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Dr Rajeev Ranade
Addl Dir,Faculty
NADT
Basis of Charge - An overview
Income tax is collected by the „State‟ & is paid by
its „Subject‟. [Here „State‟ means India]
But, the State cannot do so without lawful
authority. It must be legally empowered to charge
tax on income.
What gives such authority to the State?
○ Section 4 of the I. T. Act confers the authority to the
State to charge tax on the income of the Subject.
○ In other words, this section casts legal obligation on the
Subject to pay tax to the State on his income.
○ So, this section is said as a „Charging Section‟.
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Basis of Charge - An overview
Section 5 of the I. T. Act gives the scope of chargeable income.
○ Who has to pay income tax,
○ On what income.
Sec. 7 to 9 specifies some such income.
○ For the liability to pay tax under the I. T. Act
either the person should be related to India
or his income should be related to India.
Sec. 6 defines the residential status of a person
○ This is the basis on which the scope of chargeable income is determined.
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Basic Principles
The charge is on every person defined in s. 2(31)
The income taxed is that of the previous year and not of the year of assessment
Income-tax is to be charged at the rate or rates fixed for the year by the annual Finance Act
The levy is on the total income of the assessable entity computed in accordance with and subject to the provisions of the Act
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Tax Model
Kosh Moolo Dandah
Why Tax?
Cost of Civilisation
Whom to Tax?
Person
What to Tax?
Income,
Total Income
When to Tax?
Annual
Previous Year
Asstt. Year
At what rate?
Central Act
Finance Act
How to tax?
S. 4, 5 & 6,
S. 139, 143
How to protect rights of 2?
Appeals, revisions,
settlement, advance
ruling How to
ensure
compliance?
Assessment, Scrutiny,
Survey, Searches, 1/6,
Presumptive taxation
TDS, Advance Tax,
Self asstt.tax, Tax on
regular asstt.
P.Y. and A.Y.
Income-tax is charged on the total income of the previous year
At the rates fixed for an assessment year by the annual Finance Act
Income of the period 1st April, 2010 to 31st March, 2011 (previous year) will be charged at the rates fixed for the Assessment Year 2011-12 by the Finance Act, 2011 (in this case Finance (No. 2) Act, 2011)
P.Y. and A.Y. (contd.)
Assessment Year defined in section 2(9) to mean the period of twelve months commencing on the 1st day of April every year
Previous Year defined in section 2(34) read with section 3 to mean the financial year immediately preceding the assessment year
In case of newly set up business or profession or a source of income coming into existence for the first time – P.Y. is from such date to the end of F.Y.
P.Y. and A.Y. (contd.)
Subject of charge is the income of the previous year and not the income of the assessment year
Income of assessment year may be taxed in that very year in exceptional cases Discontinued business – s. 176(1)
Persons about to leave India – s. 174
Persons likely to transfer property to avoid tax – s. 175
Occasional shipping business – s. 172
P.Y. and A.Y. (contd.)
Tax is charged for an A.Y. in respect of income of previous year
However, as a result of processes of accelerated recovery in the form of deduction of tax at source, advance tax, self-assessment tax, tax is actually paid on most incomes before the commencement of the assessment year, that is, during the previous year itself – section 4(2)
P.Y. and A.Y. (contd.)
Each previous year is a distinct unit of time for the purposes of assessment and the profits made or liabilities or losses incurred before or after the relevant previous year are immaterial in assessing profits of that year unless there is a statutory provisions to the contrary e.g. section 72 allows business losses to be
carried forward
there is no provision for losses to be carried backwards in Indian tax laws – which country provides that?
P.Y. and A.Y. (contd.)
Subject of charge is the income of the previous year
An income-tax liability crystallizes on the last date of the previous year – CWT vs. K.S.N. Bhatt 145 ITR 1 (SC)
Law is to be applied is that in force in the assessment year unless otherwise stated or implied
Income-tax as it stands amended on 1st April of a financial year must apply to the assessment for that year – Karimtharuvi Tea Estates vs. State of Kerala 42 ITR 589 (SC)
Thus, for the income of F.Y. 2010-11, the law as on 1.4.2011, that is, on the first day of A.Y. 2011-12 will be applicable
P.Y. and A.Y. (contd.)
Thus, any amendment made with effect from a date after 1.4.2011 would not be relevant for assessment of income for A.Y. 2011-12 even if the assessment is pending – CIT vs. Scindia Steam Navigation Co. Ltd. – 42 ITR 589 (SC)
However, if the amendments are purely procedural in nature then would apply to pending assessments also
After an assessment order is passed but pending appeal, legislation with retrospective effect comes into operation, then the appellate authorities will give effect to the amended provisions – CIT vs. Straw Products Ltd. – 60 ITR 156 (SC)
P.Y. and A.Y. (contd.)
In the case of capital gains, the income arises at a fixed point of time, that is, the date of transfer
Law is to be applied on that date and not the first day of the Assessment Year
In case of penalty, the law is to be applied on the date on which default is committed
Rates as per Finance Act
Rates of taxes are fixed annually by the Finance Act
Income-tax includes surcharge (CIT vs. Srinivasan – 83 ITR 346 (SC))
Graduated scale of tax not ultra vires (Sukhlall vs. Jain – 37 ITR 101 (Cal))
Different rates for diff. categories of HUF not ultra vires – (Ram Swarup vs. UoI 139 ITR 887(All))
Rates as per Finance Act (contd.)
Section 2(1) of the Finance Act (No. 2)
2011
For A.Y. commencing on 1.4.2011 (A.Y. 2011-
12), income-tax shall be charged at the rates
specified in Part I of the First Schedule
To be increased by surcharge as provided in
First Schedule itself
Marginal Relief Provided
Section 2(2) – Agricultural Income for rate
purposes
Rates as per Finance Act (contd.)
Section 2(3) of the Finance Act (No. 2) 2011 Rates provided in Income-tax Act itself
Section 111A – Short-term capital gains – 15%
Section 112 – Long-term capital gains – 20%
115A, 115AB, 115AC, 115ACA, 115AD
115B – Profits and gains of Insurance Business – 12.5%
115BB, 115BBA, 115BBC, 115E
115JB – MAT – A.Y. 2009-10 (10%), A.Y. 2010-11 (18%)
161(1A), 164, 164A, 167A, 167B
To be increased by surcharge
Rates as per Finance Act (contd.)
Section 2(4) of the Finance Act (No. 2)
2011 Dividend Distribution Tax (115-O) – 15%
Additional tax on distribution of income to unit
holders of mutual funds (115R) – different rates
To be increased by surcharge at the rate of 10%
Rates as per Finance Act (contd.)
Section 2(6) of the Finance Act (No. 2) 2011 Tax Deducted at Source under sections 193, 194, 194A, 194B,
194BB, 194D and 195
Rates provided in Part II of the First Schedule
To be increased by surcharge in the manner provided in Part-II itself
Section 2(7) of the Finance Act (No. 2) 2011 Tax Deducted at Source under sections 194C, 194E, 194EE,
194F, 194G, 194H, 194-I, 194J, 194LA, 196B, 196C and 196D
Rates provided in the respective sections
To be increased by a surcharge
Section 2(8) of the Finance Act (No. 2) 2011 relates to Tax Collected at Source – rates provided in section 206C – to be increased by a surcharge
Rates as per Finance Act (contd.)
Section 2(9) of the Finance Act (No. 2)
2011 Relates to Advance Tax and TDS under Salaries
Also applicable to special provisions under sections
172(4), 174(2), 174A, 175 and 176(2) – income of
assessment year taxed in same year
Rates provided in Part III of the First Schedule
These rates are for deduction during F.Y. 2011-12, that
is, relates to A.Y. 2012-13
Thus, Part III of the First Schedule of Finance Act (No.
2) 2011 will be identical to Part I of the First Schedule
of Finance Act, 2012 – Why? – Very Very Important
Rates as per Finance Act (contd.)
Section 2(10) of the Finance Act (No. 2) 2011 Agricultural Income for rate purposes
Section 2(11) of the Finance Act (No. 2) 2011 2% education cess
Section 2(12) of the Finance Act (No. 2) 2011 1% secondary and higher education cess
No surcharge and cess on tax deducted on non-salary payments made to resident taxpayers – Proviso to section 2(11) and 2(12)
Rates as per Finance Act (contd.)
Section 294
If on 1st April in any year, the new Finance Bill has not yet been placed on the statute book the provision in force in the preceding year or
the provisions contained in the Finance Bill before the Parliament
whichever is more favorable to the assessee
should apply until the new provisions become effective
Residence
A defined concept for determining the „residence‟ or „source‟ based taxation
Defined in section 6 of the Income-tax Act, 1961
Defined separately for Individuals, HUFs, Companies etc.
Three types of residential status Resident
Not Ordinarily Resident
Non-resident
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Residence – Individual
Individual is resident
He is in India for a period or periods amounting in
all to 182 days or more
Or
○ He is in India for a period or periods amounting in all to 365 days or more in four preceding years
And
○ He is in India for a period or periods amounting in all to 60 days or more in that year
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Residence – Individual (contd.)
Leaving for purposes of employment
Applicable only to citizens of India
Leaving India for purposes of employment
outside India
In sub-clause (c) – sixty days will be
substituted by 182 days
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Residence – Individual (contd.)
Member of Crew of an Indian Ship Through Finance Act, 1990 it was clarified that a
seaman working on board an Indian ship is also a person leaving India for the purposes of employment
Indian ship defined in section 3(18) of Merchant Shipping Act, 1958
In these cases also, in sub-clause (c), 60 days will be substituted by 182 days
Applicable only to Indian citizens
Indian ships operating beyond Indian territorial waters would not be covered under the definition of India in section 2(25A)
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Residence – Individual (contd.)
NRIs/PIOs visiting India Applicable to citizens of India and Persons of Indian
Origin (defined in Explanation to clause (e) of section 115C)
PIO- If the individual or his parents or his grand-parents are born in undivided India – specific definition
The person was outside India but has come on a visit to India – 60 days in section 6(1)(c) substituted by 182 days
Purpose as per Explanatory Circular – Non-resident Indians who have made investments in India may find it necessary to visit India frequently and stay here for proper supervision and control of their investment
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Illustration 1
Mr A, a British national come to INDIA for the
first time during 2005-06.His stay in INDIA is
as under
F..Y 2006-07 55 DAYS
F..Y 2007-08 60 DAYS
F..Y 2008-09 80 DAYS
F..Y 2009-10 160 DAYS
F..Y 2010-11 70 DAYS
What is his residential status for A.Y.2011-12 ?
Illustration 2
Mr.X,a Malayasian citizen, leaves INDIA
after a stay of 10 yrs on 1.6.2008.
During F.Y. 2009-10,he comes to INDIA
for 46 days. Later he returns to INDIA for
good on 10.10 2010. What is his
residential status for A.Y.2011-12?
What will be the cut off
date for the three
categories for
leaving/coming to INDIA in
order to be nonresident ?
Residence – Individual (contd.)
Question of Residence must be determined every previous year
Not related at all to the nationality of the individual
Stay of 182 days need not be continuous one
Not necessary that the stay should be at the same place
Whether the individual stayed on his own volition or not is of no consequence
It is not necessary that the stay is in connection with earning of income
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Residence – Individual (contd.)
Advance Ruling P-7 of 1995 (223 ITR 462)
Both the dates of entry as well as date of exit
should be taken into consideration for
computation of 182 days – even if for one hour
As he was in India on both the dates
Entering India at 11.00 P.M. on 1.1.2007 and
leaving at 1.00 A.M. on 1.7.2007 –
Resident/Non-resident?
What is the best evidence for computing
the number of days?
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Residence – Individual (contd.)
Lord Sumner [Levene vs. IRC, 13 TC 486(HL)] “It is trite law that His Majesty’s subjects are
free, if they can, to make their own arrangements so that their cases may fall outside the scope of the taxing Acts. They incur no legal penalties and strictly speaking, no moral censure, if having considered the lines drawn by the legislature for the imposition of taxes, they make it their business to walk outside them”
Naresh Goyal, Vijay Mallaya
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Not Ordinarily Resident S.6(6)
Only for Individuals and HUFs
An Individual will be NOR if In nine out of ten preceding years he was a non-
resident
OR
During the seven preceding years, is in India for a period or periods amounting in all to 729 days or less
Same condition for manager of HUF
Removed by Finance Bill, 1998 – Again restored through Government Amendment
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ILLUSTRATION 3
Mr A, citizen of Singapore, stayed in
India for 150 days in P.Y. 2010-11. He
stayed in INDIA throughout in 2006-07.
He stayed AT Singapore for 330 and
335 days in 2004-05 and 2002-03 resp.
What is his residential status for
A.Y.2011-12 ?
ILLUSTRATION 4
Mr James, a Canadian citizen visits
INDIA for the first time on 6.4.2009. He
was in INDIA throughout 2010-11.
Determine his residential status for
A.Y.2011-12
Illustration 5
Mrs Thatcher, a British national, visits
india ON 15.10.2010 and stays upto 20-
12-2010. during 07-08 she stayed in
INDIA FOR 310 days and in 2006-07 for
57 days. Earlier she has never visited
INDIA. Determine her residential status
for A.Y.2011-12
ILLUSTRATION 6
Mr Bruce Lee ,a foreign national, leaves
INDIA after 10 years of stay on
15.6.2009. During 2010-11, he visits
INDIA on 2-1-2011 and leaves on 31-3-
2011. What is his residential status for
2011-12 ?
Not Ordinarily Resident (contd.)
Taxability of NOR almost similar to Non-
residents
Income sourced in India will be taxed and
Income accruing/arising outside India shall
not be taxed unless it is derived from a
business controlled in or a profession set up
in India (other incomes such as salary etc.
will not be taxable)
But whether this will be covered under
section 9(1)?
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Residence – HUFs & Others
Section 6(2): HUF/Firm/AOPs
Section 6(4): Every other person, i.e., except individuals and companies
Resident in India in every case except during that year, the control and management of its affairs is situated wholly outside India
The burden of proof that the control and management was situated outside India is on the taxpayer
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Residence – HUFs & Others
(contd.)
Burden of Proof on taxpayers
Karta/Senior partner/principal officer has not
come to India at all during the year
De facto control and management actually
exercised in the conduct and management
of the affairs of the family or firm or AOP
Registration of entity irrelevant – either way
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Residence – HUFs & Others
(contd.) Use of word wholly signifies that any
measure of control and management within India will make the assessee resident
Even if the control and management of the firm is partly within India – resident firm [Raza Textiles – 106 ITR 408 (All)]
Foreign Law Firms operating in India – one of the senior partners and employees are in India - control and management not wholly outside India – Can we tax its global income? Contextual interpretation of statute
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Residence – Companies
A company is resident in India
If it is an Indian Company
OR
During that year, the control and
management of its affairs is situated wholly
in India
Opposite condition to HUFs/Firms etc.
Burden of Proof is on Revenue
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Residence – Companies (contd.)
Indian Company defined in section 2(26)
Means a company formed and registered under the Companies Act and includes Company formed and registered under any law
relating to companies formerly in force in any part of India
Corporation established by or under a Central, State or Provincial Act
Any institution, association or body which is declared as company by Board
In all the above cases, the registered or the principal office of the company etc. is in India
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Residence – Companies (contd.)
Control and management means „head and brain‟ of the company where vital decisions concerning the business are taken, such as Expansion or contraction of business (territories) or
extension thereof (to new activities)
Raising of finance and their appropriation for specific purposes
Appointment and removal of staff
Disposal of profits
The place of incorporation or the place of residence of the owner (even if he owns 99.99% shares) or the place where article of company can be altered is of no significance
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Residence – Companies (contd.)
De Beers Case (5 TC 198)
`I regard that as the true rule; and the real
business is carried on where the central
management and control actually abides. It
remains to be considered whether the present
case falls within that rule. This is a pure question
of fact, to be determined, not according to the
construction of this or that regulation or by-law,
but upon a scrutiny of the course of business
and trading'.
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Residence – Companies (contd.)
Control and Management different from
carrying on business
The day-to-day affairs of the business may
be conducted through managers or by
attorneys having wide discretion to conduct
the operations of the business as per his
sound judgment
This place of conduct of business will not be
relevant if vital decisions are taken
somewhere else
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Residence – Companies (contd.)
Treaties normally use the concept of the „place of effective management‟ – same as control and management
India‟s comments to the OECD Model Commentary “India does not adhere to the interpretation given in
paragraph 24 that the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. It is of the view that the place where the main and substantial activity of the entity is carried on is also to be taken into account when determining the place of effective management.”
Why this comment?
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Residence – Companies (contd.)
Use of the word “wholly‟ signifies that the company can have dual residence
Thus, if any part of the control and management is outside India – company will not be resident [Narottam and Pereira – 23 ITR 454 (Bom)]
Mauritian Companies
Modern technologies such as video conference and virtual rooms – meeting takes place without physical presence
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Residence – Companies (contd.)
Radha Rani Holdings – Delhi ITAT Paid up capital of the company consisted of 100
shares out of which Mrs. Geeta Soni held 99 shares and Mrs. Juliana Kassim, a resident of Singapore, held one share.
No employee of the assessee-company in Singapore
The address from where the company is being operated is at New Friends Colony, New Delhi, which is headquarter of the Motherson Group to which the assessee-company belongs.
Investments of the assessee-company were made in the group companies and the source of the investments of the assessee-company was from India.
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Residence – Companies (contd.)
Radha Rani Holdings – Delhi ITAT (contd.) No expenses relating to maintenance of an office at
Singapore such as rent, salary etc. were shown by the assessee to be incurred during the year
The authority to operate all the bank accounts of the company also vests in Mrs. Geeta Soni „singly‟ (not in other director)
Only income shown by the company during the year was interest income of S$45,020 consisting of bank interest of S$ 416 and interest of S$ 44,604 from M/s. Showpla Delhi Ltd. a concern of Motherson Group.
Most important decision that is relevant to be considered is the decision to grant loan to M/s. Showpla Delhi Ltd. which was taken on Board meeting on 18.4.2001 when Mrs. Geeta Soni was not present in Singapore
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Residence – Companies (contd.)
Radha Rani Holdings – Delhi ITAT (contd.) ITAT held that the company is non-resident
○ Board meetings took place in Singapore
○ In the days of technological advancements conducting meetings by telephonic conversations or video conferencing process is very much prevalent in the world and, therefore, the actual presence of a person at the exact place of meeting or conference may not be necessary. The board resolution may also be by way of “circular suggestion”!
○ The Board meeting of 18.4.2001 has not taken place in India as the other director was in Singapore
If section 6(3)(ii) is redundant??
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New Concept in DTC
Section 4(3) of DTC
A company shall be resident in India in any
financial year, if-
(a) it is an Indian company; or
(b) Its place of control and management, at
any time in the year, is situated wholly or
partly, in India.
Lot of opposition from taxpayers/tax
consultants
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Section 6(5)
If a person is resident in India for
one source of income then he
shall be deemed to be resident in
respect of all his sources of
income
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Non-Resident
Section 2(30)
Non-resident means a person who is not
a resident and for the purposes of
sections 92, 93 and 168, includes a
person who is not ordinarily resident
Which other section refers to NOR?
10(15)(iv)(fa)
10(15)(viii)
197A(1D)
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