Basis of Charge PDF

DrRajeev 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?
Whom to Tax? Income,

Total Income
Person When to Tax?
Why Tax?
Annual
Kosh Moolo Dandah Previous Year
Cost of Civilisation Asstt. Year
Tax Model
How to protect rights of 2? At what rate?
Appeals, revisions,
settlement, advance
ruling How to Central Act
ensure Finance Act
compliance?
TDS, Advance Tax, How to tax?
Self asstt.tax, Tax onAssessment, Scrutiny,
regular asstt. Survey, Searches, 1/6,
Presumptive taxation S. 4, 5 & 6,
S. 139, 143
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 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
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
2011
Agricultural Income for rate purposes
2011
2% education cess
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
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
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
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
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 ?
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
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
Lord Sumner [Levene vs. IRC, 13 TC
486(HL)]
It is trite law that His Majestys 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 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
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 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)?
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
(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
(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
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
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
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
Treaties normally use the concept of the place of
effective management same as control and
management
Indias 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 entitys
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
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
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
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
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)
Ifa 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

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DrRajeev Ranade

Whom to Tax? Income,

He is in India for a period or periods amounting in

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