Income Tax Appellate Tribunal - Delhi
Dy. Cit vs Kapila Singla on 13 April, 2007
ORDER
R.V. Easwar, Vice President
1. The only ground taken by the revenue in this appeal is that the CIT (Appeals) erred in holding that the residential status of the assessee has to be taken as "not ordinarily resident" as against the status of "resident and ordinarily resident" adopted by the assessing officer.
2. The appeal arises this way. The assessee is an individual. He is a consultant for pharmaceuticals formulations. He filed a return for the assessment year under consideration declaring income of Rs. 7,77,000. In the return, the assessee claimed that the status was that of a resident. In respect of the interest income of Rs. 3,07,328, he claimed exemption under Section 10(15)(/a) of the Income Tax Act. The interest arose from a fixed deposit in foreign currency. While completing the assessment, the assessing officer rejected the claim for exemption on the following grounds :
(a) The assessee has claimed the status of resident, whereas the exemption is available only to an assessee who is a non-resident or "not ordinarily resident".
(b) The fixed deposit in the bank was in Indian rupees and not in foreign currency.
3. The assessee appealed to the CIT (Appeals) and claimed that the status was "not ordinarily resident" and therefore he was entitled to the exemption of the interest. The CIT (Appeals) examined the provisions of Section 10(15)(fa) and held that since the deposits were not in foreign currency, the exemption was not available. However, as regards the status claimed, he agreed with the assessee that he was "not ordinarily resident" and held that the exemption in respect of the interest income cannot be denied on the ground that the assessee was a resident. Ultimately, however, the appeal was dismissed because the deposits in the bank, as already noted, did not fulfil the conditions of the section.
4. In coming to the conclusion, that the assessee was "not ordinarily resident" the CIT (Appeals) observed that during the financial years 1990-91 to 1999-2000, the assessee stayed in India as follows :
FY Stay in India (days) 1990-91 365 1991-92 365 1992-93 365 1993-94 365 1994-95 297 1995-96 47 1996-97 00 1997-98 91 1998-993 33 1999-2000 353 Total :2581
From the above, the CIT (Appeals) held that as per Section 6(1 )(a), the assessee would not be a resident in India for the two FYs, namely, 1995-96 and 1996-97. He therefore held that the assessee was not a resident in India in 9 out of the 10 previous years preceding the previous year relevant to the assessment year in appeal and therefore according to Section 6(6)(a), he would be "not ordinarily resident.
5. The revenue is in appeal. Section 6(6)(a) of the Income Tax Act is as under :
(6) A person is said to be "not ordinarily resident" in India in any previous A year if such person is
(a) an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more; or
(b) a Hindu undivided family whose manager has not been resident in g India in nine out of ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more.
6. The word "resident" in the first part of this clause means resident within the meaning of Section 6(1) while in the second part of this clause the words has not during the seven previous years preceding that year been in India refer to physical presence of the assessee in India. In order to C claim the status of being "not ordinarily resident" under the first part of this clause resident in India for' less than nine years out of the preceding ten years is sufficient. In order to claim that status under the second part of the clause, the requisite condition is that the aggregate period of the assessee's physical presence in India during the seven years preceding the relevant accounting year should not have exceeded 729 days. The effect of the two parts of the clause read together is that an individual is said to to be 'resident and ordinarily resident' only when both the following conditions are fulfilled :
(a) He has been resident in India in nine out of the ten years preceding the relevant previous year; and
(b) He has during the seven years preceding that year been in India for a period of, or for periods; aggregating to, at least 730 days.
If either of these two conditions is not fulfilled, the individual is said to be "not ordinarily resident
7. These principles were laid down in various decisions, namely, S. Marimuthu Pillai v. CIT (1945) 13 ITR 186 (Mad.), K.M.N.N. Swaminathan Chettiar v. CIT(1947) 15 ITR 418 (Mad.), P.B.I. Bava v. CIT , and also by the Authority for Advance Ruling AAR No. P5 of 1995, In re (1997) 223 ITR 3791. No doubt, a contrary view has been expressed by the Gujarat High Court in Pradip J. Mehta v. CIT . However, the view propounded in the other judgments cited above has held the field for a very long time commencing from the Indian Income Tax Act, 1922 and is also in conformity with the speech of the Finance Member in the Central Legislative Assembly while introducing the relevant amendment Bill and has further been adopted by a circular dated 15-12-1962 by the CBDT. The circular is as under :
CIT, WB's Circular letter No. J/28320/4A/10/5/58-59, dated the 5-12-1962, addressed to the Secretary, Indian Chamber of Commerce, Calcutta-1 - I am directed to refer to the correspondence resting with the Ministry of Finance (department of revenue) letter No. 4/22/61-IT(AT), dated 25-11-1961, and to state that the department's view has all along been that an individual is "not ordinarily resident" unless he satisfied both the conditions in Section 4B(a), ie.,
(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 preceding seven years.
Thus, a person will be resident and ordinarily resident" if both these conditions are satisfied but he will be resident but not ordinarily resident if either of those conditions is not satisfied.
8. The entire position has been summed up, recognising the ambiguity in the wording of the section and the possibility of more than one view, by the Authority for Advance Ruling in the decision cited supra and ultimately, the Authority speaking through Hon'ble Justice S. Ranganathan, has preferred the settled view and we can do no better than to respectfully reproduce the entire discussion : (pages 384-385 of the report) Section 6(6) is somewhat ambiguous in its wording. It can be read either as the definition of a person who can be treated as "ordinarily resident" in India or as the definition of a person who should be treated as "resident but not ordinarily resident". The ambiguity arises as a result of the use of the double negative used in the sub-section. The two interpretations possible are (1) An individual is resident and ordinarily resident in any previous year only if
(a) He has been a "resident" (as per Section 6(1)) in nine out of ten previous years preceding that year; and
(b) He has been in India for period or periods amounting in all to 730 days or more during the seven years preceding that year.
(2) An individual, though resident, is not ordinarily resident; in any previous year
(a) Either where he has not been resident, ie., has been a non-resident in nine out of ten previous years preceding that previous year;
(b) Or where he has not been in India (ie., has been absent from India) for 730 days or more during the seven previous years preceding that year.
It will be seen that, if we apply the first of the above two interpretations, the applicant will be resident but not ordinarily resident for the assessment Pyears 1996-97 to 2004-05 as he will have been a "resident" in eight and less number of preceding previous years although his physical stay in India A would have exceeded 730 days by the end of the previous year relevant for the assessment year 1998-99. However, if the second of the tests is applied he will be a resident and ordinarily resident only for the assessment years 1996-97 and 1997-98.
It is curious that this difficulty in the interpretation of a basic provision of the Act has not been directly resolved even though the income-tax legislation in this country is about to celebrate its platinum jubilee - the provisions of Section 6(6) of the Act having been re-enacted materially on B the same lines as Section 4B of the Indian Income Tax Act, 1922. The first interpretation given above is in accordance with the speech of the Finance Member in the Central Legislative Assembly while introducing the relevant amendment Bill, has been adopted by a circular of the Central Board of Direct Taxes dated 5-12-1962, and also seems to have been broadly accepted, although the alternative view has been touched upon in some judicial dicta : See the discussion in Kanga and Palkivala on the " Law and Practice of Income- tax(8th edition), pages 247-248 and Sampath Iyengar's Law of Income-tax. (9th edition), pages 869-872" and the cases cited therein. It seems correct to construe the definition as providing that a person will become resident and ordinarily resident only if (a) he has been "resident" in nine out of the ten preceding previous years, and (b) has been in India for at least 730 days in the seven preceding previous years and that he will be treated as resident but not ordinarily resident if either of these conditions is not fulfilled. The applicant is, therefore, right when he says that he will be having the status of a resident but not ordinarily D re sident for the assessment years 1996-97 to 2004-05. It is on this assumption that his questions have to be answered and the answers are restricted to the assessment years in respect of which he will be a resident but not ordinarily resident mentioned above.
9. If we apply the above legal position to the facts of the instant case, it will be seen that the assessee was physically present in India for the entire 365 days during the previous year, namely, 1-4-2000 to 31-3-2001, having returned to India on 20-2-2000 (para 3 of the assessment order). So he is a "resident" in India for that year. The enquiry will then have to be made whether he is a "resident and ordinarily resident" or a "resident but not ordinarily resident" in India. This takes us to a consideration of the question whether he was a resident in India nine out of the ten previous years preceding the relevant previous year. As per the details given by the CIT (Appeals), the assessee was not a resident for the previous years 1995- 96 and 1996-97 and for the other eight years he would be resident. He therefore does not fulfil the condition that he should be a resident in nine out of ten previous years, falling short by one year. Thus, the first condition for being 'resident and ordinarily resident is not satisfied. As per the legal position noted above, non-fulfilment of one of the two conditions of Section 6(6)(a) is sufficient to bring the assessee under the category of not ordinarily resident. Thus is what the CIT (Appeals) has held sind we concur with him.
10. So far as the other condition, namely, that the assessee should have physically present in India for 730 days or more during the seven years preceding the relevant previous year, we find that this condition is satisfied. As per the details given by the CIT (Appeals) the seven years' period will be the FYs 1993-94 to 1999-2000 and during these years the assessee was physically present in India for a period aggregating to 1486 days. However, since the assessee has fulfilled only one of the two conditions for being "resident and ordinarily resident", he becomes "resident but not ordinarily resident" within the meaning of Section 6(6)(a) of the Income Tax Act.
11. The above section has been amended by the Finance Act, 2003, with effect from 1-4-2004 on the lines of the view expressed by the Gujarat High court in Pradip J. Mehta's case (supra). The department's circular No. 7 of 2003 which explains the new section says that the amendment was made in order to remove doubts about the interpretation of the section and that it is clarificatory in nature. Nevertheless, it has been made applicable only from 1-4-2004. We do not see how the amendment could be held to be clarificatory when the interpretation of Section 6(6)(a) as accepted in the ruling of the AAR (supra) had held the field right from its inception. In fact even under Section 4B(a) of the Indian Income Tax Act, 1922, as has been noticed by the authority for advance ruling in the decision cited supra, the same interpretation was accepted by courts. Such an interpretation of the provision was in accordance with the speech of the Finance Member in the Central Legislative Assembly while introducing the relevant amendment Bill and had been adopted in the circular dated 5-12-1962 issued by the CBDT (as noticed by the authority in the above ruling). We are therefore unable to give effect to the amendment retrospectively.
12. For the above reasons, we uphold the decision of the CIT (Appeals) regarding the status of the assessee and dismiss the appeal filed by the revenue with no order as to costs.