Important Questions for Bcom Students

SUBJECT: INCOME TAX/TAXATION

TOPIC: RESIDENTIAL STATUS

PREPARED BY

G ARUN KUMAR

LECTURER IN COMMERCE

GDC MEN SRIKAKULAM

1. Residential Status
Ans. :
Residential Status – Meaning

The incidence of tax an assessee depends on his residential status. For instance, whether an
income, accrued to an individual outside India, is taxable in India depend upon his/her residential status.
Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India
depends on the residential status of the individual, and not on his citizenship.

Residential Status

Non-Resident
Resident

Ordinarily Not-Ordinarily
Resident Resident

Sec.6 of Income Tax Act laid down some conditions for determining the residential status
of Individuals, HUF, Firm, Company and every other person.
2. Not Ordinarily Resident.

Ans. :
Not Ordinarily Resident – Meaning

Sec.6(vi) of Income Tax Act, 1961 provided two conditions for determining the residential status
of Individuals.
The two secondary conditions that must also be considered for determining residential status
of an individual are :
(a) He was non-resident in India 9 previous year out of the 10 preceding previous years preceding
the relevant previous year, or
(b) He was in India, for a period or periods aggregating in all to 729 days or less, during 7 previous
years proceeding the relevant previous year.
If both the above conditions are satisfied, the assessee will become Not Ordinarily Resident.

3. Incidence of tax :

Ans. :
According to section 5, the scope of total income depends upon the residential status of a person
for the relevant assessment year. Once the residential status of a person is determined in accordance with
Sec.6 of the Income Tax Act, the income chargeable to tax as part of total income shall be identified as
follows.
Incidence of Tax
Taxability of Income
Kinds of Income Resident Not-Ordinarily Non-
Resident Resident
1. Income received or deemed to be Yes Yes Yes
received in India
2. Income earned/accrued or deemed Yes Yes Yes
to be earned/accrued in India,
whether received within or
outside India
3. Income earned and received Yes Yes No
outside India from a business
controlled from or a profession
setup in India
4. Income earned and received Yes No No
outside India – foreign income
5. Income earned and received No No No
outside India, in the earlier years
but brought to India in the
previous year
Total Income XXX XXX XXX
Yes = Taxable; No = Not taxable.
4. How do you determine the residential status of an individual as resident and
ordinarily resident?

Ans. :
Determination of Residential Status of Individual

The conditions laid down in the Income Tax Act, for determining residential status of individuals,
may be studied under two heads.
1. Primary conditions; and
2. Secondary conditions.

1. Primary Conditions [Sec.6(1)]:There are two primary conditions

(a) An individual is said to be resident in India if he is in India for a period of 182 days or
more, during the previous year; or
(b) He is in India – (a) for a period of 60 days or more during the previous year and (b)
for a period of 365 days or more in the 4 years preceding the relevant previous year.
Indian Citizens :
(I) Where the individual, being a citizen of India, leaves the country in any previous year, for
seeking employment in a foreign country or as a member of the crew of an Indian ship; or
(II) Where an individual being, a citizen of India or a foreign national of Indian origin, who is
living outside India, comes to India for business official or private purposes, he must stay in
India for 182 days instead of 60 days as given above.
2. Secondary conditions : [Sec.6(6)] : The two secondary conditions that must also be
consideredfor determining residential status of an individual are :
(a) He was non-resident in India 9 previous year out of the 10 preceding previous years
preceding the relevant previous year, or
(b) He was in India, for a period or periods aggregating in all to 729 days or less, during 7
previous years proceeding the relevant previous year.
3. Status of Individual assessee :
(i) Resident and Ordinarily Resident : The individual will be a Resident and ordinarily resident,
ifhe fulfils any one of the primary conditions and both the secondary conditions.
(ii) Resident but not ordinarily Resident : The individual will be Resident but not
ordinarilyresident, if he fulfils any one of the primary conditions and only one or none of the
secondary conditions.
(iii) Non-Resident : The individual will be a non-resident, if he does not fulfill any one of the
twoprimary conditions. It is not relevant whether he fulfill, any one or both the secondary
conditions.

4. How do you determine the residential status of HUF and firm?

HUF : The Residential of status of Hindu undivided family is

to be determined according toSec.6(2) and Sec.6(6).
(a) Resident : A Hindu undivided family (HUF) is said to be resident in India if control
andmanagement of its affairs is wholly or partly situated in India.
 (b) Non-Resident : The Hindu undivided family is non-resident in India if control
andmanagement of its affairs is wholly or partly situated outside India.
(c) Resident and Ordinarily Resident : If the control and management of the affairs of
theHUF is wholly or partly situated in India and if the manager of the family satisfies the
following two additional conditions, the HUF shall be considered as resident and
ordinarily resident.
(I) He was non-resident in India 9 previous year out of the 10 preceding previous years
preceding the relevant previous year, or
(II) He was in India, for a period or periods aggregating in all to 729 days or less, during 7
previous years proceeding the relevant previous year.
(d) Resident but not ordinarily resident : If the control and management of the affairs of
theHUF is wholly or partly situated in India but the manager of the family does not satisfy
the above mentioned two additional conditions, such HUF shall be considered as resident
but not ordinarily resident.
(III) Firm : A firm, Association of Persons (AOP) and every other person other than a
companyis considered as resident if the control and management is wholly or partly situated
in India. If the control and management is wholly situated outside India, such firm, AOP or
any other person is considered as non-resident.

5. How would you determine the residential status of a person?

Ans. :
Residential Status of a Person

Meaning of a Person : Person may be Individual, HUF, a company, a firm, an association

ofpersons or body of individuals, a local authority and every artificial judicial person.

Determination of Residential Status : The determination of residential status of a person, HUF are
given in the above questions.

For a firm and others the residential status is to be determined in the following way. A
firm,Association of Persons (AOP) and every other person other than a company is considered as
resident if the control and management is wholly or partly situated in India. If the control and
management is wholly situated outside India, such firm, AOP or any other person is considered as non-
resident.

6. What is Residential status? Write about its incidence of Tax?

Ans. :
Residential Status and Incidence of Tax

The incidence of tax an assesse depends on his residential status. For instance, whether an income,
accrued to an individual outside India, is taxable in India depend upon his/her residential status.
Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India
depends on the residential status of the individual, and not on his citizenship.
 Residential Status

Non-Resident
Resident

Ordinarily Not-Ordinarily
Resident Resident

Sec.6 of Income Tax Act laid down some conditions for determining the residential status
of Individuals, HUF, Firm, Company and every other person.

Incidence of tax :

According to section 5, the scope of total income depends upon the residential status of a person
for the relevant assessment year. Once the residential status of a person is determined in accordance with
Sec.6 of the Income Tax Act, the income chargeable to tax as part of total income shall be identified as
follows.
Incidence of Tax
Taxability of Income
Kinds of Income Resident Not-Ordinarily Non-
Resident Resident
1. Income received or deemed to be Yes Yes Yes
received in India
2. Income earned/accrued or deemed Yes Yes Yes
to be earned/accrued in India,
whether received within or
outside India
3. Income earned and received Yes Yes No
outside India from a business
controlled from or a profession
setup in India
4. Income earned and received Yes No No
outside India – foreign income
5. Income earned and received No No No
outside India, in the earlier years
but brought to India in the
previous year
Total Income XXX XXX XXX
Yes = Taxable; No = Not tax
 Problems
1. From the following particulars of income, compute the total taxable income of Mr. Rahul for
the assessment year 2020-21, if he is (a) Non-Resident (b) Resident.

Particulars Rs.
(i) Interest on Canada Development Bond (only 50% of interest 40,000
received in India)
(ii) Dividend from British company received in London 28,000
(iii) Profit from a business in Nagpur, but managed directly from 90,000
London
(iv) Life Insurance premium paid 30,000
(v) Rent received in respect of house property at Bhopal 40,000
(vi) Agricultural income from a land situated in Andhra Pradesh 45,000
(vii) Interest on savings bank deposits in UCO Bank, Delhi 12,000
(viii) Short term capital gain on sale of shares of an Indian company 60,000
received in India

Solution :
Computation of Total Income of Mr. Rahul
(Assessment year 2020-21)

Nature of Income Resident Non

Rs. Resident
Rs.
1. Interest on Canada Development Bonds 40,000 20,000
2. Dividends from British company received in London 28,000 -
3. Profit from business in Nagpur, but managed directly 90,000 90,000
from London
4. Rent received in respect of house property at Bhopal 40,000 40,000
5. Agriculture income for Andhra Pradesh - -
6. Interest on Savings bank deposits 12,000 12,000
7. Short term capital gain on sale of shares 60,000 60,000
2,70,000 2,22,000

2. Following are the taxable incomes of Mr. Arun for the previous year 2019-20.
(a) Profit of a hotel business in Sydney Rs.2,00,000.
(b) Dividend declared in Paris but received in India Rs.60,000.
(c) Income from transfer of long term capital asset in India Rs.1,10,000.
(d) Royalty received in Germany from Mr. X a resident in India for technical services
provided for a business carried on in Germany Rs.70,000.
(e) Dividend from a domestic company Rs.25,000
(f) Interest on England development bonds (1/5 received in India) – Rs.1,00,000.
(g) Income accrued in Banglore but received in Singapore Rs.60,000
Compute the total taxable income of Mr. A for the assessment year 2020-21 if he
is (a) Resident, (b) Ordinary Resident and (c) Not ordinarily resident.
Solution:
Calculation of Taxable Income of Mr. Arun
(Assessment year 2020-21)
S.No. Particulars Resident Not Non-
ordinarily resident
Rs. resident Rs.
Rs.
1. Profit of a hotel business in Sydney 2,00,000 2,00,000 Nil
2. Dividend declared in Paris but received in 60,000 60,000 60,000
India
3. Income from transfer of long term capital 1,10,000 1,10,000 1,10,000
asset in India
4. Royalty received in Germany 70,000 - -
5. Dividend from a domestic company 25,000 25,000 25,000
6. Interest on England development bonds 1,00,000 20,000 20,000
7. Income accrued in Bangalore but received in 60,000 60,000 60,000
Singapur
Total income 6,25,000 4,75,000 2,75,000

3. Mr. Ravi Kumar went to England for studies on 5 th Aug.2018 and came back to India on 25
Feb. 2019. He had never been out of India before. What is residential status of Mr. Ravi
Kumar for the A.Y.2019-20.

Solution :

Previous Year : 2018-19 (1-4-2018 to 31-3-2019)

Assessment year : 2019-20 (1-4-2019 to 31-3-2020)

During the previous year Mr. Ravi Kumar was in India from 1-4 -2018 to 5th August, 2018 ie.,
127 days and later from 25-2-2019 to 31-3-2019 i.e., 35 days. Mr. Ravi Kumar stayed in India during the
previous year 2018 -19 for 162 days. Hence, he fails to satisfy Sec.6(i) first condition. But he satisfied
the second condition of sec.6(i) i.e., staying in India for 60 days or more during the previous year and
365 days or more during the past 4 preceding years. Therefore, Mr. Ravi Kumar is Resident in India
during the Assessment year 2019-20.

Ordinarily Resident : Further, Mr. Ravi Kumar was Ordinary Resident in India as he never
leftIndia before the previous year 2018-19. He satisfied both the below conditions given in Sec.6(6).
(a) He was resident in India 9 previous year out of the 10 preceding previous years preceding
the relevant previous year, and
(b) He was in India, for a period or periods aggregating in all to 729 days or more, during 7
previous years proceeding the relevant previous year.

4. Following are the details of Income of Mr. Varun for the A.Y. 2020-21
(i) Income accrued in India but received in Japan Rs.50,000.
(ii) Income from agricultural in Srilanka Rs.1,00,000.
(iii) Dividend from a co-operative society Rs.40,000.
(iv) Past untaxed profits brought to India Rs.60,000.
(v) Dividends from a public company Rs.80,000.
Compute the total income of Mr. Varun for the A.Y. 2020-21 if he is (a) Resident,
(b) Ordinary Resident and (c) Not ordinarily resident.
Solution:
Calculation of Taxable Income of Mr.Varun
(Assessment year 2020-21)
S.No. Particulars Resident Not Non-
ordinarily resident
Rs. resident Rs.
Rs.
1. Income accrued in India but received in 50,000 50,000 50,000
Japan
2. Income from agricultural in Srilanka 1,00,000 - -
3. Dividend from a co-operative society 40,000 40,000 40,000
4. Past untaxed profits brought to India - - -
5. Dividends from a public company 80,000 80,000 80,000
Total income 2,70,000 1,70,000 1,70,000