RESIDENTIAL STATUS UNDER INCOME TAX ACT 1961

- AMSAVIRDHA R

Residential status of a person plays a vital role in the purpose of the levy of income tax because
the Income Tax department takes the tax based on the residential status of the person. Section 6
of the Income Tax Act 1961 talks about the Residential Status.

CLASSIFICATION OF RESIDENTIAL STATUS

Resident and
ordinarily
resident (ROR)

Resident

Individual /
HUFs Resident but not
ordinarily
resident (RNOR)
Non-Resident
Residential
Status
(Section 6) Resident

Firms / AOPs /
Local Authorities
/ Company etc.

Non-Resident

Fig 1: Classification of Residential Status.

 RESIDENTIAL STATUS OF AN INDIVIDUAL

Under Section 6 (1) of the Income Tax Act an Individual is said to be resident in India if he
fulfills the condition:

1. Individual should have stayed in India for a period amounting to 182 days or more in the
relevant previous year,

(Or)

2. An Individual should have stayed 60 days in India in the relevant previous year and an
Individual should have stayed in India for a period of 365 days or more during the 4 years
immediately preceding the previous year.

If the Individual satisfies any one of the conditions, he is a Resident. If both the conditions are
not satisfied, the individual is a Non-Resident. Stay is only considered for determining the
residential status and not citizenship.

If Sec 6 (1) is fulfilled – Apply Section 6 (6) Additional conditions,

To determine whether Resident in Section 6 (1):

1. Resident Ordinarily Resident (ROR).

2. Resident but not Ordinarily Resident (RNOR).

RESIDENT AND ORDINARILY RESIDENT /RESIDENT BUT NOT ORDINARILY

RESIDENT

Only Individuals and HUF can be Resident but not ordinarily Resident in India. All other classes
of assesses can be either a resident or non-resident. A not-ordinarily resident person is one who
satisfies any one of the conditions specified under section 6 (6).

1. If such Individual has been non-resident in India in any 9 out of 10 previous years
preceding the relevant previous year.
2. If such Individual stays in India for a period of 729 days or less during the 7 previous
years preceding the relevant previous year.

In simple terms an individual is said to be a resident and ordinarily resident if he satisfies both
the following conditions,

1. He is a resident in any 2 out of last 10 years preceding the relevant previous year, and,

2. His total stay in India in the last 7 years preceding the relevant previous year is 730 days
or more.

If the individual satisfies both the conditions mentioned above, he is a resident and not ordinarily
resident but if only one or none of the conditions are satisfied the individual is a resident but not
ordinarily resident.

EXCEPTIONS TO SECTION 6 (6)

The following categories of individuals will be treated as Residents only if the period of the stay
during the relevant previous year amounts to 182 days. If such persons were in India for 365
days during the four preceding years and 60 days in relevant previous year they will not be
treated as Resident.

i) An Individual who has left India for the purpose of employment.

ii) An Individual who is of foreign origin.
iii) Members of a crew or ship.

CASE LAWS:

1. KINLOCH v. IRC 1

In this case it was cited that the place and purpose of stay is immaterial. It is not essential that
the stay should be at the same place.

1
14 TC 736
2. BARYARD BROWN v. BUTT 2
i) An Individual who stays within the territorial waters of India will be considered as “stay
in India.”
ii) Presence with 12 Nautical Miles of Indian Territorial waters is considered as deem
stay.
iii) Date of Arrival and Date of Departure is considered as stay.

EXTENDED SCOPE OF RNOR UNDER FINANCE ACT 2000

1. Total income in India is more than 15 lakhs.

2. Not liable to tax in any other country by reason of domicile/ residence.

DEEMED RESIDENT OF INDIA (SECTION 6(1A))

An individual, being a citizen of India, shall be deemed to be a resident of India if he is not liable
to tax in any other country or territory. The deemed residential status is applicable if the
individual earns total income, other than the income from foreign sources, exceeding fifteen lakh
rupees during the relevant financial year. Such non taxability in any other country or territory
would be by reason of his domicile or residence or any other criteria of similar nature.

PROBLEMS:

1. Mr. X comes to Chennai for first time on 1st may 2019 and leaves to Andaman on 2nd July
2019 and stays there 20 days. Therefore, leaves to UK and comes back to India 1 st October
2019 and stays till 31 st December 2019. On 1st March 2020 he takes a trip on cruise for 12
days in territorial water. Determine his Residential Status.

SOLUTION:

1st May 2019

To 31 + 30 + 2 = 63 days.

2nd July 2019

Andaman stay = 20 days.

2
5 TC 667
1st October 2019

To 31 + 30 + 31 = 92 days.

31st December 2019

Territorial water = 12 days.

TOTAL = 187 DAYS.

Thus, X fulfilled the condition according to section 6 (1), He is a Resident of India.

2. X, after about 30 years’ stay in India, returns to America on January 29, 2019. He returns to
India in June 2021 to join an American company as its overseas branch manager. Determine
his residential status for the assessment year 2022-23.

SOLUTION:

For the assessment year 2022-23, the year 2021-22 is the previous year. During 2021-22, X is in
India for more than 275 days. He is, therefore, resident in India. He is resident in India for 2
years out of 10 years (i.e., 2011-12 to 2020-21), and he has stayed for more than 730 days during
the seven years preceding the previous year 2021-22. He is, therefore, resident and ordinarily
resident in India for the assessment year 2022-23.
 RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY SECTION 6 (2)

To determine the residential status of a HUF, the first step is to ascertain whether the HUF is
resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain
whether it is resident and ordinarily resident or is resident but not ordinarily resident.

A resident HUF will be treated as resident and ordinarily resident in India during the year if its
manager (i.e., Karta or manager) satisfies both the following conditions:

1. He is resident in India for at least 2 years out of 10 years immediately preceding the
relevant year.
2. His stay in India is for 730 days or more during 7 years immediately preceding the
relevant year.

RESIDENT NON-RESIDENT

A Hindu Undivided Family would be

If the control and management of its affairs
Resident in India if the control and
is situated wholly outside India, then he
management of its affairs is situated wholly
would become a Non-Resident.
or partly in India.

Fig 2: Resident and Non-Resident Classification.

RESIDENT AND ORDINARILY RESIDENT/RESIDENT BUT NOT ORDINARILY

RESIDENT

If the HUF is resident, then the status of the Karta determines whether it is resident and
ordinarily resident or resident but not ordinarily resident.
1. If the Karta is resident and ordinarily resident, then the HUF is resident and ordinarily
resident.

2. If the Karta is resident but not ordinarily resident, then HUF is resident but not ordinarily
resident.

CASE LAWS:

1. SUBBAIYA CHETTIAR v. CIT 3

There were 3 Prepositions that were made. They are:

1. Control and Management – means defacto control not merely the right to manage.
2. Hindu Undivided Family may be residing in one place and doing a business in another
place – consider as Resident for tax purpose.
3. Occasional visit of Non-Resident Karta is insufficient to make Hindu Undivided Family
an ordinarily Resident in India.

2. ANNAMALAI CHETTIAR v. ITO 4

The mere fact that the family has a house in India, where some of its members reside or
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 decisions conc erning the
affairs of the family are taken at that place. The mere fact of the absence of Karta from
India does not make the family non-resident.

PROBLEM:

The business of HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the Karta of the HUF, who was born in Kolkata, visits India during previous year 2021-
2022 after 15 years; he comes to India on 14.07.2021 and leaves to Australia on 1.12.2021.
Determine the residential status of Mr. and the HUF for the assessment year 2022-2023.

3
[1951] 19 ITR 168
4
[1958] 34 ITR 88 (Mad.).
SOLUTION:

During the P.Y. 2021-2022, Mr. E, has stayed in India for 245 days (i.e., 30+31+30+ 31+31+
30+31+30+1 days).

Therefore, he is a resident. However, since he has come to India after 15 years, he does not
satisfy any of the conditions for being ordinarily resident. Therefore, the residential status of Mr.
E for the P.Y. 2021-2022 is resident but not ordinarily resident.

Since the business of the HUF is transacted from Australia and nothing is mentioned regarding
its control and management, it is assumed that the control and management is also wholly
outside India. Therefore, the HUF is a Non-resident for the P.Y. 2021-2022.
 RESIDENTIAL STATUS OF COMPANIES

RESIDENT COMPANY NON-RESIDENT COMPANY

(1)If a company is incorporated

under Indian Companies Act
(2)(or)
(3)The Control & Management of its affairs Active Business outside India
is
(4)situated wholly in India

Fig 3: Resident and Non-Resident Classification.

Place of Effective Management (POEM)

The place where key management and commercial decisions that are necessary for its conduct of
business of an entity as a whole, are in substance made (Explanation to Section 6 (3)).

It came to effect on 1st April 2017- CBDT- Issued a circular dated 24thJan 2017 on circular no.
06/2017.

Prior to Finance Act 2015artificially escaped from the Residential status

RI NRI

POEM ABOI

Accordingly, the 2 criteria for POEM fixation are as follows:

 1. Key management and decision taking.
2. Determine place where key Decisions are taken has two factors.

PRIMARY FACTORS

Control and Board Shareholder Head Junior and middle

management meeting meeting office management
operation

SECONDARY FACTORS

Substantial factors Accounting factors

Hence Sec 6 (8) was amended wide 7A 2016 incorporating POEM

Internationally recognized test for determination of residence of a company incorporated in

foreign jurisdiction.

ABOI: Active Business Outside India

When a company has ABOI their POEM is presence to be outside India, thus they become NRI
A company shall be said to be engaged in ABOI if,

1. The passive income is not less than 50% of its total income 50% < passive income.
2. Less than 50% of total employees are indeed of India.
3. Less than 50% of its total assets are situated in India assets 50%.
4. Pay roll expenses incurred on such employees is less than 50% of its payroll expenditure of
total income.
i) Place where substantial activities are carried out.
ii) Place where accounting records are kept.
iii) Determine residential Status every year.
iv) Determine POEM every year.

PROBLEMS:

1. ‘A’ a company in India is a boarding entity for ‘B’ a company in China. A Companies
warehouse stocks and assets are situated in China the employees of ‘A’ company are working
virtually from Japan. Determine the Residential Status of company ’A’.

SOLUTION:

The company is Non-Resident Company as it falls under Section 6 (3) ABOI:

i) Employees are Non-Resident

ii) Assets of company are situated outside India.
iii) The company has active business outside India.

2. XYZ Company situated in Kolkata comprises of 12 directors who are Indian citizens. In
Relevant 5 previous years there were 5 board of directors’ meetings held. In that 2 were held
in Kolkata and 3 in Mauritius. Determine XYZ’s Residential Status.

SOLUTION:

As per Sec 6 (3) the key man’s residence or residence of company is required. Both are unclear
moreover 3 out of 5 board of directors were conducted in Mauritius XYZ’s Residential Status is
NRC.

3. X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in
India. The business of the company is fully controlled from outside India. Find out the residential
status of X Ltd. for the assessment year 2022-23.
SOLUTION:

X Ltd. is an Indian company. An Indian company is always resident in India. This rule is equally
applicable even if shareholders are foreign citizens as well as non-resident or even if business is
controlled from outside India.

4. Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 core). It has 10
shareholders who are Indian citizens and resident in India. The company has active business
outside India and is controlled wholly from outside India by a team of professionals. What is
the residential status of Y Ltd. for the assessment year 2022-2023.

SOLUTION:

Y Ltd. is a foreign company. It is controlled wholly from outside India (POEM is outside India).
It is, therefore, non-resident in India for the assessment year 2022-23. Residential status of
shareholders is irrelevant. Likewise, the nationality of shareholders is not taken into
consideration.