In the ITAT Mumbai Bench ‘H’

Jayram Rajgopal Poduval

v.

Assistant Commissioner of Income-tax, Circle 27(2)

R.S. Syal, Accountant Member

and Ms. Sushma Chowla, Judicial Member

IT Appeal No. 7072 (M) of 2004

[Assessment year 2001-02]

January 18, 2008

Section 6, read with section 10(15), of the Income-tax Act, 1961 - Residential status - Assessment year 2001-02 - Whether in order to acquire status of ‘resident but not ordinarily resident’ (RNOR) in India, either of conditions enshrined in section 6(6)(a) should be fulfilled, i.e., either assessee should not be a resident in India in 9 out of 10 previous years preceding current year or he should not be in India for 730 days or more in 7 years preceding current year - Held, yes - Whether in section 6(6)(a), word ‘or’ has been used between two conditions, and, therefore, Commissioner (Appeals) was not justified in substituting word ‘and’ for word ‘or’ and in holding that for claiming residential status of ‘not ordinarily resident’ both conditions set out in section 6(6)(a) should be cumulatively satisfied - Held, yes

Section 6 of the Income-tax Act, 1961 - Residential status - Assessment year 2001-02 - Whether section 6(6) as substituted by Finance Act, 2003, with effect from 1-4-2004 is prospective in operation and, hence, would not be applicable to assessment year 2001-02 - Held, yes

Interpretation of statute : Rule of Literal Interpretation

Word and phrases : Word ‘or’ as occuring in section 6(6) of the Income-tax Act, 1961

Facts

For the relevant assessment year 2001-02, the assessee filed the return of income stating his residential status as resident but not ordinarily resident (RNOR) and, accordingly, claimed, exemption under section 10(15)(iv)(fa) in respect of interest income accrued on term deposits. On being called upon to prove status as claimed, the assessee furnished a chart showing his stay in India in preceding years. The said chart revealed that assessee had stayed in India from assessment year 1991-92 to assessment year 2000-01 and in that period was not resident in two years i.e., assessment years 1994-95 and 1995-96 thereby fulfilling criteria as per section 6(6), being not resident in India in 9 out of 10 previous years preceding the current year. The Assessing Officer, however, on examining the said chart held that the assessee was not ‘non-resident’ in 9 out of 10 years and had also resided in India for more than 730 days in the preceding 7 years. He, therefore, treated the residential status of the assessee as resident and ordinarily resident (ROR) and accordingly, disallowed the assessee’s claim for exemption under section 10(15)(iv)(fa).

On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer. He held that in order to claim residential status of RNOR both conditions set out in section 6(6)(a) be cumulatively fulfilled, that is, the assessee should not be resident in India in 9 out of 10 previous years preceding the current year and also should not be in India for 730 days or more in 7 years preceding the current year, and that the assessee was only satisfying the first condition of section 6(6)(a) and not the second.

On second appeal :

Held

The determination of correct residential status of an assessee is of paramount importance because the scope of total income as per section 5 depends on it. A person who is a resident is liable to tax in respect of his whole income received or deemed to be received, accruing or arising or deemed to be accrued or arose to him in India and also outside India. On the contrary a non-resident is liable only in respect of income received or deemed to be received, accruing or arising or deemed to accrue or arise in India only. It implies that the income derived by such non-residents from any source outside India is immune from taxation under the Income-tax Act. The third category of the assessees having status of ‘Not ordinarily resident’ within the meaning of section 6(6) is subject to tax in respect of income received or accruing or arising or deemed to be received, accruing or arising in India unconditionally and insofar as the income accruing or arising outside India is concerned, it would be put to tax only if it is derived from a business controlled in or a profession set up in India. [Para 6]

The assessee, in the instant case, had earned interest income on term fixed deposits from bank, which was claimed as exempt under section 10(15)(iv)(fa). This exemption is available to the assessees having status of non-residents or not-ordinarily residents provided the acceptance of such deposits in foreign currency by banks is approved by the RBI. The Assessing Officer had not denied that all the requisite conditions for claiming this exemption except the residential status of the assessee, were fulfilled. Thus, the moot question requiring adjudication in the instant case was to find out the correct residential status of the assessee. [Para 7]

On conjoint reading of sub-clause (a) of sub-section (6) of section 6, as it stood prior to its substitution by the Finance Act, 2003, with effect from 1-4-2004, and sub-section (1) of section 6, it becomes clear that an individual is resident in India in any previous year if he satisfies the conditions of section 6(1). Thus, if an individual is in India for a total period of 182 days or more in the previous year, he would be treated as resident in India. If, however, conditions as per either of the two clauses, i.e., (a) or (c) of section 6(1) are not satisfied, i.e., the individual is neither in India for a total period of 182 days or more in previous year nor he had been in India for a total period of 60 days or more in previous year together with 365 days or more in 4 years preceding the current year, he will acquire the status of non-resident. The essence of section 6(6)(a) is that where the individual is resident in the previous year, but was not resident in India in 9 out of 10 previous years preceding the current year or was not in India for total period of 730 days or more in seven years preceding the current year, then his residential status would become RNOR. Thus, in order to acquire the status of RNOR, it is sine qua non that on one hand the individual should not be non-resident in that year and on the other hand he should firstly be resident in that year and, thus, should fulfil either of the conditions of section 6(6)(a). That is, he should meet either of the conditions of section 6(1), say, be in India for 182 days or more in the previous year and thereafter either of the conditions enshrined in section 6(6)(a) be fulfilled, say, he should not be the resident in India in 9 out of 10 previous years preceding the current year. [Para 8]

In the instant case, the assessee was not resident in two years, i.e., assessment years 1994-95 and 1995-96 in 10 years preceding the current previous year (i.e., 1-4-1990 to 31-3-2000) thereby fulfilling the criteria as per section 6(6)(a), being not resident in India in 9 out of 10 previous years preceding the current year. [Para 9]

From the factual position noted supra, the assessee was satisfying the first condition of section 6(6)(a) and not the second. [Para 10]

Coming back to the language of section 6(6)(a), it may be found that the word ‘or’ has been used between the lines ‘who has not been resident in India in nine out of ten previous years preceding that year’ and ‘has not during the seven years, preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more’. It would be beyond comprehension as to how the Commissioner (Appeals) could substitute the word ‘and’ for the word ‘or’ used in the section. The intendment of the Legislature is manifest that either of the two conditions of section (6)(6)(a) and not both be complied with for acquiring the residential status of RNOR. As in the instant case the assessee had satisfied the first condition and not the second, the Commissioner (Appeals) erred in holding that the residential status of the assessee was ROR. [Para 12]

The opinion of the Commissioner (Appeals) that both the conditions of section 6(6) are to be fulfilled simultaneously was not correct. When one of these two conditions as laid down in section 6(6)(a) is fulfilled, the status of resident gets converted into RNOR. Therefore, as the assessee had not been resident in India in 9 out of 10 previous years preceding that year, his claim for status of RNOR could not be negatived. [Para 13]

Section 6(6) had been substituted by the Finance Act, 2003 with effect from 1-4-2004 and the substituted sub-section (6) is prospective in application. Since the instant appeal related to the assessment year 2001-02, the substituted provisions of section 6(6) were not applicable retrospectively to the instant case. [Para 14]

Therefore, it was to be concluded that the residential status of the assessee was ‘resident but not ordinarily resident’ and the claim of exemption under section 10(15)(iv)(fa) for interest received was as per law. [Para 15]

Case review

CIT v. Morgenstern Werner [2003] 259 ITR 486 (SC), followed (para 13); Abhay Pratap Singh Sengar v. ITO [2007] 108 ITD 8 (Luck.) (SMC) (para 14) agreed with.

Cases referred to

Pradip J. Mehta v. CIT [2002] 256 ITR 647/123 Taxman 1118 (Guj.) (para 4), Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36/115 Taxman 143 (SC) (para 11), Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) (para 11), CAIT v. Plantation Corpn. of Kerala Ltd. [2001] 247 ITR 155/114 Taxman 103 (SC) (para 11), CIT v. Morgenstern Werner [2003] 259 ITR 486 (SC) (para 13), Morgenstern Werner v. CIT [1998] 233 ITR 751/101 Taxman 487 (All.) (para 13) and Abhay Pratap Singh Sengar v. ITO [2007] 108 ITD 8 (Luck.) (SMC) (para 14).

Rajan Vora for the Appellant. B.K. Singh for the Respondent.

nn