lecture notes on scope of total income and residental status under income tax act 1961

SCOPE OF TOTAL INCOME & RESIDENTAL STATUS:

Under income tax Act 1961

• Scope of Total Income u/s. 5

• Residential Status in India u/s 6.• Apportionment of Income between spouses

governed by the Portuguese Civil Code u/s. 5A.

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Different taxable entities

1. Individual 2. Hindu undivided family3. Firm or association of person or a body of

individuals 4. Every other person


IMPORTANCE OF RESIDENTIAL STATUS

• Tax is to be charged on the income of the previous year of a person at the rates fixed for the assessment year .

• The tax liability of a person is determined on the basis of 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.

• The rules for determining the residential status for different types of assessees viz., individual, Hindu Undivided Family (HUF), firm and a company etc. are not same.


Scope of Total Income u/s. 5

• 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 is determined by reference to his residence in India in the previous year.


Residential status

1. Resident of India 2. Non resident of IndiaResident individual and HUF can be divided in to

two categories 1. Resident and ordinarily resident or2. Resident but not ordinarily resident All other assessee can simply be either resident

or non resident


Residential status of an individual (6)

• An individual may be 1.Resident and ordinarily resident 2.Resident but not ordinarily resident 3.Non resident


Residential status of the Assessee


Resident and ordinarily resident

• Basic condition for resident • An individual is said to be resident in India in any

previous year, if he satisfies at least one of the following basic condition

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

b)He 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

• i) Being a citizen of India if he leaves India in any previous year for the purpose of employment outside India, the period of 60 days in clause (b) above will be extended to 182 days or more.

• ii) Being a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India in any previous year the period of 60 days mentioned in clause (b) will be 182 days or more

• A person is deemed to be of Indian origin if he, or either of his parents or any of his grand parents was born in undivided India.


Additional conditions for ordinarily resident

• Resident individual is treated as “resident and ordinarily resident ” In India if he satisfies the following two additional conditions –

a) He has been resident in India in at least 2 out of 10 previous years immediately the relevant previous year

b) He is been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions and the two additional conditions .


Non -Resident Individual

• Non – Resident means a person who is not a resident.

• An individual is non-resident in India if he does not satisfy any of the two basic conditions as stated under section 6(1)


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:

Ordinarily Resident (Section 6(2) ) HUF is said to be ordinarily resident in India in any previous year : If the control and management of its affairs is wholly or partly

situated in India during the previous year.If its manager (Karta) satisfies the following conditions of Section 6(6) :i) its manager has been resident in India in 2 out of 10 previous years

preceding that year; andii) its manager has, during the 7 years preceding that year, been in

India for a period amounting in all to 730 days or more.


Not Ordinarily Resident

• 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 conditions of Section 6(6).


Non-resident

• A Hindu Undivided Family is said be non-resident in such cases only where its control and management is situated wholly outside India during the previous year.


Firms and other Association of Persons (Section 6(2) 1 )

• Firms and other association of persons can fall under two categories only. They may either be residents or non-residents.

Resident• 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 is immaterial.


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.


Companies

A company may either be a resident or non-resident.

A company is said to be resident in India in any previous year if:

I. it is an Indian company, orII. during the year, the control and management

of its affairs is situated wholly in India.


Non-Resident

• If a company does not satisfy any of the aforesaid conditions of residence, it is said to be a 'non-resident' company. In other words if the company is not registered in India and its control and management is situated wholly or partially outside India, it is regarded as a non-resident.


Every other Person (Section 6(4) )

Resident : Every other person (local authority, artificial,

juridical person & Statutory Corporations) is said to be resident in India in any previous year if the control and management of its affairs is partly or wholly situated in India

Non-Resident : Every other person is said to be non-resident if control and management of its affairs is situated wholly outside India.


Scope of total income ( Resident and 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; or

b. accrues or arises or is deemed to accrue or arise to him in India during such year; or

c. accrues or arises to him outside India during such year.


Accrual of Income

• When right to receive the income become vested in the assessee, is said to accrue or arise .

• Income has been said to accrue when there is a right to payment and when there is unconditional liability on behalf of the payer to pay it to tax payer.

• Income is said to accrue when it become due


Scope of total income ( Resident but non- Ordinarily Resident )

• Not Ordinarily Resident 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; or'

b. accrues or arises or is deemed to accrue or arise to him in India during such year; or

c. accrues or arises to him outside India and is derived from business controlled in India or a profession set up in India.


Difference between resident and non ordinarily resident

• The basic difference between the scope of a total income of a resident and not ordinarily resident relates to the income which accrues or arises to him outside India.

• In case of a resident it is included in his total income irrespective of the source of such income.

• But in case of a not ordinarily resident it will be included in his total only if it is derived from a business which is controlled in or a profession set up in India.


Scope of total income of Non-Resident

If the assessee is a non-resident in India, the total of the relevant previous year includes all income from whichever sources derived which –

a. is received or is deemed to be received in India in such year by or on behalf of such person, or

b. accrues or arises or is deemed to accrue or arise to him in India during such year. '

Thus non-residents are not liable in respect income accruing or arising outside India even if it is remitted to India.


Chart showing scope of total income

Nature of income Resident & ordinarily resident

Resident but not ordinarily resident

Non Resident

Income received in India Included Included Included

Income deemed to be received in India Included Included Included

Income accruing or arising in India Included Included Included

Income deemed to accrue or arise in India Included Included Included

Income accruing or arising outside India and received out-side India i.e. foreign income

1. From business controlled from India or profession setup in India

Included Included Excluded

2. From a business controlled outside India or profession set up outside India

Included Excluded Excluded


Apportionment of Income between spouses governed by the Portuguese Civil Code u/s. 5A.

• 5A. (1) Where the husband and wife are governed by the system of community of property (known under the Portuguese Civil Code of 1860 as "COMMUNIAO DOS BENS") in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu, the income of the husband and of the wife under any head of income shall not be assessed as that of such community of property (whether treated as an association of persons or a body of individuals), but such income of the husband and of the wife under each head of income (other than under the head "Salaries") shall be apportioned equally between the husband and the wife and the income so apportioned shall be included separately in the total income of the husband and of the wife respectively, and the remaining provisions of this Act shall apply accordingly.


• (2) Where the husband or, as the case may be, the wife governed by the aforesaid system of community of property has any income under the head "Salaries", such income shall be included in the total income of the spouse who has actually earned it.]


Thank you

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lecture notes on scope of total income and residental status under income tax act 1961

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