ON

RESIDENTIAL STATUS AND TAX LIABILITY OF ASSESSEE

SUBJECT : Principles Of Taxation Law

SUBMITTED TO : Princy Ma’am

SUBMITTED BY : Prabhat Sharma

ROLL NO. : 201090880002

Course Code : LBC- 502

DEPARTMENT OF LAW

GURUGRAM UNIVERSITY

GURUGRAM, HARYANA

Index
Introduction :

Direct tax imposed on the Income of assesses, is very significant source of revenue to the government.
Government needs money to run various welfare and developmental programmes and to maintain law and order
in the nation. Therefore, any person whose taxable income for the previous year exceeds the exemption limit is
liable to pay Income Tax to Central Government during the current financial year at the rates applicable in force
by the annual finance Act during the current year.

Few important terms used in the Income Tax Act 1961:

Assessee: In simple terms – Person who is liable to pay tax is an assessee. Here the person includes both, natural
and artificial juridical person.

Assessment Year: As per Section 2 (9) Assessment year means the period of 12 months commencing from April
01 every year and ending on March 31 of the next year. An assessee is liable to pay income tax for previous year
in the following assessment year. For example, during the assessment year 2020-21, tax shall be paid for the
previous year 2019-20.

Previous Year: As per Section 3 – previous year means the financial year[1] immediately preceding the
assessment year.

Residence of Assessees :

Residential status is a term coined under Income Tax Act and has nothing to do with nationality or domicile of a
person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American
who is a citizen of America can be resident of India for Income-tax purposes. Residential status of a person
depends upon the territorial connections of the person with this country, i.e., for how many days he has
physically stayed in India.

The residential status of an assessee is determined with reference to his residence in previous year. Residential
status during the assessment year is immaterial. It is pertinent to note that residence and citizenship are two
different concepts hence should not be mixed for the purpose of taxation. For the purpose for Taxation
citizenship of a person does not matter. An India may be non-resident and a foreigner may be resident for the
purpose of tax. The residence of a person may change from year to year but the citizenship remains constant or
atleast does not change every year.

IMPORTANCE OF RESIDENTIAL STATUS

Accordin to Section 4, of the Income Tax, Act, 1961 tax 's to be charged, OII the income o f the previous year of
a person at the rate fixed for the assessment year, immediately following the previous year, by the Annual
Finance Act paned by Parliament sometime in A ril/Ma every ear. The tax liability of a erson is detsrmined on the
basis of RB is resi ence in ! ndia in the previous year. &e 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 assessees viz., individual, Hindu Undivided Family (HUF), firm and a company etc.
CATEGORIES OF RESIDENTIAL STATUS

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

On the basis of residence all taxable entities are divided into three categories, viz.

a) Persons who are residents in India

b) Persons who are not ordinarily residents in India

c) Persons who are non-residents in India