Taxation of any person, in any Country, is dependent on his residential status. Under the Income Tax Act, 1961, the total income of a person who is a resident includes all income which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India or accrues or arises to him outside India.
The total income of a person who is a non-resident includes all income which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. So, the scope of total income of a non resident assessee is limited to income which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India.
This article analyses the captioned judgment of Income Tax Appellate Tribunal®2 [Hereinafter referred as ITAT] on an appeal filed by an assessee being aggrieved by the order of Commissioner of Income Tax [Appeals] [Hereinafter referred as CIT (A)]. The CIT(A) had upheld the contentions of the Assessing Officer [Hereinafter referred as AO,] that income of assessee i.e. salary of Rs. 13,34,884 which was transferred from bank account in Singapore to NRE bank account in India is liable to be taxed in India. Further, the CIT (A) has held that Rs. 40,589 on account of bank interest in NRE account of assessee was also liable to be taxed in India. The ITAT allowed the appeal and disposed of the matter by concluding that the salary of assessee has accrued outside India and thereafter by an arrangement, salary is remitted to India and made available to assesse, which is not liable to be taxed in India under sec. 5(2) (a). The ITAT also uphold the grievance of assessee that interest on NRE account is not liable to be taxed under sec. 10(4) (ii).
III. Relevant Facts and Provisions:
The assessee in this case is an employee of Executive Ship Management Pte. Ltd. (Hereinafter referred as ESM-S) and works on merchant vessels and tankers plying on international routes. He receives salary for his services and in addition to it, he also receives bank interest and pension from Indian Army. The assessee has stayed less than 182 days in relevant previous years and thus is a 'non- resident.' The aseessee was given a show cause notice by AO as to why his salary received from ESM-S shall not be liable to tax in India. The assessee contented that since his salary is accruing and arising outside India so it is not to be taxed in India and thus is outside the scope of Sec 5(2). The assessing officer also took a note of sec 6(5) of the act, that where a person's status is resident for any one source of income, his status for all source of income shall be taken as resident and shall be subjected to tax in India. The AO contented that since the assessee is a resident for purpose of pension, his salary from ESM-S shall also be brought to tax. Furthermore, AO was also of the view that assessee has received appointment letter from ESM-S in India and thus his salary was accrued in India. Another issue before the AO was that Rs. 40,589/- being interest on NRE bank account is also liable to be taxed and no exemption can be granted under Sec. 10(4) (ii).
Being aggrieved by this, assessee moved an appeal to CIT (A), and the contentions of AO was upheld by CIT(A) that Rs 13,34,884 is liable to be taxed in India. Further, CIT (A) held that the bank account is not a NRE account and exemptions under sec. 10(4) (ii) can't be made available. The assessee has then filed an appeal to ITAT.
Furthermore, another appeal was filed by assessee against another order of CIT (A) wherein it held that Rs. and Rs. 19,738/- on account of bank interest earned and credited in NRE account of assessee.
Relevant Provision of the Act
Section 5 of the act reads as follows: - "Scope of Total Income: -
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which – (a) Is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) Accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of subsection (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which – (a) Is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2 : For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."
Section 6(5) of the act reads as follows: - "Residence in India:-
(5) If a person is resident in India 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 relevant to the assessment year in respect of each of his other sources of income."
IV. Relevant excerpts from the Judgment
The ITAT was of the view that AO has taken note of assessee being a "non-resident" and yet he has proceeded to treat assessee as a resident for purpose of taxing his pension income and bank interest. And since he is resident for one source of income, he is required to be treated as 'resident' for all source of income under sec. 6(5) is based on fundamental conceptual misconceptions of facts as also of law. Thus AO has erred in assuming that since pension income and bank interest are taxable in India and so he is a resident, any income which is received or deemed to be received or accrues or arises in India is taxable irrespective of its being a resident or non-resident. Sec. 6(5) cannot have application in this matter.
Further, an employee has to render services to get a right to receive salary and unless these services are rendered, no such right accrues. So, merely receiving appointment letter does not give a right to receive salary, thus this stand of AO and as approved by CIT (A) is devoid of legally sustainable merits. Also, the salary amount has been received in India but salary income is received in India so the salary cannot be taxed twice. Thus ITAT held that Rs. 13, 34,884/- is not liable to be taxed.
The second ground of the assesse has also been upheld by the ITAT that assesse's account in HSBC is a NRE account and so interest therein is liable to be exempted under sec 10(4)(ii). Thus both the grounds of the assessee were allowed.
Also the second appeal of assessee wherein CIT (A) held that salary income of Rs. 10, 40,411/- and bank interest of Rs 19,738/- is liable to tax was set aside and thus appeal was disposed of accordingly.
The taxability of income is based on the principle that it should be received or is deemed to be received in India or accrues or arises in India or is accrues or is deemed to accrue or arise in India. It does not require a recipient of income to have resident status under sec 6 as even a income of non- resident by virtue of sec 5(2), is taxable in India subject to its income being received or accrued or deemed to be accrued in India. In the present case, the assessee had paid the tax on interest of savings bank account and pension income accrued and received by him in India.
Furthermore, the salary which has been received by assessee from ESM-S by offering his services are rendered outside India as crew on merchant vessels and tankers plying on International routes. So such cannot be taxed. The same was held in the case of CIT v. Avtar Singh Wadhwan3, wherein the Bombay High Court has held that income from salary, in the case of even an Indian vessel operating in international waters is to be treated as having accrued outside India. Again in the leading case of DIT v. Prahlad Vijendra Rao4, the Karnataka High Court has held that, salary earned by a non resident for services performed during his stay of 225 days outside India, working on board of ship, does not accrue or arise in India. Accordingly, the same is not taxable in India.
1. 4th year student, Symbiosis Law School, Noida.
2. Arvind Singh Chauhan v. Income Tax officer, I.T.A. No. : 319 and 320/Agr/2013
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.