Corporate Taxation

Unit 1

Basic Concepts

PART -I

Table of Contents:

1. Income Tax Law

2. Charge of Income-tax: [Sec. 4]

3. Assessment year: [Sec. 2(9)]

4. Previous year: [Sec. 3]

5. Person: [Sec. 2(31)]

6. Assessee: [Sec. 2(7)]

7. Certain Principles relating to Income under Income-tax Act

8. Income: [Sec. 2(24)]

9. Heads of Income: [Sec. 14]

10. Total Income and Computation of Tax Liability

11. Exemption and Deduction in respect of income

12. Rounding off of Income: [Sec. 288A]

13. Rounding off of Tax: [Sec. 288B]

1. Income Tax Law

Income-tax is a tax levied on the total income of an assessee, being a person

charged under the provisions of this Act, for the relevant previous year.
For understanding Income tax law in India, the following components need to be
studied carefully:

(1) Income-tax Act, 1961

(2) Annual Finance Acts

(3) Income-tax Rules, 1962

(4) Notification and Circulars, issued from time to time

(5) Judicial Decisions

1.1 Income-tax Act, 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961 which
extends to whole of India and came into force on 1st April, 1962. The Act contains
298 sections and XIV schedules. It contains provisions for determination of taxable
income, tax liability, assessment procedures, appeals, penalties and prosecutions.
These undergo changes every year with additions and deletions brought by the
Annual Finance Act passed by the Parliament.

1.2 Annual Finance Acts

Every year, Finance Bill is introduced by the Finance Minister of the Government
of India in the Parliament’s Budget Session. When the Finance Bill is passed by
both the Houses of the Parliament and gets the assent of the President, it becomes
the Finance Act. Amendments are made every year to the Income-tax Act, 1961
and other tax laws by the Finance Act. Finance Bill also mentions the Rates of
Income tax and other taxes given in various schedules which are attached to it.
Therefore, though Income-tax Act is a settled law, the operative effect is given by
the Annual Finance Act.

1.3 Income-tax Rules, 1962

Central Board of Direct Taxes (CBDT) looks after the administration of direct
taxes and is empowered u/s 295 of the Income Tax Act, to make rules for carrying
out the purposes of the Act and thereby it frames various rules from time to time
for the proper administration of the Income-tax Act, 1961. These rules were first
framed in 1962 and are thereby collectively called Income-tax Rules, 1962. It is
important to read these rules along with the Income-tax Act, 1961. The power to
make rules under this section shall also include the power to give retrospective
effect, but not earlier than the date of commencement of this Act. However, such
retrospective effect shall not be given so as to prejudicially affect the interests of
the assessees.

1.4 Circulars and Notifications

Circulars are issued by the CBDT from time to time to deal with certain specific
problems and to clarify doubts regarding the scope and meaning of the provisions.
These circulars are issued for the guidance of the officers and/or assessees. These
circulars are binding on the department and not on the assessee and therefore the
assessee can take advantage of beneficial circulars.

Notifications are issued by the Central Government to give effect to the provisions
of the Act. For example, u/s 10(15)(iv)(h), interest on bonds and debentures are
exempt by the Central Government subject to such conditions through
Notifications. The CBDT is also empowered to make and amend rules for the
purposes of the Act by issue of notifications. For example, u/s 35CCD, the CBDT
is empowered to prescribe guidelines for notification of skill development project.

1.5 Judicial Decisions

Judicial decisions are an important and unavoidable part of the study of income-tax
law. For the Parliament, it is not possible to provide for all possible issues that may
arise in the implementation of any Act and hence the judiciary will have to
consider various cases between the assessees and the department and give
decisions on various issues. The Supreme Court is the Apex Court of the country
and the law laid down by the Supreme Court is the law of the land. In case, where
the apparently contradictory decisions are given by benches having similar number
of judges, the principle of the later decision would be applicable. The decisions
given by various High Courts will apply in the respective states in which such
High Courts have jurisdiction.
2. Charge of Income-tax: [Sec. 4]

Tax cannot be levied or collected in India except under the authority of Law.
Section 4 of the Income- tax Act, 1961 gives authority to the Central Government
for charging income tax. This is the charging section in the Income-tax Act, 1961
which provides that:

(i) Tax shall be charged at the rates prescribed for the year by the Annual Finance
Act;

(ii) The charge is on every person specified under section 2(31);

(iii) Tax is chargeable on the total income earned during the previous year and not
the assessment year. (There are certain exceptions provided by sections 172, 174,
174A, 175 and 176);

(iv) Tax shall be levied in accordance with and subject to the various provisions
contained in the Act.

This section is the backbone of the law of income-tax insofar as it serves as the
most operative provision of the Act. The tax liability of a person springs from this
section.

3. Assessment year: [Sec. 2(9)]

Assessment year means a period of 12 months commencing on 1st April every

year. The total income earned by the assessee during the previous year shall be
chargeable to tax in the next year; which is termed as the assessment year. For
example, for the previous year 2022-23, the relevant assessment year shall be
2023-24 (1.4.2023 to 31.3.2024).

4. Previous year: [Sec. 3]

The year in which income is earned, i.e. the financial year immediately preceding
the assessment year, is called the previous year and the tax shall be paid on such
income in the next year which is called the assessment year. This means that the
tax is levied on the income in the year in which it is earned; referred as previous
year and the tax on such income will be paid in the assessment year. All assessees
are required to follow a uniform previous year i.e. the financial year starting from
1st April and ending on 31st March.

5. Person: [Sec. 2(31)]

As the income tax is levied on the total income of the previous year of every
‘person’, it becomes important to understand the term ‘Person’. The term ‘person’
includes the following seven categories:

(i) an individual,

(ii) a Hindu Undivided Family (HUF),

(iii) a company,

(iv) a firm,

(v) an Association of Persons (AoP) or a Body of Individuals (BoI), whether

incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person not falling within any of the preceding sub-
clauses e.g., a university or deity.

As per Explanation to Sec. 2(31), an AoP/BoI/Local authority or any artificial

juridical person shall be deemed to be a person, irrespective of whether they were
formed or established with the purpose of earning or deriving profits or not.

6. Assessee: [Sec. 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable
under this Act. It also includes the following:

(i) Every person in respect of whom any proceeding under this Act has been taken
for the assessment of his income;

(ii) Every person who is deemed to be an assessee under any provisions of this Act.
Sometimes, a person becomes assessable in respect of the income of some other
persons. In such case also, he is considered as an assessee. For example, legal
representative of a deceased person;

(iii) Every person who is deemed to be an assessee in default under any provision
of this Act. For example, where a person making any payment to other person is
liable to deduct tax at source, and if he has not deducted tax at source or has
deducted but not deposited the tax with the government; he shall be deemed to be
an assessee in default.

7. Certain Principles relating to Income under Income-tax Act

The following are the important principles relating to income:

• Income generally refers to revenue receipts, but however under the Income-
tax Act, 1961, certain capital receipts have also been specifically included within
the definition of income for example capital gains i.e. gains on sale of a capital
assets like land.

• The income to be considered for tax purpose shall be net receipts and not
gross receipts.

Net receipts are arrived at after deducting the expenditure incurred in connection
with earning such receipts.

• Income is taxable either on due basis or receipt basis, as provided under the
respective head of income. For the purpose of computing income under the heads
‘Profits and gains of business or profession’ and ‘Income from other sources’, the
method of accounting which is regularly followed by the assessee should be
considered, which can be either cash system or mercantile system.

• Income earned during the year i.e. the previous year shall be chargeable to
tax in the next year i.e. the assessment year e.g. the income of the P.Y. 2022-23
shall be chargeable in the A.Y. 2023-24. But, there are certain exceptions to this
principle (i.e. Accelerated assessment u/s 172, 174, 174A and 175) which are
discussed in the Chapter ‘Liability in Special Cases’.

8. Income: [Sec. 2(24)]

The definition of ‘Income’ given under section 2(24) is inclusive and not
exhaustive and therefore it may be possible that certain items may be considered as
income under this Act according to its general and natural meaning, even if it is not
included under section 2(24). The term ‘Income’ includes the following:

• Profits and gains;

• Dividend;

• Voluntary contributions received by a trust which is created wholly or partly

for charitable or religious purposes; or by educational institutions, hospitals or
electoral trust;

• The value of any perquisite or profit in lieu of salary taxable u/s 17;

• Any special allowance granted to the assessee to meet expenses wholly,

necessarily and exclusively for the performance of office or employment duties;

• The value of any benefit or perquisite, whether converted into money or not,
obtained from a company either by a director or by a person who has substantial
interest in the company or by a relative of the director or such person, and any sum
paid by any such company in respect of any obligation which, otherwise, would
have been payable by the director or other person aforesaid;

• The value of benefit or perquisite to a representative assessee like a trustee

appointed under a trust;

• Any sum chargeable to income-tax under clauses (ii) and (iii) of sec. 28 or
sec. 41 or sec. 59;

• Any sum chargeable to income-tax under clauses (iiia), (iiib), (iiic), (iv), (v),
(va) and (via) of sec. 28;

• Any capital gains chargeable u/s 45;

• The profits and gains of any insurance business carried on by a mutual

insurance company or by a co-operative society, computed in accordance with
section 44 or any surplus taken to be such profit and gains by virtue of provisions
contained in the First Schedule;

• The profits and gains of any of banking business (including providing credit
facilities) carried on by a co-operative society with its members;

• Winnings from lottery, crossword puzzles, races (including horse races),

card games or other games of any sort or from gambling or betting;

• Any sum received by the assessee from his employees as contributions to

any provident fund or superannuation fund or any fund set up under Employees’
State Insurance Act, 1948 or any fund for the welfare of such employee; [Sec.
2(24)(x)]

• Any amount received under the Keyman insurance policy including the sum
allocated by way of bonus; [Sec. 2(24)(xi)]

• Any sum chargeable to income-tax u/s 56(2)(v), (vi);

• Any sum of money or specified movable or immovable properties received

without consideration or inadequate consideration as provided u/s 56(2)(vii), (via);

• Any consideration received for issue of shares as exceeds the FMV of shares
referred to in section 56(2)(viib);

• Any sum of money received as advance in the course of negotiation for

transfer of a capital asset, if such sum is forfeited as the negotiation do not resulted
in transfer of the asset 56(2)(ix);

• Any sum chargeable to income-tax u/s 56(2)(x);

• Any compensation or other payment referred to in Sec. 56(2)(xi);

• Income shall include assistance received in the form of a subsidy or grant or

cash incentive or duty drawback or waiver or concession or reimbursement (by
whatever name called) from the Central Government or a State Government or any
other authority or body or agency in cash or kind to the assessee other than:
(a) the subsidy or grant or reimbursement which is taken into account for
determination of the actual cost of the asset in accordance with the provisions of
Explanation 10 to clause (1) of section 43,

(b) the subsidy or grant by the Central Government for the purpose of the corpus of
a trust or institution established by the Central Government or the State
Government, as the case may be.

9. Heads of Income: [Sec. 14]

For the purpose of computation of total income under the Income-tax Act, 1961, all
the incomes shall be classified under the following 5 heads of income:

(i) Salaries [Secs. 15 to 17]

(ii) Income from House Property [Secs. 22 to 27]

(iii) Profits and Gains of Business or Profession [Secs. 28 to 44DB]

(iv) Capital Gains [Secs. 45 to 55A]

(v) Income from Other Sources [Secs. 56 to 59]

Gross Total Income means aggregate of income computed under the above five
heads, after making clubbing provisions and adjustments of set off and carry
forward of losses.

10. Total Income and Computation of Tax Liability

Total income of an assessee means the Gross Total Income (GTI) as reduced by the
amount of deduction available under sections 80C to 80U.

1. Income from Salaries

Income from salary ……..
Add: Taxable allowances ……..
Add: Taxable perquisites ………
Gross Salary ……..
Less: Deductions u/s 16
– Standard deduction
– Entertainment ……..
allowance
– Professional tax ……..
Taxable Income under the ……..
head ‘Salaries’
2. Income from House
Property
Net Annual Value ……..
Less: Deductions u/s 24 ……..
Taxable Income under the ……..
head ‘Income from House
Property’
3. Profits and Gains of
Business and Profession
Net profit as per Profit ……..
and Loss Account
Add: Amounts debited to ……..
P & L A/c but are not
allowable as deduction
under the Act
Add: Amounts not ……..
credited to P & L A/c but
are taxable under the head
PGBP
Less: Amounts credited to ……..
P & L A/c but are exempt
u/s 10 or are taxable
under other heads of
income
Less: Amounts not ……..
debited to P & L A/c but
are allowable as
deduction under the Act
Taxable Income under the ……..
head ‘Profits and Gains of
Business and Profession’
4. Capital Gains
Amount of Capital gains ……..
u/s 48
Less: Exemption u/ss 54, ……..
54B, 54D, 54EC, 54EE,
54F, 54G, 54GA, 54GB,
54H
Taxable Income under the ……..
head ‘Capital gains’
5. Income from other
sources
Gross income ……..
Less: Deductions u/s 57 ……..
Taxable Income under the ……..
head ‘Income from other
sources’
Total [1 + 2 + 3 + 4 + 5] ……..
Less: Adjustment of set ……..
off and carry forward of
losses
Gross Total Income ……..
Less: Deductions under ……..
sections 80C to 80U
[Chapter VI-A]
Net Taxable Income ……..
Computation of Tax
Liability:
Tax on Net income ……..
Less: Rebate u/s 87A ……..
(Available if resident
individual is having net
taxable income of `
5,00,000 or less)
Income Tax after rebate ……..
Add: Surcharge, if ……..
applicable
Tax and surcharge ……..
Add: Health and ……..
Education cess
Less: Rebate u/ss 86, 89, ……..
90, 90A and 91
Less: Prepaid taxes, if
paid
Self assessment tax paid ……..
(SAT)
Tax Deducted or ……..
Collected at Source (TDS
and TCS)
Advance tax ……..
Total Net Tax liability ……..

11. Exemption and Deduction in respect of income

• Exemption in respect of any income means that such income shall not form
part of any head of income and therefore not to be included in computation of total
income. Whereas, deduction in respect of any income means that such income shall
be first included under the respective head of income for the computation of gross
total income and thereafter deduction can be claimed on such income under the
respective head or from the gross total income. Deduction may also be allowed for
making certain specified payments or contributions.

• For e.g. Section 10 provides exemption in respect of certain incomes;

sections 54, 54b, 54d, 54ec, 54f, 54g, 54ga, 54gb, 54H provides exemption in
respect of capital gains of the assessee.

Section 16 [i.e. standard deduction, entertainment allowance and professional tax]

provides deduction from gross salary, section 24 provides standard deduction and
deduction for interest of loan borrowed under the head ‘Income from House
Property’. Further, Chapter VI-A [i.e. sections 80C to 80U] provides deduction
from gross total income of the assessee.

• Exemption cannot exceed the taxable income; but deduction can exceed
taxable income.

12. Rounding off of Income: [Sec. 288A]

The total income computed in accordance with the provisions of this Act shall be
rounded off to the nearest multiple of ` 10.
If the last figure in that amount is five or more, the amount shall be increased to the
next higher amount which is multiple of 10 and if the last figure is less than five,
the amount shall be reduced to the next lower amount which is multiple of 10.

13. Rounding off of Tax: [Sec. 288B]

The total amount of income tax payable and the amount of refund due, computed
in accordance with the provisions of this Act shall be rounded off to the nearest
multiple of ` 10.

If the last figure in that amount is five or more, the amount shall be increased to the
next higher amount which is multiple of 10 and if the last figure is less than five,
the amount shall be reduced to the next lower amount which is multiple of 10.

PART -II

Definitions

Table of Contents:

1. Definition of ‘Liable to Tax’: [Sec. 2(29A)]

2. Definition of ‘Company’: [Sec. 2(17)]

3. Definition of ‘Company in which the public are substantially interested’:

[Sec. 2(18)]

4. Definition of ‘Person having substantial interest in the company’: [Sec.

2(32)]

5. Definition of ‘India’: [Sec. 2(25A)]

6. Definition of ‘Indian Company’: [Sec. 2(26)]

7. Definition of ‘Domestic company’: [Sec. 2(22A)]

8. Definition of ‘Foreign company’: [Sec. 2(23A)]

9. Definition of ‘Amalgamation’: [Sec. 2(1B)]

10. Definition of ‘Demerger’: [Sec. 2(19AA)]

1. Definition of ‘Liable to Tax’: [Sec. 2(29A)]

‘Liable to tax’, in relation to a person and with reference to a country, means that
there is an income-tax liability on such person under the law of that country for the
time being in force and shall include a person who has subsequently been
exempted from such liability under the law of that country.

[Inserted by Finance Act, 2021]

2. Definition of ‘Company’: [Sec. 2(17)]

Company means:

(i) any Indian company, or

(ii) any body corporate incorporated under the laws of any country outside India,
or

(iii) any institution, association or body which was assessed as a company for any
assessment year under the Income-tax Act, 1922 or was assessed under this Act as
a company for any assessment year commencing on or before 1-4-1970, or

(iv) any institution, association or body, whether incorporated or not and whether
Indian or non- Indian, which is declared by a general or special order of CBDT to
be a company.

3. Definition of ‘Company in which the public are substantially interested’:

[Sec. 2(18)]

Section 2(18) defines ‘A company in which the public are substantially interested’
to include as under:

(i) A company owned by Government or Reserve Bank of India.

(ii) A company in which not less than 40% of the shares are held by Government
or RBI or a corporation owned by the RBI.

(iii) Companies registered u/s 25 of the Companies Act, 1956 or Sec. 8 of

Companies Act, 2013. However, if at any time these companies declare dividend
they would lose the status of a company in which the public are substantially
interested.

(iv) A company, declared by the CBDT.

(v) Mutual benefit finance company, where principal business of the company is
acceptance of deposits from its members and which has been declared by C.G. to
be a Nidhi or a Mutual Benefit Society.

(vi) A company in which at least 50% or more equity shares have been held by one
or more co-operative societies.

(vii) A Public Ltd. Company: A Company is deemed to be a public limited

company if it is not a private company as defined by Companies Act, 2013 and is
fulfilling either of the following two conditions:

(a) Its equity shares were listed on a recognized stock exchange, as on the last day
of the relevant previous year; or

(b) Its equity shares carrying at least 50% of the Voting power (in the case of an
industrial company, the limit is 40%) were beneficially held throughout the
relevant previous year by Government or a statutory corporation or a company in
which the public are substantially interested or a wholly owned subsidiary of such
a company.

Note:

‘Company in which the public are substantially interested’ is also referred to as

Widely held company.

Company in which the public are not substantially interested is also referred to as
Closely held company.

4. Definition of ‘Person having substantial interest in the company’: [Sec.

2(32)]
A person who is –

(i) the beneficial owner of shares (not being shares entitled to a fixed rate of
dividend),

(ii) whether with or without a right to participate in profits,

(iii) carrying at least 20% of the total voting power.

5. Definition of ‘India’: [Sec. 2(25A)]

The term ‘India’ means –

(i) the territory of India as per article 1 of the Constitution,

(ii) its territorial waters, seabed and subsoil underlying such waters,

(iii) continental shelf,

(iv) exclusive economic zone, or

(v) any other specified maritime zone and the air space above its territory and
territorial waters.

Specified maritime zone means the maritime zone as referred to in the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones
Act, 1976.

6. Definition of ‘Indian Company’: [Sec. 2(26)]

‘Indian Company’ means a company formed and registered under the Companies
Act and includes –

(i) 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) a corporation established by or under a Central, State or Provincial Act;

(b) any institution, association or body which is declared by the Board to be a
company;

(ii) in the case of the state of Jammu and Kashmir, a company formed and
registered under any law for the time being in force in that state;

(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa,
Daman and Diu, and Pondicherry, a company formed and registered under any law
for the time being in force in that Union Territory:

Provided that the registered or, as the case may be, principal office of the company,
corporation, institution, association or body, in all cases is in India.

7. Definition of ‘Domestic company’: [Sec. 2(22A)]

A domestic company means an Indian company or any other company which, in

respect of its income is liable to tax under the Income Tax Act, has made
arrangements for declaration and payment of the dividends (including dividends on
preference shares) within India.

8. Definition of ‘Foreign company’: [Sec. 2(23A)]

Foreign company means a company which is not a domestic company.

9. Definition of ‘Amalgamation’: [Sec. 2(1B)]

‘Amalgamation’ in relation to companies, means the merger of one or more

companies with another company or the merger of two or more companies to form
one company (the company or companies which is so merge being referred to as
the amalgamating company or companies and company with which they merge or
which is formed as a result of merger, as the amalgamated company) in such a
manner that:

(i) all the property or liabilities of the amalgamating company or companies

immediately before the amalgamation becomes the property of the amalgamated
company by virtue of amalgamation;

(ii) shareholders holding not less that 75% in value of the shares in the
amalgamating company or companies other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary become shareholders of the amalgamated company by
virtue of amalgamation,

otherwise than as a result of the acquisition of the property of one company by

another company pursuant to the purchase of such property by the other company
or as a result of the distribution of such property to the other company after the
winding up of the first-mentioned company.

10. Definition of ‘Demerger’: [Sec. 2(19AA)]

‘Demerger’ in relation to companies, means the transfer, pursuant to a scheme of

arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged
company of its one or more undertakings to any resulting company in such a
manner that:

(i) all the property and liabilities of the undertaking being transferred by the
demerged company, immediately before the demerger, becomes the property and
liabilities of resulting company by virtue of demerger;

(ii) the property and liabilities are transferred by the demerged company at values
appearing in its books of account immediately before the demerger:

Provided that this sub-clause shall not be applicable where the resulting company
records the value of the property and liabilities at a value different from the value
appearing in the books of account of the demerged company, immediately before
the demerger, in compliance to the Ind AS specified in Annexure to the Companies
(Ind AS) Rules, 2015.

(iii) the resulting company issues, in consideration of the demerger, its shares to
the shareholders of the demerged company on a proportionate basis except where
the resulting company itself is a shareholder of the demerged company;

(iv) the shareholders holding not less than 75% in value of shares in the demerged
company other than shares already held therein immediately before the demerger,
or by a nominee for, the resulting company or, its subsidiary become the
shareholders of the resulting company or companies by virtue of demerger,
otherwise than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting company;
(v) the transfer of the undertaking is on a going concern basis;

(vi) the demerger is in accordance with the conditions, if any, notified u/s 72A(5)
by the Central Government in this behalf.

For the purposes of this section, the reconstruction or splitting up of a public sector
company into separate companies shall be deemed to be a demerger, if such
reconstruction or splitting up has been made to transfer any asset of the demerged
company to the resulting company and the resulting company:

(i) is a public sector company on the appointed day indicated in such scheme, as
may be approved by the C.G. or any other body authorised under the provisions of
Companies Act, 2013 or any other law for the time being in force governing such
public sector companies in this behalf; and

(ii) fulfils such other conditions as may be notified by the Central Government.

PART – III

Voluntary Disclosure Scheme

1. Introduction
 Undisclosed foreign income and undisclosed foreign assets are taxable
under the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015 (BM Act).
 Undisclosed foreign income and assets are not taxable under sections
68 to 69D read with section 115BBE
 Sections 68 to 69D of the Income-tax Act,1961 (‘the Act’) deal with
additions to total income, in respect of undisclosed income (other than
undisclosed foreign income and undisclosed foreign assets) represented
by:
1.
1. Unexplained Cash Credits [Section 68]
2. Unexplained Investments [Section 69]
3. Unexplained money, etc. [Section 69A]
 4. Amount of investments, etc., not fully disclosed in the books of
account [Section 69B]
5. Unexplained expenditure, etc. [Section 69C]
6. Amount borrowed or repaid on Hundi [Section 69D]
 Section 115BBE of the Act provides for Tax on income referred to in
section 68 or section 69 or section 69A or section 69B or section 69C
or section 69D.
 Section 115BBE (1)(a) provides an on-tap Voluntary Disclosure
Scheme (VDS) for disclosure in ITR by assessee in respect of
undisclosed incomes covered by sections 68 to 69D of the Act as
above.
 On-tap VDS u/s 115BBE(1) can be availed as under:
1.
1. Assessee should work out amount of undisclosed income and pay
tax @ 78% (60% tax plus surcharge of 25% plus health and
education cess of 3%) on or before 31st March of relevant
previous year.
2. Then disclose the amount of undisclosed income in Schedule OS
of ITR forms (all ITR forms have the provision for this except
ITR 1 and ITR 4S-Sugam)
 If not so disclosed and detected by Assessing Officer doing
assessment, penalty of 10% so that effective rate comes to 85.8%
 Undisclosed foreign income and assets will be taxed under the BM Act
and not u/s 115BBE(1) and hence can’t be disclosed in ITR in
Schedule OS
 Voluntary disclosure u/s 115BBE(1) and paying 78% tax will not
provide immunity from the Prohibition of Benami Property
Transactions Act, 1988 (PBPT Act) or any other law such as
Prevention of Corruption Act, 1988
2. Law applicable to taxation of undisclosed income/black money
The taxation of undisclosed income or black money is not exclusively
governed by the provisions of the Income-tax Act, 1961 (‘the Act’). If
undisclosed income is undisclosed foreign income or undisclosed foreign
asset, then the same will be taxed under the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 (BM Act) with
effect from 01-07-2015. Section 4 of the BM Act provides for the “scope of
total undisclosed foreign income and asset” which shall be taxed under that
Act. Section 4(1) of the BM Act provides that the total undisclosed foreign
income and asset of any previous year of an assessee shall be,—
(a) the income from a source located outside India, which has not been
disclosed in the return of income furnished by the assessee u/s 139 of the
Act;
(b) the income from a source located outside India, in respect of which ITR
was required to be filed u/s 139 of the Act but not filed by assessee;
(c) the value of undisclosed asset located outside India
As per section 2(2) of the BM Act, “assessee” means a person,—
(a) being a resident in India within the meaning of section 6 of the Income-
tax Act, 1961 (43 of 1961) in the previous year; or
(b) being a non-resident or not ordinarily resident in India within the
meaning of clause (6) of section 6 of the Income-tax Act, 1961 (43 of 1961)
in the previous year, who was resident in India either in the previous year to
which the income referred to in section 4 relates; or in the previous year in
which the undisclosed asset located outside India was acquired:
Section 4(3) of the BM Act provides clearly that the income included in the
total undisclosed foreign income and asset under this Act shall not form part
of the total income under the Income-tax Act. Therefore, Income-tax Act will
not apply if the BM Act applies to the undisclosed income in question.
If BM Act does not apply, then, undisclosed income (domestic undisclosed
income) will be taxed under the provisions of sections 68 to 69D of the
Income-tax Act. The additions under sections 68 to 69D are taxable under
section 115BBE of the Act at effective flat tax rate of 78%.
2.1 Taxation of unexplained amounts under sections 68 to 69D at flat
rate without allowing any deductions/threshold exemption limit –
Section 115BBE
Section 115BBE was first inserted into the Act by Finance Act, 2012.
Section 115BBE(1) was substituted by the Taxation Laws (Second
Amendment) Act, 2016 with effect from assessment year 2017-18.
The following points are noteworthy:
 The Finance Act, 2012 inserted section 115BBE in the Act to tax
unaccounted money represented by the additions covered by sections
68, 69, 69A, 69B, 69C and 69D at flat 30% without any deductions or
basic threshold exemption limit.
 Section 115BBE was enacted ‘In order to curb the practice of
laundering of unaccounted money by taking advantage of basic
exemption limit’.
Section 115BBE, as originally inserted in the Act had the following lacunae:
(i) The tax rate was ridiculously low rate of 30% given that the income was
not offered to tax but had to be detected and brought to tax.
(ii) There was no penalty for amounts of income detected and brought to tax
under this head.
(iii) Further, section 115BBE nowhere envisaged a voluntary disclosure
scheme where past unaccounted income can be declared by assessee in
current ITR by paying flat tax. Also, the ITR forms had no provision for
such voluntary disclosure.
The Taxation Laws (Second Amendment) Act, 2017 has cured the above
lacunae by putting in place a new section 115BBE regime by substituting
sub-section (1) of section 115BBE, inserting new section 271AAC and by
inserting new sub-section (1A) in section 271AAB. Section 115BBE(2) was
amended retrospectively w.e.f. 2017-18 by the Finance Act, 2018.
Section 115BBE(1), as applicable w.e.f. assessment year 2017-18, provides
that where the total income of an assessee,—
(a) includes any income referred to in section 68, section 69, section 69A,
section 69B, section 69C or section 69D and reflected in the return of
income furnished under section 139;
(b) determined by the Assessing Officer includes any income referred to in
section 68, section 69, section 69A, section 69B, section 69C or section 69D,
if such income is not reflected in Income-tax return as per (a) above,
the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the income referred to in clause
(a) and clause (b), at the rate of sixty per cent; and
(ii) the amount of income-tax with which the assessee would have been
chargeable had his total income been reduced by the amount of income
referred to in clause (i).
A Surcharge of 25% and education cess of 4% are applicable on the 60% tax
rate in section 115BBE taking the effective tax rate to 78%.
Section 115BBE(2), as amended by the Finance Act, 2018, provides that
notwithstanding anything contained in the Act, no deduction in respect of
any expenditure or allowance or set-off of any loss shall be allowed to the
assessee under any provisions of the Act in computing income under section
115BBE(1).
Since the term ‘or set off of any loss’ was specifically inserted in section
115BBE(2) only vide the Finance Act, 2016, w.e.f. 01.04.2017, an assessee
is entitled to claim set-off of loss against income determined under section
115BBE of the Act till the assessment year 2016-17.-CBDT Circular
No.11/2019 dated 19.06.2019.
Sub-section (1A) of section 271AAB provides that Assessing Officer may,
notwithstanding anything contained in any other provisions of this Act,
direct that, in a case where search has been initiated under section 132 on or
after 15-12-2016, the assessee shall pay:
(a) a penalty at the rate of 30% of the undisclosed income of the specified
previous year, if the assessee—
(i) in the course of the search, in a statement under sub-section (4) of section
132, admits the undisclosed income and specifies the manner in which such
income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived;
and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed
income; and
(B) furnishes the return of income for the specified previous year declaring
such undisclosed income therein;
(b) a penalty at the rate of 60% of the undisclosed income of the specified
previous year, if it is not covered under the provisions of clause (a);
The above penalty shall be in addition to tax, if any, payable by him.
Section 271AAC provides that:
(i) The Assessing Officer may direct that, in a case where the income
determined includes any income referred to in section 68, section 69, section
69A, section 69B, section 69C or section 69D for any previous year, the
assessee shall pay by way of penalty, in addition to tax payable under section
115BBE, a sum computed at the rate of 10% of the tax payable under clause
(i) of sub-section (1) of section 115BBE.
(ii) However, such penalty shall not be imposed in respect of income referred
to in section 68, section 69, section 69A, section 69B, section 69C or section
69D to the extent such income has been included by the assessee in the
return of income furnished under section 139 and the tax in accordance with
the provisions of clause (i) of sub-section (1) of section 115BBE has been
paid on or before the end of the relevant previous year.
(iii) No penalty under section 270A shall be leviable in respect of any
income referred to in section 68, section 69, section 69A, section 69B,
section 69C or section 69D.
(iv) Provisions of sections 274 and 275 shall apply to penalty under section
271AAC.
2.1.1 Features of Section 115BBE regime
The features of the section 115BBE are as under:
(i) Voluntary disclosure of undisclosed income by assessee enabled by
disclosure in a return filed under section 139. All Income-Tax Return forms
for AY2017-18 except ITR-1 and ITR-4 Sugam form envisage disclosure of
‘Deemed income chargeable to tax u/s 115BBE’ in Schedule OS and its
break-up as:


 Cash credits u/s 68
 Unexplained investments u/s 69
 Unexplained money etc. u/s 69A
 Undisclosed investments etc. u/s 69B
 Unexplained expenditure etc. u/s 69C
 Amount borrowed or repaid on hundi etc. u/s 69D
(ii) The effective tax rate (inclusive of 25% surcharge and Health and
Education Cess of 4%) under section 115BBE is 78%.
(iii) Voluntary disclosure scheme under section 115BBE has no expiry date.
It is ‘open on-tap’ unless in future section 115BBE is amended again to
prohibit voluntary disclosure.
(iv) Voluntary disclosure must be accompanied by deposit of tax of 78% of
the undisclosed income on or before the end of the relevant previous year.
Relevant previous year means previous year in return of which voluntary
disclosure is intended to be made.
(v) Voluntary disclosure should be made before any notice is issued by the
Department or before any search or seizure is carried out. This is important
as disclosure has to be in a return filed under section 139-be it original return
or revised return or belated return.
Disclosure in updated Return or ITR-U will serve no useful purpose as the
tax in respect of deemed income u/s 115BBE disclosed in ITR has to be paid
on or before 31st March of the relevant previous year as required by section
271AAC.
Besides, there is no Schedule – OS like disclosure provision in updated
return form ITR-U.
Instead of filing an updated return u/s 139(8A) to disclose incomes covered
by sections 68 to 69D, it would be preferable to pay tax u/s 115BBE @ 78%
by the end of current financial year and disclose the same in ITR for current
financial year.
(vi) If voluntary disclosure not made and undisclosed income is detected in
scrutiny assessment or reassessment or through survey ( i.e. any manner other
than search), then 10% penalty will apply under section 271AAC taking the
effective burden to 85.8% of the undisclosed income. Filing of return in
response to notice under section 142 or after survey is conducted will not be
regarded as voluntary disclosure. Nor will disclosure in any return filed
under section 148 be regarded as voluntary disclosure.
(vii) If undisclosed income is detected in any search, then in addition to the
10% penalty under section 271AAC, further penalty of 30% or 60% will be
levied under new sub-section (1A) of section 271AAB.
(viii) No penalty is imposable under section 270A.
In Fakir Mohmed Haji Hasan v. CIT [2002] 120 Taxman 11 (Guj.), the
Gujarat High Court laid down the following propositions:
 The scheme of sections 69, 69A, 69B and 69C of the Act would show
that in cases where the nature and source of investments made by the
assessee or the nature and source of acquisition of money, bullion, etc.,
owned by the assessee or the source of expenditure incurred by the
assessee are not explained at all, or not satisfactorily explained, then
the value of such investments and money, or value of articles not
recorded in the books of account or the unexplained expenditure may
be deemed to be the income of such assessee.
 It follows that the moment a satisfactory explanation is given about
such nature and source by the assessee, then the source would stand
disclosed and will, therefore, be known and the income would be
treated under the appropriate head of income for assessment as per the
provisions of the Act.
 However, when these provisions apply because no source is disclosed
at all on the basis of which the income can be classified under one of
the heads of income under section 14 of the Act, it would not be
possible to classify such deemed income under any of these heads
including ‘Income from other sources’ which have to be sources known
or explained.
 When the income cannot be so classified under any one of the heads of
income under section 14, it follows that the question of giving any
deductions under the provisions which correspond to such heads of
income will not arise.
 If it is possible to peg the income under any one of those heads by
virtue of a satisfactory explanation being given, then these provisions
of sections 69, 69A, 69B and 69C will not apply, in which event the
provisions regarding deductions, etc., applicable to the relevant head
of income under which such income falls will automatically be
attracted.
 The opening words of section 14 ‘Save as otherwise provided by this
Act’ clearly leave scope for ‘deemed income’ of the nature covered
under the scheme of sections 69, 69A, 69B and 69C being treated
separately, because such deemed income is not income from salary,
house property, profits and gains of business or profession, or capital
gains, nor is it income from ‘other sources’ because the provisions of
sections 69, 69A, 69B, and 69C treat unexplained investments,
unexplained money, bullion, etc., and unexplained expenditure as
deemed income where the nature and source of investment, acquisition
or expenditure, as the case may be, have not been explained or
satisfactorily explained. Therefore, in these cases, the source not being
known, such deemed income will not fall even under the head ‘Income
from other sources’.
 Therefore, the corresponding deductions, which are applicable to the
incomes under any of these various heads, will not be attracted in case
of deemed incomes which are covered under the provisions of sections
69, 69A, 69B and 69C in view of the scheme of those provisions.
2.1.2 Whether section 115BBE is applicable to business receipts/business
turnover omitted from profit and loss account and not included in ITR?
In the case of ACT Central Circle-13 Mumbai v. Rahil Agencies, order dated
23 November, 2016 the Tribunal held that section 115BBE does not apply to
business receipts/business turnover. The Tribunal observed as under:
“19. We have considered rival contentions and found that by applying
provisions of section 115BBE the AO has declined set off of business loss
against income declared during the course of survey/search. The provisions
of section 115BE are applicable on the income taxable under section 68, 69,
69A, 69B, 69C or 69D of the Act. The income declared by the assessee is
unrecorded stock of diamond found during the course of search. The assessee
is in the business of diamond trade and such stock was part of the business
affair of the company. Therefore, since income declared is in the nature of
business income, the same is not taxable under any of the section referred
above and accordingly section 115BBE has no application in case.”
Section 115BBE does not apply to business receipts/business turnover.
Where AO had accepted after confronting the assessee with facts that
undisclosed amount of assessee in his bank account was undisclosed
business receipts/turnover and made additions applying @ 4% net profit
margin on the amount, section 115BBE would not be attracted and
revisionary order under section 263 directing AO to apply section 115BBE
cannot be sustained. Only probability and likelihood to find error in
assessment order is not permitted under section 263, Commissioner ought to
find out specific error in assessment order [Abdul Hamid v. Income-tax
Officer [2020] 117 taxmann.com 986 (Gauhati – Trib.)]
In Principal Commissioner of Income Tax, 20, Delhi v. Akshit Kumar [2021]
124 taxmann.com 123 (Delhi), it was held that where quantum figure and
opening stock was accepted in previous years during scrutiny assessments,
receipt from sales made by assessee proprietary concern out of its opening
stock could not be treated as unexplained income to be taxed as ‘income
from other sources’.
Where nature and source of excess stock found during search was not
specifically identifiable from profits which had accumulated from earlier
years, AO was justified in holding that said excess stock was not undisclosed
investment of assessee and no case of perversity or lack of enquiry on part of
Assessing Officer was made out so as to render his decision erroneous under
Explanation 2 to section 263. In the present cases, explanations have been
offered by the assessees that excess stock was a result of suppression of
profits from business over the years and is a part of the overall stock found.
In ITA Nos. 9 & 14 of 2021, the assessees concerned gave further
clarification that the excess stock had been admitted in Schedule ‘L’ under
the heading, ‘other operating income’ under the head “Profits and Gains of
the Business” in Part A of the Return filed for the relevant Assessment Year.
Hence, the excess stock could not have been treated as ‘undisclosed
investment’ under section 69 of the Act. [PCIT v. Deccan Jewellers (P.)
Ltd. [2021] 132 taxmann.com 73 (AP)]
AO can’t make additions u/s 69A on a hypothetical basis without carrying
out enquiry to find out more details. Where assessee sold several flats during
year and pursuant to search, a letter addressed to one DS showed that DS
paid Rs. 57.73 lakhs towards purchase of flat, whereas agreement value with
reference to same was Rs. 49.18 lakhs and Assessing Officer multiplied
difference in sale price to number of flats sold and made additions under
section 69A, Tribunal having accepted assessee’s explanation that initially
said flat was negotiated for a sum of Rs. 59.34 lakhs, however, later booking
was cancelled and thereafter it was sold at Rs. 49.18 lakhs to DS, entire
additions having been made by Assessing Officer without enquiry on
hypothetical basis, Tribunal had not committed any perversity or applied
incorrect principles to given facts to set aside additions so made [ PCIT v.
Nexus Builders and Developers (P.) Ltd. [2022] 134 taxmann.com 82
(Bom.)]

PART – IV

Residential Status
Table of Contents
1. What is the relevance of residential status

2. What one must know for deciding residential status

3. How to determine residential status of an individual [Sec. 6]

4. How to find out residential status of a Hindu undivided family

5. How to determine residential status of firm and association of persons

6. How to find out residential status of a company

7. How to determine residential status of every other person

8. What is the relationship between residential status and incidence of tax

[Sec. 5]

9. What is receipt of income

10. What is accrual of income

11. What is income deemed to accrue or arise in India

1. What is the relevance of residential status?

Tax liability of an assessee depends upon his residential status. Suppose an

individual generates some income outside India. He is an Indian citizen. To find
out whether his foreign income is taxable in India, one has to determine his
“residential status” under the provisions of Income-tax Act. Likewise, whether an
income earned by a foreign national in India (or outside India) is taxable in India,
depends on the residential status of the individual, rather than on his citizenship.
Therefore, the determination of the residential status of a person is very significant
in order to find out his tax liability.

1.1 Relationship between residential status and tax liability in brief

There are two types of taxpayers – resident in India and non-resident in India.
Indian income is taxable in India whether the person earning income is resident or
non-resident. Conversely, foreign income of a person is taxable in India only if
such person is resident in India. Foreign income of a non-resident is not taxable in
India.

2. What one must know for deciding residential status?

The following norms one has to keep in mind while deciding residential status of
an assessee :

 Different taxable entities – All taxable entities are divided in the following
categories for the purpose of determining residential status :

a. an individual ;

b. a Hindu undivided family ;

c. a firm or an association of persons ;

d. a joint stock company ; and

e. every other person.

 Different residential status – An assessee is either : (a) resident in India, or

(b) non-resident in India. However, a resident individual or a Hindu
undivided family has to be (a) resident and ordinarily resident, or (b)
resident but not ordinarily resident. Therefore, an individual and a Hindu
undivided family can either be :

a. resident and ordinarily resident in India ; or

b. resident but not ordinarily resident in India ; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company
and every other person) can either be :

a. resident in India ; or

b. non-resident in India.

The table given below highlights the same—

  Residential status for each previous year – Residential status of an
assessee is to be determined in respect of each previous year as it may vary
from previous year to previous year.

 Different residential status for different previous years in same

assessment year not possible – If a person is resident in a previous year
relevant to an assessment year in respect of any source of income, he shall
be deemed to be resident in India in the previous year(s) relevant to the same
assessment year in respect of each of his other sources of income [sec. 6(5)].

 Different residential status for different assessment years – An assessee

may enjoy different residential status for different assessment years. For
instance, an individual who has been regularly assessed as resident and
ordinarily resident has to be treated as non-resident in a particular
assessment year if he satisfies none of the conditions of section 6(1) in that
year.

 Resident in India and abroad – It is not necessary that a person who is

“resident” in India, cannot become “resident” in any other country for the
same assessment year. A person may be resident in two (or more) countries
at the same time. It is, therefore, not necessary that a person who is resident
in India will be non-resident in all other countries for the same assessment
year.

3. How to determine the residential status of an individual? [Sec. 6]

An individual may be (a) resident and ordinarily resident in India, (b) resident but
not ordinarily resident in India, or (c) non-resident in India.

3.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)]

To find out whether an individual is “resident and ordinarily resident” in India, one
has to proceed as follows—
 Step First find out whether such individual is “resident” in See para 3.1.1
1 India.

Step If such individual is “resident” in India, then find out See para 3.1.2
2 whether he is “ordinarily resident” in India. However,
if such individual is a “non-resident” in India, then no
further investigation is necessary.

3.1.1 Basic conditions to test as to when an individual is resident in India

Under section 6(1) an individual is said to be resident in India in any previous year,
if he satisfies at least one of the following basic conditions—

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

Basic condition He is in India for a period of 60 days or more during the

(b) previous year and 365 days or more during 4 years
immediately preceding the previous year

3.1.1a Exceptions

The aforesaid rule of residence is subject to the following exceptions—

 Exception one (Special Case 1) – In Special Case 1, the period of “60

days” referred to in Basic condition (b) above has been extended to 182 days
by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is
available only in the case of an Indian citizen who leaves India during the
previous year for the purpose of employment outside India or an Indian
citizen who leaves India during the previous year as a member of the crew of
an Indian ship. For this purpose, the requirement is not leaving India for
taking employment outside India but leaving India for the purposes of
employment (the employment may be in India or may be outside India). To
put it differently, the individual need not be an unemployed person. He may
be employed in India and leave India during the previous year on a foreign
 assignment of his employer company. Alternatively, he may be an
unemployed person who goes outside India to take an employment outside
India.

In Special Case 1, an individual will be resident in India only if he is in India

during the relevant previous year for at least 182 days‡.

 Exception two (Special Case 2) – In Special Case 2, the period of “60

days” referred to in Basic condition (b) above has been extended to 182 days
by virtue of Explanation 1(b) to section 6(1). However, Special Case
2 covers only an Indian citizen or a person of Indian origin who comes on a
visit to India during the previous year. 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. It may be noted that grand-parents include both maternal
and paternal grand-parents.

In Special Case 2, an individual will be resident in India only if he is in India

during the relevant previous year for at least 182 days‡.

 Exception three – Exception three is given by section 6(1A). For this

exception, see para 3.3.1.

3.1.2 Additional conditions to test as to when a resident individual is ordinarily

resident in India

Under section 6(6), a resident individual is treated as “resident and ordinarily

resident” in India if he satisfies the following two additional conditions —

Additional He has been resident† in India in at least 2 out of 10

condition (i) previous years immediately preceding the relevant
previous year.

Additional He has been in India for a period of 730 days or more

condition (ii) during 7 years immediately preceding the relevant
previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in
India if he satisfies at least one of the basic conditions [i.e., (a) or (b)] and the two
additional conditions [i.e., (i) and (ii)].

3.1.3 Other Points

It is worthwhile to note the following propositions –

 It is not essential that the stay should be at the same place. It is equally not
necessary that the stay should be continuous. Similarly, the place of stay or
the purpose of stay is not material.

 Where a person is in India only for a part of a day, the calculation of

physical presence in India in respect of such broken period should be made
on an hourly basis. A total of 24 hours of stay spread over a number of days
is to be counted as being equivalent to the stay of one day. If, however, data
is not available to calculate the period of stay of an individual in India in
terms of hours, then the day on which he enters India as well as the day on
which he leaves India shall be taken into account as stay of the individual in
India.

3.2 Resident but not ordinarily resident [Sec. 6(1), (6)(a)]

An individual who satisfies at least one of the basic conditions [i.e., condition (a)
or (b) mentioned in para 3.1.1] but does not satisfy the two additional conditions
[i.e., conditions (i) and (ii) mentioned in para 3.1.2], is treated as a resident but not
ordinarily resident in India. In other words, an individual becomes resident but not
ordinarily resident in India in any of the following circumstances :

Case If he satisfies at least one of the basic conditions [i.e., condition (a) or
1 (b) of para 3.1.1] but none of the additional conditions [i.e., (i) and (ii)
of para 3.1.2]

Case If he satisfies at least one of the basic conditions [i.e., condition (a) or
2 (b) of para 3.1.1] and one of the two additional conditions [i.e., (i) and
(ii) of para 3.1.2]
3.3 Non-resident

An individual is a non-resident in India if he satisfies none of the basic conditions

[i.e., condition (a) or (b)]. In the case of non-resident, additional conditions are not
relevant.

3.3.1 Exceptions

Even if an individual satisfies none of the two basic conditions, he is deemed to be

resident but not ordinarily resident in the cases given below –

 First exception – This exception is given under section 6(1A) read with
section 6(6)(d) and applicable from the assessment year 2021-22. Under this
exception an individual shall be deemed to be resident but not ordinarily
resident in India, if he satisfies the following 3 conditions –

a. he is an Indian citizen;

b. his total income (other than the income from foreign sources) exceeds Rs.
15,00,000#during the relevant previous year, and

c. he is not liable to tax in any other country or territory by reason of his domicile
or residence or any other criteria of similar nature.

The rule given by above exception is not applicable in the case of an individual
who becomes resident in India by satisfying any of the basic conditions given by
section 6(1) [see para 3.1]. Moreover, the above exception is not applicable in the
case of a foreign citizen (even if he is a person of Indian origin).

 Second exception – This exception is given by section 6(6)(c) read

with Explanation 1(b) to section 6(1) and applicable from the assessment
year 2021-22. Under this exception, an individual shall be deemed to be
resident but not ordinarily resident in India if he satisfies the following 4
conditions –

a. he is an Indian citizen or a person of Indian origin;

b. his total income (other than the income from foreign sources) exceeds Rs.
15,00,000#during the relevant previous year;
c. he comes to India on a visit during the relevant previous year, and

d. he is in India for 120 days (or more but less than 182 days) during the relevant
previous year and 365 days (or more) during 4 years immediately preceding the
relevant previous year.

3.3.1a Other Points

For the aforesaid two exceptions, the following should be kept in view –

 How to find out total income of Rs. 15,00,000 – Total income for the
ceiling of Rs. 15,00,000 is calculated after ignoring income from foreign
sources. “Income from foreign sources” means income which accrues or
arises outside India (except income derived from a business controlled in or
a profession set up in India). Income which is deemed to accrue or arise in
India shall be included in computation of the ceiling of Rs. 15,00,000.

 Liable to tax – “Liable to tax” (in relation to a person and with reference to
a country) means that there is an income-tax liability on such person under
the law of that country for the time being in force and shall include a person
who has subsequently being exempted from such liability under the law of
that country.

 Person of Indian origin – A person is deemed to be of Indian origin if he,

or either of his parents or any of his grandparents, was born in undivided
India.

3.4 Rule of residence for an individual in brief –

The table given below summarises the rule of residence –

Who is resident and He must satisfy at least one of the basic conditions [i.e.,
ordinarily resident in (a) and/or (b)]. At the same time, he should also satisfy
India the two additional conditions.
 Who is resident but He must satisfy at least one of the basic conditions [i.e.,
not ordinarily (a) and/or (b)]. He may satisfy one or none of the
resident in India additional conditions.

Who is non-resident He satisfies none of the basic conditions [i.e., he does

resident in India not satisfy basic condition (a) and basic condition (b)].
Additional conditions are not relevant in the case of a
non-resident.

Note – Besides the provisions summarised in the above table, an individual

becomes resident but not ordinarily resident in India if he comes within the two
exceptions mentioned in para 3.3.1.

4. How to find out the residential status of a Hindu undivided family?

A Hindu undivided family (like an individual) is either resident in India or non-

resident in India. A resident Hindu undivided family is either ordinarily resident or
not ordinarily resident.

4.1 When a Hindu undivided family is resident or non-resident

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

The table given below highlights the same proposition —

Place of control Residential status of Ordinarily resident

family or not

Control and management of the

affairs of a Hindu undivided
 family is—

 Resident See para 4.2

 Wholly in India

 Non-resident —

 Wholly out of India

 Resident See para 4.2

 Partly in India and

partly outside India

In order to determine whether a Hindu undivided family is resident or non-resident,

the residential status of the karta of the family during the previous year is not
relevant. Residential status of the karta during the preceding years is considered for
determining whether a resident family is “ordinarily resident”.

 What is “control and management” – Control and management is situated

at a place where the head, the seat and the directing power are situated. 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 concerning the affairs of the family are taken at that
place.

4.2 When a resident Hindu undivided family is ordinarily resident in India

A resident Hindu undivided family is an ordinarily resident in India if karta or

manager of the family (including successive kartas) satisfies the following two
additional conditions as laid down by section 6(6)(b) :

Additional Karta has been resident in India in at least 2 out of 10 previous

 condition years [according to the basic condition mentioned in para 3.1.1]
(i) immediately preceding the relevant previous year

Additional Karta has been present in India for a period of 730 days or more
condition during 7 years immediately preceding the previous year
(ii)

If karta or manager of a resident Hindu undivided family does not satisfy the two
additional conditions, the family is treated as resident but not ordinarily resident in
India.

5. How to determine the residential status of the firm and association of

persons?

A partnership firm and an association of persons are said to be resident in India if

control and management of their affairs are wholly or partly situated within India
during the relevant previous year. They are, however, treated as non-resident in
India if control and management of their affairs are situated wholly outside India.

The above rule may be summarised as follows—

Place of control Residential

status

Control and management of the affairs of a firm/association

of persons is—

 Resident

 Wholly in India

 Non-resident

 Wholly outside India

  Resident

 Partly in India and partly outside India

A firm/an association of persons cannot be “ordinarily” or “not ordinarily

resident”. The residential status of the partners/members of the firm/association is
not relevant in determining the status of the firm/association.

6. How to find out the residential status of a company?

Residential status of a company is determined as follows –

Sectio Company Residential status

n

6(3)(i) Indian company Always resident in India

6(3) A foreign company (whose It will be resident in India if its

(ii) turnover/gross receipt in the place of effective management
previous year is more than Rs. 50 (POEM), during the relevant
crore) previous year, is in India

6(3) A foreign company (whose Always non-resident in India

(ii) turnover/gross receipt in the
previous year is Rs. 50 crore or
less)

7. How to determine the residential status of every other person?

Every other person is resident in India if control and management of its affairs is,
wholly or partly, situated within India during the relevant previous year. On the
other hand, every other person is non-resident in India if control and management
of its affairs is wholly situated outside India.

8. What is the relationship between residential status and incidence of tax?

[Sec. 5]
Under the Act, incidence of tax on a taxpayer depends on his residential status and
also on the place and time of accrual or receipt of income.

8.1 Indian income and foreign income

In order to understand the relationship between residential status and tax liability,
one must understand the meaning of “Indian income” and “foreign income”.

8.1.1 Indian income

Any of the following three is an Indian income—

1. If income is received (or deemed to be received) in India during the previous

year and at the same time it accrues (or arises or is deemed to accrue or
arise) in India during the previous year.

2. If income is received (or deemed to be received) in India during the previous

year but it accrues (or arises) outside India during the previous year.

3. If income is received outside India during the previous year but it accrues (or
arises or is deemed to accrue or arise) in India during the previous year.

8.1.2 Foreign income

If the following two conditions are satisfied, then such income is “foreign
income”—

1. income is not received (or not deemed to be received) in India; and

2. income does not accrue or arise (or does not deemed to accrue or arise) in
India†.

8.2 Incidence of tax for different taxpayers

Tax incidence of different taxpayers is as follows—

Individual and Hindu undivided family

Resident and Resident but Non-resident

ordinarily not ordinarily
 resident in resident in in India
India India

 Taxable in Taxable in Taxable in

India India India
 Indian income

 Taxable in Only two Not taxable in

India types of India
 Foreign income
foreign
incomes

(i.e., Case
1 and Case
2 given
below) are
taxable in
India

Any other
foreign
income is not
taxable in
India

The following foreign incomes are taxable in the hands of a resident but not
ordinarily resident in India—

Case 1 – If it is business income and business is controlled wholly or partly from

India.

Case 2 – If it is income from a profession which is set up in India.

No other foreign income (like salary, rent, interest, etc.) is taxable in India in the
hands of a resident but not ordinarily resident taxpayer.
 Any other taxpayer (like company, firm, co-operative
society, association of persons, body of individual,
etc.)

Resident in India Non-resident in India

Indian income Taxable in India Taxable in India

Foreign income Taxable in India Not taxable in India

8.3 Conclusions

The following broad conclusions can be drawn—

1. Indian income – Indian income is always taxable in India irrespective of the

residential status of the taxpayer.

2. Foreign income – Foreign income is taxable in the hands of resident (in

case of a firm, an association of persons, a joint stock company and every
other person) or resident and ordinarily resident (in case of an individual and
a Hindu undivided family) in India. Foreign income is not taxable in the
hands of non-resident in India.

In the hands of resident but not ordinarily resident taxpayer, foreign income is
taxable only if it is (a) business income and business is controlled wholly or partly
from India, or (b) professional income from a profession which is set up in India.
In any other case, foreign income is not taxable in the hands of resident but not
ordinarily resident taxpayers.

8.4 Provisions illustrated

Different situations are covered in the table given below —

Nature of income Reasons Conclusions – Is it taxable in

 India for the assessment year
2022-23

Resident* Resident Non-

or but not residen
resident ordinaril t
and y
Ordinaril resident
y
resident*
*

1. Rental income of It is Indian income. Yes Yes Yes

Rs. 36,000 is received Indian income is
in India on May 10, always taxable
2021 (it may accrue
outside India or in
India)

2. Interest income of It is Indian income. Yes Yes Yes

Rs. 46,000 accrues in Indian income is
India on March 31, always taxable
2022 (it may be
received in India or
outside India)

3. Income of Rs. It is Indian income. Yes Yes Yes

56,000 is deemed to Indian income is
be received in India always taxable
on April 20, 2021 (it
may accrue outside
India or in India)
4. Income of Rs. It is Indian income. Yes Yes Yes
66,000 is deemed to It is always taxable
accrue or arise in
India during the
previous year 2021-
22 (it may be received
in India or outside
India)

5. Business income/ It is foreign income. Yes No No

professional income It is taxable in the
of Rs. 76,000 is case of resident and
received and accrued ordinarily resident
outside India during taxpayer. It is not
the previous year taxable in the case
2021-22 (business is of a non-resident.
controlled from Since it is
outside India or business/profession
profession is set up income and
out-side India) business is
controlled from
outside India or
profession is set up
outside India, it is
not taxable in the
case of resident but
not ordinarily
resident taxpayer

6. In situation 5, It is foreign income. Yes Yes No

suppose business is Since it is
controlled from India business/profession
or profession is set up al income and the
in India business is
controlled from
India or profession
is set up in India, it
is taxable in all
cases except non-
resident

7. Rental income or It is foreign income. Yes No No

salary income or It is taxable in the
interest income of Rs. case of resident and
86,000 is received ordinarily resident
outside India in the taxpayer. It is not
previous year 2021- taxable in the case
22 and at the same of non-resident.
time it accrues or Since it is foreign
arises outside India income which is
neither business
income nor
professional
income, it is not
taxable in the case
of resident but not
ordinarily resident

8. Gift† of Rs. 2 lakh It is foreign income. Yes No No

received outside India It is taxable in the
by an individual on case of resident and
November 6, 2021 ordinarily resident
from a friend. taxpayer. It is not
taxable in the case
of non-resident.
Since it is foreign
 income which is
neither business
income nor
professional
income, is not
taxable in the case
of resident but not
ordinarily resident

9. Gift† of Rs. 1 lakh It is Indian income. Yes Yes Yes

received in Delhi by It is taxable
an individual on
November 30, 2021
from a friend

10. Income of Rs. This income No No No

96,000 earned and pertains to the
received outside India previous year 2014-
in 2014-15 but later 15. It cannot be
on remitted to India in taxed at the time of
2021-22 remittance in 2021-
22

9. What is receipt of income

Income received in India is taxable in all cases irrespective of residential status of

an assessee. The following points are worth mentioning in this respect:

9.1 Receipts vs. Remittance

The “receipt” of income refers to the first occasion when the recipient gets the
money under his control. Once an amount is received as income, any remittance or
transmission of the amount to another place does not result in “receipt” at the other
place.
Provisions illustrated

An assessee receives $10,000 in USA on May 16, 2021. Out of $10,000, he remits
Rs. 50,000 to India on May 18, 2021. In this case, income is “received” outside
India on May 16, 2021.

9.2 Cash vs. Kind

It is not necessary that income should be received in cash. Income may be received
in cash or in kind. For instance, value of a free residential house provided to an
employee is taxable as salary in the hands of the employee though the income is
not received in cash.

9.3 Receipt vs. Accrual

Receipt is not the sole test of chargeability to tax. If an income is not taxable on
receipt basis, it may be taxable on accrual basis.

9.4 Actual receipt vs. Deemed receipt

It is not necessary that an income should be actually received in India in order to

attract tax liability. An income deemed to be received in India in the previous year
is also included in the taxable income of the assessee. The Act enumerates the
following as income deemed to be received in India:

 Interest credited to recognised provident fund account of an employee in

excess of 9.5 per cent.

 Excess contribution of employer in the case of recognised provident fund

(i.e., the amount contributed in excess of 12 per cent of salary).

 Transfer balance.

 Contribution by the Central Government or any other employer to the

account of an employee under a notified pension scheme referred to in
section 80CCD.

 Tax deducted at source.

10. What is accrual of income?

Income accrued in India is chargeable to tax in all cases irrespective of residential
status of an assessee. The words “accrue” and “arise” are used in contradistinction
to the word “receive”. Income is said to be received when it reaches the assessee ;
when the right to receive the income becomes vested in the assessee, it is said to
accrue or arise.

11. What is income deemed to accrue or arise in India?

In some cases, income is deemed to accrue or arise in India under section 9 even
though it may actually accrue or arise outside India. Section 9 applies to all
assessees irrespective of their residential status and place of business. The
categories of income which are deemed to accrue or arise in India are as under :

11.1 Income from business connection

The following conditions should be satisfied —

 Condition one – The taxpayer has a “business connection” in India.

 Condition two – By virtue of “business connection”† in India, income

actually arises outside India.

If the above conditions are satisfied, income which arises outside India because of
“business connection” in India, is deemed to accrue or arise in India.

11.2 Income through or from any property, asset or source of income in India

Income from any property, asset or source of income in India is deemed to accrue
or arise in India. For instance, a property in Chennai is owned by X, a non-resident.
It is given on rent. Rental income from the property is deemed to be earned in India
in the hands of X. This rule is applicable even if rent is received outside India.

11.3 Income through the transfer of capital asset situated in India

Any capital gain earned by a person by transfer of any capital asset situated in
India, is deemed to accrue or arise in India.

 An asset or a capital asset (being any share or interest in a company or entity

registered or incorporated outside India) shall be deemed to be and shall
always be deemed to have been situated in India if the share or interest
 derives, directly or indirectly, its value substantially from the assets located
in India*.

11.4 Income under the head “Salaries”

If service is rendered in India, salary income is deemed to be earned in India†.

11.5 Salary payable abroad by the Government to a citizen of India

Salary received by an Indian citizen from the Government of India for rendering
service outside India is deemed to accrue or arise in India. Such salary is taxable in
the hands of concerned employee even if he is non-resident. However, allowances
and perquisites received from the Government by an Indian citizen for rendering
service outside India, are exempt from tax.

11.6 Dividend paid by an Indian company [Sec. 9(1)(iv)]

Dividend received by a shareholder from an Indian company is always deemed to

accrue or arise in India.

11.7 Income by way of interest, royalty and technical fees

These are deemed to accrue or arise in India in the following cases –

1. Interest, royalty or technical fees received from the Central Government/any

State Government, is deemed to accrue or arise in India.

2. Interest, royalty or technical fees received from a resident person is deemed

to accrue or arise in India in the hands of recipient. However, this rule is not
applicable (a) if borrowed money is utilised by the payer for carrying on a
business/profession outside India or for earning any income outside India; or
(b) payment of royalty/technical fees pertains to a business/profession
carried on by the payer outside India or earning any income outside India.

3. Interest, royalty or technical fees received from a non-resident, is deemed to

accrue or arise in India in the hands of recipient, if (a) borrowed money is
utilised by the payer for carrying on a business/profession in India; or (b)
payment of royalty/technical fees pertains to a business/profession carried on
by the payer in India or earning any income in India.
  Interest received outside India by a foreign bank from its branch in
India – In the hands of recipient, income shall be deemed to accrue or arise
in India.

 Meaning of royalty – Broadly the term “royalty” means consideration

received or receivable for transfer of all or any right in respect of certain
rights, property or information. It also includes consideration for transfer of
all (or any) right for use (or right to use) a computer software (including
granting of a licence) irrespective of the medium through which such right is
transferred. Further, it includes consideration in respect of any right,
property or information, whether or not—

a. the possession or control of such right, property or information is with the payer;

b. such right, property or information is used directly by the payer;

c. the location of such right, property or information is in India.

Moreover, it includes consideration for use of any patent, invention, model, secret
formula or process. The expression “process” includes transmission by satellite
(including up-linking, amplification, conversion for down-linking of any signal),
cable, optic fibre or by any other similar technology, whether or not such process is
secret.

11.8 Deemed accrual of gift of money to a non-resident/foreign company [Sec.

9(1)(viii)]

Clause (viii) has been inserted in section 9(1) by the Finance (No. 2) Act, 2019.
This clause is applicable if the following conditions are satisfied –

1. Payer is resident in India (or money is received from a person resident in

India).

2. Recipient is non-resident/foreign company. A sum of money is received by

non-resident/foreign company on or after July 5, 2019.

If these conditions are satisfied, money received by the non-resident/foreign

company, shall be deemed to accrue or arise in India (even if it is received outside
India).
RESIDENTIAL STATUS OF A COMPANY

1. Residential status of a company [Sec. 6(3)]

Residential status of a company is determined as follows –

Section Company Residential status

6(3)(i) Indian company Always resident in India

[Note 1]

6(3)(ii) A foreign company (whose It will be resident in

turnover/gross receipt in the India if its place of
previous year is more than Rs. effective management
50 crore) (POEM), during the
relevant previous year, is
in India [Note 2]

6(3)(ii) A foreign company (whose Always non-resident in

turnover/gross receipt in the India [Note 3]
previous year is Rs. 50 crore
or less)

Notes –
1. An Indian company is always resident in India. Even if an Indian company
is controlled from a place located outside India (or even if shareholders of an
Indian company controlling more than 51 per cent voting power are non-
resident and/or located outside India), the Indian company is resident in
India. An Indian company can never be non-resident.
2. A foreign company is resident in India if its place of effective
management (POEM), during the relevant previous year, is in India. For this
purpose, the place of effective management means a place where key
management and commercial decisions that are necessary for the conduct of
the business of an entity as a whole are, in substance made. For this purpose,
a set of guiding principles (to be followed in determination of POEM) have
been issued by the Board in Circular No. 6/2017, dated January 24, 2017.
These guiding principles are briefly explained in para 28.1.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having
turnover or gross receipts of Rs. 50 crore or less in a financial year –
Circular No. 8/2017, dated February 23, 2017. In other words, a foreign
company (whose annual turnover/gross receipts is Rs. 50 crore or less)
cannot be resident in India from the assessment year 2017-18 onwards.

1.1 Place of effective management (POEM) as per Circular No. 6/2017

“Place of effective management” (POEM) is an internationally recognised
test for determination of residence of a company incorporated in a foreign
jurisdiction. Any determination of the POEM will depend upon the facts and
circumstances of a given case. The POEM concept is one of substance over
form. An entity may have more than one place of management, but it can
have only one place of effective management at any point of time. Since
“residence” is to be determined for each year, POEM will also be required to
be determined on year to year basis. The process of determination of POEM
would be primarily based on the fact as to whether or not the company is
engaged in active business outside India.
1.1.1 Company engaged in active business outside India
The place of effective management in case of a company engaged in active
business outside India shall be presumed to be outside India if the majority
meetings of the board of directors of the company are held outside India.
 Active business outside India – A company shall be said to be
engaged in “active business outside India” if –
(a) the passive income is not more than 50 per cent of its total income;
(b) less than 50 per cent of its total assets are situated in India;
(c) less than 50 per cent of total number of employees are situated in India or
are resident in India; and
(d) the payroll expenses incurred on such employees is less than 50 per cent
of its total payroll expenditure.
 Passive income – “Passive income” of a company shall be
aggregate of, —
(a) income from the transactions where both the purchase and sale of goods
is from/to its associated enterprises; and
(b) income by way of royalty, dividend, capital gains, interest or rental
income;
However, any income by way of interest shall not be considered to be
passive income in case of a company which is engaged in the business of
banking or is a public financial institution, and its activities are regulated as
such under the applicable laws of the country of incorporation.
1.1.2 Management power exercised in India
If on the basis of facts and circumstances it is established that the Board of
directors of the company are standing aside and not exercising their powers
of management and such powers are being exercised by either the holding
company or any other person(s) resident in India, then the place of effective
management shall be considered to be in India. For this purpose, merely
because the Board of Directors follows general and objective principles of
global policy of the group laid down by the parent entity which may be in the
field of Pay roll functions, Accounting, Human resource (HR) functions, IT
infrastructure and network platforms, Supply chain functions, Routine
banking operational procedures, and not being specific to any entity or group
of entities per se; would not constitute a case of Board of Directors of
companies standing aside.
1.1.3 Other cases
In cases of companies other than those discussed above, the determination of
POEM would be a two stage process, namely –
– First stage would be identification or ascertaining the person or persons
who actually make the key management and commercial decision for
conduct of the company’s business as a whole.
– Second stage would be determination of place where these decisions are in
fact being made.
The place where these management decisions are taken would be more
important than the place where such decisions are implemented. For the
purpose of determination of POEM it is the substance which would be
conclusive rather than the form.
 Guiding principles – Some of the guiding principles which may be
taken into account for determining the POEM are as follows –
1. The location where a company’s Board regularly meets and makes
decisions may be the company’s place of effective management provided, the
Board –
(a) retains and exercises its authority to govern the company; and
(b) does, in substance, make the key management and commercial decisions
necessary for the conduct of the company’s business as a wh ole.
2. If a board has de facto delegated the authority to make the key
management and commercial decisions for the company to the senior
management or any other person including a shareholder, promoter, strategic
or legal or financial advisor, etc., and does nothing more than routinely
ratifying the decisions that have been made, the company’s place of effective
management will ordinarily be the place where these senior managers or the
other person make those decisions.
3. A company’s board may delegate some or all of its authority to one or
more committees such as an executive committee consisting of key members
of senior management. In these situations, the location where the members of
the executive committee are based and where that committee develops and
formulates the key strategies and policies for mere formal approval by the
full board will often be considered to be the company’s place of effective
management.
4. The location of a company’s head office will be a very important factor in
the determination of the company’s place of effective management because it
often represents the place where key company decisions are made.
5. The use of modern technology impacts the place of effective management
in many ways. It is no longer necessary for the persons taking decision to be
physically present at a particular location. Therefore, physical location of
board meeting or executive committee meeting or meeting of senior
management may not be where the key decisions are in substance being
made. In such cases the place where the directors or the persons taking the
decisions or majority of them usually reside may also be a relevant factor.
6. The decisions made by shareholder on matters which are reserved for
shareholder decision under the company laws are not relevant for
determination of a company’s place of effective management . Such decisions
may include sale of all or substantially all of the company’s assets, the
dissolution, liquidation or deregistration of the company, the modification of
the rights attaching to various classes of shares or the issue of a new class of
shares etc. These decisions typically affect the existence of the company
itself or the rights of the shareholders as such, rather than the conduct of the
company’s business from a management or commercial perspective and are
therefore, generally not relevant for the determination of a company’s place
of effective management.
7. Day to day routine operational decisions undertaken by junior and middle
management shall not be relevant for the purpose of determination of POEM.
8. The determination of POEM is to be based on all relevant facts related to
the management and control of the company, and is not to be determined on
the basis of isolated facts that by itself do not establish effective
management, as illustrated by the following examples –
– The fact that a foreign company is completely owned by an Indian
company will not be conclusive evidence that the conditions for establishing
POEM in India have been satisfied.
– The fact that there exists a Permanent Establishment of a foreign entity in
India would itself not be conclusive evidence that the conditions for
establishing POEM in India have been satisfied.
– The fact that one or some of the directors of a foreign company reside in
India will not be conclusive evidence that the conditions for establishing
POEM in India have been satisfied.
– The fact of, local management being situated in India in respect of
activities carried out by a foreign company in India will not, by itself, be
conclusive evidence that the conditions for establishing POEM have been
satisfied.
– The existence in India of support functions that are preparatory and
auxiliary in character will not be conclusive evidence that the conditions for
establishing POEM in India have been satisfied.
1.1.4 Prior approval of Principle CIT/CIT Required
In case the Assessing Officer proposes to hold a foreign company, on the
basis of its POEM, as being resident in India then any such finding shall be
given by the Assessing Officer after seeking prior approval of the collegium
of three members consisting of the Principal CITs or CITs, as the case may
be, to be constituted by the Principal Chief Commissioner of the region
concerned, in this regard. The collegium so constituted shall provide an
opportunity of being heard to the foreign company before issuing any
directions in the matter.
1.2 Case studies
P1. 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.
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.
P2. Y Ltd. is a company incorporated in Mauritius (turnover more than Rs.
50 crore). 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 2022-23.
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.
P3. Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian
citizens and resident in India). The company has no active business in
Japan. Gross annual turnover of the company for the previous year 2021-
22 is Rs. 48 crore mainly from operations conducted from Korea, Sri
Lanka and India. The company is managed by a team of professionals
from India. Find out the residential status of Z Ltd. for the assessment year
2022-23.
Z Ltd. is a foreign company. Gross turnover of the company for the relevant
previous year is Rs. 48 crore. A foreign company (whose turnover/gross
receipts is not more than Rs. 50 crore) is treated as non-resident in India.
P4. B Ltd. is an Indian company. A Ltd. is a Mauritius company and it is
100 per cent subsidiary of B Ltd. The assets of A Ltd. are situated in
Mauritius. All employees of A Ltd. are also located in Mauritius. The
average income wise break-up of total income of A Ltd. for the current
year and last 2 years is as follows –
– 32 per cent of income is from transaction where purchases are made
from parties which are non-associated enterprises and sold to associated
enterprises;
– 34 per cent of income is from transaction where purchases are made
from associated enterprises and sold to associated enterprises;
– 27 per cent of income is from transaction where purchases are made
from associated enterprises and sold to non-associated enterprises; and
– 7 per cent of the income is by way of interest, royalty, dividend, capital
gain and rent.
Find out the residential status of A Ltd. for the assessment year 2022-23
(turnover of A Ltd. is more than Rs. 100 crore).
Passive income of A Ltd. is 41% (i.e., 34% + 7%). Passive income of A Ltd.
is not more than 50% of its total income. Besides, A Ltd. satisfies the
following condition –
(a) less than 50 per cent of its total assets are situated in India;
(b) less than 50 per cent of total number of employees are situated in India or
are resident in India; and
(c) the payroll expenses incurred on such employees is less than 50 per cent
of its total payroll expenditure.
A Ltd. is engaged in active business outside India. POEM of A Ltd. is
outside India. Consequently, A Ltd. is non-resident in India.
P5. Make the following changes in Problem 28-P4 and determine the
residential status of A Ltd. –
1. A Ltd. has 90 employees. 87 employees manage accounts, store and
warehouse in Mauritius. Managing director, Chief Executive Officer and
Sales Head are posted in Mumbai. Total payroll expenditure of 87
employees is Rs. 3.3 crore. Annual payroll expenditure of managing
director, Chief Executive Officer and Sales Head is Rs. 3.8 crore.
2. Tax is deducted under section 192 out of salary of Rs. 3.8 crore.
Only 41% of total income of A Ltd. is passive in nature. Further, more than
50% of the employees are also situated outside India. All the assets are
situated outside India. However, the payroll expenditure in respect of the
managing director, Chief Executive Officer and Sales Head (being
employees resident in India) exceeds 50% of the total payroll expenditure.
Therefore, A Co. is not engaged in active business outside India. The
Assessing Officer may conclude that POEM of A Ltd. is situated in India
and, consequently, A Ltd. is resident in India. However, before recording
this finding the Assessing Officer will have to take prior approval of the
collegium of three members consisting of the Principal CITs or CITs, as the
case may be, to be constituted by the Principal Chief Commissioner of the
region concerned, in this regard. The collegium so constituted shall provide
an opportunity of being heard to A Ltd. before issuing any directions in the
matter.
P6. In Problem 28-P4, assume that A Ltd. has 5 directors. These directors
are Indian citizens and resident in India. During the relevant previous
year, 2 meetings of board of directors are held in India, 3 meetings are
held in Mauritius and 1 meeting is held in Maldives. Determine the
residential status of A Ltd.
A Ltd. is engaged in active business outside India (as discussed in Problem
28-P4). The majority of board meetings have been held outside India.
Therefore, the POEM of A Ltd. is situated outside India. A Ltd. is non-
resident in India.
P7. The facts are same as in Problem 28-P6. However, it is noted by the
Assessing Officer that A Ltd.’s senior management team signs all the
contracts up to Rs. 15 lakh. For all the contracts above Rs. 15 lakh, A Ltd.
must submit its recommendation to its Indian holding company B Ltd. In
such cases, B Ltd. takes the final decision from India. It is also noted from
the records that during the current previous year more than 98 per cent of
the contracts are above Rs. 15 lakh (over past 2 years this percentage is 99
per cent). Find out the residential status of A Ltd.
These facts suggest that the effective management of the A Ltd. may have
been usurped by the holding company B Ltd. Therefore, POEM of A Ltd.
cannot be presumed to be outside India, even though A Ltd. is engaged in
active business outside India and majority of board meeting are held outside
India. Therefore, A Ltd. is resident in India. However, before recording this
finding the Assessing Officer will have to take prior approval of the
collegium of three members consisting of the Principal CITs or CITs, as the
case may be, to be constituted by the Principal Chief Commissioner of the
region concerned, in this regard. The collegium so constituted shall provide
an opportunity of being heard to A Ltd. before issuing any directions in the
matter.
P8. An Indian multinational group has a local holding company A Ltd. in
Singapore. A Ltd. also has 100 per cent downstream subsidiaries B Ltd.
and C Ltd. in Hong Kong and D Ltd. in Cyprus. A Ltd. has income only by
way of dividend and interest from investments made in its subsidiaries. The
POEM of A Ltd. is in India and is exercised by ultimate parent company of
the group. B Ltd., C Ltd. and D Ltd. are engaged in active business outside
India. The meetings of Board of Director of these companies are held in
Hong Kong and Cyprus. Find out the residential status of B Ltd., C Ltd.
and D Ltd.
Merely because POEM of A Ltd. (i.e., intermediate holding company) is in
India, the POEM of its subsidiaries shall not be taken to be in India. Each
subsidiary has to be examined separately. B Ltd., C Ltd. and D Ltd. are
independently engaged in active business outside India and majority of board
meetings of these companies are also held outside India. The POEM of these
companies shall be presumed to be outside India.