A Close Analysis Of Section 6 Income Tax Act 1961

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

Project Report on

A CLOSE ANALYSIS OF SECTION 6 INCOME TAX ACT 1961

Subject:

Law Of Taxation

Submitted to:

Mr.Rana Navneet Roy

Submitted by:

Prashant Kerketta

(B.A.LL.B. (Hons.) 5th semester, Roll no. 119 Sec-B)

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 A Close Analysis Of Section 6 Income Tax Act 1961

Acknowledgements
On the completion of this project I find that there are many persons to whom I would like to
express my gratitude, since without their help and co-operation the success of this educative
endeavour would not have been possible. I welcome this opportunity to express my sincere
gratitude to my teacher and guide Mr. Rana Navneet Roy, who has been a constant source of
encouragement and guidance throughout the course of this work. I am grateful to the IT Staff for
providing all necessary facilities for carrying out this work. Thanks are also due to all members
of the Library staff for their help and assistance at all times. I am also grateful to all my friends
and colleagues for being helpful in their differences and for their constant support.

Prashant Kerketta
(Researcher)

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 A Close Analysis Of Section 6 Income Tax Act 1961

Objectives
 To discuss Section 6 Residence in India
 To study about Concept of Residence Under IT Act 1961
 To study Residential Status under the IT Act, 1961.

Research Methodology
 The methodology adopted in this research work is doctrinal and based on PRIMARY sources
like bare acts and SECONDARY sources of information like books, journals, articles etc.
This research work contains elaborated theoretical research, an overall study of the topic and
in depth and in depth web browsing.

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 A Close Analysis Of Section 6 Income Tax Act 1961

TABLE OF CONTENT

Acknowledgments……………………………………………………………….…...2

Objectives………………………………………………………………………..……3

Research methodology………………………………………………….………….....3

Table of Content……………………………………………………………..……,,,,,.4

Introduction…………………………………………………………………….…,,,,..5

Fundamental rules for determining residential status of an assessee…………….,.....7

Residential status …………………………………………………………………..…7

Resident and non-resident treatment for various entities…………………………....11

Conclusion……………………………………………………………………………14

Bibliography………………………………………………………………………….15

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 A Close Analysis Of Section 6 Income Tax Act 1961

INTRODUCTION

1) Residence in India For the purposes of this Act,-

An individual is said to be resident in India in any previous year,
(a) if he- is in India in that year for a period or periods amounting in all to one hundred and
eighty- two days or more; or
(c) having within the four years preceding that year been in India for a period or periods
amounting in all to three hundred and sixty- five days or more, is in India for a period or
periods amounting in all to sixty days or more in that year. Explanation.- In the case of
an individual,-
(a) being a citizen of India, who leaves India in any previous year as a member of the crew
of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act,
1958 (44 of 1958 ), or] for the purposes of employment outside India, the provisions of
subclause (c) shall apply in relation to that year as if for the words" sixty days",
occurring therein, the words" one hundred and eighty two days" had been substituted;
being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause
(e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the
provisions of sub- clause (c) shall apply in relation to that year as if for the words" sixty days"
occurring therein, the words one hundred and eighty- two days" had been substituted.

2) 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.
3) A company is said to be resident in India in any previous year, if-
i. it is an Indian company; or
ii. during that year, the control and management of its affairs is situated wholly in India.
4) Every other person is said to be resident in India in any previous year in every case, except
where during that year the control and management of his affairs is situated wholly outside
India.

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5) If a person is resident in India 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
relevant1 to the assessment year in respect of each of his other sources of income.
6) A person is said to be" not ordinarily resident" in India in any previous year if such person is-
(a) an individual who 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 thirty
days or more; or
(b) 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 thirty days or more.

CONCEPT OF “RESIDENCE” UNDER INCOME TAX ACT, 1961

In India, as in many other countries, the charge of income tax and the scope of taxable income
varies with the factor of residence. Thus, identification and classification of the residence of a
person is one of the first steps carried out in order to proceed with assessing the liability of an
individual. There are two categories of taxable entities viz. (1) residents and (2) non-residents.
Residents are further classified into two sub-categories (i) resident and ordinarily resident and
(ii) resident but not ordinarily resident. Section 6 of the Income Tax Act deals with residence.
This article aims to clarify and elucidate the concept of residence under the IT Act and to show
how there are different types of statuses applicable and consequently, different incidences of tax
liability on individuals respectively.
Tax incidence and imposition on an assessed is dependent on his residential status. For
example, whether an income, accrued to an individual out of India, is taxable in India is
dependent upon the residential status of an individual in India. Likewise, whether an income
secured by a foreign national in India (or out of India) is taxable in India is dependent on the

1. CIT v. K.S. Ratnaswamy [1980] 122 ITR 217 (SC)

2. http://www.incometaxindiapr.gov.in/incometaxindiacr/incometaxAct_index.jsp
3. CIT v. Dhanomal Kewalram Aswani [1949] 17 ITR 568

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residential status of an individual, rather than his citizenship. Consequently, the determination of
the residential status of the person is very important to ascertain his tax liability. One can
affirmatively conclude that taxation of the assessee is dependent on his residence. As a result, the
first question is always towards appropriate establishment of the residential status of an assessee.

In the case of the Resident, the entire income is taxable, oblivious to the fact that it is
earned in India or outside India. In the situation of a Non-resident, only the income earned in
India is taxed. There should be a basis for the government for taxing any income of an
indivudual. Indian Government has taken

conditions for levy of income-tax in India:

(1) Residence
(2) Source of Income
(3) Receipt of Income

For the charge of income-tax, Indian Government can tax the total income of Indian tax
residents; or the Indian sourced income & income earned in India of tax non-residents of India.

FUNDAMENTAL RULES FOR DETERMINING RESIDENTIAL STATUS

OF AN ASSESSEE

Section 63 lays down the tests of territorial correlation amounting for residence for all taxable
entities. Two different tests are provided for individuals, two for companies, and one for Hindu
undivided families, firms, associations of persons and other assessable units. The tests are mock -
staying for a day more or less may make a difference- but they make for exactitude and accuracy,
and they were held legitimate and inter vires under the 1922 Act4.

RESIDENTIAL STATUS

Three types of residential status are envisaged for an assessee under the Act. He may be-

1. Resident (also known as resident and ordinarily resident)

2. Non resident or not resident. 2

2
4. CWT v. P.R. Shanmugam [1985] 153 ITR 330

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3. Resident but not ordinarily resident (a category of residential status) only valid for
individuals and Hindu undivided families.

The residential status for the Income Tax Act is determined in section 6 as under:

1. An individual will be treated as a resident in India in any previous year if he fulfills any of
the following two conditions:
(a) he/she is in India in that year for period or periods amounting in all to 182 days or
more, or
(b) Having within the four years preceding that year been in India for a period or periods
amounting in all to 365 days or more, and has been in India for 60 days or more in
that year.
2. Under Explanation to section 6 (1) of the Income-tax Act, the residential status of an
individual who is rendering service outside India and who visits India during leave or
vacations in any previous year or an individual who is outside India and who comes on a visit
to India in any previous year will be determined as under :
(a) An Indian citizen who leaves India in any previous year for the purpose of
employment outside India or as a crew member of an Indian ship would be treated as
a resident in India if he stays in India in that year for 182 days or more Conversely, if
he stays in India for less than 182 days, he will be treated as non-resident for that year
and his foreign income would not attract tax liability.Further, w.e.f. 1st April, 1999, a
crew member will be treated as non-resident in India if he is on board such ship
outside the territorial water of India for 182 days or more during any year.
(b) An Indian citizen or a person of Indian origin who resides outside India and who
comes on a visit to India in any previous year will be treated as resident in India if he
stays in India in that year for 182 days or more Conversely, he will be treated as non-
resident if he stays in India in that year for less than 182 days.
3. An individual (whether Indian citizens or not) who is outside India and who comes on a visit
to India in any previous year will be treated as “non-resident” in India if he stays in India in
that previous year less than 182 days subject to the condition that during the preceding four

5. C.N. Townsend v. CIT [1974] 97 ITR 185

6. CIT v. V.E.K.R. Savumiamurthy [1946] 14 ITR 185

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previous years his stay in India does not amount to 365 days or more. An Individual who
fulfills any of the conditions mentioned in section 6(1) is treated as resident in India. But in
order to become an “ordinarily resident”, he must satisfy the following two conditions as laid
down under section 6(6) (a) of the Income-tax Act, 1961:
i. He should have been resident in India in nine out of the ten previous years preceding the
previous year in which he is resident within the meaning of section 6(1); and
ii. He should have been in India for a period or periods amounting in all to 730 days or
more during the seven years preceding that previous year. If he does not fulfill any of the
above conditions, he will be treated as “not ordinarily resident”.
4. An individual who does not satisfy both the conditions as mentioned above as laid down in
section 6 (1) will be treated as “non-resident” in that previous year.
5. A Hindu undivided family, firm or other association of persons will be treated as “non –
resident” in India in any previous year if the control and management of its affairs is situated
wholly outside India during that year.
6. A company will be treated as “non-resident” in India in any previous year if it is not an
Indian company and also the control and management of its affairs is not situated wholly in
India in that year.

The following essential rules must be kept in mind while determining the residential status:

 Residential status is established by each category of persons disjointedly e.g., there are
distinct set of rules for establishing the residential status of an individual and distinct
rules for companies etc.
 Residential status is always established for the previous year because one has to establish
the total income of the previous year only.
 Residential status of person is established for every previous year because it may change
to year to year. For example, A, who is resident of India in the previous year 2004-05,
may become a non-resident in the previous year 2005-06.
 If a person is resident in India in a previous year applicable to assessment year in respect
of any source of income, he shall considered to be resident in India in previous year
applicable to the assessment year with regard to each of his other source(s) of his income.

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 A person may be resident of more than a country in any previous year. 3

 Citizenship of a country and residential status of that country are disconnect concepts. An
individual may be an Indian national/citizen, but may not be a resident in India.
Conversely, a person may be a foreign national/citizen, but may be a resident in India.
 It is the obligation of the assessee to place all relevant facts before the assessing officer to
facilitate him to establish his exact residential status.

The tests of residence provided in Clause (1) for individuals are substitutes and not collective.
Each of the tests needs the personal attendance of assessee in India for the said period in the
duration of the accounting year. If the assessed is incessantly out of India during whole of a year,
even though, he may be, in the non-technical sense, normally resident in India.

The term ‘India’ means the geographical territories and the territorial waters of the
country, and does not involve Indian ships operating beyond the Indian territorial waters. Thus,
for counting the days, for which a person is in India, his stay in Indian ship abroad is not
considered. The Finance Act 1990 gave statutory recognition to this aspect with an amendment
to the explanation to Section 6(1) which ensured that the Indian seamen working on board an
Indian ship would be seen as resident in India for any year, only if the sojourn in India is for 182
days and more in that year.

A Hindu undivided family, firm or other association of persons are classified as residents
in India in any previous year in every case excluding where during that year the control and
administration of its affairs is entirely outside India. Additionally, the existence of one of the
partners in India who keep himself abreast with the affairs of the business will not comprise a
second centre of management in India. It has been constantly held by the Courts that just mere
presence of partners in India would not lead to a supposition that the running and supervision of
the firm had been exercised in India.

An Indian company is considered always to be resident in India, where it may have its business.

7. 3 Ram Kumar Dhanuka v. Union of India [2001] 252 ITR 205

8. Vijay Mallya v. Asstt. CIT [2003] 131 Taxman 477

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Additionally, if the company is not an Indian company, it shall be deal with as resident in
India in any previous year, if throughout that year, the control and running of its affairs are
positioned completely in India. Direction and administration is one thing but the carrying of
business operation of a company is quite another. By management of affairs means not running
and supervision of the daily affairs of the business performed through agents, employees and
servants. In interpreting the expression “control and management”, it is compulsory to keep in
mind the difference between doing of business and control and management of the business.
Business and the whole of it may be carried outside and yet, the control and management of the
business is entirely within India.

In case of non- companies’ entities such as firms and associations of persons, if throughout the
previous year, the control and management is located partially in India, they become resident in
India. In situations of non- Indian Companies, such part situation of control and management of
its affairs is not adequate to consider it a resident in India. This is the concept of “residence” as
envisaged in the Income Tax Act, 1961

As has been seen, foreign- earned income of the Indian residents becomes taxable in India.
Equally, foreign earned income of the non- residents are not taxable in India. Thus, a person will
always attempt to become a non- resident in India for the purpose of taxation. Consequently, it is
very imperative to appreciate when a person becomes resident in India. Likewise it’s vital to
recognize the conception of resident and not ordinarily resident in terms of Hindu undivided
family (HUFs) and companies under the Income Tax Act, 1961

RESIDENT AND NON-RESIDENT TREATMENT FOR VARIOUS

ENTITIES

 A Hindu Undivided Family, firm or other association of persons is said to be resident in

India if the control and management of its affairs is in India, either partly, or wholly. It
will be a non-resident only when its affairs are wholly outside India. It is a non-resident if
its manager is outside India for 9 out of 10 years or has not during the 7 previous years
been in India for a period of, or periods amounting in all to, 729 days or less.

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 A company is said to be resident if its affairs are managed partly or wholly in India and
non-resident only if all its affairs are managed outside India. Hence, every company
registered in India is a resident.
 Control and management of a company can be decided on the factor of where the
director's meetings are held, but not on the share-holder's meeting place.
 Residency status of the company can change depending on from where its
operations are held in the previous year.
 In case of 'every other person', the person is resident in India if a previous year
relevant to an assessment year in respect of any source of income. He is deemed
to be resident of India in the previous year relevant to the assessment year in
respect of his other sources of income.
 The burden of proof about the status of resident or non-resident lies on the assessee only.

Explanation

In the case of an individual

i. being a citizen of India, who leaves India in any previous year [as a member of the crew of
an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958
(44 of 1958), or] for the purposes of employment outside India, the provisions of sub-
clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring
therein, the words “one hundred and eighty-two days” had been substituted ;
ii. being a citizen of India, or a person of Indian origin within the meaning of Explanation to
clause (e) of section 115C, who, being outside India, comes on a visit to India in any
previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for
the words “sixty days”, occurring therein, the words “one hundred and 58[eighty-two]
days” had been substituted.]

2. 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.

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3. A company is said to be resident in India in any previous year, if—

i. it is an Indian company ; or
ii. During that year, the control and management of its affairs is situated wholly in India.

4. Every other person is said to be resident in India in any previous year in every case, except
where during that year the control and management of his affairs is situated wholly outside
India.
5. If a person is resident in India 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.
6. A person is said to be “not ordinarily resident” in India in any previous year if such person
is—

a) an individual who has been a non-resident in India in nine out of the ten previous years
preceding that year, or has 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; or
b) a Hindu undivided family whose manager has been a non-resident in India in nine out of
the ten previous years preceding that year, or has 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.]

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CONCLUSION

Income Tax Act 1961, section 6 is a section which defines the residential status of various
persons on whom the tax is to be charged. Person means which is defined u/s 2(31). The
individuals are classified into three categories based on the residential status

a) Resident
b) Not-Ordinarily Resident
c) Non Resident

An individual is said to be a resident in India in any previous year if he satisfies one or both of
the basic conditions given u/s 6(1). And ones he satisfies the basic conditions then he is being
checked under the two additional conditions to determine wether he is an ordinarily resident or a
NOR u/s 6(6).Similarly, residential status of a hindu undivided family and partnership firm or
AOP or any other person is given under section 6(2). The residential status of HUF and
prtnership is determined by its control and management. Section 6(3) defines the residential
status of a company. The residential status of a company is divided into two

a) Indian company
b) Other company

An Indian company is always a resident where as the other company can be a resident or a non
resident

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BIBLIOGRAPHY

Acts
1. Income Tax Act, 1961.
Books

1. Dr. Vinod K. Singhania & Dr. Kapil Singhania, Direct Taxes Law and Practice, (48th Ed),
Taxman Publications (P.) Ltd.
2. Chaturvedi & Pithisaria’s Income Tax Laws (5th Ed. 1999)

Dictionaries

1. Garner A. Brayan, Black’s Dictionary, 7th edition, Western Group Publication.

2. Judy Pearsall, Concise Oxford English Dictionary, 10th edition, Oxford Press.
3. Rutherford Leslie, Osborn’s Concise Dictionary,8th edition, Universal Law Publication.

Websites
http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx

http://indiankanoon.org/doc/191105/

http://www.lawnotes.in/Section_6_of_Income-Tax_Act,_1961

http://www.slideshare.net/MohdAadil/residential-status-sec-6-1

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