Tha Tamilnadu Oz•.

Ambadkaz• Law Uniuer•aicy

LAW OF TAXATION
ASSIGNMENT SUBMITTED TO
THE TAMILNADU DR. AMBEDKAR LAW UNIVERSITY (TNDALU)
(SCHOOL OF EXCELLENCE IN LAW (SOEL], CHENNAI)
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
COMPLETION OF INTERNAL ASSESSMENT

TOPIC
Residential status and incidence of tax

SUBMITTED TO

Mr. Kevin rgj

(Faculty of LAW, TNDALU, SOEL)

SUBMITTED BY

NAME : DHANUESH . B
REGISTER NO. : H321048
COURSE : LLB hons
SECTION : “A”
YEAR : 3 Year
SEMESTER : 6th SEM
SUBMISSION :16.04.2024

STUDENT SIGNATURE FACULTY SIGNATURE

 PAGE NO.

Importance and category

Ends of income 17-20

Incidence of tax 21-23

Case laws 23-27

Conclusion 28

Bibliography 28
INTRODUCTION;
Tax incidence on an assessee depends on his residential status. For instance.
whether an income, accrued to a person outside India, is taxable in India depends
upon the residential status of the person 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.The residential status of an assessee is to be determined in
respect of each previous year as il may vary from previous year to previous year.
The foreign INVESTORS may be Indian nationals residing outside India, person of
Indian origin and other foreign investors including corporations.

Under Section 2(31) of the Income Tax Act, the term person includes an
individual a Hindu Undivided Family, a Partnership Firm, a Company, an
Association of’ Persons, a Body of Individ-ual, a local Authority and every other
Artificial Juridical Entity. Similarly under FEMA clause (u) of section 2, person
includes all the above categories and also any agency, office or branch owned or
controlled by any such person.The residential status of a person has been dealt under
the in- come tax Act, 1961 FOREIGN EXCHANGE Management Act,1999
(FEMA), Companies Act, 1956 and under Proposed Direct Tax Code Bill 2009.

DEFINITION OF AGRICULTURAL INCOME AS PER THE

INCOME TAX ACT, 1961;

As per S.2(1A) of the Income Tax Act, 1961, unless the context otherwLse requires,
the term“agricultural income” means:

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a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;

b) Any income derived from such land by—

i. Agriculture; or

ii. The pertormance by a cultivator or receiver of rent-in-kind of any process

ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce
raised or received by him lit to be taken to market; or

iii. The sale by a cultivator or receiver of rent-in-kind of the produce raised or

received by him, in respect of which no process has been performed other than a
process of the nature described in paragraph (ii) of this sub-clause;

c) Any income derived from any building owned and occupied by the receiver of
the rent or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any land with respect to which, or the produce of which, any process
mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on

Provided that—

i) The building is on or in the immediate vicinity of the land, and is a building which
the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind,
by reason of his connection with the land, requires as a dwelling house, or as a store-
house, or other out-building, and

ii) The land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government as such or where the land is
not so assessed to land revenue or subject to a local rate, it Le not situated-

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a. In any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town area
committee, town committee or by any other name) or a cantonment board and which
has a population of not less than ten thousand; or

b. In any area within the distance, measured aerially:

i. Not being more than two kilometres, from the local limits or any municipality or
cantonment board referred to in item (A) and which has a population of more than
ten thousand but not exceeding one lakh;

ii. Not being more than six kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than
one lakh but not exceeding ten lakh; or1

iii. Not being more than ei%t kilometres, mom the local limits of’ any municipahty
or cantonment board referred to in item (A) and which has a population of more than
ten lakh

EXPLANATIONS:

1. Revenue derived from land shall not include and shall be deemed never to have
included any income arising from the transfer of any land referred to in item (a) or
item (b) of sub-clause (iii) of clause (14) of this section.

2. Income derived from any building or land referred to in sub-clause (c) arising
from the use of such building or land for any purpose (including letting for
residential purpose or for the purpose of any business or profession) other than

' Residential status and Incidence of tax by Dr. Sangeetha R

3
agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural
mcome.

3. For the purposes of this clause, any income derived from saplings or seedlings
grown in a nursery shall be deemed to be agricultural income.

IMPORTANCE OF RES&ENTIAL STATUS;

According to Section 4 of the Income Tax Act, 1961, tax is to be charged, on the
income of the previous year of a person at the rate fixed for the assessment year,
immediately following the previous year, by the Annual Finance Act passed by
Parliament in February every year. The tax liability of a person is determined based
on his residence in India in the previous year. The residential status of an assessee
may not necessarily be the same in each year; he may be a resident in one year and
a non-resident in the next. As such, clear identification of residential status, is
necessary. It is important to note, however, that the status of an assessee will be the
same for all sources of income. The rules for determining the residential status are
not the same for different types of assessee viz., individual Hindu Undivided Family
(HUF), firm and a company etc.

CATEGORIES OF RES&ENTIAL STATUS;

Section 5 of the Income tax Act deals with the scope of’ total income. It states that
the scope of total income of a person Le determined by reference to his residence in
India in the previous year.

Based on residence, the individuah and HUF entities are divided into three
categories, viz.

a) Persons who are ordinarily residents in India

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b) Persons who are not ordinarily residents in India

c) Persons who are non-residents in India

TAXABLE ENTITOS;

H Ordinarily
H Residents Non-Ordinarily Non-residents

CATEGORIES OF RESIDENTIAL STATUS;

For the purpose of determining the rules apphcable in this regard, the assessees are
divided into 4 groups, viz.

i) Individuals

ii) Non-company plural entities (H.U.F., lbs or other association of persons)

) Companies

iv) Every other person

RULES FOR DETERMINING THE RES&ENTIAL STATUS;

As stated earlier, there are separate rules for determining the residential status of
different types of assessee. The tests for residence of an individual are contained in
Section 6(1), those for Hindu Undivided Families, or other associations of
persons are laid down in Section 6(2), those for companies in Section 6(3) and for
every other person in Section 6(4).2

z
Residential Status and Tax Incidence by navitha shan

5
An Individual may have any of the following residential status depending upon
applicability of rules of Income Tax Act:

a) Resident and Ordinarily Resident

b) Not Ordinarily Resident

c) Non-Resident

A) RES&ENT AND ORDINARILY RES&ENT:

Section 6(1) and Section 6(6)(a) of the Income Tax Act determines the Residential
status of an Individual. Section 6(1) prescribes two conditions which may be treated
as basic conditions and similarly, Section 6(6)(a) also prescribes two conditions
which may be treated as additional conditions. An Individual shall be considered as
Resident in India if he shall fulfil at least one basic condition and both the additional
conditions.

CONDITIONS OF PART I OR BASIC CONDITIONS:

i) He must be physically present in India for a period of 152 days or more during the
relevant previous year, or

ii) He must be in India for a period of’ 60 days (182 days in some special
circumstance) or more during the relevant previous year and 365 days or more for 4
years immediately preceding the relevant previous year.

EXCEPTION TO THE ‘BASIC CONDITIONS',

a) In the case of an individual being “Citizen of India’, if he leaves India during the
previous year as a member of’ the crew of an Indian ship or for the purpose of

6
employment outside India, he shall fulfil the basic condition No (ii) only where he
is in India for at least 182 days instead of 60 days.

b) ln the case of an individual who is a ‘Citizen of India’ or a person of Indian

Origin’, if he is akeady outside India and comes on a visit to India during the
previous year, he shall fukil the basic condition No (ii) only when he is in India for
at least 182 days instead of 60 days.

CONDITIONS OF PART II OR ADDITIONAL CONDITIONS [SECTION

6(6)(A)];

a) If he has been resident in India for at least 2 out of the 10 years preceding the
previous year, and

b) He has been in India for a period or periods amounting in all to 730 days or more
during 7 previous years preceding the previous year.

FUNDAMENTALS STAY IN INDIA;

His stay in India for at least 182 days during the previous year need not necessarily
be a continuous one and at the same place. It is the total duration of his stay in India
that will be considered for the purpose. It Lh ilTlmaterial whether he stayed in a rented
house, or his own house, in a hotel or with some friends. What is important is that
he must have stayed in India for a period of 182 days or more in the previous year.
Regarding his stay for at least 365 days, the stay may be regular or irregular or only
once in four years preceding the previous year. But he must have stayed in India for
365 days in all during the four years. The period of 4 years preceding the previous
year means the period of 12 calendar months each immediately preceding the
commencement of the relevant previous year.Again, with regard to the second
condition of Pan I i.e. his stay tor 365 days or more, the stay need not be regular, it

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could be only once in four years preceding the previous year. It is the total stay which
is significant which must be 365 days or more in the 4 years preceding the previous
year.

ILLUSTRATION 1

Mr. Anil citizen of Spain has been staying in India since 1955. He leaves India on
16.7.2022 on a visit to U.S.A and returns on 4.1.2023. Determine his residential
status for the previous year 2022-23.

SOLUVON:
If Mr. Anil satisfies first condition (stay in India for at least 182 days) his stay in

India during the previous year 1.4.2022 to 31.3.2023 is as under:

Apri1,2022 30 days

May, 2022 31 days

June,2022 30 days

July,2022 16 days

August, 2022 Nil

September, 2022 Nil

October,2022 Nil

November, 2022 Nil

December,2022Nil

January,2023 28 days
February,2023 28 days

March,2023 31 days

Thus, hLs total stay in India during the previous year L8 194 days. As, he is in India
for more than 182 days during the relevant previous year, he satisfies the first
condition and is, therefore, a resident.

NOT ORDINARILY RESIDENT

If an individual satisfies anyone of the two conditions of Part I, or basic condition

but does not satisfy both the conditions or fult’ils only one of’ the two additional
conditions of Part II, he is said to be resident but not ordinarily resident or simply
stated, he will be a “not ordinarily resident”.

EXAMPLE 2

Mr. MANI came to India for the lLst time in July 2022 and stayed in Delhi up to
31st March 2023. Determine his residential status for the assessment year 2023-24.

SOLUTION:

For the assessment year 2023-24, Mr. MaNI is resident but not ordinarily resident
During the previous year 2022-23, Mr. MaNI was in India for a period of more than
182 days, and he thereby fulfils one of the basic conditions or condition (1) of Part
I. But he does not satisfy both the additional conditions of Part II. Therefore, he is
resident but not ordinarily resident for the assessment year 2023-24.

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C) NON-RES&ENT

If an individual does not satisfy anyone of the basic conditions or conditions of Part
I, he is said to be non-resident in that previous year whether he satisfies one or both
conditions of Part II or additional conditions.

EXAMPLE 3

Mr. krish left India for Canada on August 15, 2014. During 2022-23, he came to
India on July 12, 2022, and stayed in Delhi for a period of one month and again left
for Canada, on August 10, 2022. Determine his residential status for the assessment
year 2023-24.

SOLUMON:

Mr. krish is a non-resident for the assessment year 2023-24, as he stayed in India for
only 30 days during the previous year 2022-23. As such, he does not satisfy any of
the basic conditions of Pan I. Therefore, he is a non-resident.

EXCEPTIONS (SECTION 6(1A)) APPLICABLE FROM AY 2021-

22

In the following cases, an individual is deemed to be resident but not ordinarily

resident even if he does not satisfy the two basic conditions:

1. An individual is deemed to be resident but not ordinarily resident iI he satisfies

the following 3 conditions:

i. He is an Indian citizen and not a foreign citizen (even though he may be a person
of Indian origin)

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ii. His total taxable income during the previous year(excluding incomefrom foreign
sources) Le more than Rs. 15,00,000

iii. He is not liable to be taxed in any other country

2. An individual is deemed to be resident but not ordinarily resident if he satisf’ies

the following 4 conditions

i. He is an Indian citizen or a person of Indian origin

ii. His total taxable income during the previous year (excluding income from foreign
sources) is more than Rs. 15,00,000 Fundamentals

iii. He comes to India on a visit during the relevant previous year

iv) He is in India for more than equal to 120 days (but less than 182 days) during the
relevant previous year and more than equal to 365 pays for 4 years immediately
preceding the previous year

HINDU UNDIVIDED FAMILY [SECTION 6(2)];

The residential status of an HUF depends on two factors, the location of control and
management of its affairs and the residential status of its Karta.

A) ORDINARILY RESIDENT (SECTION 6(2)]

HUF IS SAID TO BE ORDINARILY RESIDENT IN INDIA IN ANY

PREVIOUS YEAR:

a) If the control and management of its affairs is wholly or-partlysituated in India

during the previous year.The expression ‘Control and Management’ signifies
controlling anddirective power. In other words, it means the ‘head and brain’.

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Moreover, the control and management should be de facto (in effect) and not merely
the right or power to control and manage.

b) If its manager (Karta) satisfies the following conditions of Section 6(6)(a):

i) Its manager has been resident in India in 2 out of 10 previous years preceding that
year; and

ii) Its manager has, during the 7 years preceding that year, been in India for a period
amounting in all to 730 days or more.

For the purposes of calculating the period of the manager’s stay in India, we shall
add up the stay in India of all the successive managers of the family, in case of the
death of the first manager.

EXAMPLE 4

A Hindu Undivided Family carries Import-Export business in India, Nepal, Sri

Lanka, and Pakistan. The Karta stays in India and manages the affairs of HUF
through employees and agents. What will be the status of the family for income -tax
purpose?

SOLUTION:

The control and management of the affairs of the family is situated wholly in India
and the manager stays in India and l’ulfils the conditions of Part II or additional
conditions of Section 6(6)(a). Hence, the Hindu Undivided Family is resident in
India.

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B) NOT ORDINARILY RES&ENT

A Hindu Undivided family is said to be “not ordinarily resident in India, if

control and management of its affairs is situated wholly or partly in India during the
previous year, but its manager does not satisfy the additional condition conditions of
Section 6(6)(a).

C) NON-RES&ENT

A Hindu Undivided Family is said be a non-resident in such cases only where its
control and management are situated wholly outside India during the previous year.
If, however, the control and management is situated partly in India and the Karta
satisfies the conditions of Part II Section 6(6), it becomes a resident in India.

FIRMS AND OTHER ASSOCIATION OF PERSONS [SECTION 6(2)];

Firms and other association of persons can fall under two categories only. They may
either be residents or non-residents. The category of non-ordinarily residents does
not apply to such assessee.

A) RESIDENT

According to section 6(2), a firm or other association of persons is said to be resident

in India in any previous year where during that year the control and management of
its affairs is partially or wholly situated in India. The residential status of its partners
in India Le ilTlmaterial.

B) NON-RESIDENT

A firm or an association of persons is said to be non-resident in such cases only

where the control and management of its affairs is situated wholly outside India
during the previous year.

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EXAMPLE 5

A firm has five partners who are permanent residents in India. The IN owns a
rubber estate in Malaysia. The estate Le managed and controlled by the partners in
India, through an agent in Malaysia. Determine the residential status of the firm.

Solution:

Even if the control and management of the firm is partly situated in India, the 40
firm becomes resident. Here, all the partners reside in India and manage at least a
part of the affairs of’ the estate. As such, the firm is resident in India.

Residential status of a company [Section 6(3)];

A company is said to be resident in India, in a previous year, if-

i) It is an Indian company, or

ii) The company is foreign company, its place oT’ effective management (POEM), in
that year, is in India

A company is said to be non—resident in any previous year, if —

i) It is not an Indian company, and.

ii) Its place of effective management, in that year, is not in India.

‘Place of effective management’ means a place where key management and

commercial decisions that are necessary for the conduct of the business of an entity
are in substance made.

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EXAMPLE 6

International Remedies is a registered company in Germany, and has a registered

office in Germany, but the management and control are situated wholly in Bombay
(India). What will be the residential status of the company for tax purpose?

SOLUTION:

As the company’s control and management is situated wholly in India, it is resident

in India, and the location of the registered office of the company is immaterial.

In the above illustration, i1 the control and management is partially situated in India
the company is non-resident in India for tax purpose.

ANY OTHER PERSON [SECTION 6(4)];

A) Resident:

Every other person (local authority, artificial juridical person

e.g.: Statutory Corporations) is said to be resident in India in any previous year, il’
the control and management of its affairs is partly or wholly situated in India.

B) Non-Resident: Every other person is said to be non-resident if control and

management of’ its affairs Le situated wholly outside India.

SCOPE OF TOTAL INCOME ON THE BASIS OF RESIDENCE;

We have examined the rules determining the residential status of assessee as given
in section 5 of Income Tax Act. As stated earlier, the scope of total income of an
assessee depends on his residential status in the previous year. In the following
sections, we will explain the scope of total income for the different categories of
assessee viz.

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i) Residents and ordinarily resident [Section 5(1)]

ii) Not-ordinarily residents [Section 5(1)]

iii) Non-residents [Section 5 (2)]

RES&ENT ORDINARILY RESIDENT;

The total income of any person, who is resident in the relevant previous year,
includes all income from whatever sources derived which:

a) Is received, or deemed to be received in India in such year by him or on his behalf

during the previous year; or

b) Accrues or arses or is deemed to accrue or arise to him in India during the

previous year; or

c) Accrued or arises to him outside India during such year.

NOT ORDINARY RES&ENT;

If the assessee is ‘not-ordinarily resident’, the total income of the relevant previous
year includes all incomes from whatever sources derived which:

a) Is received or is deemed to be received in India in such year by or on behalf of’

such person during the previous year; or

b) Accrues or arises or is deemed to accrue or arise to him in India during the

previous year; or

c) Accrues or arises to him outside India during such year but derived from business
controlled (wholly or partly) in India or a profession set up in India.

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Thus, it will be seen that the basic difference between the scope of total income of
an ordinarily resident and not ordinarily resident relates to the income which accrues
or arises to him outside India. In case of a resident, it LS inCluded in hLs total income
irrespective of the source of such income. But, in case of a not ordinarily resident, it
will be included in his total income only if it is derived from a business which is
controlled (wholly or partly) in or a profession set up in India.

NON-RES&ENT;

If the assessee is a non-resident in India, the total income of the relevantprevious

year includes all income from whichever sources derived which:

a) Is received or Le deemed to be received in India in such year by or on behalfof

such person during the previous year, or

b) Accrues or arises or is deemed to accrue or arise to him in India during suchyear.

Thus, non-residents are not liable in respect of income accruing or arising

outsideIndia even if it is remitted to India.

KINDSOFMCOM
It appears mom the scope of total income that four types of incomes form part of

the tax liability. They are:

I) Income received in India. (Section 7)

2) Income deemed to be received in India. (Section 7)

3) Income accruing or arising in India. (Section 9)

4) Income deemed to accrue or arise in India. (Section 9)

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INCOME RECEIVED IN INDIA;

Any income received in India, during the previous year by an assessee is taxable,
irrespective of the residential status of the assessee and the place of accrual of such
income. The receipt of income refers to the income received by the assessee for the
first time under hLs control. But, once amount is received as income, any remittance
of the amount to another place does not result in receipt. It is not necessary that
income should be received in cash, it may be received in kind aho, for example, rent
free accommodation and certain other facilities provided to an employee are taxable
as ‘salary’ in the hands of the employee though the income Le not received in cask
Though income may be received in kind, it should be equivalent of cash or should
be in money’s worth.

In case of non-resident, their foreign income is not assessable unless it is received in

India. At the time the money is received in India, it is received as income from an
outside source; such receipt will not be an income receipt. II a non — resident had
akeady received money outside India as income or exempt income and he has
transferred the money into India, in any year, such transfer will not count as income.

INCOME DEEMED TO BE RECEIVED IN INDIA;

The given below incomes shall be deemed to be received in India in the previous
year”.

i) The contribution made by the central Government in the previous year to

the account of an employee under a pension scheme u/s 80CCD.

ii) Contribution made by the employer to the recognized provident fund in excess
of 12% of the salary of the employee is the income deemed to be received.

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iii) Interest credited to the recognized provident fund of the employee which is in
execs of 9.5% p.a is the income deemed to be received.

iv) When an employee, who is member of an unrecognized provident fund,becomes

member of a recognized provident fund, the accumulated amount transferred to a
recognized provident fund from the unrecognized provident fund, is termed as
‘transferred balance’. Employer’s contribution and interest, thereon, induced in the
transferred balance, Le the income deemed to be received.

INCOMES ACCRUING OR ARISING IN INDIA

Income is said to be received, when it reaches the assessee, but where the right to
receive the income becomes vested in the assessee, it is said to accrue or arise.
Accrual of income means a stage, where the assessee has acquired a right to receive
such income, when the same income is received in the accounting year, it LS Said to
arise. Income accrues when the right to receive it comes into existence; but it arises
when the method of accounting shows it in the shape of profits or gains.The income
must accrue or arise in India. If it accrues or arises outside India; it cannot be taxed
in the hands of person who is non-resident in India.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA;

The given below incomes shall be deemed to accrue or arise in India:

i) Income from a business connection in India: Any income which arses, directly or
indirectly, from any acting or a business connection in Indin, is deemed to be earned
in India. Business connections may be in several forms: formation of a subsidiary
company in India to carry business of the non — resident parent company, branch
office in India or an agent of an organization of non — resident in India.

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ii) Income from any property, asset or source of income situated in India: Any
income which arises from any property. movable or immovable, tangible, or
intangible which Le situated in India is deemed to accrue or arise in India.

) Income from interest, royalty or technical fee is deemed to accrue or arise in

India, if it is payable by: -

1) Government, or

2) A person who is a resident in India and use for the purpose of business or
profession in India.

3) A person who is a non—resident in India provided, the interest is payable in respect

of money borrowed and used for business or profession carried on in India.

iv) Salary payable by the Government to a citizen of India for the services rendered
outside India.

v) Any salary payable for services rendered in India will be regarded as income
earned in India.

vi) Income from the transl‘er of any capital asset situated in India regardless of the
residential status of the transferor or transferee would be deemed to be income
accruing or axeing in India and would be taxable.

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INC&ENCE OF TAX

As per Section 5 of the Income Tax Act, 1961 incidence of tax on a taxpayer depends
on his residential status and also on the place and time of accrual or receipt of
income.

In order to understand the relationship between residential status and tax liability,
one must understand the meaning of “Indian Income” and “Foreign Income”. An
Indian Income is one which satLsfies any of the following conditions:

1) If income is received (or deemed to be received) in India during previous year and
at the same time it accrues ( or arises or Le deemed to accrue or arise) in India during
the previous year, OR

2) If income is received (or deemed to be received) in India during previous year but
it accrues (or arises) outside India during the previous year, OR

3) If Income is received outside India during the previous year but it accrues (or
arises or Le deemed to accrue or arise) in India during the previous year.

Similarly, Foreign Income is one which satisfies both the following conditions:

1) Income Le not received (or not deemed to be received) in India , and

2) Income does not accrue or arise (or does not deemed to accrue or arise) in India

Indian income of an individual and HUF from a business controlled or prol’ession

setup in India will be taxable in the hands of resident and ordinarily resident and
resident but not ordinarily resident but not in the hands of a non-resident. However
Foreign income from a business controlled or profession setup outside India will be
taxable only in the hands oT’ resident and ordinarily resident and not in the hands of
a resident but not ordinarily or a non-resident person. Foreign income of any other

21
taxpayer (Company, Firm, AOP, BOI etc.) will be taxable il the taxpayer is resident
in India and will not be taxable in case the taxpayer Le non-resident in India.

RES&ENTIAL STATUS UNDER THE PROPOSED DIRECT TAX

CODE BILL, 2009;

The proposed Direct Tax Code Bill, 2009(referred to as “the code”) is a

comprehensive legislation that consolidates the entire law relating to direct taxes
(income tax dividend distribution tax, fringe benefit tax and wealth tax) in India and
aims to simplify the eUsting laws which have for long been considered as complex
by the practitioners of the laws. As per the Code, an individual shall be resident in
India an any financial year, if he is in India (a) for a period or periods amounting in
all to 182 days or more in the year or (b) for a period or periods amounting in all to
(i) 60 days or more in that year, and (ii) 365 days or more within the four years
immediately preceding thatThe Code proposes to do away with the classification
resident but not ordinarily resident, which is available under the present system of
taxation. This would mean that Indians working abroad would be classified as
resident even 2 they fall under the category oT’ resident but not ordinarily resident
and consequently, such income would be taxable in India.

Further, it provides that a company shall be resident in India in any I ancial year, if
it Le an Indian company or its place of control and management, at any time in the
year, is situated wholly or partly in India. In contrast, under the Income Tax Act
1961 a Company is resident in India in any previous year if the control and
management of’ its affairs Le situated wholly in India.

In effect the definition under the Code, which is expected to come into effect from
April 1, 2011 would regard foreign company as a domestic one il any part of’ its
control and management were to be situated in India for the concerned financial

22
year,So for instance, if the board of directors of a foreign company meets in India
even once during a year. It would be considered a resident company and its entire
global would be liable to corporate tax in India.The provLsion penaining to
residential status under the code will shift the burden on the company to show that
its control and management is not situated in India. In case a foreign company is
held to be a resident of India, its tax exposure would significantly increase.

IMPORTANT CASE LAWS:

Bacha F. Guzdar v. C.I.T., Bombay 3

The Appellant, Bacha, was a shareholder in 2 companies who were engaged in the
business of growing and manufacturing tea. They received dividends from the above
companies which was brought to tax by the Income Tax. The appellant claimed that
the dividends received are eligible to a beneficial tax rates under the Income Tax
Act, 1922; as growing of tea is agricultural income.However. the Supreme Coun
held that Agricultural income as defined in the Act is obviously intended to refer to
the revenue received by direct association with the land which is used for agricultural
purposes and not by indirectly extending it to cases where that revenue or part
thereof changes hands either by way of distribution of dividends or otherwise.In face
the dividend is derived from the investment made in the shares of’ the company and
the toundation of it rests on the contractual relations between the company and the
shareholder. Dividend is not derived by a shareholder by his direct relationship with
the land. Therefore whosoever receives profit from the land directly is entitled to
the exemption.A shareholder does not receive profit directly from land, though the
company may be involved in agricultural activities and Le not entitled for exemption

(1955 AIR 740)

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Is Horticulture Also Agriculture? - CIT vs Raja Benoy Kumar Sahas Roy

In this case the court emphasized that certain basic operations should be carried out
alongwith subsequent operations. The Supreme Court observed that if the integrated
activity of the agriculturist, viz., agriculture, which includes the basic operations and
the subsequent operations, is undertaken and performed in regard to any land, that
land can be said to have been used for agricultural purposes and the income derived
therefrom can be said to be agricultural income derived from the land by agriculture.
In the very same judgment, the Supreme Court also considered the other activities
in relation to the land or having connection with the land including breeding and
rearing of’ live-stock, dairy-farming, butter and cheese-making, poultry-farming, etc.

A reference was made to CIT - Madras vs Sundara MudaliaN, where Hon’b1e

V.Sastri observed

“Pasture land used for the feeding and rearing of live-stock is land used for
agricultural purposes: Emperor v. Alexander Allen. Rearing of live-stock such as
cows, buflaloes, sheep and poultry is included in 'husbandry'. These animals are
considered to be the products of the soil, just like crops, roots, flowers and trees, for
they live on the land and derive their sustenance from the soil and its produce:
Glanely v. Wightman; Commissioner of Income-tax, Burma v. Kokine Dairy Co. It
is not therefore legitimate, in my opinion, to confine the word 'agriculture' to the
cultivation of an open field with annual or periodical crops like wheat. rice, ragi,
cotton, tobacco, jute, etc. Casuarina is usually raised on dry lands of poor quality,
and it is usual to find the same land used alternatively for the cultivation of ordinary
cereal crops like groundnut, gingelly, cholam, kambu, etc. and for the raising of“

4
1957 32 ITR 466 (SC)
5
(AIR 1950 Mad 566)

24
casuarina plantations. The land bears the dry assessment whatever be the nature of
the crop raised”

This enlarged connotation of the term "agriculture" has been tinged by the dictionary
meanings ascribed to it in Murray's Oxford Dictionary and Webster's Dictionary
quoted above which understood the term as including the allied pursuits of rearing,
l’eeding and management of live-stock and aLso including husbandry, farming,
horticulture. etc., in the widest sense, as also butter, cheese-making, etc. We shall
have to consider at the appropriate stage as to how far such enlargement is warranted
by the definition of "agricultural income" as given in section 2(1)(a) of the Indian
Income-tax Act.

The cases above noted all of them involve some expenditure of human skill and
labour either on the land or the produce of the land, for without such expenditure
there would be no question of’ the income derived from such land being agricultural
income. Though the above decision did not decide on the matter of honiculture being
agriculture, the observation of the Hon’ble Supreme Court gives veracity to the
argument itself.

In CIT vs Soundarya Nursery‘ the question was raised whether the income from
sale of plants grown directly in the pots and the sale of seeds, can be treated as
agricultural income within the meaning of Section 2(1) of the Income -tax Act, 1961.
The Tribunal had held that, since the plants were not grown in the pots directly, but
they are, after several operations carried out in the land, viz., cutting, gootying and
inarching for the plants, transplanted in suitable containers, including pots and kept
in the green house or in shade, and the trees were grown on the land directly.

^ (2000 241ITR 530 Mad)

25
Significant contribution of human labour and energy is essential to do the same and
therefore, it will be considered to be an agricultural activity.

The Madras High Court referred to the case of Raja Benoy Kumar and stated that
all the products of the land, which have some utility either for consumption or for
trade or commerce, il’ they are based on land, would be agricultural products. Here,
it is not the case of the Revenue that without performing the basic operations, only
the subsequent operations, as described in the decision of the apex court have been
performed by the assessee. If the plants sold by the assessee in pots were the result
of the basic operations on the land on expending human skill and labour thereon and
it is only after the performance of the basic operations on the land, the resultant
product grown or such pan thereof as was suitable for being nurtured in a pot, was
separated and placed in a pot and nunured with water and by placing them in the
green house or in shade and after performing several operations, such as weeding,
watering, manuring, etc., they are made ready for sale as plants all these questions
would be agricultural operations all this involves human skill and el’tort. Thus, the
plants sold by the assessee in pots were the result of primary as well as subsequent
operations comprehended within the term "agriculture" and they are clearly the
products of agriculture.The High Court further stated that it Le not possible for the
seeds to east without the mother plants, and the mother plant, it is nobody's case,
was not grown on land. It is also not the case of the Revenue that the seeds were the
result of the wild growth and not on account of cultivation by the assessee. The seeds
were clearly a product ol’agriculture and the income derived from the sale ol’seeds,
was agricultural income.

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In Karra Jayabhyarathi, Vedayapalem, Nellore vs Income Tax Officer, Ward-
Ii, Nellore’ the Hon’ble single member bench of Hyderabad held that Income
derived from fL8hing over land covered by water and which is not used for any
agricultural purposes cannot be treated as income from agricultures inasmuch aS fLSh
cannot be treated as the produce of the land. The bench also placed reliance on
decisions which stated that the word ‘agriculture’ even in its widest import, has
received some sort of definite and restricted meaning, and I find it difficult to bring
fishery under the heading ‘agriculture’ even in its widest sense as ordinarily
understood. Therefore, income derived from fishing over land covered by water and
which Le not used for any agricultural purposes cannot be treated as income from
agricultural inasmuch as fish cannot be treated as the produce of the land, since their
element Le water and therefore. their cultivation and welfare depend in no sense upon
agriculture.

7
(2005-TIOL-20S-ITAT-HYD)

27
Conclusion;

Ironically, contrary to the objectives of the Code to simpMy tax laws and reduce
disputes, the provision is also likely to expand the scope of litigation as it would be
up to the assessing officer to decide if a foreign company is indeed a resident. Unless
situations describing part management and control in India are clarified, this could
have significant implications for a foreign company’s operations in India.

BIBLIOGRAPHY

1. Residential Status and Tax Incidence by navitha shan

2. Residential status and Incidence of tax by Dr. Sangeetha R
3. principles of Taxation laws by Ulas kumar shah
4. www.indiankannon.com

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