Dr Rajeev Ranade Addl Dir,Faculty NADT

Dr Rajeev Ranade Addl Dir,Faculty NADT 1

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. 2

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. 3

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

What to Tax? Why Tax? Kosh Moolo Dandah Cost of Civilisation Whom to Tax? Person How to protect rights of 2? Appeals, revisions, settlement, advance ruling Tax Model How to ensure compliance? TDS, Advance Tax, Self asstt.tax, Tax on Assessment, Scrutiny, regular asstt. Survey, Searches, 1/6, Presumptive taxation Income, Total Income How to tax? When to Tax? Annual Previous Year Asstt. Year At what rate? S. 4, 5 & 6, S. 139, 143 Central Act Finance Act 5

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 1 st April, 2010 to 31 st 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 1 st 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 1 st 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 nonsalary payments made to resident taxpayers Proviso to section 2(11) and 2(12)

Rates as per Finance Act (contd.) Section 294 If on 1 st 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 22

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 23

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 24

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) 25

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 grandparents 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 26

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 30

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? 31

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 32

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 nonresident 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 33

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 Nonresidents 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)? 38

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 39

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 40

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 41

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 42

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 43

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 44

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'. 45

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 46

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? 47

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 48

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. 49

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 50

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?? 51

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 52

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 53

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) 54