CHAPTER - 2

RESIDENTIAL STATUS OF INDIVIDUALS AND COMPANIES - INCIDENCE

OF TAX

RESIDENTIAL STATUS OF INDIVIDUALS AND COMPANIES

CHARGE OF INCOME TAX

Under Section 4 of Income tax act Income tax is charged on the total income of an
assessee earned in the previous year at the rates fixed by the annual finance act for the
assessment year.

SCOPE OF TOTAL INCOME

As per Section 5 the scope of total Income of an assessee is determined with reference to
his residence in India in the previous year. In other words the total income of each person
is based upon his residential status.

PROCEDURE TO DETERMINE THE RESIDENTIAL STATUS OF AN

INDIVIDUAL

For the purpose of determining the residential status of an individual the act lay
down two types of conditions namely, basic conditions and additional conditions. These
are discussed as follows.

CLASSIFICATION OF ASSESSEES ON THE BASIS OF THEIR RESIDENTIAL

STATUS OR DIFFERENT TYPES OF ASSESSEES

1. RESIDENT AND ORDINARILY RESIDENT: Persons who are residents in

India.
 2. RESIDENT BUT NOT ORDINARILY RESIDEN: Persons who are not
ordinary residents in India.

3. NON-RESIDENT: Persons who are non-resident in India.

RULES FOR DETERMINING THE RESIDENTIAL STATUS:

There are different types of assessee such as individuals, HUF, Firms, Companies,
Association of persons, Body of Individuals, Local authority, Artificial Juridical persons.

There are separate rules for determining the residential status of different kinds of
assessee:

1. RESIDENTIAL STATUS OF AN INDIVIDUALS: The rules for determining the

residential status of an individual are as follows:

An Individual may be

1. RESIDENT AND ORDINARILY RESIDENT: Persons who are residents in

India.

2. RESIDENT BUT NOT ORDINARILY RESIDENT: Persons who are not

ordinary residents in India.

3. NON-RESIDENT: Persons who are non-resident in India.

RESIDENT AND ORDINARILY RESIDENT:

Under Section 6(1) an Individual is said to be a RESIDENT in India in any previous

year if he satisfies:

1) BASIC CONDITION: ( ANY 1)

 Any ONE of the following basic conditions should be satisfies:

1) He is in India in the previous year for a period of 182 days or more

2) He is in India for a period of 60 days or more during relevant previous year and
365 days or more during four previous years immediately preceding the relevant
previous year.

EXCEPTIONS TO THE ABOVE RULE OF 60 DAYS STAY IN INDIA:

1. An Individual who is a citizen of India and leaves India in any previous year for the
purpose of employment outside India or as a member of the crew of an Indianship
must have stayed in India for atleast 182 days instead of 60 days during the previous
year.

2. If an Indian Citizen or a foreign national of Indian origin who is living outside India
comes on a visit to India in the previous year he must have stayed in India for atleast
182 Days instead of 60 Days during the previous year.

2. ADDITIONAL / SECONDARY CONDITIONS - (BOTH)

Under SECTION 6(6) an individual may become an ordinary resident if he satisfies

BOTH the following condition besides satisfying any ONE of the basic condition:

1. He has been resident in India in atleast 2 out of 10 previous years immediately

preceeding the relevant previous year.

2. He has been in India for a period of 730 days or more during 7 previous years
immediately preceeding the relevant previous year.

THUS
IF AN INDIVIDUAL SATISFIES ANY ONE BASIC CONDITION AND BOTH
THE ADDITIONAL CONDITION HE IS SAID TO BE RESIDENT AND
ORDINARY RESIDENT.

RESIDENT BUT NOT ORDINARILY RESIDENT

Under Section 6(1) and 6(6) if an individual satisfies any ONE of the basic condition
but DOES NOT SATISFY the two additional conditions he is said to be not
ordinarily resident.

In other words if an individual satisfies any ONE basic Condition and

1) He has been a non-resident in India in 9 out of 10 previous years preceeding the

relevant previous year.

2) He was in India for a period of less than 730 days in 7 previous years preceding
the relevant previous year.

3. NON – RESIDENT

If an individual satisfies NONE of the basic condition and secondary condition he is

known as Non-Resident
 Residential status of individual in a Nutshell

S.No Status Basic Additional

Conditions Conditions
Any one both
1. Resident Satisfied -
2. Resident and ordinary Resident [OR] Satisfied Satisfied
3. Resident and Not Ordinary Resident Satisfied Not Satisfied
[NOR]
4. Non-Resident [NR] Not Satisfied -

3. COMPANIES : Section 6(3)

The rules for determining the residential status of a Company are as follows:

A Company may be

A) RESIDENT

B) NON-RESIDENT

1. RESIDENT : A company is said to be resident in India in any previous year

if:

i) It is an Indian Company (or)

ii) During the year the control and management of its affairs is situated wholly in
India

2. NON-RESIDENT: If a company does not satisfy BOTH the aforesaid conditions

of residence it is said to be a non-resident company.

EXPLANATION TO THE ABOVE:

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.

In other words 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.
Place OF CONTROL RESIDENTIAL STATUS

An Indian A company other

Company than an Indian
Company

CONTROL AND MANAGEMNT OF

ITS AFFAIRS OF A COMPANY

1) WHOLLY IN INDIA
RESIDENT RESIDENT

2) WHOLLY OUTSIDE INDIA RESIDENT NON- RESIDENT

3) PARTLY IN INDIA AND PARTLY RESIDENT NON- RESIDENT

OUTSIDE INDIA

NOTE: CONTROL AND MANAGEMENT:

Refers to the place which directs the affairs of policy, finance, disposal of profits,
Place where meetings of board of directors are held and vital things concerning the
management of a company.
 RESIDENTIAL STATUS OF INDIVIDUALS:

A) PROBLEMS ON DETERMINING THE RESIDENTIAL STATUS

OF INDIVIDUALS:
1. X’ left India for the first time on May 20 th 2016. During the financial year 2019-
2020, he came to India once on May 27 for a period of 53 days. Determine his
residential status for the assessment year 2020-2021

2. ‘X ‘comes to India for the first time on April 16th 2018. During his stay in India
up to October 5th 2019, he stays at Delhi up to April 10 th 2019 and thereafter
remains in Chennai till his departure from India. Determine his residential status
for the assessment year 2020-2021.

3. ‘X’ a foreign citizen (not being a person of Indian origin) comes to India for the
first time in the last 30 years on March 20 2019. On September 1 2019 he leaves
India for Nepal on a Business trip. He comes back on February 26 2020.
Determine the residential status of X for the assessment year 2020-2021.

4. X’ a foreign national (not being a person of Indian origin) comes to India for the
first time on April 15th 2015. During the financial years 2015-2016, 2016-2017,
2017-2018, 2018 – 2019 and 2019 - 2020 he is in India for 130 days, 80 Days, 13
Days, 210 Days and 75 Days respectively. Determine the residential status of X
for the assessment year 2020-2021.

5. X’ a foreign citizen (not being a person of Indian origin) leaves India for the first
time in the last 20 years on November 20th 2017. During the calendar year 2018,
he comes to India on September 1st for a period of 30 Days. During the calendar
Year 2019, he does not visit India at all but comes to India on January 16 th 2020.
Determine the residential status of X for the assessment year 2020-2021.

6. ‘X’ is a foreign citizen (not being a person of Indian origin). During the financial
year 2019-2020, he comes to India for 85 Days. Determine his residential status
 for the assessment year 2020-2021 on the assumption that during financial years
2005 - 2006, to 2018 – 2019 he was present in India as follows.
2005-2006 = 85 Days
2006-2007 = 310 Days
2007-2008 = 6 Days
2008-2009 = 5 Days
2009 -2010 = 65 Days
2010 - 2011 = 180 Days
2011 – 2012 = 360 Days
2012 – 2013 = 16 Days
2013- 2014 = 360 Days
2014 – 2015 = 181 Days
2015 – 2016 = 305 Days
2016 – 2017 = 65 Days
2017 – 2018 = 10 Days
2018 – 2019 = 126 Days

7. ‘X’ an Indian citizen who is appointed as senior taxation officer by the

government of Nigeria leaves India for the first time on September 26th 2018 for
joining his duties in Nigeria. During the previous year 2019-2020, he comes to
India for 176 Days. Determine the residential status of X for the assessment years
2020-2021.

8. ‘X’ an Indian Citizen leaves India for the first time on September 20 2017 for the
purpose of employment. He comes to India for a visit of 146 days on April 10 th
2018. He comes back on May 16 th 2019. Find out the residential status of X for
the assessment year 2020-2021.

9. X is a foreign citizen not being a person of Indian origin. Since 1986 he visits
India every year in the month of April for 100 Days. Find out the residential status
of X for the assessment year 2020-2021.

10. Mr. Ramesh Who was born and brought up in India went for further studies to
U.K. on 1st March 2018 and came back to India on 1 st October 2019 early in the
morning. Find out his residential status for the assessment year 2020-2021.

11. Mr. Peter, a foreigner came to India from Poland for the first time on 1 st April
2013. He stayed here continuously for 3 years and went to France on 1st April
2016. He however returned to India on 1st July 2016 and went to Poland on 1 st
 December 2017. He again came back to India on 25 th January 2020 on a service in
India. What is his residential status for the assessment year 2020 – 2021.

12. Mr. John a foreign national came to India for the first time on June 15 2014
During the financial years 2014-2015, 2015-2016, 2016 – 2017, 2017-2018,
2018-2019 and 2019-2020 he stays in India for 120 days, 115 days, 15 days, 191
days, 124 days and 80 days respectively. Determine his residential status for the
assessment year 2020-2021

13. Mr. X is a German National was appointed in India as a senior scientific officer
on 1st April 2006. On January 31st 2016 he goes to Iran on deputation for a period
of three years but leaves his wife and children in India. On 1st May 2019 he came
to India and took with him his family to Uganda on 30th June 2019. He returned to
India and joined his original job on 2nd February 2020. Determine his residential
status for the assessment years 2020 -2021.

14. Determine the residential status of Mr. X for the previous year 2019 -2020,
assuming that he did not go out of India before this and came back to India on 10
April 2020 in the following cases:

i) Sponsored by his employer in India for training in U.K. and he leaves India

a) On 15 June 2019 or

b) On 10 May 2019

ii) He goes for employment purposes to U.K. and leaves India on 15 September
2019.

15. Mr. X. came to India for the first time on 1 st November 2018. During his stay in
India upto 30th October 2019 he stayed at Mumbai upto 10 th May 2019 and
thereafter remained in Bangalore till his departure from India. Determine his
residential status for the assessment year 2020 - 2021.

16. X a foreign national (not being a person of Indian origin) came to India for the
first time from USA on July 11 2013. He stayed here for a stretch of 3 years and
left for Japan on July 11 2016. He returned to India on April 10 th 2017 and
remained here till August 17, 2017, when he went back to USA. He again came
back to India on January 30 2020 at 11.59 p.m. and continued to stay in India
thereafter. Determine his residential status for the assessment year 2020 – 2021.

17. X a chief executive of a company had undertaken foreign tour on various

occasions for company’s work and was out of India for a total number of 225
days during the previous year ending March 31 2020. He submits his return of
 Income for the assessment year 2020-2021 in the status of non-resident. Is he
justified? He visited a foreign country for the first time during May 2018.

INCIDENCE OF TAX

Under Section 5 incidence of tax on a tax payer depends on his residential status and also
on the place and time of accrual or receipt of income.

The rules laid down in Section 5 of the income tax act as regards the tax liability of the
assesses having different residential status are as follows.

COMPUTATION OF TAXABLE INCOME

Resident and Resident but Non -

INCOMES Ordinarily not Ordinarily Resident
Resident Resident

1. Income received in India

whether accrued or arisen in Taxable Taxable Taxable
India or outside India

2. Income deemed to be received in Taxable Taxable Taxable

India whether accrued or arisen
in India or outside India.

Income accruing or arising in

India whether received in India or Taxable Taxable Taxable
3. outside India
 Income deemed to accrue or
arise in India whether received in Taxable Taxable Taxable
4. India or outside India

Income received and accrued or Taxable Taxable Not Taxable

arisen outside India from a
5. business controlled from or a
profession set up in India

6. Income received and accrued or Taxable Not Taxable Not Taxable

arisen outside India from a
business controlled from outside
India or a profession set – up
outside India

7. Income received and accrued or Taxable Not Taxable Not Taxable

arisen outside India from any
other source

8. Income accrued or arisen and

received outside India in earlier
years but later on remitted to India Not Taxable Not Taxable Not Taxable
during the previous year.

Notes:

1. RECEIVED :

Received means the receipt of income on the first occasion. The place of its receipt shall
be the place where it is received for the first time and not the place of its receipt on
subsequent remittance.

2. DEEMED TO BE RECEIVED:

Means that the income has not been actually received but it is deemed to be received
under the income tax act.
 3. ACCRUE OR ARISE:

Means right to receive the income as against receipt of income.

4. DEEMED TO ACCRUE:

Means that the income has actually not accrued or arisen in India but it is deemed to
accrue or arise in India.

5. INDIAN INCOME:

a) Income received in India whether accrued or arisen in India or outside

India

b) Income deemed to be received in India whether accrued or arisen in

India or outside India.

c) Income accruing or arising in India whether received in India or outside

India

d) Income deemed to accrue or arise in India whether received in India or

outside India

6. FOREIGN INCOME

a) Income is not received or not deemed to be received in India,

b) Income does not accrue or arise or does not deemed to accrue or arise in India.

POINTS

1. Gifts Received from a person other than relative is taxable provided the amount is
above Rs 50000. Is it is received in India it is taxable for all, it is received outside
India it is taxable only for ROR.

2. Gifts from a relative is not an Income

3. Dividend from a company registered in India is Exempt under section 10( 34)
 INCIDENCE OF TAX

POINTS

1. Gifts Received from a person other than relative is taxable provided the amount is
above Rs 50000. Is it is received in India it is taxable for all, it is received outside
India it is taxable only for ROR.

2. Gifts from a relative is not an Income

3. Dividend from a company registered in India is Exempt under section 10( 34)

PROBLEM:

1. For the assessment year 2020-2021 previous years 2019-2020, X is employed in India
and receives Rs 24000 as salary. His Income from other sources includes:

a) Dividend Received in London on June 3rd 2019 Rs 31000 from a foreign Company.

b) Share of profit received in London on December 15th 2019 from a business situated in
Srilanka But controlled from India Rs 60000

c) Remittance from London on Januray 15th 2020 out of past untaxed profit of 2009-2010
earned and received there Rs 30000

d) Interest earned and received in India on May 11 2020 Rs 76000

Find out his gross total income if he is i) ROR , ii) NOR iii) NR

2. X is resident and ordinarily resident in India for the assessment year 2020-2021. He
gives the following information in respect of his income for the previous year 2019-2020:

a) Capital gain on sale of a house situated in pune (sale consideration is received in

Nepal) Rs 40000.

b) Salary received in Sri Lanka for rendering service in Tamil Nadu Rs 50000.

c) Interest received from Government of India ( It is paid to him in Sri lanka the money is
utilize by the government outside India.
d) Royalty received from A ltd ( a foreign company which is non- resident in India )
Outside India ( Royalty is paid for a manufacturing business situated outside India) Rs
70000.

Find out the taxable Income of X for the assessment year 2020 -2021.

3. X furnishes the following particulars of his Income earned during the previous year
relevant to the assessment year 2020 -2021.

1. Interest on German Development Bonds (two – fifths is received in India) Rs 60000

2.Income from Agriculture in Bangladesh received there but later on Rs 50000 is remitted
to India ( Agricultural activity is controlled from Bangladesh) Rs 181000

3. Income from property in Canada received outside India (Rs 76000 is used in Canada
for meeting educational expenses of X’s daughter in USA and Rs 1000 is later on
remitted to India.) Rs 86000

4. Income earned from Business in Kampala (Uganda) which is controlled from Delhi
(Rs 15000 is received in India) 65000

5. Dividend paid by a foreign company but received in India on April 10th 2019 Rs 46500

6. Past Untaxed profit of 1999-2000 brought to India in 2019-2020 Rs 1043000

7. Profits from a business in Madras and managed from outside India Rs 27000

8. Profits on sale of a buildings in India but received in SriLanka Rs 1480000

9. Pension from a former employer in India, received in Rangoon Rs 36000

10. Gift in foreign currency from a friend received in India on January 20th 2017 Rs
80000

Find out the gross Total Income of X if he is ROR , ii) NOR iii) NR

5. The following are the incomes of Ram Prasad for the previous year 2019-2020

a) Profits from Business in Iran received in India Rs 5000

b) Income from house property in Iran received in India Rs 500

c) Income from house property in Pakistan deposited in a bank there Rs 1000

d) Accrued in India but received in English Rs 2000

e) Profits earned from business in Kanpur R s6000

f) Income from agriculture in England it is all spent on the education of children in

London Rs 5000.

g) Past Untaxed foreign income brought into India during the previous year Rs 10000

h) Profits of business established in Pakistan deposited in a bank there Rs 20000, out of

RS 20000, a sum of Rs 10000 is brought into India and this business is controlled
from India.

Ascertain the taxable income of Ram Prasad for the previous year 2019-2020 if he is

i) ROR , ii) NOR iii) NR

6. The following are the incomes of Kishanlal for the previous year 2019-2020.

a) Income from agriculture in Pakistan Rs 30000

b) Income from salary received in India but the services were rendered in Iraq

(Computed) Rs 12000

c) Income from business carried on in India Rs 12000

d) Income earned and received in Bangladesh from bank deposits there Rs 6000

e) Dividend from a domestic company Rs 2000

f) Income from business in Srilanka but controlled from India and remitted to India
Rs 14000

Compute Kishanlal’ s Gross total Income for the assessment year 2020 - 2021 if he is

i) ROR, ii) NOR iii) NR

7. Following are the taxable income of Shri Ratan Chand for the previous year 2019
-2020.

1. Income from Salary accrued and received in India Rs 20000

2. Profit of a hotel business at Melbourne Rs 30000

3. Dividend declared in Perth but received in India Rs 4000

4. Income from transfer of a long term capital assets situated in India Rs 20000

5. Interest on debentures of a company at Manchester which was received in India Rs

6000

6. Interest received from Philip a non-resident on the loan provided to him for a business
carried on in India Rs 5000

7. Royalty received in Germany from kailash a resident in India for technical services
provided for a business carried on in Germany Rs 20000

8. Fees from a Indian Company carrying on business at London from technical services
rendered at London having been directly deposited by the company in his bank account in
India Rs 30000

Compute his total Income for the Assessment year 2020 -2021 if he is if he is

1)ROR, ii) NOR iii) NR

8. From the following incomes which incomes are assessable in India if the assessee is

A) Resident

B) Not Ordinarily Resident

C) NON- Resident

1. Income from business in Kolkata managed in U.S.A Rs 25000

2. Income from pension for services rendered in India received in London Rs

15000.

3. Income from assets in Burma received in India Rs 10000

4. Profit from Business in sri lanka deposited in a bank there Rs 15000

5. Income from profession in Kenya received there. The profession was set
up in India Rs 15000

6. Interest on U.K. Government securities, half of which received in India Rs

5000.

7. Interest on England Development Bonds ( 1/5 received in India ) Rs 50000

8. Income from agriculture in America received there but later on remitted to

India Rs 81000
 9. Income from property in Canada received outside India Rs 40000

10. Income earned from business in Uganda which is controlled from Delhi
( RS 25000 is received in India) RS 45000

11. Profit on sale of a building in India but received in Sri Lanka Rs 18000

12. Salary received in India for services rendered in London Rs 8000

13. Income earned and received in Bangladesh from bank deposits there Rs
6000

14. Income accrued in Bhopal but received in Singapore Rs 6000

15. Income from agriculture in England it is all spent on the education of

children in London Rs 5000

9. Shankar a foreign national furnishes the following particulars of his income relevant
for the pervious year 2019-2020.

1. Profit on sale of plant at London ( one – half is received in India) Rs 146000

2. Profit on sale of plant at Delhi ( one – half is received in London) Rs 102000

3. Salary from an Indian Company received in London ( one-half is paid for

rendering services in India) Rs 60000

4. Interest on U.K. Development Bonds (entire amount is received in London ) Rs

40000.

5. Income from property in London received there Rs 30000

6. Profit from a business in Delhi managed from India Rs 49000

7. Income from agriculture in London received there, half of which is used for
meeting hostel expenses of Shankar’s son in England and remaining amount is
later ion remitted to India Rs 25000

8. Dividend ( Gross) received in London from a company registered in India but

mainly operating in U.K. RS 17000

9. Rental income from a property in Nepal deposited by the tenant in a foreign

branch of an Indian bank operating there Rs 12000
 10. Gift from a relative in foreign currency ( one – third of which is received in India
and remaining amount is used for meeting education expenses of shakers son in
USA) RS 370000

Determine Gross Total Income of Shankar for the assessment year 2020 -2021 if he is

A) Resident

B) Not Ordinarily Resident

C) NON- Resident

NOTE:

1. Gifts Received from a person other than relative is taxable provided the amount is
above Rs 50000. Is it is received in India it is taxable for all, it is received outside
India it is taxable only for ROR.

2. Gifts from a relative is not an Income.

10. Sriram a foreign national furnishes the following particulars of his income relevant
for the Assessment year 2020 -2021

a) Income from property in new York received there Rs 120000

b) Income from business in Kolkata managed from Singapore Rs 240000

c) Profit on sale of machinery in Califonia ( one – half received in Kolkata ) Rs

90000

d) Dividend ( Gross) received in Thailand from a company registered in India but

mainly operating in Thailand Rs 15000.

e) Income from house property in Dhaka deposited by the tenant there in a foreign
branch of SBI Rs 36000

f) Gift in foreign currency Rs 350000 from a relative ( one-half received in India

and the balance used in New York)

g) Income from agriculture in Burma Rs 45000 received there. 1/3rd used while
visiting there and 2/3rd remitted later in Kolkata.

h) Income from profession (as a management consultant) in Philippines received

there . The profession set up in India Rs 220000.

i) Compute his total income if he is

A) Resident

B) Not Ordinarily Resident

C) NON- Resident