Unit 2

Scope of Total Income and Residential Status

Q1) Define gross total income. Explain the scope of Total income. (5 Marks) 

A1) Gross Total Income is the aggregate of all the income earned by you during a specified period. According to Section 14 of the Income Tax Act 1961, the income of a person or an assessee can be categorised under these five heads,

• Income from Salaries
• Income from House Property
• Profits and Gains of Business and Profession
• Capital Gains
• Income from Other Sources

While calculating gross total income one must sum up all of their income without reducing the amount for any tax saving investments made under Section 80C to 80U under Income Tax Act 1961.

Apart from adding earnings from all five heads of income following shall also be added to calculate your gross total income

• Income to be added as per the clubbing provisions under the Income Tax Act
• Adjustments for set off and carry forward of losses
• Unexplained Tax Credit under section 68 of the Income Tax Act 1961, received whether in cash or credit. Which means receipt of any amount of which you do not have sufficient or valid explanation describing the source of receipt of such income. These categories of income are added to your Gross Total Income.
• Unexplained Investments i.e., the investments which you have made but you are unable to give satisfactory explanation about the source or improper disclosures have been made on your part. In all these situations your investments will be termed as unexplained investments as per the purview of section 69 of the Income Tax Act. Also, it shall be added to your Gross Total Income (GTI)
• Assets and other money under Section 69A, valuables like money, jewellery etc for which no proper explanation is available with the assessee will be added to the Gross Total Income of the person.
• Undisclosed or lower disclosed income is added to the Gross Total Income as per the provisions of Section 69B of the Income Tax Act 1961. This relates to all those income and assets which you have not reported or made a lower disclosure then the actual funds.
• Unexplained expenditures under section 69C. In case you have made some expenses and no proper explanation regarding the same available then it would be added to your Gross Total Income and henceforth charged to taxes accordingly.
• Hundi amount borrowed or repaid. In case you have borrowed or repaid some amount on Hundi then it shall be added to your Gross Total income or GI as per the provisions of section 69D of the income tax act.

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year.

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Note-

1. Residential status is as per section 6 of Income Tax Act, 1961.
2. Deemed income is not actually accrued but is supposed to be accrued notionally.
3. The income accrued is when the assessee obtains the rights to receive it.
4. Previous year means the financial year immediately preceding the assessment year.

Q2) Write a note on Residential Status? (5 Marks) (2018, 2019)

A2) Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently.

Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfies any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

Ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfies all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if-

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

Ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Q3) How is the residential status of an individual determined? (5 Marks)

A3) Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfies any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

Ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfies all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if-

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

Ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Q4) Write a small note on tax. Write about Tax Incidence in India. (5 Marks)

A4) A tax is a mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure. The collected fund is then used to fund different public expenditure programs. 

These taxes are further subcategorized into direct and indirect taxes depending on the manner in which they are paid to the taxation authorities.

Direct Tax

• The definition of direct tax is hidden in its name which implies that this tax is paid directly to the government by the taxpayer
• The general examples of this type of tax in India are Income Tax and Wealth Tax.
• From the government’s perspective, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.

Indirect Tax

• Indirect taxes are slightly different from direct taxes and the collection method is also a bit different. These taxes are consumption-based that are applied to goods or services when they are bought and sold.
• The indirect tax payment is received by the government from the seller of goods/services.
• The seller, in turn, passes the tax on to the end-user i.e., buyer of the good/service.
• Thus, the name indirect tax as the end-user of the good/service does not pay the tax directly to the government.
• Some general examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.

Tax Incidence in India

A Resident Ordinary Resident is subject to tax on his global income in India. Resident Not Ordinary Resident and Non-Residents are generally subject to tax in India only in respect of India source income that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India.

Salary received in India or for services provided in India, rental income from a house property in India, capital gains on sale of assets in India — be it shares or house property, income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also Resident Not Ordinary Resident and Non-Residents.

Q5) What can an individual do to enjoy the benefits through Non-Resident status? (5 Marks)

A5) The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year.

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident

A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions:

1. Stay in India for a year is 182 days or more or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

In the event an individual who is a citizen of India or person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay in India. However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh. In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature.

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.

From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India who is deemed to be a resident in India (w.e.f FY 2020-21) will be a resident and ordinarily resident in India.

NOTE: Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in India or profession set up in India).

Non-resident

An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year.

Benefits of NRIs

In order to enjoy tax benefits through Non-Resident Status, individuals visiting India on a business trip should not stay for more than 181 days during one previous business year and their total stay in the previous four years should not exceed more than 364 days.

If individuals, having been in India for more than 365 days during four years preceding the relevant previous year, and stay for more than 60 days in the previous year, they should plan their visit to India in such a manner that their total stay in India falls under two previous years. Such persons can come to India any time in the first week of February and stay till May 29.

Q6) Mr. D, who is business head for Asia Pacific regions for a private firm. Mr. D was born and brought up in India. He has to travel to various locations of the continent for business purposes. He has spent 200 days travelling in the current financial year. Also, he has been travelling abroad from the past two years and has stayed out of India for about 400 days in this period.

Evaluate whether Mr. D was resident in India for the current financial year. (8 Marks)

A6) Condition I (Resides in India for a minimum of 182 days in a year) – Not satisfied

To figure out the resident status of Mr. D, you will understand that he has only spent 165 days in India during the current financial year as he spent 200 days travelling. Hence, he does not satisfy the first condition.

Condition II (Resides in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year) – Satisfied

However, it is given that Mr. D has been travelling only from the past two years. Also, it is said that he has travelled for 400 days in the past two years. That means, in the past four years, Mr. D has stayed in India for more than 365 days (1061 days).

Hence, Mr. D has resided for atleast 60 days in the current financial year and for more than 365 days in the immediately preceding four financial years. Therefore, Mr. D satisfies the second condition.

Hence, if any one of the above two condition is satisfied, he is a resident taxpayer.

Resident and Ordinarily Resident (ROR) and

Resident but Not Ordinarily Resident (RNOR)

There is a further classification under the resident status – Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).

In addition to the basic conditions, if both the below conditions are met, he will be a ROR:

• He has resided in India for at least 2 out of 10 immediate previous years.
• He has resided in India for at least 730 days in seven immediately previous years.

In above example Mr. D has satisfied as resident of India. Let us further classify whether Mr. D is ROR or RNOR

If both the additional conditions are satisfied then Mr. D is ROR

Considering the example, Mr. D was travelling out of India since past 2 years only. Hence, the first condition is satisfied as he resided in India for atleast 2 years out of the immediate previous 10 years. Also, he has fulfilled the criteria of residing for at least 730 days in seven immediately preceding years. Therefore, he can be considered as Resident Ordinarily Resident.

Q7) During the previous year 2018-19, X, a foreign citizen, stayed in India for just 69 days. Determine his residential status for the assessment year 2019-20 on the basis of the following information: (i) During 2015-16, X was present in India for 366 days. (ii) During 2012-13 and 2011-12, X was in Japan for 359 and 348 days respectively and for the balance period in India. (iii) Mrs. X is ‘resident’ in India for the assessment year 2019-20.  (8 marks)

A7) 

i)                   To determine whether he is resident or not — He is resident for previous year 2018-19 as he satisfies the second condition as he was here during the previous year for 69 days and in the preceding 4 years for 366 days.

Ii)                 To determine whether he is ordinarily resident or not — He should satisfy both of the additional conditions.

Year Stay in India

Whether resident or non-resident

2017-18   Nil   Non-resident

2016-17   Nil   Non-resident

2015-16   366 days  Resident

2014-15   Nil   Non-resident

2013-14   Nil   Non-resident

2012-13   7 days    Non-resident

2011-12   17 days   Non-resident

2010-11   Nil   Non-resident

Earlier years  Nil   Non-resident

He was in India for less than 730 days in the 7 preceding previous years. He is also non-resident in 9 out of 10 previous years preceding the previous year. Hence, he is “resident but not ordinarily resident”.

Q8) Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian Company, since 1.5.2014. He has been regularly going to USA for export promotion. He spent the following days in U.S.A. For the last five years:

Previous year ended   No. Of days spent in USA

31.3.2015     317 days

31.3.2016     150 days

31.3.2017     271 days

31.3.2018     311 days

31.3.2019     294 days

Determine his residential status for assessment year 2019-20 assuming that prior to 1.5.2014 he had never travelled abroad. (8 marks)

A8) Total stay in India

2014-15  48 days

2015-16  216 days

2016-17  94 days

2017-18  54 days

2018-19  71 days

During previous year 2018-19 his stay in India is 71 days and in the four preceding years 48 + 216 + 94 + 54 = 412 days. Resident in India (condition of 182 days for citizen not applicable as he has not gone for employment abroad but has been going out of India during the course of employment)

2017-18 —  54 days (Non-Resident)

2016-17 —  94 days but more than 365 days in the 4 preceding previous year. (Resident)

2015-16 —   216 days (Resident)

2014-15 —  48 days (Non-resident)

Prior to 2014-15 —  Resident

He satisfies the first condition of being resident in at least 2 out of 10 previous years prior to relevant previous year and the 2nd condition of being in India for 730 days or more in the 7 preceding previous years. He is “resident and ordinarily resident in India.”

Q9) (a) R was born in Lahore in 1948. He has been staying in America since 1970. He came to visit India on 2.10.2018 and returns on 31.3.2019. Determine his residential status for the assessment year 2019-20. (b) Shane Warne, an Australian cricket player, has been coming to India since 1994-95 every year to play cricket and has been staying here for about 4 months. What will be his residential status for the assessment year 2019-20? (5 marks)

A9)

(а) Non-resident as he neither satisfy the first conditions of 182 days nor the 2nd conditions as although he was in India during the previous year for 181 days (i.e., more than 60 days), but he was not in India for at least 365 days in the 4 preceding previous year.

(b) Resident in India, as he is in India for more than sixty days in the previous year and was in India for more than 365 days in the 4 preceding previous years. Further, he satisfies both the conditions of category B. He was resident in at least 2 out of 10 previous years prior to relevant previous year and was in India for 730 days or more in the 7 preceding previous years. Hence, he is “resident and ordinarily resident in India”.

Q10) Write an exhaustive note on residential status of an individual assessee. (5 marks)

A10) The Income Tax Act, 1961, (Act) to consolidate and amend the law relating to income tax. However, not everyone is liable to pay taxes on income under the Act. The Act makes certain exceptions and exempts certain kind and extent of income from taxation. As per Section 2(31) of the Act, defines the term “Person” for whom we will assess the income. Further, those who are liable to pay tax and whose incomes are assessed under the Act are known as “Assessees” and the same has been defined under section 2(7) of the Act. Also, for determining the tax liability of the Assessees, the same has been further categorise on the basis of Residential Status.

Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. Here, we have discussed about how the residential status of an individual taxpayer can be determined for the Previous Year i.e., 2019-2020 or Assessment Year 2020-2021.

Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfies any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

Ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfies all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

Ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Amendment have also been made vide Finance Act, 2020, From F.Y. 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakhs.

The Finance Act, 2020, has also introduced the concept of “Deemed Resident” whereby all such citizen of India who are not taxable in any other country by reason of residence or domicile or any other criteria of similar nature and such individuals have income exceeding Rs. 15 lakhs from sources in India and from business controlled from India or Profession set up in India. With effect From F.Y. 2020-202 1 deemed resident will be a resident and ordinarily resident in India.