Commentary On Section 4 Of The Income Tax Act, 1961

• Section 4 of the Income Tax Act lays down the “Charge of Income”
• Income-tax is charged in an assessment year.
• It is charged in respect of the total income for the previous year of every person. [For eg, Assessment Year of 2011-12 means the income accrued in the financial year (Previous Year) of 2010-11]. Total income is computed after giving various deductions and allowances under the Act.
• Income-tax for any assessment year is charged at the rate(s) prescribed by the Central Act, i.e., the Finance Act enacted each year.
  • Example 1: The income-tax on total income of the previous year 2005-06 is charged for the assessment year 2006-07 at the rates prescribed by the Finance Act, 2006.
  • Example 2 : If the income of the previous year 2002-03 [assessment year 2003-04] has not been assessed to in the financial year 2003-04, but is being assessed in the financial year 2006-07, nevertheless tax is charged at the rates prescribed by the Finance Act, 2003.
• The Act, as it stands amended as on 1st April of any financial year, is applied to the assessment of that year. Thus, any amendment made after 1st April of that financial year, is not applied in the assessment for that year, even if the assessment is made after the amendment becomes effective.
• Thus, with respect to the income of the previous year, say, 2005-06, assessment is made in accordance with the law as it stands on 1st April, 2006. Any amendment coming into effect subsequent to this date is wholly irrelevant in assessing the income for the previous year 2005-06.

 

Commentary On Section 5

• Sec 5 of the Act talks about the Scope of Total Income.
• The scope of total income depends on the residential status of the assessee and the time and place of accrual or receipt of income. The scope, as provided by the section, is made clear with the help of the following tabular presentation :

 

 

Commentary On Section 6

Section 6 talks about the residential status of all persons. However, the most important provisions related to the residential status of an individual are -

Clauses (1) and (6) – Residential Status of an Individual:

• Steps to determine the residential status of an individual :
  • Step 1 – Is the individual a resident? If yes, proceed to Step 2. If no, the individual is a non-resident.
  • Step 2 – Is the individual a resident but not ordinarily resident? If yes, the individual is resident but not ordinarily resident. If no, the individual is resident and ordinarily resident.
  • In the case of an Indian citizen, who leaves India during the previous year as a member of the crew of an Indian ship or for the purposes of employment outside India :

• Prerequisites for an individual being regarded as a resident are as follows :

(1) Days for which he should be in India in the previous year are 182 days or more.

(2) Days for which he should be in India during the 4 years immediately preceding the previous year are not functional in this context.

• In the case of an Indian citizen or a person of Indian origin, who being outside India, comes on a visit to India during the previous year :

(1) Days for which he should be in India in the previous year are 182 days [150 days from the assessment years 1990-91 to 1994-95] or more.

(2) Days for which he should be in India during the 4 years, immediately preceding the previous year are not functional in this context.

• In the case of any other individual :

(1) Days for which he should be in India in the previous year are 182 days or more.

(2) Days for which he should be in India during the 4 years, immediately preceding the previous year are not functional in this context.

OR

(1) Days for which he should be in India in the previous year are 60 days or more.

(2) Days for which he should be in India during the 4 years, immediately preceding the previous year are 365 days or more.

• The definition of ‘not ordinarily resident’ given in clause (6) of section 6 was subject to differing legal interpretations. Therefore, to remove any doubts in this regard, by way of clarificatory amendment, this definition has been substituted from the assessment year 2004-05. Henceforth, the prerequisites for an individual to be regarded as a resident but not ordinarily resident are :

(1) He has been a non-resident in India in 9 out of 10 previous years preceding the relevant previous year ; or

(2) He has been in India for a period of 729 days or less during the 7 previous years preceding the relevant previous year.

 

 

Guidance Notes:

• 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.

• Year means the period of 12 calendar months, each immediately preceding the commencement of the relevant previous year, i.e., April to March.

• The individual need not be in India for the period(s) specified, at one place. He is also not required to stay continuously for such period. What is required is that the individual should stay for specified number of days in the aggregate during a previous year.

 

Commentary On Section 9

General Propositions:

• Income referred to in this section is deemed to accrue or arise in India even though it accrues or arises outside India. Such income is assessable in the hands of all presons irrespective of their residential status or citizenship or domicile or place of residence or business.

• The section specifically provides for such incomes. It should be noted that the list of incomes given in the section is not inclusive but exhaustive.

• Incomes which are already included in the total income of a person on receipt or accrual basis are not again included in the total income by virtue of this section {Turner Morrison & Co. Ltd.v. CIT [1953] 23 ITR 152 (SC)}.

Clause (i) of sub-section (1) – Income From A Business Connection In India

• Income covered – Income accruing or arising, directly or indirectly, through or from any business connection in India. Thus, such income is included in the total income even if it actually accrues/arises outside India.

• Meaning of ‘business’ – Business includes not only trade and manufacture but also profession and vocation .

• Meaning of ‘business connection’ – The following points may be noted :

• Business connection involves a relation between the business of the assessee and some activity in India which contributes directly or indirectly to the earning of profits and gains by the assessee from his business. Isolated transactions arenot normally regarded as ‘business connection’. From the assessment year 2004-05, an inclusive definition of ‘business connection’ has been provided by way of Explanation 2 to clause (i).
  • Cases where income is not deemed to arise from business connection [Explanation to clause (i)] :

(a) In the case of a business where all its operations are not carried out in India, only the part of income that is reasonably attributable to the operations carried out in India is deemed to accrue or arise in India.

(b) Income of a non-resident from operations consisting only of purchase of goods in India for export.

Clause (i) of sub-section (1) – Income from any property, etc., in India:

• Income covered – Income accruing or arising, directly or indirectly, through or from any property, or any asset or source of income in India.

• Property should be tangible. It includes movable as well as immovable property. Intangible assets are, however, covered by the words ‘any asset or source of income’ and, thus, such assets are also covered here.

Clause (i) of sub-section (1) – Income From Any Capital Asset InIndia:

• Income covered – Income accruing or arising, directly or indirectly, through the transfer of a capital asset provided such asset is situated in India.

• Thus, if a capital asset is situated in India, income accruing or arising from its transfer is liable to be taxed in India even if the documents of transfer are registered outside India or consideration for transfer is paid outside India. It should be noted that capital asset may be movable or immovable, tangible or intangible.

• Such income is chargeable under the head ‘Capital Gains’ under section 45.

Clauses (ii) and (iii) of sub-section (1) and sub-section (2) – Salary Earned in India:

• Salary income deemed to accrue or arise in India :

(1) Salary income payable for services rendered in India – Such income may actually be paid outside India.

(2) Salary income if (a) it is payable by the Government, (b) it is payable to a citizen of India, and (c) it is payable for service rendered outside India [clause (iii) of sub-section (1)]. This is, thus, an exception to the provision that salary income is deemed to accrue or arise in India only if the related service is rendered in India

• Salary income not deemed to accrue or arise in India:

Any pension payable outside India to certain retired civil servants or judges who are residing permanently outside India [sub-section (2)]. Thus, in such case salary is not deemed to accrue or arise in India even if the pension is payable in respect of services rendered in India.

Clause (iv) of sub-section (1) – Dividend Income Deemed To Accrue or Arise In India:

• Dividend paid by an Indian company outside India is deemed to accrue or arise in India. Therefore, in such a case, even a non-resident recipient is liable to be taxed in respect of the dividend.
• Dividend from a foreign company paid outside India is, therefore, not deemed to accrue or arise in India.

Clause (v) of sub-section (1) – Interest Income Deemed To Accrue or Arise In India:

• Interest is deemed to accrue or arise in India in the following cases :

(1) In the case of interest payable by Government (Central or State), interest income is deemed to accrue or arise in India in all cases.

(2) In the case of interest payable by resident person, interest income is deemed to accrue or arise in India in all cases except where the interest pertains to any debt incurred or moneys borrowed and used for the purposes of –

(a) business or profession carried on by such person outside India ; or

(b) making or earning any income from any source outside India.

For example, if X (a resident) borrows money from Y (a non-resident) and utilises the money in business carried on by him in India, interest payable by X to Y will be included in the total income of Y by virtue of this clause.

(3) In the case of interest payable by a non-resident, interest income is deemed to accrue or arise in India in a case where interest pertains to any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such person in India. Thus, where debt incurred or money borrowed is used for a purpose other than business or profession carried on by the non-resident in India, the interest income is not deemed to accrue or arise in India under this clause.

Clause (vi) of sub-section (1) – Royalty Income Deemed To Accrue or Arise In India:

• Royalty, as defined by Explanation 2 of clause (vi) is deemed to accrue or arise in India in the following cases :

(1) In the case of royalty payable by Government (Central or State), royalty income is deemed to accrue or arise in India in all cases.

(2) In the case of royalty payable by resident person, royalty income is deemed to accrue or arise in India in all cases except where the royalty pertains to any right, property or information used or services utilised for the purpose of –

(a) business or profession carried on by such person outside India ; or

(b) making/earning any income from any source outside India.

(3) In the case of royalty payable by non-resident, royalty income is deemed to accrue or arise in India in a case where royalty pertains to any right, property or information used or services utilised for the purpose of –

(a) business or profession carried on by such person in India, or

(b) making/earning any income from any source in India.

Clause (vii) of sub-section (1) – Income By Way Of Fees For Technical Services Deemed To Accrue Or Arise InIndia:

• Income by way of fees for technical services is deemed to accrue or arise in India in the following cases :

(1) Where it is payable by Government (Central or State), income is deemed to accrue or arise in India in all cases.

(2) Where it is payable by resident person, income is deemed to accrue or arise in India in all cases except where the fees are payable in respect of services utilised –

(a) in a business or profession carried on by such person outside India ; or

(b) for making/earning any income from any source outside India.

(3) Where it is payable by, non-resident, income is deemed to accrue or arise in India in cases where fees are payable in respect of services utilised –

(a) in a business or profession carried on by such person in India ; or

(b) for making/earning any income from any source in India.

Taxability Of Income In India

• This depends upon the tax residential status during the financial year (FY). Residential status is determined by the physical presence of the individual during the FY and immediately preceding seven FYs. It is important to determine your residential status on year-on-year basis to ascertain taxability of income. There are three categories of residential status in India: non-resident (NR), not ordinarily resident (NOR) and ordinarily resident (OR).

If one qualifies as either NR or NOR during the FY, one shall be taxable in India only on India-sourced income.

Disclosure of Foreign Assets: 

According to a recent amendment in the Act, effective from FY12, an individual who qualifies as OR and has assets located outside India (including financial interest in any entity) or is a signing authority in any bank account located outside India is required to:

• Furnish income-tax returns, irrespective of the amount of income;

• Furnish details of assets located outside India such as bank accounts and immovable property in the income-tax return

If one qualifies as NR or NOR for FY12, one would not be required to comply with the aforesaid requirements. However, in case a person qualifies as OR, he shall be required to disclose the details of overseas bank account in his income-tax return.