.g. manufacturing, selling the goods manufactured, exporting goods and importing), the profits need to be apportioned between the businesses based on well established accounting principles. Profits apportioned to manufacture will be deemed to accrue in the place of manufacure, profits arising from sales, at the place of sale, profits from export-import, from the place where this business is conducted.