SUPREME COURT OF INDIA

Pradip J. Mehta

v.

Commissioner of Income-tax, Ahmedabad

ASHOK BHAN AND DALVEER BANDARI, JJ

CIVIL APPEAL NO. 4291 OF 2002

APRIL 11, 2008

Section 6 of the Income-tax Act, 1961 - Residential status - Assessment year 1982-83 - Assessee who was a marine engineer in a foreign shipping company was posted to work on high seas and was paid abroad for many years - During relevant assessment year, assessee claimed status of ‘not ordinarily resident in India’ for exclusion of its income accruing outside India as he was not resident in India in 9 out of 10 previous years - However, Assessing Officer refused to grant said status on ground that assessee was a non-resident in India for only three years during last ten years and during past seven years he had stayed in India for more than 730 days - Whether a person will become an ordinarily resident only if (a) he has been residing in nine out of ten preceding years; and (b) he has been in India for at least 730 days in previous seven years and, therefore, assessee was ‘not ordinarily resident’ as claimed by him - Held, yes

FACTS

The assessee was appointed as Marine Engineer by a foreign company. During the course of his employment, the assessee was posted to work on high seas and was paid abroad for many years. During the relevant assessment year, the assessee claimed the status of ‘not ordinarily resident in India’ under section 6(6) and to exclude income accruing outside India under section 5(1)(c). As the assessee was not resident in India in 9 out of 10 previous years preceding that year, he claimed the status of ‘not ordinarily resident’ for the relevant year. However, the Assessing Officer refused to grant the assessee the status of ‘not ordinarily resident’ for the relevant year on the ground that the assessee was a non-resident in India for only three years during the last ten years and during the last seven years he had stayed in India for more than 730 days. The Commissioner (Appeals) as well as the Tribunal upheld the view of the Assessing Officer. On reference, the High Court also refused to grant the status of ‘not ordinarily resident’ holding that section 6(6)(a) contemplates the period of nine years out of ten preceding years of not being a resident' in India before an individual could be said to be ‘not ordinarily resident’ in India, which position would entitle such person to claim exemption under section 5(1)(c) in respect of his foreign income.

On appeal to the Supreme Court:

HELD

The proposed definition of ‘resident’ and ‘not ordinarily resident’ was enacted by the British Rulers, i.e., the officers of the Indian Civil Services and those in armed forces serving in India, who were absent from India on furlough for a year out of every four years so that they could be treated as ‘not ordinarily resident’ and avoid tax on income in their home country, notwithstanding continuous stay and service in India. [Para 16]

The Law Commission of India had recommended that the provisions of section 4B of 1922 Act defining ‘ordinary residence’ of the taxable entities be deleted but the suggestion was not accepted by the Legislature. Rather, on the legislative anvil, it was felt necessary to deep section 4B of 1922 Act intact and, accordingly, section 6(6), which corresponds to and is pari material with section 4B of 1922 Act, was enacted in the 1961 Act. This shows the Legislative will. It can be presumed that the Legislature was in the know of the various judgments given by the different High Courts interpreting section 4B but still the Legislature chose to enact section 6(6) in the 1961 Act, in its wisdom, the Legislature felt necessary to keep the provisions of 4B of 1922 Act intact. It shows that the Legislature accepted the interpretation put by the various High Court prior to enactment of 1961 Act. It is only in the year 2003 that the Legislature amended section 6(6) of the 1961 Act, which came into effect from 1-4-2004. [Para 26]

It is well settled that when two interpretations are possible, then invariably, the Court would adopt the interpretation which is in favour of the tax payer and against the revenue. [Para 27]

In a catena of decisions it was held that the circulars issued by the department are binding on the department. K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) UCO Bank v. CIT, Collector of Central Excise v. Dhiren Chemical Industries [2002] 2 SCC 127, etc. In all these cases it was held that the circulars issued under the Income-tax Act or Central Excise Act are binding on the department. It might be noted that in the circulars issued by the Commissioner, reference had been made to the correspondence resting with the Ministry of Finance (Department of Revenue) Letter No. 4/22//61-IT(AT), dated 25-11-1961, wherein it is stated that the department’s view has all along been that an individual is ‘not ordinarily resident’ unless he satisfies both the conditions in section 4B(a), i.e, (i) he must have been a resident in nine out of ten preceding years ; and (ii) he must have been in India for more than two years in the preceeding seven years. In the instant case, the circular issued by the Board in which the opinion of the Central Government the Ministry of Finance (Department of Revenue) Letter No. 4/22/61-IT(AT), dated 25-11-1961 was noted, the interpretation similar to the one put by the various High Courts on section 4B has been accepted to be the correct position. [Para 28]

Thus, a person will become an ordinarily resident only if (a) he has been residing in nine out of ten preceding years; and (b) he has been in India for at least 730 days in the previous seven years. [Para 29]

Accordingly, the appeal was to be accepted and the order passed by the High Court and the lower authorities were to be set aside. Thus, the High Court in the impugned judgment had erred in its interpretation of section 6(6) and the view taken by Patna High Court in case of C.N. Townsend v. CIT [1974] 97 ITR 185 Bombay High Court in Manibhai S. Patel v. CIT [1953] 23 ITR 27 and Travancore-Cochin High Court in P.B.I. Bava v. CIT [1955] 27 ITR 463 has laid down the correct law. [Para 30]

CASE REVIEW:

PBI Bava v. CIT [1955] 27 ITR 463 (Trava - Cochin); Manibhai S. Patel v. CIT [1953] 23 ITR 27 (Bom); C.N. Townsend v. CIT [1974] 97 ITR 185 (Pat.) approved. [Para 30]