Dr Rajeev Ranade Addl Dir,Faculty NADT - · PDF fileThe levy is on the total income of the assessable entity computed in accordance with and ... Subject of charge is the income of

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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.


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


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)


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?


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


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)


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


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



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%


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



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


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)


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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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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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 ?


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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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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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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(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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(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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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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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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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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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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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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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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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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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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Documents

Dr Rajeev Ranade Addl Dir,Faculty NADT - · PDF fileThe levy is on the total income of the assessable entity computed in accordance with and ... Subject of charge is the income of