Previous year and Assessment year

Income-tax is a charge on Income earned in a financial year which starts on 1st April of a calendar year and ends on 31st March of the following calendar year. It is generally a period of twelve months from April to March. The Income-tax is charged in the financial year following the year in which the income is earned. In view of this position under the system of Indian Income-tax the financial year in which income is earned is known as "Previous year" and the financial year in which the charge on that income is due is known as "Assessment year". Thus common terminology used in India for taxation of income is that the income of "Previous year" is assessed in the following financial year called "assessment year". It means income earned by any person from 1-4-1999 to 31-3-2000 for which the previous year is 1999-2000 will be taxed in the following financial year which is known as assessment year 2000-2001.

ASSESSEE

Under the Indian Income Tax Act, the entity on whom Income Tax is levied is called an "Assessee". An "assessee" is a "person" (which expression is defined in the next para) by whom any tax or any other sum of money (such as interest, penalty, etc.) is payable under the Income Tax Act or in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss. It also includes every representative assessee deemed to be an assessee under Chapter XV of the Income Tax Act, 1961.

PERSON

The word "person" is frequently used in the Income Tax Act. The word "person" is defined in section 2(31) of the I.T. Act. According to this definition a "person" is understood to mean not only an individual but also corporate bodies like companies or non-corporate bodies such as Partnership firms, Associations, societies, local authorities, civic or town planning bodies and even artificial juridical persons like temple, deities etc. Apart from the above it also includes a special class known as Hindu Undivided Family (H.U.F.) a status enjoyed for several years by Hindus in India who follow a system of joint family owning joint property.

Thus whenever the word "person" is used in the I.T. Act, its meaning will depend upon the context in which it is used and to which one of the above categories it applies.

RESIDENTIAL STATUS

The residential status plays an important role in the matter of assessment of persons. This is explained in section 6 of the Income Tax Act. According to these provisions Residential Status is divided into three categories.

1. Non-Resident
2. Resident
3. Resident, but not ordinarily resident

The status given at 'C' above, comes into operation only in respect of Individuals and Hindu undivided families.

The categories of persons referred to at serial No. (a) and (c) above are liable to pay tax only on their "Indian Income" while tax payers who are resident in India as per Income Tax Act are taxed on their "world income". What is Indian income etc. will be discussed a little later.

NON-RESIDENT UNDER INCOME TAX ACT

An individual is considered as a Non-resident if he is in India during any financial year (i.e period of twelve months from 1st April to 31st of March following) for an aggregate period of less than 182 days. However there is an exception to this rule. In case his stay in India in a year is 60 days or more and additionally he was in India in the four years preceding the said year for a total period of 365 days or more then even though he may have stayed in India for less than 182 days in that year (but more than 60 days) he would not be a "Non Resident" but a Resident. This may best be explained by means of an example.

Mr. 'A' left India for the first time on 1-5-1996 and came to India in financial year 1997-98 for 70 days. Thereafter in the year 1998-99 he came to India on 1-6-1998, stayed upto 30-6-1998, came back again on 1-12-1998 and left on 31-12-1998. It will be seen that during financial year 1998-99 he stayed in India for 30 days in June and 31 days in December aggregating to 61 days. Since his stay in financial year 1998-99 was less than 182 days, ordinarily he should be Non-resident in India for financial year 1998-99. But he is not so, because in the four years prior to F.Y. 98-99 he was in India for 365 days or more as under;

In F.Y. 1994-95	366 days
In F.Y. 1995-96	365 days
In F.Y. 1996-97	30 days
In F.Y. 1997-98	70 days
In F.Y. 1998-99	61 days
Total	831 days

In view of this, his status in India will be Resident for F.Y. 1998-99. Similar will be the case for F.Y. 1997-98, as he was in India for more than 365 days in the immediately preceding 4 previous years, and for 70 days in that year. However for F.Y. 1996-97 his residential status will be Non-resident since he was in India for less than 60 days in that year. However even in respect of this position the Govt. of India has relaxed the period of stay of 59 days to 181 days in the cases of certain individuals, as detailed below.

1. In the case of an Indian citizen who leaves India for employment (not being for medical treatment, studies or for running a business) including employment on an Indian ship, as a member of it's crew when the ship is outside India. Normally stay on Indian ship (wherever it may be) is considered as stay in Indian territory. However as a matter of concession, stay of Indian crew members during their stay on Indian ship outside India is treated as stay in foreign territory. Thus in the case of Indian crew members on Indian ship which leaves India, their stay abroad would be treated as employment outside India.

2. In the case of Indian citizen as well as in the case of "persons of Indian Origin" who is settled abroad but comes on a visit to India (not for business or any employment).

Thus in the above two categories a person will be Resident only if his aggregate stay is 182 days or more in any previous year. The concession of extended stay is thus available only to Indian citizens or to "persons of Indian origin". A "Person of Indian origin" here means a person who though may be non Indian citizen, but who himself or either of his parents or any one of his grand parents (from paternal or maternal side) was born in India.

In the earlier paras we discussed the status of "Non-Resident" only in respect of Individuals. However, as discussed earlier, besides individuals the term "person" includes various other categories also. In respect of such categories of persons, their residential status is determined as under:-

1. An Hindu undivided family is non-resident in India when during the whole year the control and management of its affairs are situated wholly out of India.

2. A company incorporated in India and known as "Indian company" is always resident in India irrespective of the fact where its control and management is situated.

3. Any other company (i.e. non-Indian Co.), Association of Persons and any other category of person (wherever constituted) is treated as non-resident when the control and management of its affairs is situated throughout the year wholly outside India.

It will be thus seen that in the cases of non-Individual categories of persons, except in the cases of Indian companies, it is the control and management that determines whether that person is Non-resident or otherwise. Thus if the control and management is in India, the status is Resident, if outside India, it is non-resident.

RESIDENT BUT NOT ORDINARILY RESIDENT

Under FEMA a person is either Resident or Non-Resident (Resident outside India). However under the Indian Income Tax Act a Resident can be either (a) Resident and Ordinarily resident, or (b) Resident but not Ordinarily resident. The meaning of these two terms are discussed below.

A resident is considered to be "Ordinarily Resident" in any previous year provided he satisfies the following two conditions, cumulatively:-

1. he is resident in nine out of ten previous years preceding that year.

2. he was in India in the seven previous years preceding that year for a period aggregating to 730 days or more.

It may be noted that both these conditions are cumulative. If a person does not satisfy any one of the above mentioned two conditions, he would be treated as "Not ordinarily resident".

Let us illustrate this by an example:-

Mr. "A" for the A.Y. 1999-2000 relevant to his income for F.Y. 1998-99 (i.e. 1-4-1998 to 31-3-1999) would be "resident but not ordinarily resident" if he was either -

1. A Resident, only for one previous year, in any one of the ten previous years comprising in period between 1-4-1988 and 31-3-1998

2. Or In India for less than 730 days between 1-4-1991 and 31-3-1998.

It will be seen that even if one of the above mentioned conditions is satisfied the person will be treated as "resident but not ordinarily resident". Thus, even if a person was in India for 730 days or more in the seven previous years preceding the year in question but was non- resident in nine out of ten previous years preceding that year he will still be "not ordinarily resident". Further even where a person was in India for an aggregate period of less than 730 days in the seven previous years preceding the year in question but was a resident for more than one previous year out of the ten previous years preceding that year, he will still be "not ordinarily resident".

This assumes importance because whereas in the case of "ordinarily resident" assessee Income tax is attracted on his "World Income" in the cases of "not ordinarily residents" only Indian Income is taxable.

Apart from individuals whose status can be treated as "ordinarily resident" and "not ordinarily resident" as discussed above, the only other category of person who can be treated as "ordinarily resident" or "not ordinarily resident" is H.U.F. In this case the condition to be fulfilled to be 'not ordinarily resident' is that its manager or karta who is normally the eldest living male member of that family should fulfill the conditions laid down for the individual requirement of being Non-Resident for nine out of ten years or not being in India for 730 days or more in the earlier seven previous years.

This will mean that except for individual and H.U.F. for all other categories of persons there are only two categories of Residential Status. (1) Non-resident and (2) Resident. The Residential Status of an assessee is an important aspect as it is this status which determine the assessee's tax liability, whereas in the case of "Resident" the entire world income attracts tax, in the case of Non-Resident only Indian Income is subjected to tax.

The definition of Non-Resident under FEMA is different from that given in the Income Tax Act. Under the Income Tax Act, the residential status of a person is determined only on the basis of his stay (number of days he stays) in India whereas under FEMA, it is not so. Under Section 2(v) of FEMA "Person resident in India"means

1. a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include

   1. a person who has gone out of India or who stays outside India, in either case
      1. for or on taking up employment outside India, or
      2. for carrying on outside India a business or vocation outside India,
      3. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
   2. a person who has come to or stays in India, in either case, otherwise than -
      1. for or on taking up employment in India, or
      2. for carrying on in India a business or vocation in India, or
      3. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

any person or body corporate registered or incorporated in India,

an office, branch or agency in India owned or controlled by a person resident outside India,

an office, branch or agency outside India owned or controlled by a person resident in India;

It will be seen that for the purposes of FEMA apart from actual stay in India the intention of the person to stay in India or outside India should also be taken into account.

It may be of interest to note here that the phrase "Non-Resident Indian", i.e. N.R.I. is foreign to FEMA. In FEMA what is almost akin to "NRI in Indian income tax Act, is a phrase "Person resident outside India" which term has been defined to mean a person who is not resident in India.

Income - meaning of

In the Indian Income-tax Act, the word "income" has been given very wide scope. Though section 2(24) of the Income-tax Act defines the word "income", it gives only an inclusive definition i.e. it says that the word "income", in addition to the general or common meaning attributable to it also includes certain items of receipts or accruals as income, such as voluntary contribution received by a trust created in a certain manner, perquisites received by an employee in terms of money or in terms of money worth, profits on sale of license granted under the import (control) orders, any sum received by an assessee from his employees as contribution to any provident fund, superannuation fund, etc. any sum received under a keyman insurance policy including the sum allocated by way of bonus of such policy, etc.etc. Thus under the Indian Income-tax Act, the word "Income" used therein, not only cannotes what a common man understands form the said word but also cannotes certain items of receipts / accruals which ordinarily would not have been treated as income but for their inclusion in the definition of the word "income" in the Act. It is also noteworthy to note that the Indian parliament can include any other items of receipts or accruals in the term "income" as and when it deems fit to do so.

Such income is to be brought to tax under certain specific heads. Section 14 of the Indian Income-tax Act specifies that all incomes should be classified under any one of the following heads :-

1. Salary
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources

The 5th Category i.e. "income from other sources" is the residuary head i.e. if any item of receipts or accruals which does not fall under any of the earlier 4 categories mentioned at Sr.Nos. 1 to 4, and such receipt or accrual has the attributes of "income" as given in section 2(24), of the Act, then such item should be brought to tax under the residuary head "income from other sources".

This categorization of income under different heads is absolutely needed as procedure to be adopted in quantification of income on which tax is to be levied, is different in all these cases. The scheme of taxation is not to tax the gross income but only the net income after deduction of expenses connected with earning of such income. The allowance of such expenses as deduction differs greatly under the various heads of income specified above. Hence unless the category in which an item of income falls is first determined, it will not be possible to quantify the tax leviable thereon.

Such income may be actually received by a person or it may just accrue or arise to him and not received. But the charge of income tax is at the first level when it becomes taxable. Thus an income when it is taxed on accrual basis cannot be brought to tax again on receipt basis.

Further categorization of income is based on the point or the area in which such income is accruing, arising or being received. On this basis, the income has been classified into two categories i.e. (i) "World Income" and (ii) "Indian Income". World income is that income which accrues, arises or is being received in any place under the sun. Whereas, "Indian income' is only that income which accrues to an assessee in the taxable territories of India. This classification of income is important from the point of view of taxation of the income of "Non-Residents". In their case, only that income which accrues or arises to them or is being received by them in the taxable territories of India i.e. "Indian income" alone is taxable. Whereas in the case of "Resident" income accruing anywhere in the world is to be brought to tax in their hands. In the case of non-residents, income earned outside India which is later on remitted to India is not taxable in India. However, pension directly remitted to India by Overseas employers would be taxable on the basis of its receipt.

Income deemed to accrue or arise in India

This issue is separately incorporated in section 9 of the Indian Income-tax Act. This section introduces a fiction and provides that certain incomes shall be deemed to accrue or arise in India even though in reality such income actually accrues or arises outside India.

The following categories of income are covered under the definition "income deemed to accrue or arise in India". Income shall be deemed to accrue in India through business connection in India or from any property/asset in India/or source of income in India or transfer of capital asset in India.

Income from business connection denotes a relationship between business carried on by a Non-Resident yielding profit and some activity in India which contributes to earning of the profit. However, the following transactions do not amount to business connections :-

1. In respect of business operations carried out both in India and overseas, transactions relating to overseas operations,
2. Transactions relating only to purchase of goods in India for purpose of export by the non-resident,
3. Transactions confined to the collection of news for transmission outside India in the business of news agency or publishing newspapers, magazines or journals, carried on by non-resident,
4. Operations confined to shooting of cinematography films by a non-resident foreign national.

Income from salary is deemed to accrue or arise in India if it is earned in India. For this purpose income from services rendered in India is regarded as income earned in India. Salary received abroad by Indian nationals from Government of India for services rendered outside India is deemed to accrue or arise in India. However, allowances and perquisites paid abroad are fully exempt u/s 10(7).

The following incomes which are payable outside India are deemed to arise in India:-

1. Dividend paid by an Indian company outside India.
2. Interest payable on money borrowed and brought into India.
3. Royalty and technical service fees payable in respect of any right/ technical services used for business / profession in India. However, royalty and fees for technical services is exempt, where such royalty / fees earned is in respect of computer software supplied by a Non-resident manufacturer along with the computer or computer based equipment under an approved scheme.