Closements
Introduction :
1.1 In case of Individual (also HUF), if he is ‘Resident’ as
per the provisions of S. 6(1) of the Income-tax Act, 1961 (the ‘Act’), he can
also be regarded as ‘Not Ordinarily Resident’ (NOR) if he satisfies the
conditions provided u/s.6 (6) of the Act. Prior to its amendment by the Finance
Act, 2003 (with effect from 1-4-2004), this provision was very useful and
beneficial, especially for Indians residing abroad for a long time and returning
to India after their long stay outside India at their retirement age. These
provisions also became a tool for arranging one’s affairs in such a manner that
one cleared the status of NOR by remaining outside India for a shorter period of
two to three years continuously. Similar provisions were also contained in S. 4B
of the Income-tax Act, 1922 (1922 Act). The status of NOR gives an advantage of
non-taxability of foreign income in most cases. In the post-amendment period
(from A.Y. 2004-05) , the conditions for acquiring the status of NOR have been
made very stringent. However, we are not concerned in this write-up with the
post-amendment provisions and therefore, in this write-up, reference is made
only to pre-amendment provisions. For the sake of convenience, the reference of
HUF is also avoided in this write-up.
1.2 Once an Individual is regarded as ‘Resident’ u/s.6(1), he
can also be regarded as NOR, if, he has not been ‘Resident’ in India in nine
years out of the ten previous years preceding that year [preceding years], or
has not been in India during the seven preceding years for a period of, or
periods amounting in all to, 730 days or more. As stated earlier, similar
provisions were also contained in S. 4B of the 1922 Act. In view of this, an
Individual, who is ‘Resident’ u/s.6(1), unless he is NOR, is regarded as what is
popularly known as Ordinarily Resident. Accordingly, Individual can either be
Ordinarily Resident or NOR.
1.3 The consistent judicial as well as Departmental view was,
if an Individual is ‘Resident’ u/s.6(1), he is regarded as Ordinarily Resident,
if, he satisfies both the conditions contained in S. 6(6), viz. (i) he
should be ‘Resident’ in India [u/s.6(1)] for nine years out of ten preceding
years AND (ii) he should be in India for an aggregate period of 730 days or more
in the preceding seven years. In other words, he can be regarded as NOR, if he
is in India for an aggregate period of less than 730 days in the seven preceding
years. OR effectively, he is ‘Non-Resident’ (NR) for at least two years u/s.6(1)
in ten preceding years. This was the consistent view under the Act as well as
under the 1922 Act till the Gujarat High Court took a different view in the case
of Pradip J. Mehta, which ultimately resulted into amendment in S. 6(6) in 2003
to keep the provisions in line with the view expressed by the Gujarat High
Court. The High Court took the view that an Individual has to be NR u/s.6(1) for
nine years out of the ten preceding years to acquire the status of NOR in a case
where he was in India for 730 days or more in seven preceding years. Therefore,
the controversy came-up with the judgment of the Gujarat High Court and existed
for the pre-amendment period. In fact, the Department was also attempting to
take a view that the amendment of 2003 is clarificatory and will also apply to
earlier years. Therefore, the issue became very vital.
1.4 The judgment of the Gujarat High Court referred to in
para 1.3 above, came up for consideration before the Apex Court recently and the
issue has now got resolved. Therefore, though the provisions have been amended
in 2003, it is thought fit to consider the same in this column, as the same will
be useful in many pending cases of the pre-amendment period.
Pradip J. Mehta v. CIT, 256 ITR 647 (Guj.) :
2.1 In the above case, the brief facts were : the assessee
had claimed status of NOR for the A.Y. 1982-83. The assessee was in India for
196 days in the relevant previous year and was also in India for more than 730
days (1402 days) in the seven preceding years. However, out of ten preceding
years, the assessee was NR for two years and hence, he claimed that as he was
not ‘Resident’ for nine years out of ten preceding years, he should be regarded
as NOR. The Assessing Officer (AO) took the view that for an Indian to become
NOR, he should be NR for a period of nine years out of ten preceding years and
as the assessee was NR only for two years out of the ten preceding years, he
cannot be regarded as NOR and accordingly he is Ordinarily Resident and his
foreign income is taxable in India. The First Appellate Authority, as well as
ITAT confirmed the view of the AO and the issue came up before the Gujarat High
Court at the instance of the assessee.
2.2 Before the High Court, on behalf of the assessee, it was,
inter alia, contended that the intention of the Legislature in enacting
the provisions of S. 6(6)(a) of Act was that, if an individual was not a
‘Resident’ for a period of nine years out of ten preceding years, he should be
treated as NOR. According to the counsel, the assessee was ‘Resident’ in India
for eight years out of ten preceding years, which means he was not a ‘Resident’
in India for a period of nine years out of ten preceding years. Therefore, he
falls in the category of NOR.
2.2.1 In support of his contention, the counsel for the
assessee drew the attention of the Court on the judgment of Patna High Court in
the case of C.M. Townsend (97 ITR 185), in which the High Court, while dealing
with the provisions of S. 6(6)(a) of the Act, has held that the assessee will be
regarded as NOR, if he was not a ‘Resident’ in India for a period of nine years
out of ten preceding years. In that case that was so, though the assessee was in
India for more than 730 days in seven preceding years. Similar view was also
taken by the Authority for Advance Rulings (AAR) reported in (223 ITR 379).
Reliance was also placed on the judgments of the Bombay High Court in Manibhai
S. Patel (23 ITR 27) of the Travancore-Cochin High Court in the case of P.B.I.
BAVA (27 ITR 463), in which also similar view was taken under the 1922 Act. The
attention of the Court was also drawn to the observations on the commentaries of
the learned authors Kanga and Palkhivala in their book the Law and Practice of
Income Tax, 7th Edition, in which similar conditions of S. 6(6) have been
clearly explained by relying on various judgments referred to therein.
2.3 On behalf of the Revenue, the counsel supported the reasonings of the Tribunal in support of its decision. It was also contended that the condition in the first part of S. 6 (6)(a) of the Act requires an individual not to be ‘Resident’ in India for a period of nine years out of ten preceding years for being treated as NOR.
2.4 After referring to the provisions contained in S. 6(6)(a) and noting the fact that similar provisions were contained in S. 4B of the 1922 Act, the Court stated that the short question raised for the assessee was that he should be treated as NOR because he was ‘Resident’ in India for a period of eight years and not nine years, as the law requires out of ten preceding years. In other words, he would be NOR, even if for all the remaining eight years out of ten years he was ‘Resident’ in India.
2.5 Referring to the contentions of the assessee, the Court stated as under (page 654) :
“This contention though appearing to be attractive at first blush, is not at all warranted by the provisions of S. 6(6)(a) of the Act. S. 6(6)(a) does not define ‘ordinarily resident in India’, but describes ‘not ordinarily resident’ in India. It resorts to the concept of ‘resident in India’, for which the criteria are laid down in S. 6(1) of the Act. On its
plain construction clause (a) of S. 6(6) would mean that if an individual has in all the nine out of ten previous years preceding the relevant previous year not been resident in India as contemplated by S. 6(1), he is a person who is ‘not ordinarily resident’ in India. To say that an individual who has been resident in India for eight years out of ten preceding years should be treated as ‘not ordinarily resident’ in India, does not stand to reason and such contention flies in the face of the clear provision of clause (a) of S. 6(6) which contemplates the period of nine years out of ten preceding years of not being a resident in India before an individual could be said to be ‘not ordinarily resident’ in India, which position will entitle such person to claim exemption under 5(1)(c) of the Act in respect of his foreign income. An individual who has not been resident in India, within the meaning of S. 6(1), for less than nine out of ten preceding years does not satisfy that statutory criteria laid down for treating such individual as a person who can be said to be ‘not ordinarily resident’ in India, as defined by S. 6(6). A resident of India who goes abroad and is not a resident in India for two years during the preceding period of ten years will therefore, not satisfy the said condition of not being a resident of India for nine out of ten years.”
2.6 The Court, then, noted that as per one of the conditions of S. 6(6)(a), if the assessee is in India for 730 days or more in seven preceding years, he does not become NOR. The Court also noted that u/s.6(1)(c), the individual will become ‘Resident’ if his total stay in India is 365 days or more in the preceding four years. The Court then observed as under (Page 655) :
“…………It would therefore, be strange to treat a person who has been resident in India in eight years out of ten preceding years as an individual who is ‘not ordinarily resident’ in India. This mis-conception that has also crept in the commentaries of some learned authors on which reliance was placed, arises, because one tries to search for a definition of ‘ordinarily resident’ in India in S. 6(6)(a), which as observed above, only lays down the condition of not being resident in India for nine out of ten preceding years for being treated as ‘not ordinarily resident of India’ besides the other condition of not being in India for seven hundred and thirty or more days in the preceding seven years………..”
2.7 The Court, then, stated that ‘ordinarily resident’ for the purpose of income tax connotes residence in a place with some degree of continuity and apart from accidental or temporary absences. For this, the Court referred to certain decisions given in the UK and stated that the motive of presence here is immaterial, it is a question of quality which the presence assumes.
2.8 The Court, while deciding the issue against the assessee, finally concluded as under (page 656) :
“The foreign income of every resident even when it is not brought into the country is chargeable to tax except when the resident is ‘not ordinarily resident’ in India. For an individual including a resident in order to be ‘not ordinarily resident’ so as to escape tax on his foreign income, it must be shown that the position is covered by clause (a) of Ss.(6) of S. 6 of the Act. When an individual has been a resident in India for nine out of ten preceding years, then in order to escape tax on his foreign income, he must not have been in India for seven hundred and thirty days or more in the aggregate during the preceding seven years. The test is one of presence and not absence from India and the length of presence will determine when an individual is ‘not ordinarily resident’ in India. In order that an individual is not an ordinarily resident, he should satisfy one of the two conditions laid down in S. 6(6)(a) of the Act, the first condition is that he should not be resident in India in all the nine out of ten years preceding the accounting year and the second condition is that he should not have during the seven years preceding that year, been in India for a total period of seven hundred and thirty or more days.”
2.9 In the above judgment, somehow, the Court chose to not to deal with the reasonings of the judgments on which reliance was placed on behalf of the assessee (referred to in para 2.2.1 above).
Pradip J. Mehta v. CIT, 300 ITR 231 (SC) :
3.1 The judgment of the Gujarat High Court referred to in para 2 above came up for consideration before the Apex Court. For the purpose of dealing with the issue, the Court noted the facts of the case of the assessee in brief. It seems that the Court has believed that the assessee was NR in three years out of ten preceding years while the factual position seems to be (as is apparent form the judgment of the High Court) that the assessee was NR for two years in ten preceding years. However, this factual misleading/wrong noting does not make any dif-ference in principle and therefore, one may ignore the same.
3.2 After considering the facts and the relevant provisions and the observations of the High Court (major part referred to in para 2.5 above), the Court noted the fact that certain decisions of the High Court and AAR (referred to in para 2.2.1 above) were cited on behalf of the assessee in support of his claim. The Court, then, considered those judgments/rulings and observed as under:
“The aforesaid decisions cited by the assessee have been noted by the High Court. The High Court answered the reference in favour of the Revenue and against the assessee, without either agreeing or disagreeing with the view taken by the various High Courts and the Authority for Advance Rulings, which is presided over by a retired judge of the Supreme Court.”
3.3 The Court noted that S. 6(6)(a) of the Act cor-responds to and is in pari materia with S. 4B of the 1922Act. The Court then referred to the background of introduction of S. 4B in the 1922Act and speeches made during the assembly debates on proposed Section at that time which was referred to in the judgment of the Travancore-Cochin High Court in the case of P.B.I. BAVA (supra). Referring to this as well as other judgments, the Court observed as under (page 240) :
“The Indian Income-tax Act of 1922was replaced by the Income-tax Act of 1961.The Law Commission of India has recommended the total abolition of the provisions of S. 4B of the 1922Act defining ‘Ordinary Residence’ of the taxable entities. The Income-tax Bill, 1961 (Bill No. 27 of 1961), did not contain any such provision. On the legislative anvil, it was felt necessary to keep the provisions of S. 4B of the 1922 Act intact and therefore,S. 6(6)had to be enacted in the 1961Act. Referred to Chaturvedi & Pithisaria’s Income Tax Law, fifth Edition, volume I 1998, page 565.”
3.4 The Court also took note of Departmental Circular (being Circular letter dated 5-12-1962)issued by Commissioner of Income-tax, West Bengal, addressed to Secretary,Indian Chamber of Commerce, (Calcutta) in which also the effect of the provisions was explained, which supports the stand of the assessee. It was also noted that the letter was issued after having communications with the Ministry of Finance.
3.5 The Court also took note of the fact that the Law Commission of India had recommended that the provisions of S. 4B of the 1922 Act be deleted, but that suggestion was not accepted by the Legislature. The Court then stated as under (Page 242):
“………Rather, on the legislative anvil, it was felt necessary to keep S. 4B of the 1922Act intact and, accordingly, S. 6(6), which corresponds to and is in pari materia with S. 4B of the 1922act, was enacted in the 1961 Act. This shows the legislative will. It can be presumed that the Legislature was in the know of the various judgments given by the different High Courts interpreting S: 4B, but still the Legislature chose to enact S. 6(6) in the 1961Act, in its wisdom, the Legislature felt necessary to keep the provisions of S. 4B of the 1922Act intact. It shows that the Legislature accepted the interpretation put by the various High Courts prior to the enactment of the 1961Act. It is only in the year 2003that the Legislature amended S. 6(6) of the 1961Act, which came into effect from April 1, 2004”.
3.6 The Court then clearly stated that it is well settled that when two interpretations are possible, then invariably, the Court would adopt interpretation which is in favour of the taxpayer and against the Revenue. For this, the Court also drew support from other judgments of the Apex Court.
3.7 Referring to the various judgments of the Apex Court, the Court also reiterated the settled position that the Circulars issued by the Department are binding on the Department. The Court also noted that Circular letter issued by the Commissioner of Income-tax, West Bengal has reference to the correspondence resting with the Ministry of Finance, wherein it is stated that the Department’s view has all along been the same as contended on behalf of the assessee. While deciding the issue in favour of the assessee, the Court finally concluded as under (page 243):
“In these circumstances, a person will become an ordinarily resident only if (a) he has been residing in nine out of ten preceding years; and (b) he has been in India for at least 730 days in previous seven years.
Accordingly, this appeal is accepted. The order passed by the High Court and the authorities below are set aside. It is held that the High Court in the impugned judgment has erred in its interpretation of S. 6(6) of the Act and the view taken by the Patna High Court, Bombay High Court and Travoncore-Cochin High Court has laid down the correct law……..”
Conclusion:
4.1 In view of the above judgment of the Apex Court, it is now clear that in the pre-amended provisions, the assessee has to be ‘Resident’ for nine years out of ten preceding years as well as he should also be in India at least for 730 days in the preceding seven years to be regarded as ‘Ordinarily Resident’. If, anyone of these conditions is not satisfied, he would be regarded as NOR under the preamended provisions.
4.2 The amendment made by the Finance Act, 2003 is prospective and will not apply to period prior to A.Y.2004-05.
4.3 The Court has emphatically reiterated its earlier position that when two interpretations are possible, then invariably the interpretation favouring the taxpayer and against the Revenue should be adopted.
4.4 One more important principle reiterated by the Apex Court is that the judgments cited before the Courts in support of the contentions should be dealt with and reasons should be recorded for taking a contrary view.
