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

Lecture notes prepared for the students of Income tax , based on Income tax Act of India 1961. topic covered are Residential status and scope of total income of assessee.

1. SCOPE OF TOTAL INCOME & RESIDENTAL STATUS:
Under income tax Act 1961
•Scope of Total Income u/s. 5
•Residential Status in India u/s 6.
• Apportionment of Income between spouses
governed by the Portuguese Civil Code u/s. 5A.
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2. Different taxable entities
1. Individual
2. Hindu undivided family
3. Firm or association of person or a body of
individuals
4.Every other person
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3. IMPORTANCE OF RESIDENTIAL
STATUS
•Tax is to be charged on the income of the previous year of a
person at the rates fixed for the assessment year .
•The tax liability of a person is determined on the basis of
Residence in India in the previous year.
•The residential status of an assessee may not necessarily be
the same-in each year, he may be a resident in one year and a
non-resident in the next.
• As such, clear identification of residential status is necessary.
•The rules for determining the residential status for different
types of assessees viz., individual, Hindu Undivided Family
(HUF), firm and a company etc. are not same.
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4. Scope of Total Income u/s. 5
•Section 5 of the Income tax Act deals with the
scope of total income. It states that the scope
of total income of a person is determined by
reference to his residence in India in the
previous year.
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5. Residential status
1. Resident of India
2. Non resident of India
Resident individual and HUF can be divided in to
two categories
1.Resident and ordinarily resident or
2.Resident but not ordinarily resident
All other assessee can simply be either resident
or non resident
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6. Residential status of an individual (6)
•An individual may be
1.Resident and ordinarily resident
2.Resident but not ordinarily resident
3.Non resident
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7. Residential status of the Assessee
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8. Resident and ordinarily resident
•Basic condition for resident
•An individual is said to be resident in India in any
previous year, if he satisfies at least one of the
following basic condition
a)He is in India in the previous year for a period of
182 days or more
b)He is in India for a period of 60 days or more
during the previous year and 365 days or more
during 4 years immediately preceding the
previous year
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9. Exceptions
•i) Being a citizen of India if he leaves India in any
previous year for the purpose of employment outside
India, the period of 60 days in clause (b) above will be
extended to 182 days or more.
•ii) Being a citizen of India or a person of Indian origin,
who being outside India, comes on a visit to India in
any previous year the period of 60 days mentioned in
clause (b) will be 182 days or more
•A person is deemed to be of Indian origin if he, or
either of his parents or any of his grand parents was
born in undivided India.
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10. Additional conditions for ordinarily
resident
•Resident individual is treated as “resident and
ordinarily resident ” In India if he satisfies the following
two additional conditions –
a)He has been resident in India in at least 2 out of 10
previous years immediately the relevant previous year
b)He is been in India for a period of 730 days or more
during 7 years immediately preceding the relevant
previous year.
Individual becomes resident and ordinarily resident in
India if he satisfies at least one of the basic conditions
and the two additional conditions .
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11. Non -Resident Individual
•Non – Resident means a person who is not a
resident.
•An individual is non-resident in India if he
does not satisfy any of the two basic
conditions as stated under section 6(1)
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12. Hindu Undivided Family (Section 6(2) )
The residential status of an HUF depends on two factors, the location
of control and management of its affairs and the residential status
of its Karta:
Ordinarily Resident (Section 6(2) )
HUF is said to be ordinarily resident in India in any previous year :
If the control and management of its affairs is wholly or partly
situated in India during the previous year.
If its manager (Karta) satisfies the following conditions of Section 6(6) :
i)its manager has been resident in India in 2 out of 10 previous years
preceding that year; and
ii)its manager has, during the 7 years preceding that year, been in
India for a period amounting in all to 730 days or more.
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13. Not Ordinarily Resident
•A Hindu Undivided Family is said to be 'not
ordinarily resident in India, if control and
management of its affairs is situated wholly or
partly in India during the previous year but its
manager does not satisfy the conditions of
Section 6(6).
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14. Non-resident
•A Hindu Undivided Family is said be non-
resident in such cases only where its control
and management is situated wholly outside
India during the previous year.
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15. Firms and other Association of Persons
(Section 6(2) 1 )
•Firms and other association of persons can fall
under two categories only. They may either be
residents or non-residents.
Resident
•A firm or other association of persons is said to
be resident in India in any previous year where
during that year the control and management of
its affairs is partially or wholly situated in India.
•The residential status of its partners in India is
immaterial.
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16. Non resident
•A firm or an association of persons is said to
be non-resident in such cases only where the
control and management of its affairs is
situated wholly outside India during the
previous year.
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17. Companies
A company may either be a resident or non-
resident.
A company is said to be resident in India in any
previous year if:
I. it is an Indian company, or
II. during the year, the control and management
of its affairs is situated wholly in India.
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18. Non-Resident
•If a company does not satisfy any of the
aforesaid conditions of residence, it is said to
be a 'non-resident' company. In other words if
the company is not registered in India and its
control and management is situated wholly or
partially outside India, it is regarded as a non-
resident.
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19. Every other Person (Section 6(4) )
Resident :
Every other person (local authority, artificial,
juridical person & Statutory Corporations) is
said to be resident in India in any previous
year if the control and management of its
affairs is partly or wholly situated in India
Non-Resident : Every other person is said to be
non-resident if control and management of its
affairs is situated wholly outside India.
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20. Scope of total income ( Resident and ordinarily
Resident )
The total income of any person, who is resident in
the relevant previous year, includes all income
from whatever sources derived which….
a.is received, or deemed to be received in India in
such year by him or on his , behalf; or
b.accrues or arises or is deemed to accrue or arise
to him in India during such year; or
c.accrues or arises to him outside India during such
year.
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21. Accrual of Income
•When right to receive the income become
vested in the assessee, is said to accrue or
arise .
•Income has been said to accrue when there is
a right to payment and when there is
unconditional liability on behalf of the payer
to pay it to tax payer.
•Income is said to accrue when it become due
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22. Scope of total income ( Resident but
non- Ordinarily Resident )
•Not Ordinarily Resident
If the assessee is 'not-ordinarily resident', the total
income of the relevant previous year includes all
incomes from whatever sources derived which -
a. is received or is deemed to be received in India
in such‘ year by or on behalf of such person; or'
b.accrues or arises or is deemed to accrue or arise
to him in India during such year; or
c.accrues or arises to him outside India and is
derived from business controlled in India or a
profession set up in India.
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23. Difference between resident and non
ordinarily resident
•The basic difference between the scope of a total
income of a resident and not ordinarily resident
relates to the income which accrues or arises to
him outside India.
• In case of a resident it is included in his total
income irrespective of the source of such income.
• But in case of a not ordinarily resident it will be
included in his total only if it is derived from a
business which is controlled in or a profession
set up in India.
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24. Scope of total income of Non-
Resident
If the assessee is a non-resident in India, the total
of the relevant previous year includes all income
from whichever sources derived which –
a.is received or is deemed to be received in India in
such year by or on behalf of such person, or
b.accrues or arises or is deemed to accrue or arise
to him in India during such year. '
Thus non-residents are not liable in respect income
accruing or arising outside India even if it is
remitted to India.
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25. Chart showing scope of total income
Nature of income Resident &
ordinarily
resident
Resident but
not ordinarily
resident
Non
Resident
Income received in India Included Included Included
Income deemed to be received in IndiaIncluded Included Included
Income accruing or arising in India Included Included Included
Income deemed to accrue or arise in India Included Included Included
Income accruing or arising outside India and received out-side India i.e. foreign income
1. From business controlled from India or
profession setup in India
Included Included Excluded
2. From a business controlled outside India
or profession set up outside India
Included Excluded Excluded
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26. Apportionment of Income between spouses governed
by the Portuguese Civil Code u/s. 5A.
•5A. (1) Where the husband and wife are governed by the system of
community of property (known under the Portuguese Civil Code of
1860 as "COMMUNIAO DOS BENS") in force in the State of Goa and
in the Union territories of Dadra and Nagar Haveli and Daman and
Diu, the income of the husband and of the wife under any head of
income shall not be assessed as that of such community of property
(whether treated as an association of persons or a body of
individuals), but such income of the husband and of the wife under
each head of income (other than under the head "Salaries") shall be
apportioned equally between the husband and the wife and the
income so apportioned shall be included separately in the total
income of the husband and of the wife respectively, and the
remaining provisions of this Act shall apply accordingly.
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27. •(2) Where the husband or, as the case may be,
the wife governed by the aforesaid system of
community of property has any income under
the head "Salaries", such income shall be
included in the total income of the spouse
who has actually earned it.]
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28. Thank you
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