Section 6, read with section 10(15) of the Income-tax Act,

IN THE ITAT, MUMBAI BENCH ‘H’ Jayram Rajgopal Poduval v. Assistant Commissioner of Income-tax, Circle 27(2) R.S. SYAL, ACCOUNTANT MEMBER AND MRS. SUSHMA CHOWLA, JUDICIAL MEMBER IT APPEAL NO. 7072 (M) OF 2004 (MUM.) [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] individual should meet either of conditions of section 6(1), say, be in India for 182 days or more in previous year and thereafter either of conditions enshrined in section 6(6) be fulfilled, say, he should not be resident in India in 9 out of 10 previous years preceding that year - Held, yes - For relevant assessment year, assessee filed 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 - Assessing Officer having notice that assessee was not ‘"non-resident’ in 9 out of 10 years and had also resided in India for more than 730 days in preceding 7 years treated status of assessee as resident and ordinarily resident (ROR) and accordingly disallowed assessee’s claim for exemption under section 10(15)(iv)(fa) - Commissioner (Appeals) confirmed action of Assessing Officer holding that in order to claim residential status of RNOR both conditions set out in section 6(6)(a) be cumulatively fulfilled, that is, assessee should not be resident in India in 9 out of 10 previous years preceding that year and also should not be in India for 730 days or more in 7 years preceding that year, and that assessee was only satisfying first condition of section 6(6)(a) and not second - Whether Commissioner (Appeals) was justified in his view - Held, no - Whether since in relevant previous year i.e. from 1-4-2000 to 31-3-2001 assessee was in India for 365 days and was also not resident in two assessment years 1994-95 and 1995-96 in 10 years preceding previous year claim of residential status by assessee as RNOR was as per law - Held, yes - Whether, therefore, assessee was entitled to exemption as claimed - Held, yes 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. The Assessing Officer examined the chart showing the assessee’s status in India in the preceding ten years and 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 that year and also should not be in India for 730 days or more in 7 years preceding that 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 world 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, 1961. 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 in so far 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 had earned interest income on term fixed deposits from bank, which was claimed as exempt under section 10(15)(iv)(fa). This exemption was available to the assessee if the assessee’s view was accepted that he was RNOR. [Para 7] On conjoint reading 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 that year, he will acquire the status of non-resident. The essence of section 6(6) 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 that year or was not in India for total period of 730 days or more in seven years preceding that 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 fulfill either of the conditions of section 6(6). 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) be fulfilled, say, he should not be the resident in India in 9 out of 10 previous years preceding that year. [Para 8] In the instant case the assessee was residing in India from 1-4-1995 to 31-3-2001 and during that period he was out of India only for 6 days, i.e., from 8-6-1997 to 14-6-1997. Therefore, in the previous year (i.e. from 1-4-2000 to 31-3-2001) the assessee was in India for 365 days, thereby successfully satisfying the test of section 6(1) and was also not resident in two years, i.e., assessment years 1994-95 and 1995-96 in 10 years preceding the previous year (i.e., 1-4-1990 to 31-3-2000) thereby fulfilling the criteria as per section 6(6), being not resident in India in 9 out of 10 previous years preceding that year. [Para 9] It is well settled that the intention of the legislature is to be gathered from the words used and should not be needlessly inferred. [Para 11] In sub-section (6) of section 6 the word ‘or’ has been used between the lines "who has hot 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 is 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 the assessee had satisfied the first condition and not the second, Commissioner (Appeals) erred in holding that the residential status of the assessee was ROR. [Para 12] Therefore, the opinion of the Commissioner (Appeals) for fulfilling both the conditions of section 6(6) simultaneously was no more 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] No doubt, section 6(6) has been substituted by the Finance Act, 2003 with effect from 1-4-2004 and has no retrospective application, since the instant appeal related to the assessment year 2001-02, the substituted provisions of section 6(6) were not applicable to the instant case. [Para 14] CONCLUSION Therefore, it was to be held 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.