Taxmann's Direct Taxes Law & Practice by Taxmann

A few words from the authors

HE compendious and complex nature of our law relating to direct taxes makes the task of students and professional practitioners, who have not only to understand it but have also to develop the ability to apply it in given situations, extremely onerous and difficult. They have to acquire a familiarity with, and awareness of, the nature and scope of the main provisions of direct taxes. At the same time, they also require an up-to-date knowledge of how a statutory provision has been interpreted by different courts of law on different occasions. As such, they need a book on direct taxes which not only is comprehensive and up-to-date on both the law and its judicial interpretations but which also explains the difficult subject lucidly and through appropriate illustrations so as to render the study of direct taxes simple and easy. Unlike other text books available on this subject, this book makes a fresh and novel approach to the study of direct taxes keeping in view the specific requirements of the candidates appearing in CA, CS, ICWA, MCom., LLB and MBA examinations as well as those appearing in the income-tax departmental examination. The chief aim of the book is to enable the students to cut the time spent by them in preparing for the examination, while, at the same time, giving them the most precise and up-to-date information on the subject of their study. The present edition of the book has several unparalleled features which make it distinct from other available text books. These are : u

The present edition is thoroughly revised with a view to making it more reader-friendly.

The treatment of the subject is lucid, to-the-point and the matter is painstakingly arranged in paras and sub-paras with distinct numbers to save time and energy. Besides, debatable issues have been deliberated to their logical conclusion.

Theoretical discussion is suitably supplemented by illustrations (over 600 in number and covering an exhaustive range of issues) providing solutions to the knotty problems with reference to the latest case law.

Hints are given wherever tax planning can be resorted to.

Latest circulars, notifications, amendments and the case laws (i.e., up to January 31, 2022) are included in the discussion. All recent citations of court rulings, circulars and notifications have been highlighted.

In a nutshell, law is lucidly enumerated and its practical application is adequately explained. I-5

A few words from the authors

I-6

Our grateful thanks are due to Shri Rakesh Bhargava for his guidance and suggestions and for extending various facilities during the preparation of the manuscript of this book. Readers’ views, comments and criticism relating to the present work are most welcome. 22 Deepali, Pitampura, Delhi - 110034. Email : vks@taxmann.com Phone : 27015500, 27016686, 9810008160

VKS KS

About the Authors Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of special interest include all facets of corporate legislation and corporate economics especially the tax laws. Associated in different capacities with several professional institutes and business houses in India and abroad, Dr. Singhania is author of many popular books and software published by Taxmann. He has to his credit more than 300 research articles which have appeared in leading journals. He has been a resource person in over 800 seminars in India and abroad. He can be reached at vks@taxmann.com. Dr. Kapil Singhania, a Fellow of the Institute of Chartered Accountants of India and belonging to the alumni of Shri Ram College of Commerce, has completed his research work for which he has been awarded Ph.D. in 2003. His fields of involvement in research work in form of articles in various reputed journals and analytical studies span across from corporate laws to direct and indirect taxation. He has authored a variety of acclaimed books on direct and indirect taxes published by Taxmann. Dr. Singhania is providing tax consultancy to a number of business organizations, which include multinational and public sector companies.

I-7

Contents PAGE u

A few words from the authors

I-5

About the authors

I-7

Section-wise Index

I-25

1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Assessment year Previous year Person Assessee Charge of income-tax Income Gross total income Total income and tax liability Agricultural income Difference between exemption and deduction Assessment Definition of “manufacture” Capital asset Company Fair market value Capital receipts vs. Revenue receipts Capital expenditure vs. Revenue expenditure Method of accounting Definitions of amalgamation, demerger, infrastructure capital company and infrastructure capital fund Rules of interpretation

2 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

Basic concepts 1 1 5 6 6 7 17 21 32 32 32 32 32 32 33 33 39 39 40 41

Residential status and tax incidence

What is relevance of residential status Residential status - General norms Residential status of an individual Residential status of a Hindu undivided family Residential status of the firm and association of persons Residential status of a company Residential status of “every other person” Relation between residential status and incidence of tax Receipt of income Accrual of income Income deemed to accrue or arise in India

I-9

55 55 56 64 65 66 70 70 73 75 79

Contents

I-10 PAGE

Fund Managers in India not to constitute business connection of offshore funds Hints for tax planning in respect of residential status Problems on residential status and tax incidence

32A. 33. 34.

40. 41. 42. 43. 44.

4 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. Annex

102 135 135 139 139 139 140

Salaries

Essential norms of salary income Basis of charge Place of accrual of salary income Tax treatment of different forms of salary income Allowance Perquisites Valuation of perquisites Deduction from salary income Tax on salary of non-resident technicians Salaries of other foreign citizens Employees’ provident fund Approved superannuation fund Approved gratuity fund Deduction under section 80C Relief under section 89 Meaning of salary for different computations Hints for tax planning Problems on salary income 1 : Frequently Asked Questions (FAQs) about computation of salary income

5 86. 87. 88. 89. 90. 91. 92. 93.

Incomes exempt from tax

Incomes exempt under section 10 Special provisions in respect of newly established undertakings in free trade zone, etc. Special provisions in respect of newly established units in Special Economic Zone Special provisions in respect of newly established hundred per cent export-oriented undertakings Special provision in respect of export of artistic hand-made wooden articles Income exempt under section 13A Exemption to Electoral Trust

38. 39.

96 98 99

141 143 144 145 163 170 174 205 205 205 206 211 211 211 211 214 216 217 229

Income from house property

Chargeability Applicability of section 22 in certain typical situations Principle of mutuality vis-a-vis section 22 Property income exempt from tax Computation of income from a let out house property Computation of income from self-occupied property Special provisions when unrealised rent is realised subsequently Mode of taxation of arrears of rent in the year of receipt

230 235 237 238 238 247 256 256

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Contents PAGE

Hints for tax planning Problems on computation of property income Frequently Asked Questions (FAQs) about mode of computation of annual value

94. 95. App.

6 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 110A. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 120A. 120B. 121. 121A. 121B. 122. 123. 124. 125. 126. 127. 127A. 128. 128A. 129. 130. 131. 132. 133.

256 257 267

Profits and gains of business or profession

Chargeability General principles governing assessment of business income Method of accounting Scheme of deductions and allowances Basic principles governing admissibility of deduction under sections 30 to 44DB Deductions expressly allowed in respect of expenses/allowances Rent, rates, taxes, repairs and insurance of building Repairs and insurance of machinery, plant and furniture Depreciation Investment allowance for acquisition and installation of new plant and machinery Investment allowance in backward area in Andhra Pradesh, Bihar, Telangana or West Bengal Tea/coffee/rubber development account Site restoration fund Reserves for shipping business Expenditure on scientific research Expenditure on acquisition of patent rights, copyrights, know-how Expenditure for obtaining right to use spectrum for telecommunication services Amortization of telecom licence fees Expenditure on eligible projects or scheme Deduction in respect of expenditure on specified business Payment to the associations and institutions carrying out rural development programmes Deduction for expenditure incurred on agricultural extension project Deduction for expenditure for skill development Amortisation of preliminary expenses Amortisation of expenditure in the case of amalgamation/demerger Amortisation of expenditure under voluntary retirement scheme Amortisation of expenditure on prospecting, etc., for development of certain minerals Insurance premium Insurance premium paid by a federal milk co-operative society Insurance premium on health of employees Bonus or commission to employees Interest on borrowed capital Discount on zero coupon bonds Employer’s contribution to recognised provident fund and approved superannuation fund Employer’s contribution to notified pension scheme Contribution towards approved gratuity fund Employees’ contribution towards staff welfare schemes Write off allowance for animals Bad debts Provision for bad and doubtful debts relating to rural branches of commercial banks

271 284 290 291 291 293 293 294 295 338 338 339 343 344 344 355 355 356 358 358 363 364 364 365 369 369 369 372 372 372 372 373 376 377 378 378 378 379 379 383

Contents

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Transfer to special reserve Family planning expenditure Contribution towards Exchange Risk Administration Fund Revenue expenditure incurred by entities established under any Central, State or Provincial Act 137A. Contribution to credit guarantee trust fund 137B. Commodities transaction tax/Securities transaction tax 138. Expenditure for purchase of sugarcane by a co-operative society engaged in sugar manufacturing 138A. Marked to market loss 139. Expenditure on advertisement 140. Expenses deductible from commission earned by life insurance agents, UTI agents, post office/Government securities agents and agents of notified mutual funds 141. General deduction 142. Amounts expressly disallowed under the Act 143. Amount not deductible under section 40(a) 144. Amount not deductible in the case of partnership firm 145. Amounts not deductible in the case of an association of persons and body of individuals 146. Amount not deductible under section 40(c)/(d) 147. Payments to relative 148. Payments exceeding Rs. 10,000 paid otherwise than by account payee cheques or bank drafts 149. Expenditure on payment of salary or perquisite to employees 150. Fees for services payable to a former employee 151. Provision for payment of gratuity 152. Interest on public deposit 153. Restriction on contributions by employers to non-statutory funds 154. Disallowance of marked to market loss 155. Disallowance of unpaid liability 156. Deemed profit 157. Income from undisclosed sources 158. Maintenance of accounts by certain persons 159. Audit of accounts by certain persons 160. Special provisions consequential to changes in the rate of exchange of currency 161. Special provision for deduction in the case of trade, professional or similar associations 162. Special provisions 163. Valuation of stock 164. Hints for tax planning 165. Problems on computation of income from business/profession 134. 135. 136. 137.

7 166. 167. 168. 169. 170. 171. 172.

386 388 389 389 389 389 389 390 390 391 392 449 449 460 460 460 460 463 467 467 467 468 468 469 469 479 483 485 487 489 491 491 514 519 524

Capital gains

Chargeability Meaning of capital asset Types of capital assets Transfer of capital asset Computation of capital gain Full value of consideration Expenditure on transfer

534 534 538 541 555 558 560

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Contents PAGE

Cost of acquisition Cost of improvement Indexed cost of acquisition and indexed cost of improvement Computation of capital gain in certain special cases Reference to Valuation Officer Capital gains exempt from tax Capital gains arising from transfer of residential house Capital gains arising from the transfer of land used for agricultural purpose Capital gains on compulsory acquisition of land and buildings forming part of industrial undertaking 182. Capital gain not to be charged on investment in certain bonds 182A. Capital gain not to be charged on investment in units of a specified fund 183. Capital gains on transfer of a long-term capital asset other than a house property 184. Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area 185. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone 185A. Capital gain on transfer of residential property 185B. Extension of time-limit for acquiring new asset 186. Short-term/long-term capital gains - How charged to tax 187. Hints for tax planning 188. Problems on computation of capital gains 173. 174. 175. 176. 177. 178. 179. 180. 181.

Basis of charge Relevance of method of accounting Dividend Winnings from lotteries, crossword puzzles, horse races and card games, etc. Sum received from employees as their contribution towards staff welfare schemes 196. Interest on securities 197. Income from machinery, plant or furniture let on hire 198. Income from composite letting of building, machinery, plant or furniture 199. Money/property is received without consideration or for inadequate consideration 200. Share premium in excess of fair market value 201. Advance money received in course of negotiations for transfer of a capital asset 201A. Compensation on termination of employment or modification of terms of employment 202. Interest on KVP, IVP, NSC, etc. 203. Deductions 204. Other points 205. Problems on computation of income from other sources

206. 207. 208. 209.

620 621 624 625 631 633 634 638 639 655 657

Income from other sources

191. 192. 193. 194. 195.

561 574 576 580 610 611 612 618

663 666 666 675 677 677 681 681 683 693 696 696 696 698 700 701

Income of other persons included in assessee’s total income

Transfer of income without transfer of assets Revocable transfer of assets When an individual is assessable in respect of remuneration of spouse When an individual is assessable in respect of income from assets transferred to spouse

707 707 708 711

Contents

I-14 PAGE

When individual is assessable in respect of income from assets transferred to son’s wife When individual is assessable in respect of income from assets transferred to a person for the benefit of spouse When an individual is assessable in respect of income from assets transferred to a person for the benefit of son’s wife Income of minor child Conversion of self-acquired property into joint family property and subsequent partition Other profits Recovery of tax Hints for tax planning Problems explaining clubbing provisions

210. 211. 212. 213. 214. 215. 216. 217. 218.

233.

11 234. 235. 235A. 236. 237. 237A. 237B. 237C. 238. 239. 240. 241. 241A. 241B. 241C. 242. 243. 244.

716 717 717 719 720 720 721 722

Set off and carry forward of losses

Mode of set off and carry forward - The three steps Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss Loss of partnership firms Loss of closely held companies Carry forward and set off of loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems illustrating the provisions of set off and carry forward of losses

226. 227. 228. 229. 230. 231. 232.

715

727 727 728 730 743 743 743 744

Deductions from gross total income and tax liability

Essential rules governing deductions Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. Deduction in respect of deposit under National Savings Scheme Equity Linked Savings Scheme Deduction in respect of pension fund Deduction in respect of contribution to a National Pension System (NPS) Deduction in respect of subscription to long-term infrastructure bonds When available under section 80CCF Deduction in respect of investment made under any equity saving scheme Deduction in respect of medical insurance premia Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available Deduction in respect of medical treatment, etc. Deduction in respect of payment of interest on loan taken for higher studies Deduction in respect of interest on loan taken for residential house property Deduction in respect of interest on loan taken for certain house property Deduction in respect of interest on loan taken for purchase of electric vehicle Deduction in respect of donation to certain funds, charitable institutions, etc. Deduction in respect of rent paid Deduction in respect of certain donations for scientific research or rural development

748 749 757 758 759 760 762 762 763 766 768 771 771 772 773 773 779 781

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Contents PAGE

245. 246. 247. 248. 249. 250. 251. 252. 253. 253A. 253B. 254. 254A. 255. 255A. 255B. 256. 257. 258. 259. 260. 261. 262. 263. 264. 265. 266. 267. 268. 269. 270.

Deduction in respect of contributions given by companies to political parties or electoral trust Deduction in respect of contributions given by any person to political parties or electoral trust Deduction in respect of profits and gains from projects outside India Deduction in respect of profits and gains from housing projects aided by World Bank Tax incentives for exports Deduction in respect of earnings in convertible foreign exchange Deduction in respect of profit from export of computer software Deduction in respect of profits and gains from export or transfer of films software Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. - How to find out Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Deduction in respect of eligible start-up Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail Deduction in respect of profits from housing projects Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out Deduction in the case of hotels and convention centre in NCR Deduction in respect of certain undertakings in North-Eastern States Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste Deduction in respect of employment of new employees Deduction in respect of interest on certain securities, investments, etc. Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre Deduction in respect of inter-corporate investment Deduction in respect of income of a co-operative society Deduction in respect of certain income of producer companies Deduction in respect of royalty income of authors Deduction in respect of remuneration or professional income from certain foreign sources Deduction in respect of royalty on patents Deduction in respect of interest on deposits in savings accounts Deduction in respect of interest on deposits in case of senior citizens Deduction in case of a person with disability Deductions from tax liability Rebate for resident individuals

12 278. 279. 280. 281.

782 782 783 783 783 783 783 783 783 795 796 797 814 816 819 819 820 821 823 824 825 827 827 828 830 830 831 832 832 834 834

Agricultural income

Definition Income which is partly agricultural and partly from business Partially integrated taxation of non-agricultural income with income derived from agriculture Computation of net agricultural income

836 842 844 845

Contents

I-16 PAGE

13 285. 286. 287. 288.

Tax incidence on individuals Taxable income - How computed Tax liability Problems on computation of taxable income

14 295. 296. 297. 298. 299. 300. 301. 302. 303.

318. 319. 320. 321. 322. 323. 324. 325. 326. 327. 328.

333. 334. 335.

869 869 869 870 870 871 873 873 875

Special provisions governing assessment of firms and association of persons

Meaning of partnership Scheme of taxation of firms When remuneration/interest is deductible What are the conditions a firm should fulfil under section 184 What are the conditions for claiming deduction of remuneration to partners under section 40(b) What are the conditions for claiming deduction of interest to partners under section 40(b) Carry forward and set-off of loss in the case of change in the constitution of firm Computation of income of firm Computation of tax of firm Assessment of partners of a firm How to compute income of an association of persons (AOP) or body of individuals (BOI) Computation of income of an AOP/BOI Computation of tax of AOP or BOI Assessment of member of AOP/BOI Hints for tax planning Problems on computation of taxable income of firms/partners and association of persons

853 853 854 858

Tax treatment of Hindu undivided families

Meaning of Hindu undivided family Hindu coparcenary Different schools of Hindu law Jain and Sikh families Assessment as Hindu undivided family - Basic conditions Taxable income - How to compute Rates of tax Partition of a Hindu undivided family Problems on Hindu undivided families

15 313. 314. 315. 316. 317.

Typical problems on assessment of individuals

882 882 882 883 884 890 891 894 896 903 906 908 908 910 915 922

Taxation of companies

Definitions Taxable income and tax liability - How computed Carry forward and set-off of losses in the cases of certain companies

928 930 932

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Contents PAGE

Minimum alternate tax Tax on distributed profits of domestic companies Tax on income distributed to unitholders Tax on income received from venture capital companies and venture capital funds 337C. Additional income-tax on distributed income by company for buy-back of unlisted shares 338. Problems on computation of taxable income of a corporate-assessee 336. 337. 337A. 337B.

18 343. 344. 345. 346. 347. 348. 349. 350. 351. 352. 352A. 352B. 352C. 352D.

353. 354. 355. 356. 357. 358. 359. 359A. 359B. 360. 361. 361A. 362.

957 958

983 983 984 992

Assessment of charitable and other trusts

Meaning of trust Tax exemption Charitable purpose Essential conditions for exemption How to find out exemption u/s 11 Accumulation of income Forfeiture of exemption Public charitable/religious trust - How chargeable to tax Private discretionary trust Income from property held under trust partly for religious purposes and partly for other purposes Oral trust Tax on distributed income by securitization trusts Special provisions pertaining to business trust Pass through status to Category I and Category II Alternative Investment Funds

957

Assessment of co-operative societies

Meaning of co-operative society Taxable income and tax liability - How computed Deduction in respect of income of co-operative societies Problems on computation of income of a co-operative society

339. 340. 341. 342.

934 956 957

994 994 994 998 1003 1010 1012 1021 1024 1025 1026 1027 1028 1030

Return of income and assessment

Voluntary return Return of loss Extension of time Belated return Revised return Defective or incomplete return Scheme to facilitate submission of returns through Tax Return Preparers Power of Board to dispense with furnishing of documents Filing of return in electronic form Return by whom to be verified Permanent Account Number (PAN) Quoting of Aadhaar number What is self-assessment

1035 1039 1039 1039 1040 1042 1044 1044 1045 1045 1046 1050 1051

Contents

I-18 PAGE

Inquiry before assessment Summary assessment without calling the assessee Assessment in response to notice under section 143(2) Best judgment assessment Reference to dispute resolution panel Income escaping assessment and re-assessments Issue of notice for reassessment under section 148 What are the provisions regarding rectification of mistake Time limit for completion of assessments/reassessments Provisions of section 155 Problems on return of income and assessment Obligation to furnish annual information return pertaining to financial transactions 372B. Submission of statement by a non-resident having liaison office in India 372C. Furnishing of information or document by an Indian concern 363. 364. 365. 366. 366A. 367. 368. 369. 370. 371. 372. 372A.

20 373. 374. 375. 376. 377. 378. 379. 380.

381. 382. 383. 384.

385. 386. 387. 388. 389. 390. 391. 392.

404. 405.

1152 1153 1154 1154

Interest

Interest payable by the assessee Interest payable to assessee Procedure to be followed in calculation of interest Waiver or reduction of interest under sections 234A, 234B and 234C Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Power of CBDT and Settlement Commission to reduce/waive interest Writ petition Problems illustrating computation of interest

1107 1118 1138 1138 1143 1143 1146 1150

Advance payment of tax

Income liable for advance tax Advance tax liability - Under different situations Interest payable by the assessee or Government Problems illustrating advance tax provisions

1103 1106 1106

Penalties and prosecutions

Penalties for defaults in brief Penalty for concealment/under-reporting of Income Who can levy penalty Power of Commissioner to reduce or waive penalty Procedure for imposition of penalty Time-limit for completion of penalty proceedings Offences and prosecutions Onus of proof

1053 1057 1060 1072 1073 1075 1082 1088 1093 1099 1100

1156 1172 1176 1176 1177 1177 1178 1178

Tax deduction or collection at source

Scheme of tax deduction at source Deduction of tax from salaries

1185 1189

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Contents PAGE

Tax deduction at source from withdrawal from employees provident fund scheme Deduction of tax at source from interest on securities Deduction of tax at source from dividends Deduction of tax at source from interest other than interest on securities Deduction of tax at source from winnings from lotteries or crossword puzzles 410. Deduction of tax at source from winnings from horse races 411. Deduction of tax at source from payments to contractors or sub-contractors 412. Deduction of tax at source from insurance commission 412A. Tax deduction from payment of life insurance policy 413. Payment to non-resident sportsman or sports association 414. Deduction of tax from payments in respect of National Savings Scheme 415. Deduction of tax at source on payments on account of repurchase of units by Mutual Funds or UTI 416. Deduction of tax from commission, etc., on sale of lottery tickets 417. Deduction of tax at source from commission or brokerage 418. Deduction of tax at source from income by way of rent 418A. Tax deduction at source on purchase of immovable property 418B. Tax deduction from payment of rent by certain individuals/HUFs 418C. Tax deduction from payment under joint development agreement 419. Tax deduction at source on fees for professional or technical services, royalty or directors fees 419A. Tax deduction at source in respect of income from units 420. Tax deduction from payment of compensation in certain cases 420A. Deduction of tax at source from interest payable on infrastructure debt fund 420AA. Tax deduction from income from units of business trust 420AB. Tax deduction from income in respect of units of investment fund 420ABB. Tax deduction from income in respect of investment in Securitization fund 420B. Tax deduction by an Indian specified company or business trust from interest to a non-resident/foreign company 420C. Tax deduction at source on interest on bonds/Government securities 420D. TDS on certain payments by individual/HUF 420E. TDS on payment of certain amounts in cash 420F. TDS on payment by e-commerce operator to e-commerce participants 420G. Deduction of tax in case of specified Senior Citizen 420H. Deduction of tax at source on payment for purchase of goods 421. Deduction of tax at source from other sums 422. Tax deduction from any income payable to non-resident unit-holders of Mutual Fund 423. Deduction of tax at source in respect of units referred to in section 115AB 424. Deduction of tax from income or long-term capital gain from foreign currency bonds/Global Depository Receipts 425. Deduction of tax at source from income of Foreign Institutional Investors from securities 426. Payment without tax deduction or with deduction at lower rate 427. Processing of statements of tax deducted at source 428. Other points for consideration 429. Tax collection at source 405A. 406. 407. 408. 409.

24 430. 431.

1194 1197 1198 1199 1204 1204 1204 1211 1211 1212 1213 1213 1213 1214 1216 1221 1221 1222 1223 1227 1227 1228 1228 1229 1229 1230 1231 1232 1233 1234 1237 1237 1240 1247 1247 1247 1248 1248 1252 1252 1261

Refund of excess payments

Right to claim refund - When arises Who can claim refund

1272 1272

Contents

I-20 PAGE

432. 433.

How to claim refund Other points

25 435. 436. 437. 438. 439. 440. 441. 442. 443. 444.

445. 446.

471. 472. 473. 474. 475. 476. 477. 478.

480.

1317

1319 1319

1323 1323 1327

Special measures in respect of transactions with persons located in notified jurisdictional area

Special measures in respect of certain transactions Notified jurisdictional area Applicability of transfer pricing provisions Disallowance of payment to financial institutions located in notified jurisdictional area Disallowance of other expenditure Amount received to be treated as income in some cases TDS at higher rate Provisions illustrated

1317

Settlement Commission and Dispute Resolution Committee

Settlement Commission Discontinuation of Income-tax Settlement Commission Dispute Resolution Committee

1275 1275 1276 1289 1297 1309 1315 1316

Income-tax authorities

Tax authorities Central Board of Direct Taxes

27 457. 458. 459.

Appeals and revisions

Meaning of appeal Appellate hierarchy Appeal to the Commissioner (Appeals) Revision by the Commissioner of Income-tax Appeal to the Appellate Tribunal Appeal to High Court Appeal to the Supreme Court Provision for avoiding repetitive appeals Procedure for appeal by revenue when an identical question of law is pending before Supreme Court Consequence of non-filing of appeal in respect of cases where the tax effect is less than the prescribed monetary limit

1272 1273

1329 1329 1329 1330 1330 1330 1330 1330

General Anti-avoidance Rule

Applicability of general anti-avoidance rule

1333

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Contents PAGE

Impermissible avoidance arrangement Procedure for invoking GAAR Clarifications given by Board

481. 482. 483.

1333 1335 1335

Advance ruling

485.

Constitution of the Board for Advance Ruling

1337

486.

Advance ruling

1339

487.

Procedure for filing application

1340

488.

Procedure on receipt of application

1342

489.

Applicability of advance ruling

1344

490.

Advance ruling to be void in certain circumstances

1345

491.

Powers of authority

1345

491A. Authority for advance rulings

31 492. 493. 494. 495. 496. 497. 498. 498A. 499. 500.

Search, seizure and assessment

Powers regarding discovery, production of evidence, etc. Search and seizure Requisitioning of books of account, etc. Application of assets seized or requisitioned Power to call for information Power of survey Power to collect certain information Power to call for information by prescribed income-tax authority Scheme of assessment in case of search or requisition Prior approval in the case of search

1345

1347 1348 1356 1357 1358 1359 1362 1362 1363 1370

Transfer pricing

506.

Taxation of international transaction

1371

507.

Computation of the arm’s length price

1375

508.

Arm’s length price - Computation of

1376

509.

Computation of arm’s length price in cases where more than one price is determined under most appropriate method

1383

510.

Reference to transfer pricing officer

1393

510A. Power of Board to make Safe Harbour Rules

1396

511.

Maintenance of books of account and furnishing of report in respect of international group

1399

512.

Report from accountant

1404

513.

Specified domestic transactions

1404

514.

Advance Pricing Agreement (APA)

1405

514A. Secondary adjustment in certain international transactions

1407

514B. Provisions pertaining to thin capitalisation

1411

514C. Important judicial rulings

1414

Contents

I-22 PAGE

33 515. 516. 517. 518. 519. 520. 521. 522. 523.

Restructuring business Amalgamation Demerger Conversion of sole proprietary business into company Conversion of firm into company Slump sale Transfer of assets between holding and subsidiary companies Amalgamation or demerger of co-operative banks Conversion of private company/unlisted public company into Limited Liability Partnership (LLP)

34 531. 532. 533. 534. 535. 536. 537. 538. 539. 540. 541. 542. 543. 544. 545. 546. 547. 548. 549. 550. 551. 552. 553. 554.

1415 1415 1424 1434 1435 1437 1443 1448 1450

Alternative tax regime

Alternative tax regime available under different sections Manufacturing domestic companies under section 115BA Tax on income of certain domestic companies Conditions and restrictions Tax rate Option MAT not applicable Case studies New manufacturing domestic companies Conditions Mode of computation of income Computation of tax liability under section 115BAB Option MAT not applicable Case study Income of individuals and Hindu undivided family Rate of income-tax under the alternative tax regime Conditions and restrictions Option Case studies Tax on certain resident co-operative societies Conditions and restrictions under section 115BAD Tax rate Option

35 565. 566. 567. 568.

Business restructuring

1455 1457 1458 1458 1459 1459 1459 1459 1463 1463 1464 1464 1465 1465 1466 1466 1467 1467 1469 1470 1473 1473 1474 1474

Tax planning

Tax planning Tax planning with reference to setting up of a new business Tax planning with reference to financial management decisions Tax planning with reference to specific managerial decisions

1475 1477 1479 1480

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Contents PAGE

569. 570. 571.

Tax planning in respect of employees’ remuneration Tax planning in respect of non-residents Tax planning in respect of amalgamation or demerger of companies or business restructuring

36 572. 573. 574. 575. 577. 578. 580. 581. 582. 583.

1484 1486 1491

Miscellaneous

Introduction of Tonnage Tax Securities Transaction Tax Tax clearance certificate Equalisation levy Income-tax on fringe benefit Commodities transaction tax Facility for electronic communication Introduction of Document Identification Number Power to withdraw approvals Restriction on cash transactions

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ANNEXURES 1. 2. 3. 4. 5.

Tax rates Rates of depreciation The Eleventh Schedule, Thirteenth Schedule, Fourteenth Schedule/ Investment ceiling in the case of small scale industrial undertaking Notified backward districts Questions set for CA (Final) Examinations and Answers from November 2010 to July 2021

1509 1532 1539 1546 1548

CHAPTER TWO

Residential status and tax incidence What is relevance of residential status 22. There are two types of taxpayers—resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.

Residential status - General norms 23. One has to keep in mind the following norms while deciding the residential status of an assessee : 23.1 Different taxable entities - Section 6 lays down the test of residence for the following taxable entities : a. an individual ; b. a Hindu undivided family ; c. a firm or an association of persons or a body of individuals ; d. a company ; and e. every other person. 23.2 Different kinds of residential status - Assessees are either (a) resident in India, or (b) nonresident in India. As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessees (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident. 23.3 Different residential status in respect of different previous years of the same assessment year not possible [Sec. 6(5)] - If a person is resident in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year(s) relevant to the same assessment year in respect of each of his other sources of income [see problem 24-P9]. 23.4 Different residential status for different assessment years - An assessee may enjoy different residential status for different assessment years. For instance, an individual who has been regularly assessed as resident and ordinarily resident, has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1) in that year [see para 24.1]. 23.5 Resident in India and abroad - It is not necessary that a person who is resident in India, cannot become resident in any other country for the same assessment year. A person may be resident in more than one country at the same time for tax purposes, though he cannot have two domiciles simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be nonresident for all other countries for the same assessment year. 23.6 Onus of proof - Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities—Rai Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.). In the case of V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168, the Supreme Court held that section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them. However, 55

Income-tax - Residential status and tax incidence

Para 24

the burden of proving that an individual or a company is resident in India lies on the department— Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC).

Residential status of an individual [Sec. 6]† 24. An individual may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident. 24.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)] - To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows — Step 1

First find out whether such individual is “resident” in India.

See para 24.1-1

Step 2

If such individual is “resident” in India, then find out whether he is “ordinarily resident” in India. However, if such individual is a “non-resident” in India, then no further investigation is necessary.

See para 24.1-2

24.1-1 BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS RESIDENT IN INDIA - Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions— Basic condition (a)

He is in India in the previous year for a period of 182 days or more.

Basic condition (b)

He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

24.1-1a EXCEPTIONS - The aforesaid rule of residence is subject to the following exceptions— ■ Exception one (Special Case 1) - In Special Case 1, the period of “60 days” referred to in (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is available in the case of an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship‡. For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or may be outside India). To put it differently, the individual need not be an unemployed person—British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR - New Delhi). He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Travelling abroad on business visa to take up any employment or for any business carried outside India, is sufficient to prove this condition—K. Sambasiva Rao v. ITO [2014] 42 taxmann.com 115 (Hyd.). Alternatively, he may be an unemployed person who goes outside India to take an employment outside India. In Special Case 1, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days. ■ Exception two (Special Case 2) - In Special Case 2, the period of “60 days” referred to in (b) above has been extended to 182 days# by virtue of Explanation 1(b) to section 6(1). However, Special Case 2 covers an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. 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. It may be noted that grand-parents include both maternal and paternal grand-parents.

† Vide Circular No. 2/2021, dated March 3, 2021, CBDT has provided that if any individual is facing double taxation even after taking into account the relief provided by the relevant Double Taxation Avoidance Agreement (DTAA), he/ she may furnish the specified information by March 31, 2021 in Form-NR annexed to the said Circular. This form is to be submitted electronically to the Principal Chief CIT (International Taxation). ‡In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, not include the period given in rule 126. Under rule 126, the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.

Non-resident

Para 24.3

In Special Case 2, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days#. ■ Exception three - Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22. For the provisions of this section, see para 24.3-1. 24.1-2 ADDITIONAL CONDITIONS TO TEST WHEN A RESIDENT INDIVIDUAL IS ORDINARILY RESIDENT IN INDIA - Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions— Additional condition (i)

He has been resident† in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.

Additional condition (ii)

He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions and the two additional conditions [i.e., (i) and (ii)]. ■ Exceptions

- For a few exceptions, see para 24.3-1.

24.1-3 OTHER POINTS - In determining the residential status of an assessee, the following settled propositions have to be borne in mind : ■ Stay at the same place not necessary - It is not essential that the stay should be at the same place— Kinloch v. IRC 14 TC 736. It is equally not necessary that the stay should be continuous. Similarly place of stay or purpose of stay is not material. ■ Stay in territorial waters - A stay by an individual on a yacht moored in the territorial waters of India would be treated as his presence in India for the purpose of this section—Baryard Brown v. Burt 5 TC 667. ■ Presence for a part of a day - Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the stay of one day—Walkie v. IRC [1952] 1 AER 92. If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on which he leaves India shall be taken into account as stay of the individual in India— Advance Ruling P. No.7 of 1995, In re [1997] 90 Taxman 62 (AAR - New Delhi). ■ Involuntary stay - Involuntary stay of a person in India caused by unauthorized impounding of passport must be excluded for determining his residential status under section 6—CIT v. Suresh Nanda [2015] 233 Taxman 4 (Delhi). 24.2 Resident but not ordinarily resident [Sec. 6(1), 6(6)(a)] - An individual who satisfies at least one of the basic conditions mentioned in para 24.1-1 but does not satisfy the two additional conditions [i.e., conditions (i) and (ii) mentioned in para 24.1-2], is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances : Case 1

If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] but none of the additional conditions [i.e., (i) and (ii) of para 24.1-2].

Case 2

If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] and one of the two additional conditions [i.e., (i) and (ii) of para 24.1-2].

■ Exceptions

- For a few exceptions, see para 24.3-1. 24.3 Non-resident - An individual is a non-resident in India if he satisfies none of the basic conditions [para 24.1-1]. In the case of non-resident, the additional conditions [i.e., (i) and (ii) of para 24.1-2] are not relevant. # This provision is subject to one exception. It is applicable from the assessment year 2021-22. For this exception, see para 24.3-1. †According to basic conditions given in para 24.1-1.

Para 24.3

Income-tax - Residential status and tax incidence

24.3-1 EXCEPTIONS - Even if an individual satisfies none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the cases given below – ■ First exception - This exception is given under section 6(1A) read with section 6(6)(d) and applicable from the assessment year 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions – a. he is an Indian citizen; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000† during the relevant previous year, and c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. This exception is not applicable in the case of a foreign citizen, even if he is a person of Indian origin. ■ Second exception - This exception is given by section 6(6)(c) read with Explanation 1(b) to section 6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions – a. he is an Indian citizen or a person of Indian origin; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000† during the relevant previous year; c. he comes to India on a visit during the relevant previous year, and d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year. 24.3-1a OTHER POINTS - For the aforesaid two exceptions, the following should be kept in view – How to find out total income of Rs. 15,00,000 - Total income for the ceiling of Rs. 15,00,000 is calculated after ignoring income from foreign sources. “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). Income which is deemed to accrue or arise in India shall be included in computation of the ceiling of Rs. 15,00,000.

■

Liable to tax - “Liable to tax” (in relation to a person and with reference to a country) means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently being exempted from such liability under the law of that country.

■

■ Person of Indian origin - A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.

24.4 Rule of residence in brief - The Table given below summarises the rule of residence for the assessment year 2022-23— RULE OF RESIDENCE Who is resident and ordinarily He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same resident in India time, he should also satisfy the two additional conditions. Who is resident but not ordinarily resident in India

He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may satisfy one or none of the additional conditions.

Who is non-resident resident in India

He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) and basic condition (b)*]. Additional conditions are not relevant in the case of a nonresident.

*In the two special cases mentioned in para 24.1-1, basic condition (b) is not relevant.

† For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India.

Clarification in respect of residency

Para 24.5

BASIC CONDITIONS AT A GLANCE In the case of an Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian ship (1)

In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous year

In the case of an individual [other than that mentioned in columns (1) and (2)]

(2)

a. Presence for at least 182 days in India during the previous year 2021-22 b. Not functional

a. Presence for at least 182 days in India during the previous year 2021-22. b. Not functional†

(3) a. Presence for at least 182 days in India during the previous year 2021-22. b. Presence in India for at least 60 days during the previous year 2021-22 and 365 days during 4 years immediately preceding the previous year (i.e., during April 1, 2017 and March 31, 2021).

ADDITIONAL CONDITIONS AT A GLANCE i.

Resident in India in at least 2 out of 10 years immediately preceding the previous year [i.e., he must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., during previous years 2010-11 and 2019-20)]. ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year (i.e., during April 1, 2013 and March 31, 2020).

24.5 Clarification in respect of residency under section 6 - In order to avoid genuine hardship due to suspension of international flights, CBDT vide Circular No. 11/2020, dated May 8, 2020 has decided that for the purpose of determining the residential status under section 6 during the previous year 2020-21 in respect of an individual who has come to India on a visit before March 22, 2021 and – a. has been unable to leave India on or before March 31, 2021, his period of stay in India from March 22, 2021 to March 31, 2021 shall not be taken into account; or b. has been quarantined in India on account of outbreak of COVID-19 on or after March 1, 2021 and has departed on an evacuation flight on or before March 31, 2021 or has been unable to leave India on or before March 31, 2021, his period of stay from the beginning of his quarantine to his date of departure or March 31, 2021, as the case may be, shall not be taken into account; or c. has departed on an evacuation flight on or before March 31, 2021, his period of stay in India from March 22, 2021 to his date of departure shall not be taken into account. 24-P1 X, a foreign national (not being a person of Indian origin), came to India for the first time from USA on July 11, 2015. He stayed here for a stretch of 3 years and left for Japan on July 11, 2018. He returned to India on April 10, 2019 and remained here till August 17, 2019, when he went back to USA. He again came back to India on January 30, 2022 at 11.59 p.m. and continued to stay in India thereafter. Determine his residential status for the assessment year 2022-23. SOLUTION : For the assessment year 2022-23, financial year 2021-22 is previous year. During the previous year 2021-22, X is in India for a period of 60 days (i.e., January 2022 : 1 + February 2022 : 28 days + March 2022 : 31 days). Moreover, during 4 years immediately preceding the previous year 2021-22, he is in India for 597 days (i.e., 2017-18 : 365 days, 2018-19 : 102 days, 2019-20 : 130 days and 2020-21 : Nil). Thus, he satisfies condition (b) mentioned in para 24.1-1 (namely, presence of at least 60 days during the previous year and 365 days during 4 years preceding the previous year). He, therefore, becomes resident in India. A resident individual may either be ordinarily resident or not ordinarily resident in India. To determine it, one has to apply the test of two additional conditions mentioned in para 24.1-2. During 7 years immediately preceding the previous year 2021-22, X is in India for 1227 days and during 10 years immediately preceding the previous year 2021-22, he is resident in India for 5 years as follows : † However, this condition has been activated from the assessment year 2021-22, in a few cases. See para 24.3-1.

Income-tax - Residential status and tax incidence

Para 24.5 Year

2020-21 2019-20 2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12

Presence in India (number of days) Nil 130 102 366 365 264 Nil Nil Nil Nil

Resident (R) or nonresident (NR) NR R R R R R NR NR NR NR

Which of the condition (a), or (b) of para 24.1-1 is satisfied to become resident or non-resident None (b) (b) (a) as well as (b) (a) (a) None None None None

Thus, he satisfies one of the basic conditions and the two additional conditions. He will, therefore, be treated as resident and ordinarily resident in India for the assessment year 2022-23. If X comes to India at any time after zero hour on January 30, 2022, he will be non-resident for the assessment year 2022-23. 24-P2 X, a chief executive of a company had undertaken foreign tour on various occasions for company s work and was out of India for a total number of 255 days during the previous year ending March 31, 2022. He submits his return of income for the assessment year 2022-23 in the status of non-resident. Is he justified ? He visited a foreign country for the first time during May 2020. SOLUTION : By virtue of section 6(1)(c), an individual will be resident in India in any previous year if he has been in India for a period of at least 60 days during the previous year and at least 365 days during 4 years preceding the previous year. However, as per Explanation (a) where an Indian citizen leaves India for the purpose of employment outside India, the above period of 60 days has been extended to 182 days. In the given problem, X had left India for purposes of employment outside India. In other words, Explanation (a) will be applicable. Accordingly, X will be treated as non-resident for the assessment year 2022-23. Hence, the submission of his return of income for the assessment year 2022-23 in the status of non-resident is justified. 24-P3 During his 196 days stay in India in the previous year 2021-22, X, a citizen of U.K. is all the time moving from one place to another. He claims that he is non-resident in India for the assessment year 2022-23 on the following grounds : 1. He had never visited India before April 1, 2021. 2. During 2021-22, though he is in India for 196 days, he could not spend two consecutive nights at any one place. 3. For the assessment year 2022-23, he is resident in U.K. according to the English Income-tax Act. He insists that he cannot be resident of two countries for the same assessment year. Do you agree with him? SOLUTION : The claim of X is not tenable, as he is in India for 196 days during the previous year 2021-22. He satisfies one of the two basic conditions (namely, presence of 182 days or more during the previous year 2021-22) and none of the additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2022-23. The fact that he could not spend two consecutive nights at any one place is immaterial. Moreover, a person who is resident in India, may become resident of any other country according to the tax laws of that country for the same or a different assessment year. 24-P4 X, after about 30 years stay in India, returns to America on January 29, 2019. He returns to India in June 2021 to join an American company as its overseas branch manager. Determine his residential status for the assessment year 2022-23. SOLUTION : For the assessment year 2022-23, the year 2021-22 is the previous year. During 2021-22, X is in India for more than 275 days. He is, therefore, resident in India. He is resident in India for 2 years out of 10 years (i.e., 2011-12 to 2020-21), and he has stayed for more than 730 days during the seven years preceding the previous year 2021-22. He is, therefore, resident and ordinarily resident in India for the assessment year 2022-23. 24-P5 X sets up a new profession on January 14, 2021 and keeps his books of account on the basis of financial year. Though he has never gone out of India, he claims that he is resident and not ordinarily resident for the assessment year 2022-23. For the support of his claim, he submits that he does not fulfil one of the additional conditions (i.e., he is not resident in India for at least 2 out of 10 preceding years), as he has not been assessed as resident during 2 out of the preceding 10 years due to absence of taxable income. Comment on the claim of X and determine his residential status for the assessment year 2022-23. SOLUTION : The claim of X is not acceptable. Section 6(6) prescribes additional conditions for deciding whether or not a resident individual is ordinarily resident. These conditions are based upon physical presence in the preceding

Clarification in respect of residency

Para 24.5

7 years and residential status during preceding 10 years. Residential status during preceding 10 years is to be determined, whether or not an individual is assessed as resident in the past. In other words, an individual who does not have taxable income during preceding 10 years, does not become non-resident (in preceding 10 years) merely because of the fact that he was not assessed as resident during these years. Claim of X is, therefore, not justified. As X has never gone out of India, he will satisfy basic as well as additional conditions and, accordingly, he will be resident and ordinarily resident for the assessment year 2022-23. 24-P6 X is a foreign citizen, not being a person of Indian origin. Determine his residential status for the assessment year 2022-23 on the assumption that during financial years 2007-08 to 2021-22 he was present in India as follows : 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

221 days 22 days 50 days 72 days 130 days 340 days 30 days

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

160 days 96 days 286 days 100 days 182 days 85 days 280 days 86 days

SOLUTION : For the assessment year 2022-23, financial year 2021-22 is the previous year. During 2021-22, X is in India for a period of 86 days and during four years preceding the previous year 2021-22, he is in India for 647 days. Thus, he satisfies one of the two basic conditions laid down by section 6(1) [i.e., condition (b) mentioned in para 24.1-1] and, consequently, he becomes resident in India. A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether X is ordinarily resident or not ordinarily resident, one has to test the two additional conditions as laid down by section 6(6)(a) [see conditions (i) and (ii) in para 24.1-2]. Information presented in the Table given below may be used to test the additional conditions : Year

2020-21 2019-20 2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08

Presence in India (number of days)

280 85 182 100 286 96 160 30 340 130 72 50 22 221

Status

Resident Resident Resident Resident Resident Resident Resident Non-resident Resident Resident

Which of condition (a) or (b) [para 24.1-1] is satisfied to become resident or non-resident (a) or (b) (b) (a) or (b) (b) (a) or (b) (b) (b) None (a) (b)

Not necessary to determine

Condition (i) of para 24.1-2 - This condition requires that an individual should be resident in India for at least 2 out of 10 years immediately preceding the relevant previous year. X, in the present case, is resident in India in 9 years out of 10 years (i.e., during 2011-12 to 2020-21, he is resident in India in all the years except 2013-14). He, thus, satisfies this condition. Condition (ii) of para 24.1-2 - This condition requires that an individual should be present in India for at least 730 days during 7 years immediately preceding the relevant previous year. X is in India for 1189 days during 2014-15 to 2020-21. He, thus, satisfies this condition. X satisfies one of the two basic conditions and the two additional conditions. He is, therefore, resident and ordinarily resident in India for the assessment year 2022-23. 24-P7 X, an Indian citizen, who is appointed as Senior Taxation Officer by the Government of Iran, leaves India, for the first time on September 10, 2020 for joining his duties in Iran. During the previous year 2021-22, he

Income-tax - Residential status and tax incidence

Para 24.5

comes to India on a visit for 119 days. Determine the residential status of X for the assessment years 2021-22 and 2022-23. SOLUTION : During the previous year 2020-21, X is in India for 163 days (and during four years immediately preceding the previous year 2020-21, he was in India for more than 365 days). Though he satisfies one of the conditions laid down in section 6(1), yet by virtue of Explanation to section 6(1), he will be non-resident for the assessment year 2021-22 (an Indian citizen, leaving India for the purpose of employment, will be treated as resident in India only if he has been in India in that year for at least 182 days). During the previous year 2021-22 (for the assessment year 2022-23), X comes to India for 119 days. Therefore, X does not satisfy one of the conditions laid down by section 6(1) [read with Explanation to section 6(1)]. He will, accordingly, be treated as non-resident in India for the assessment year 2022-23. 24-P8 X is a foreign citizen (not being a person of Indian origin). Since 1981, he visits India every year in the month of April for 100 days. Find out the residential status of X for the assessment year 2022-23. SOLUTION : During the previous year 2021-22, X is in India for 100 days and during 4 years preceding the year 2021-22 (i.e., 2017-18 to 2020-21), he is in India for 400 days. Thus, he satisfies basic condition (b) to become resident in India. To determine, whether a resident individual is ordinarily resident or not ordinarily resident, one has to test two additional conditions as laid down by section 6(6)(a). Condition (i) of para 24.1-2 - Every year X satisfies basic condition (b), as he is in India for 100 days during the relevant previous year and 400 days during 4 years preceding the previous year. Therefore, he satisfies this condition. Condition (ii) of para 24.1-2 - X is in India for 700 days during 7 years prior to the previous year 2021-22. He does not satisfy this condition. X satisfies one of the basic conditions and one of the two additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2022-23. 24-P9 X (a foreign citizen, not being a person of Indian origin) comes to India for the first time on September 1, 2021. On September 15, 2021, he joins a company on monthly salary of Rs. 60,000, as a part-time production consultant (duty hours : 6.30 PM to 9.30 PM). Prior to September 15, 2021, X does not have any source of income. On October 9, 2021, he starts a trading business in computer hardware after obtaining approval of his employer. For the previous year ending March 31, 2022, he has the following income : Salary from the part-time employment : Rs. 3,90,000, income from the business of trading in computer hardware in India : Rs. 7,86,000 ; and foreign income from the same business : $ 40,000. Find out the residential status of X for the assessment year 2022-23. SOLUTION : For the assessment year 2022-23, X has the following sources of income in India : Sources of income Salary income Business income

Previous year

Number of days when X was in India

September 15, 2021 to March 31, 2022 October 9, 2021 to March 31, 2022

198 days 174 days

For the first source of income, X becomes resident in India by satisfying one of the basic conditions. As he comes to India for the first time in 2021, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not ordinarily resident in India for the first previous year. For the second source of income, X is a non-resident, as he satisfies none of the basic conditions. It may be noted that he is non-resident in India for the business income and resident but not ordinarily resident for the salary income. In view of section 6(5), if a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other sources of income in the same assessment year. In respect of the assessment year 2022-23, X will, therefore, be regarded as resident but not ordinarily resident for all sources of income. 24-P10 X is an Indian citizen. Currently, he is in employment with an overseas company located in Dubai. During different years, he is in India as follows Previous year 2021-22 2020-21 2019-20

Presence in India

Previous year

Presence in India

Previous year

55 days 190 days 200 days

2018-19 2017-18 2016-17

170 days 200 days 250 days

2015-16 2014-15 2013-14

Presence in India 70 days 71 days 72 days

For the previous year 2021-22, X is not taxable in Dubai or in any other country/territory by reason of his domicile or residence. Income of X (other than income from foreign sources) for the previous year 2021-22 is Rs. 16,00,000. Find out the residential status of X for the assessment year 2022-23.

Clarification in respect of residency

Para 24.5

SOLUTION : X is in India for 55 days during the previous year 2021-22. He is unable to satisfy any of the basic condition given by section 6(1). However, he satisfies the following 3 conditions given by section 6(1A) a. X is an Indian citizen; b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year, and c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. He is deemed to be resident but not ordinarily resident in India [as per section 6(1A) read with section 6(6)(d)]. The information given in the above table pertaining to earlier years, is not relevant in this case.

24-P11 X is an Indian citizen. Currently, he is in employment with a multinational company and posted in Singapore. During the previous year 2021-22, he comes to India for a visit of 145 days. In earlier 4 years, he is in India for more than 900 days. X wants to know his residential status for the assessment year 2022-23. His annual income for the previous year 2021-22 is as follows Rs. Income from salary, rent, consultancy and interest earned and received in Singapore Income from business (accrued and received outside India, controlled from Singapore) Income from another business (accrued and received outside India, controlled from India) Interest on bank fixed deposits in India Any other income in India or outside India Life insurance premium paid in India

29,00,000 21,00,000 8,00,000 11,00,000 Nil 2,60,000

SOLUTION : In the previous year 2021-22, X is in India for 145 days. Total income of X (other than income from foreign sources) is Rs. 17,50,000 (i.e., Rs. 8,00,000 + Rs. 11,00,000 deduction under section 80C : Rs. 1,50,000). X satisfies 4 conditions of second exception [see para 24.3-1] as follows

a. X is an Indian citizen or a person of Indian origin; b. total income of X (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year; c. he comes to India on a visit during the previous year 2021-22, and d. he is in India for 145 days (i.e., his Indian visit is for 120 days or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year. Consequently, for the previous year 2021-22 (i.e., assessment year 2022-23), X is resident but not ordinarily resident in India. 24-P12 X is an Indian citizen (or he is a person of Indian origin). He wants to know his residential status in India for the previous year 2022-23 in the following different possible situations a. if he visits India during the previous year 2022-23 for less than 120 days; or b. if he visits India during the previous year 2022-23 for 150 days; or c. if he visits India during the previous year 2022-23 for 180 days or more. SOLUTION : The table given below highlights the impact of amendment made by the Finance Act, 2021 in the case of an Indian citizen or person of Indian origin who visits India during the relevant previous year How many days an Indian citizen/a person of Indian origin visits India during the relevant previous year Less than 120 days Non-resident in India

120 days or more but not more than 181 days

182 days or more

n If he satisfies both of the following conditions, he will be resident but not ordinarily resident - During preceding 4 years, he was in India for 365 days or more; and - His taxable income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year

n If he satisfies both of the following conditions,

If he satisfies one or none of the above two conditions, he will be non-resident in India

n If he satisfies one or none of the above two conditions, he will be resident but not ordinarily resident

he will be resident and ordinarily resident - He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year; and - He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Para 25

Income-tax - Residential status and tax incidence

Residential status of a Hindu undivided family [Sec. 6(2)] 25. A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident. 25.1 When a Hindu undivided family is resident or non-resident - A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India. The table given below highlights the same proposition — Place of control

Residential status of family

Control and management of the affairs of a Hindu undivided family is — ■ Wholly in India ■ Wholly out of India ■ Partly in India and partly outside India

Resident Non-resident Resident

Ordinarily resident or not

See para 25.2 — See para 25.2

Note - In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”—see para 25.2.

25.1-1 WHAT IS CONTROL AND MANAGEMENT - Different courts have defined the term “control and management” as follows — ■ De facto control - Control and management means de facto control and management and not merely the right to control or manage—CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC). ■ Place of control and management - Control and management is situated at a place where the head, the seat and the directing power are situated. The head and brain is situated where vital decisions concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken—San Paulo (Brazilian) Railway Co. v. Carter [1886] AC 31 (HL). ■ Residence of HUF in India - The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family, unless the decisions concerning the affairs of the family are taken at that place. The mere fact of the absence of karta from India does not make the family non-resident—Annamalai Chettiar v. ITO [1958] 34 ITR 88 (Mad.). ■ Broad propositions - The following propositions can be stated on the basis of the rulings given in Subbayya Chettiar v. CIT [1951] 19 ITR 163 (SC) and Narasimha Rao Bahadur v. CIT [1950] 18 ITR 181 (Mad.)— 1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs is situated wholly outside India. 2. HUF may be residing in one place and doing a great deal of business in other place. 3. Occasional visit of a non-resident karta to the place of HUF’s business in India would be insufficient to make HUF ordinarily resident in India. 25.2 When a resident Hindu undivided family is ordinarily resident in India - A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b) : Additional condition (i)

Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in para 24.1-1] immediately preceding the relevant previous year

Additional condition (ii)

Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.

If the karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

What is control and management

Para 26.1

25-P1 The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since 1980) who is resident in India in only 3 out of 10 years preceding the previous year 2021-22 and he is present in India for more than 729 days during the last 7 years. Determine the residential status of the family for the assessment year 2022-23 if the affairs of the family s business are (a) wholly controlled from Hong Kong, (b) partly controlled from India. SOLUTION : If affairs of a Hindu undivided family are controlled from a place outside India, the family will be nonresident. Accordingly XY Hindu undivided family is non-resident for the assessment year 2022-23 under situation (a). Under situation (b), affairs of the family s business are partly controlled from India during the previous year 2021-22. Therefore, the family is resident in India. However, it would be ordinarily resident in India if karta satisfies the following two conditions laid down by section 6(6)(b) : 1. He has been resident in India in at least 2 out of 10 years preceding the previous year. 2. He has been present in India for at least 730 days during seven years preceding the previous year. As the karta is resident in India in 3 out of 10 years preceding the previous year, the family would be resident and ordinarily resident in India for the assessment year 2022-23 in situation (b). 25-P2 A Hindu undivided family (X is karta, A, B and C are other coparceners) carries on cloth business in Burma. A comes to India and starts a cloth business at Bombay in partnership with some other persons. The capital supplied by A to this firm is found to have come from the family. Subsequently, B joins the firm as partner. Later on another business is started at Banaras with the same persons and one outsider as partner. C joins this firm. The Assessing Officer wants to treat the family as resident on the ground that its coparceners are partners in the firms, financed out of the family funds, and the firms are resident in India. Is the Assessing Officer legally correct ? SOLUTION : A case on similar facts was examined by the Supreme Court of India in the case of CIT v. Nandlal Gandalal [1960] 40 ITR 1, wherein the Court pointed out that both under the Hindu law and under the law of partnership, the Hindu undivided family as such could exercise no control over the management of a firm in which some of its coparceners were partners, even if capital contributed by coparceners was found to have come from the family. The position in Hindu law with regard to coparcener who has entered into partnership with others is well settled. The partnership is a contractual partnership and is governed by the Indian Partnership Act, 1932. The partnership is between the coparcener individually and partners and not between the family and other partners. This remains so even if the coparcener is accountable to the family for the income received. Thus, control and management over the firm s business lies in the hands of individual coparceners and not in the hands of the family. The Assessing Officer is, therefore, not justified while holding the Hindu undivided family as resident in India.

Residential status of the firm and association of persons [Sec. 6(2)] 26. A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India. ■ The above rule may be summarised as follows — Place of control Control and management of the affairs of a firm/association of persons is — ❑ Wholly in India ❑ Wholly outside India ❑ Partly in India and partly outside India

Residential status Resident Non-resident Resident

Note - A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the partners/members of the firm/association is not relevant in determining the status of the firm/ association.

26.1 What is “control and management” - While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated. Where the partners of a firm are resident in India the normal presumption is that the firm is resident in India. This presumption can, however, be effectively rebutted by showing that the control and management of the affairs of the firm is situated wholly outside India. The onus of rebutting the presumption is on the assessee.

Para 27

Income-tax - Residential status and tax incidence

Residential status of a company [Sec. 6(3 )] 27. Residential status of a company is determined as follows – Section

Company

Residential status

6(3)(i)

Indian company

Always resident in India [Note 1]

6(3)(ii)

A foreign company (whose turnover/gross receipt in the previous year is more than Rs. 50 crore)

It will be resident in India if its place of effective management (POEM), during the relevant previous year, is in India [Note 2]

6(3)(ii)

A foreign company (whose turnover/gross receipt in the previous year is Rs. 50 crore or less)

Always non-resident in India [Note 3]

Notes – 1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in India. An Indian company can never be non-resident. 2. A foreign company (with effect from the assessment year 2017-18) is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose, a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017, dated January 24, 2017. These guiding principles are briefly explained in para 27.1. 3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment year 2017-18 onwards.

27.1 Place of effective management (POEM) as per Circular No. 6/2017 - “Place of effective management” (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. An entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India. 27.1-1 COMPANY ENGAGED IN ACTIVE BUSINESS OUTSIDE INDIA - The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India. ■ Active business outside India - A company shall be said to be engaged in “active business outside India” if –

a. the passive income is not more than 50 per cent of its total income; b. less than 50 per cent of its total assets are situated in India; c. less than 50 per cent of total number of employees are situated in India or are resident in India; and d. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure. Passive income - “Passive income” of a company shall be aggregate of, — a. income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and b. income by way of royalty, dividend, capital gains, interest or rental income; ■

Place of effective management

Para 27.1

However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation. 27.1-2 MANAGEMENT POWER EXERCISED IN INDIA - If on the basis of facts and circumstances it is established that the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India, then the place of effective management shall be considered to be in India. For this purpose, merely because the Board of Directors follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Payroll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; would not constitute a case of Board of Directors of companies standing aside. Moreover, the Board has clarified in its Circular No. 25/2017, dated October 23, 2017 that if the Regional Headquarter operates for subsidiaries/group companies in a region within the general and objective principles of global policy of the group laid down by the parent entity in the field of Pay roll functions. Accounting, HR functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures (and not being specific to any entity or group of entities per se); it would, in itself, not constitute a case of Board of Director of companies standing aside and such activities of Regional Headquarter in India alone will not be a basis for establishment of POEM for such subsidiaries/group companies†. 27.1-3 OTHER CASES - In cases of companies other than those discussed above, the determination of POEM would be a two stage process, namely – -

First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.

Second stage would be determination of place where these decisions are in fact being made.

The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form. Guiding principles - Some of the guiding principles which may be taken into account for determining the POEM are as follows – ■

1. The location where a company’s Board regularly meets and makes decisions may be the company’s place of effective management provided, the Board – a. retains and exercises its authority to govern the company; and b. does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole. 2. If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor, etc., and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions. 3. A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company’s place of effective management. † The provisions of General Anti-Avoidance Rule contained in Chapter XA may get triggered in such cases where the above clarification is found to be used for abusive/aggressive tax planning – Circular No. 25/2017, dated October 23, 2017.

Para 27.1

Income-tax - Residential status and tax incidence

4. The location of a company’s head office will be a very important factor in the determination of the company’s place of effective management because it often represents the place where key company decisions are made. 5. The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor. 6. The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s place of effective management. Such decisions may include sale of all or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These decisions typically affect the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company’s business from a management or commercial perspective and are therefore, generally not relevant for the determination of a company’s place of effective management. 7. Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM. 8. The determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples – - The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. - The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. - The fact that one or some of the directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. - The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not, by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied. - The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied. 27.1-4 PRIOR APPROVAL OF PRINCIPAL CIT/CIT REQUIRED - In case the Assessing Officer proposes to hold a foreign company, on the basis of its POEM, as being resident in India then any such finding shall be given by the Assessing Officer after seeking prior approval of the collegium of three members consisting of the Principal CITs or CITs, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the foreign company before issuing any directions in the matter. 27.1-5 SPECIAL PROVISIONS PERTAINING TO FOREIGN COMPANY WHICH BECOMES RESIDENT IN INDIA ON THE BASIS OF POEM [SEC. 115JH] - In a case where a foreign company is said to be resident in India on account of its POEM being in India (and such foreign company has not been resident in India in any of the preceding years), then a few special provisions are applicable for the computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery, etc. Such modifications are given in section 115JH read with Notification No. SO 3039(E), dated June 22, 2018. 27-P1 X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in India. The business of the company is fully controlled from outside India. Find out the residential status of X Ltd. for the assessment year 2022-23.

DIRECT TAXES Law & Practice AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO PAGE NO. BINDING TYPE

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VINOD K. SINGHANIA, KAPIL SINGHANIA TAXMANN FEBRUARY 2022 66TH EDITION 9789393880444 1748 PAPERBACK

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Description Taxmann’s flagship publication on Direct Taxes has been the ‘go-to-guide’ for Students & Professional Practitioners for over 40 years. This book aims at not only making the reader understand the Law & but also helps the reader develop the ability to apply the Law. In other words, this book aims at providing the reader with the following: u Acquire familiarity with the direct tax provisions u Awareness of the direct tax provisions u The nature and scope of the direct tax provisions u Up-to-date knowledge of how different courts of Law have interpreted a statutory provision on different occasions This book is written in simple language, explaining the provision of the Law in a step-by-step & to-thepoint manner – with the help of suitable illustrations, without resorting to paraphrasing of sections and legal jargons. This book will be helpful for students appearing in CA, CS, ICWA, M.Com., LL.B., and MBA examinations. It will also be helpful for those appearing in the income-tax departmental examination. The Present Publication is the 66th Edition for A.Y. 2022-23 (amended up to January 31st 2022), authored by Dr. Vinod K. Singhania & Dr. Kapil Singhania. The noteworthy features of this book are as follows: u [Self-Learning/Practice Book] Features learn-yourself-technique enabling students to learn & apply the Law faster u [Treatment of Text is To-The-Point] The matter is arranged in paras and sub-paras with distinct numbers to save time and energy. Also, debatable issues have been deliberated to their logical conclusion u [Well-Thought-Out-Original-Problems] Each para starts with analytical discussions supported by 600+’ well-thought-out-original-problems’. A unique style of illustrating all complex provisions has been adopted. Hints are also given wherever tax planning can be resorted to u [Most Amended] Latest Circulars, Notifications, Amendments & Case Laws (up to January 31st, 2022) are included in all discussions. All recent citations of Court Rulings, Circulars and Notifications have been highlighted u [Past Exam Questions with Answers] Question set for CA (Final) examination and answers from November 2010 to July 2021 u [Follows Six-Sigma Approach] to achieve the benchmark of ‘Zero-Error’

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