Corporate Tax Planning

Unit I

RESIDENTIAL STATUS

Shahrukh Saleem
Assistant Professor
Dept. of Management Studies
MITS – Madanapalle, A.P.,
India
 Residential
Status

• Determination of residential status of a person is very important for the purpose of levy of
income tax, as income tax is levied based on the residential status of tax payer.

• What is essential is the status during the previous year and not in the assessment year.
Moreover, the concept of residential status is nothing to do with the nationality or domicile
of a person.

• The residential status of the assessee may change from year to year.

• An Indian, who is a citizen of India, can be non-resident for Income Tax purposes,
whereas a foreigner can be resident of India for Income Tax purpose.
Residential Status ≠ Citizenship

Residential Status

Section 6(1)
Resident (Sec. 6(1) Non – Resident (Sec. 2(30))

Section 6(6)

Ordinary Not Ordinarily

Resident
Resident
Taxable
Entity
A taxable entity can be:
• An Individual
• A Hindu Undivided Family
• An Association of Persons
• A firm
• Joint stock company
• Local authority and
• any other artificial judicial person
• The following table explains how these are subcategorized with respect to their
residential status.

INDIVIDUAL/HUF

RESIDENT NON-RESIDENT Others Included in the Definition of “Person”

ORDINARY
RESIDENT NON-RESIDENT
NOT-ORDINARILY
Determining the Residential Status of An
Individual
• Section 6(1): This section applies to individuals. If an individual is to qualify as
resident of India, he has to fulfill at least one of the following two basic
conditions:
Condition Explanation

1 The Individual is in India in the previous year for a period of 182 days or more
2
The Individual is in India for a period of 60 days or more during the
previous year and
365 days or more during 4 years immediately preceding the previous year
 Exceptions to 60
days:

In the following two cases, an individual needs to be present in India for a period of 182 days
or more in order to become resident in India:

1. An Indian citizen who leaves India during the previous year for the purpose of taking
employment outside India

2. An Indian citizen leaving India during the previous year as a member of the crew of an
Indian ship.

3. An Indian citizen or a person of Indian origin who comes on visit to India during the
previous year (a person is said to be of Indian origin if either he or any of his parents
or any of his grand parents was born in undivided India).
Determining if A Resident is an Ordinary
Resident
Section 6(6): This section applies to individuals. If an individual is to qualify as an
ordinary resident of India, he has to fulfill both of the following two conditions in
addition to fulfilling the criteria as provided in section 6(1):

Condition Explanation

1
He has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year.
2
He has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
• Individuals who satisfy any one of the basic conditions and do not satisfy the

two additional conditions, are classified as Resident but not

ordinarily resident.

• Individuals not satisfying anyone of the basic conditions will be classified as

Non-Resident.
Important
Points
• Meaning of stay in India: Any where within Indian geographical territory.

• Stay may be continuous or intermittent: Stay in India for specified days should not
necessarily be continuous.

• Stay need not be at one place

• Object of stay is not important

• While calculating number of days for stay in India, both day of departure from India and
day of arrival in India are to be counted as stay in India.
 Determining the Residential Status of HUF - Section
6(2)
Resident HUF

“A Hindu undivided family is said to be resident in India if control and management of its
affairs is wholly or partly situated in India.”

Non-Resident HUF

“A Hindu undivided family is non-resident in India if control and management of its affairs is
wholly situated outside India.”

• Control and management is situated at a place where the head, the seat and the directing
power are situated.
• Section 6(6)(b): A resident Hindu undivided family is an ordinary resident in
India if the karta or manager of the family business satisfies the following two
additional conditions:
Condition Explanation

1
He has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year.
2
He has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
Residential Status of Firm/AOP/BOI – Sec.
6(2)
• Resident:

A firm/AOP/BOI if controlled from India either wholly or partially, it will be resident

assessee.

• Non-Resident:

• A firm/AOP/BOI shall be non-resident if the control and management of affairs is situated

wholly outside India.
Residential Status of Company – Section 6(3)

• Resident Company – Section 6(3)

A company is said to be resident in India in any previous year if
i) It is an Indian Company; or
ii) Its place of effective management in that year is in India

Place of effective management shall mean a place where key management and
commercial decisions that are necessary for the conduct of the business of an
enterprise as a whole are made.
• Example:

i. A company is incorporated in India, but has head office in New York …… Resident Company

Ii. A company is incorporated in Brazil, but has head office in Hyderabad….Resident Company

• In the first example, it is an Indian company where as in second example, its place of
effective
management is in India.
• Non-Resident Company – Section 2(30)

A company shall be non-resident if it is not resident in India during the

relevant previous year.

It means, a foreign company whose place of effective management is

not situated in India will be a non-resident company.
To put it simple,

• Resident - Sec. 6(3): If Control and Management of its business affairs is wholly
in India.

• Non-Resident - Section 2(30): If Control and Management of its business affairs is

wholly or partly outside India.
• It is not what directors have power to do, but what they actually do, that is of
importance in determining the question of the place where the control is
exercised.
Definition of
Company

Company [Sec. 2(17)]: The expression ‘company’ is defined to mean the following:

• Any Indian company; or

• Any body corporate incorporated under the laws of a foreign country; or

• Any institution, association or a body which is assessed or was assessable/assessed as a

company for any assessment year commencing on or before April 1, 1970; or

• Any institution, association or a body, whether incorporated or not and whether Indian or
non-Indian, which is declared by general or special order of the Central Board of Direct Taxes
to be a company.
 Indian Company [Sec.
2(26)]:
An Indian company means a company formed and registered under the Companies Act, 1956/2013. Besides, it includes the following:

• A company formed and registered under any law relating to companies formerly in force in any part of India other than the State of
Jammu and Kashmir and the Union territories;

• A corporation established by or under a Central, State of Provincial Act;

• Any institution, association or body which is declared by the Board to be a company under section 2(17);

• A company formed and registered under any law in force in the State of Jammu and Kashmir;

• A company formed and registered under any law for the time being in force in the Union territories of Dadra and Nagar Haveli, (State of)
Goa, Daman and Diu and Pondicherry.

In the aforesaid cases, a company, corporation, institution, association or body will be treated as an Indian company only if its registered
office is in India.
Domestic
Company:

• As per Section 2(22A)​, "domestic company" means an Indian company, or any

other company which, in respect of its income liable to tax under this Act, has

made the prescribed arrangements for the declaration and payment of dividends

within India.
Foreign
Company:

• As per Section 2(23A) of the Income Tax Act, 1961, Foreign Company is
a

company which is not a domestic company.

• Thus, all those companies which do not qualify the conditions to be considered

domestic company shall be considered foreign companies.

A Company in which Public are Substantially Interested: [Sec.
2(18)]

• Owned by Government/RBI – A company owned by the Government or the RBI or in

which not less than 40% shares (in terms of value) are held by the Government or the
Reserve Bank or a corporation owned by the Reserve Bank. Ex. BEML, BHEL, BPCL etc.

• Section 25-1956 /Sec. 8 – 2013 companies – A company registered under section 25 of

the Companies Act, 1956 (Sec. 8, 2013), namely companies for promotion of commerce,
art, science, religion, charity and prohibiting the payment of any dividends to its
members. Ex: International Bible Society India, Association of Lady Entrepreneurs of
Andhra Pradesh, Ravindranath Medical Foundation, etc.
• A company without share capital - A company having no share capital and declared by the Central
Board of Direct Taxes to be a company in which the public are substantially interested. Clubs ,
trade associations, societies are the examples of this type of companies

• Nidhi or Mutual Benefit Society- A company which carries on, as its principal business, the
business of acceptance of deposits from its members and which is declared by the Central
Government under section 62 A of the Companies Act to be a Nidhi or Mutual Benefit Society.
JAYANT INDIA NIDHI LIMITED, Vaibhav Nidhi India Limited, Deepmanglam Nidhi Limited, etc are
the examples.

• Company owned by a Co-operative Society - If it is company in which shares carrying at least 50%
of the voting power have been allotted unconditionally to or acquired unconditionally by, and are
throughout the relevant previous year beneficially held by, one or more cooperative societies; or
• Listed Companies - If it is a company which is not a private company as defined in
Section 3 of the Companies Act, 1956 and equity shares of the company were, as
on the last day of the relevant previous year, listed in a recognised stock exchange
in India;

• Industrial Company - It means a company which is mainly engaged in the

business of generation or distribution of electricity or any other form of power or
in the construction of ships or in the manufacture or processing of goods or in
mining.
The following activities are held as ‘manufacture’ or ‘processing’ of goods on the basis of judicial
pronouncements:

• Book publishing

• Mixing different types of tea to arrive at a desired blend

• Manufacture and selling of carpets but having major source of income from sale of import entitlement
(generated by export of carpets)

• Production of cinematographic films

• Tailoring clothes

• Conversion of computer cash vouchers, invoices, etc., into balance sheet, stock account, etc.

• Sorting out, washing, drying and blending wool.

• Undergoing a change in a commodity as a result of some operation (many be manual or mechanical)

and as a result a new and distinct commodity emerges.
Investment
Company:

• It means a company whose gross total income consists mainly of income which is
chargeable under the heads ‘Income from House Property’, ‘Capital Gains’ and
‘Income from other sources’.

Ex.: Larsen & Toubro Mutual Fund, Tata Investment Corporation

Widely-held
Company

• A company in which the public are substantially interested is known

as widely-held company.
Closely-held Company :

• A company in which the public are not substantially interested

is known as a closely-held company.

Ex.: Family owned companies

Incidence Of Tax for Corporate Assessees

Particulars Resident in India Non-resident in India

Indian income Taxable in India Taxable in India

Foreign income Taxable in India Not Taxable in India

• Indian income is always taxable in India irrespective of the residential

status of the taxpayer.

• Foreign income is taxable in the hands of resident in India. It is not

taxable in the hands of non-resident in India.

Indian
Income

Any of the following three is an Indian income –

• If income is received or deemed to be received in India during the previous year and at
the same time it accrues or is deemed to accrue in India during the previous years.

• If income is received or deemed to be received in India during the previous year but it
accrues outside India during the previous year.

• If income is received outside India during the previous year but it accrues or is deemed
to accrue in India during the previous year.
Foreign Income

If the following two conditions are satisfied, then such income is ‘foreign
income’-

• Income is not received or not deemed to be received in India; and

• Income does not accrue or does not deemed to accrue in India.

Residential Status of Every Other Artificial Person

• Resident: Which has its control or management wholly in

India during the relevant previous year.

• Non-Resident: Who has its control or management wholly

outside India during the relevant previous year.
•Thank You