Taxmann's Direct Taxes Law & Practice

A few words from the authors
HE compendious and complex nature of our law relating to direct taxes
makes the task of students and professional practitioners, who have not only
tounderstanditbuthavealsotodeveloptheabilitytoapplyitingivensituations,
extremely onerous and difficult. They have to acquire a familiarity with, and
awareness of, the nature and scope of the main provisions of direct taxes. At the
same time, they also require an up-to-date knowledge of how a statutory
provisionhasbeeninterpretedbydifferentcourtsoflawondifferentoccasions.
As such, they need a book on direct taxes which not only is comprehensive and
up-to-date on both the law and its judicial interpretations but which also
explains the difficult subject lucidly and through appropriate illustrations so as
to render the study of direct taxes simple and easy.
Unlike other text books available on this subject, this book makes a fresh and
novel approach to the study of direct taxes keeping in view the specific
requirements of the candidates appearing in CA, CS, ICWA, MCom., LLB and
MBA examinations as well as those appearing in the income-tax departmental
examination. The chief aim of the book is to enable the students to cut the time
spent by them in preparing for the examination, while, at the same time, giving
them the most precise and up-to-date information on the subject of their study.
The present edition of the book has several unparalleled features which make
it distinct from other available text books. These are :
u The present edition is thoroughly revised with a view to making it more
reader-friendly.
u The treatment of the subject is lucid, to-the-point and the matter is painstak-
ingly arranged in paras and sub-paras with distinct numbers to save time and
energy. Besides, debatable issues have been deliberated to their logical con-
clusion.
u Theoretical discussion is suitably supplemented by illustrations (over 600 in
number and covering an exhaustive range of issues) providing solutions to
the knotty problems with reference to the latest case law.
u Hints are given wherever tax planning can be resorted to.
u Latest circulars, notifications, amendments and the case laws (i.e., up to
January 31, 2021) are included in the discussion. All recent citations of court
rulings, circulars and notifications have been highlighted.
u In a nutshell, law is lucidly enumerated and its practical application is
adequately explained.
T
I-5

Our grateful thanks are due to Shri Rakesh Bhargava for his guidance and
suggestions and for extending various facilities during the preparation of the
manuscript of this book.
Readers’ views, comments and criticism relating to the present work are most
welcome.
22 Deepali, Pitampura, VKS
Delhi - 110034. KS
Email : vks@taxmann.com
Phone : 27015500, 27016686, 9810008160
A few words from the authors I-6

About the Authors
Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976.
His fields of special interest include all facets of corporate legislation and corporate
economics especially the tax laws. Associated in different capacities with several
professional institutes and business houses in India and abroad, Dr. Singhania is
author of many popular books and software published by Taxmann. He has to his
credit more than 300 research articles which have appeared in leading journals.
He has been a resource person in over 800 seminars in India and abroad. He can
be reached at vks@taxmann.com.
Dr. Kapil Singhania, a Fellow of the Institute of Chartered Accountants of India
and belonging to the alumni of Shri Ram College of Commerce, has completed his
research work for which he has been awarded Ph.D. in 2003. His fields of
involvement in research work in form of articles in various reputed journals and
analytical studies span across from corporate laws to direct and indirect taxation.
He has authored a variety of acclaimed books on direct and indirect taxes
published by Taxmann. Dr. Singhania is providing tax consultancy to a number
of business organizations, which include multinational and public sector compa-
nies.
I-7

Contents
PAGE
I-9
u A few words from the authors I-5
u About the authors I-7
u Section-wise Index I-25
1 Basic concepts
1. Assessment year 1
2. Previous year 1
3. Person 5
4. Assessee 6
5. Charge of income-tax 6
6. Income 7
7. Gross total income 17
8. Total income and tax liability 21
9. Agricultural income 31
10. Difference between exemption and deduction 31
11. Assessment 32
12. Definition of “manufacture” 32
13. Capital asset 32
14. Company 32
15. Fair market value 32
16. Capital receipts vs. Revenue receipts 32
17. Capital expenditure vs. Revenue expenditure 39
18. Method of accounting 39
19. Definitions of amalgamation, demerger, infrastructure capital company and
infrastructure capital fund 40
20. Rules of interpretation 41
2 Residential status and tax incidence
22. What is relevance of residential status 55
23. Residential status - General norms 55
24. Residential status of an individual 56
25. Residential status of a Hindu undivided family 63
26. Residential status of the firm and association of persons 65
27. Residential status of a company 65
28. Residential status of “every other person” 70
29. Relation between residential status and incidence of tax 70
30. Receipt of income 73
31. Accrual of income 75
32. Income deemed to accrue or arise in India 79

Contents I-10
PAGE
32A. Fund Managers in India not to constitute business connection of offshore funds 96
33. Hints for tax planning in respect of residential status 98
34. Problems on residential status and tax incidence 99
3 Incomes exempt from tax
38. Incomes exempt under section 10 102
39. Special provisions in respect of newly established undertakings in
free trade zone, etc. 131
40. Special provisions in respect of newly established units in Special Economic Zone 131
41. Special provisions in respect of newly established hundred per cent
export-oriented undertakings 135
42. Special provision in respect of export of artistic hand-made wooden articles 135
43. Income exempt under section 13A 135
44. Exemption to Electoral Trust 136
4 Salaries
46. Essential norms of salary income 137
47. Basis of charge 139
48. Place of accrual of salary income 140
49. Tax treatment of different forms of salary income 141
50. Allowance 159
51. Perquisites 166
52. Valuation of perquisites 170
53. Deduction from salary income 200
54. Tax on salary of non-resident technicians 201
55. Salaries of other foreign citizens 201
56. Employees’ provident fund 201
57. Approved superannuation fund 204
58. Approved gratuity fund 205
59. Deduction under section 80C 205
60. Relief under section 89 205
61. Meaning of salary for different computations 208
62. Hints for tax planning 210
63. Problems on salary income 211
Annex 1 : Frequently Asked Questions (FAQs) about computation of salary income 223
5 Income from house property
86. Chargeability 224
87. Applicability of section 22 in certain typical situations 229
88. Principle of mutuality vis-a-vis section 22 231
89. Property income exempt from tax 232
90. Computation of income from a let out house property 232
91. Computation of income from self-occupied property 241
92. Special provisions when unrealised rent is realised subsequently 250
93. Mode of taxation of arrears of rent in the year of receipt 250

I-11 Contents
PAGE
95. Problems on computation of property income 251
App. Frequently Asked Questions (FAQs) about mode of computation of annual value 261
6 Profits and gains of business or profession
102. General principles governing assessment of business income 278
103. Method of accounting 284
104. Scheme of deductions and allowances 285
105. Basic principles governing admissibility of deduction under sections 30 to 44DB 285
106. Deductions expressly allowed in respect of expenses/allowances 287
107. Rent, rates, taxes, repairs and insurance of building 287
108. Repairs and insurance of machinery, plant and furniture 288
109. Depreciation 289
110. Investment allowance for acquisition and installation of new plant and machinery 332
110A. Investment allowance in backward area in Andhra Pradesh, Bihar, Telangana or
West Bengal 332
111. Tea/coffee/rubber development account 333
112. Site restoration fund 337
113. Reserves for shipping business 338
114. Expenditure on scientific research 338
115. Expenditure on acquisition of patent rights, copyrights, know-how 349
116. Expenditure for obtaining right to use spectrum for telecommunication services 349
117. Amortization of telecom licence fees 350
118. Expenditure on eligible projects or scheme 352
119. Deduction in respect of expenditure on specified business 352
120. Payment to the associations and institutions carrying out rural
development programmes 357
120A. Deduction for expenditure incurred on agricultural extension project 358
120B. Deduction for expenditure for skill development 358
121. Amortisation of preliminary expenses 359
121A. Amortisation of expenditure in the case of amalgamation/demerger 363
121B. Amortisation of expenditure under voluntary retirement scheme 363
122. Amortisation of expenditure on prospecting, etc., for development
of certain minerals 363
123. Insurance premium 366
124. Insurance premium paid by a federal milk co-operative society 366
125. Insurance premium on health of employees 366
126. Bonus or commission to employees 366
127. Interest on borrowed capital 367
127A. Discount on zero coupon bonds 370
128. Employer’s contribution to recognised provident fund and
approved superannuation fund 371
128A. Employer’s contribution to notified pension scheme 372
129. Contribution towards approved gratuity fund 372
130. Employees’ contribution towards staff welfare schemes 373
131. Write off allowance for animals 373
132. Bad debts 373
133. Provision for bad and doubtful debts relating to rural branches of
commercial banks 377

Contents I-12
PAGE
134. Transfer to special reserve 380
135. Family planning expenditure 382
136. Contribution towards Exchange Risk Administration Fund 383
137. Revenue expenditure incurred by entities established under any
Central, State or Provincial Act 383
137A. Contribution to credit guarantee trust fund 383
137B. Commodities transaction tax/Securities transaction tax 383
138. Expenditure for purchase of sugarcane by a co-operative society engaged in
sugar manufacturing 383
138A. Marked to market loss 384
139. Expenditure on advertisement 384
140. Expenses deductible from commission earned by life insurance
agents, UTI agents, post office/Government securities agents and
agents of notified mutual funds 385
141. General deduction 386
142. Amounts expressly disallowed under the Act 443
143. Amount not deductible under section 40(a) 443
144. Amount not deductible in the case of partnership firm 454
145. Amounts not deductible in the case of an association of persons
and body of individuals 454
146. Amount not deductible under section 40(c)/(d) 454
147. Payments to relative 454
148. Payments exceeding Rs. 10,000 paid otherwise than by account payee
cheques or bank drafts 457
149. Expenditure on payment of salary or perquisite to employees 461
150. Fees for services payable to a former employee 461
151. Provision for payment of gratuity 461
152. Interest on public deposit 462
153. Restriction on contributions by employers to non-statutory funds 462
154. Disallowance of marked to market loss 463
155. Disallowance of unpaid liability 463
156. Deemed profit 473
157. Income from undisclosed sources 477
158. Maintenance of accounts by certain persons 479
159. Audit of accounts by certain persons 481
160. Special provisions consequential to changes in the rate of exchange of
currency 483
161. Special provision for deduction in the case of trade, professional or similar
associations 485
162. Special provisions 485
163. Valuation of stock 508
165. Problems on computation of income from business/profession 518
7 Capital gains
167. Meaning of capital asset 528
168. Types of capital assets 532
169. Transfer of capital asset 535
170. Computation of capital gain 547
171. Full value of consideration 550
172. Expenditure on transfer 552

I-13 Contents
PAGE
173. Cost of acquisition 553
174. Cost of improvement 566
175. Indexed cost of acquisition and indexed cost of improvement 568
176. Computation of capital gain in certain special cases 572
177. Reference to Valuation Officer 600
178. Capital gains exempt from tax 601
179. Capital gains arising from transfer of residential house 602
180. Capital gains arising from the transfer of land used for agricultural purpose 608
181. Capital gains on compulsory acquisition of land and buildings
forming part of industrial undertaking 610
182. Capital gain not to be charged on investment in certain bonds 611
182A. Capital gain not to be charged on investment in units of a specified fund 614
183. Capital gains on transfer of a long-term capital asset other than a house property 615
184. Capital gains on transfer of assets in cases of shifting of industrial
undertaking from urban area 621
185. Exemption of capital gains on transfer of assets in cases of shifting of
industrial undertaking from urban area to any Special Economic Zone 623
185A. Capital gain on transfer of residential property 624
185B. Extension of time-limit for acquiring new asset 628
186. Short-term/long-term capital gains - How charged to tax 629
188. Problems on computation of capital gains 647
8 Income from other sources
191. Basis of charge 653
192. Relevance of method of accounting 656
193. Dividend 656
194. Winnings from lotteries, crossword puzzles, horse races and card games, etc. 665
195. Sum received from employees as their contribution towards staff
welfare schemes 667
196. Interest on securities 667
197. Income from machinery, plant or furniture let on hire 671
198. Income from composite letting of building, machinery, plant or furniture 671
199. Money/property is received without consideration or for inadequate
consideration 673
200. Share premium in excess of fair market value 683
201. Advance money received in course of negotiations for transfer of a capital asset 686
201A. Compensation on termination of employment or modification of terms of
employment 686
202. Interest on KVP, IVP, NSC, etc. 686
203. Deductions 688
204. Other points 690
205. Problems on computation of income from other sources 691
9 Income of other persons included in assessee’s total income
206. Transfer of income without transfer of assets 697
207. Revocable transfer of assets 697
208. When an individual is assessable in respect of remuneration of spouse 698
209. When an individual is assessable in respect of income from assets
transferred to spouse 701

Contents I-14
PAGE
210. When individual is assessable in respect of income from assets
transferred to son’s wife 705
211. When individual is assessable in respect of income from assets
transferred to a person for the benefit of spouse 706
212. When an individual is assessable in respect of income from assets
transferred to a person for the benefit of son’s wife 707
213. Income of minor child 707
214. Conversion of self-acquired property into joint family property and
subsequent partition 709
215. Other profits 710
216. Recovery of tax 710
218. Problems explaining clubbing provisions 712
10 Set off and carry forward of losses
226. Mode of set off and carry forward - The three steps 717
227. Inter-source adjustment - How made 717
228. Inter-head adjustment - How made 718
229. Carry forward of loss 720
230. Loss of partnership firms 733
231. Loss of closely held companies 733
232. Carry forward and set off of loss and depreciation - When permissible in the
hands of amalgamated and demerged company or co-operative bank 733
233. Problems illustrating the provisions of set off and carry forward of losses 734
11 Deductions from gross total income and tax liability
234. Essential rules governing deductions 738
235. Deduction in respect of life insurance premia, deferred annuity, contributions
to provident fund, subscription to certain equity shares or debentures, etc. 739
235A. Deduction in respect of deposit under National Savings Scheme 747
236. Equity Linked Savings Scheme 748
237. Deduction in respect of pension fund 749
237A. Deduction in respect of contribution to a National Pension System (NPS) 750
237B. Deduction in respect of subscription to long-term infrastructure bonds -
When available under section 80CCF 752
237C. Deduction in respect of investment made under any equity saving scheme 752
238. Deduction in respect of medical insurance premia 753
239. Deduction in respect of maintenance including medical treatment of a
dependent being a person with disability - When and to what extent available 756
240. Deduction in respect of medical treatment, etc. 758
241. Deduction in respect of payment of interest on loan taken for higher studies 761
241A. Deduction in respect of interest on loan taken for residential house property 761
241B. Deduction in respect of interest on loan taken for certain house property 762
241C. Deduction in respect of interest on loan taken for purchase of electric vehicle 763
242. Deduction in respect of donation to certain funds, charitable institutions, etc. 763
243. Deduction in respect of rent paid 769
244. Deduction in respect of certain donations for scientific research or rural
development 771
245. Deduction in respect of contributions given by companies to political
parties or electoral trust 772

246. Deduction in respect of contributions given by any person to
political parties or electoral trust 772
247. Deduction in respect of profits and gains from projects outside India 773
248. Deduction in respect of profits and gains from housing projects aided
by World Bank 773
249. Tax incentives for exports 773
250. Deduction in respect of earnings in convertible foreign exchange 773
251. Deduction in respect of profit from export of computer software 773
252. Deduction in respect of profits and gains from export or transfer of
films software 773
253. Deduction in respect of profits and gains from industrial undertaking or
enterprises engaged in infrastructure development etc. - How to find out 773
253A. Deductions in respect of profits and gains by an undertaking or enterprise
engaged in development of Special Economic Zone 786
253B. Deduction in respect of eligible start-up 787
254. Deduction in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings - How to avail 788
254A. Deduction in respect of profits from housing projects 807
255. Deduction in respect of profits and gains of certain undertakings in
certain special category of States - How to find out 809
255A. Deduction in the case of hotels and convention centre in NCR 812
255B. Deduction in respect of certain undertakings in North-Eastern States 813
256. Deduction in respect of profits and gains from the business of
collecting and processing of bio-degradable waste 814
257. Deduction in respect of employment of new employees 815
258. Deduction in respect of interest on certain securities, investments, etc. 817
259. Deduction in respect of certain income of Offshore Banking Units and
International Financial Services Centre 818
260. Deduction in respect of inter-corporate investment 818
261. Deduction in respect of income of a co-operative society 821
262. Deduction in respect of certain income of producer companies 821
263. Deduction in respect of royalty income of authors 822
264. Deduction in respect of remuneration or professional income from certain
foreign sources 824
265. Deduction in respect of royalty on patents 824
266. Deduction in respect of interest on deposits in savings accounts 825
267. Deduction in respect of interest on deposits in case of senior citizens 826
268. Deduction in case of a person with disability 826
269. Deductions from tax liability 828
270. Rebate for resident individuals 828
12 Agricultural income
278. Definition 830
279. Income which is partly agricultural and partly from business 836
280. Partially integrated taxation of non-agricultural income with income
derived from agriculture 838
281. Computation of net agricultural income 839
13 Typical problems on assessment of individuals
285. Tax incidence on individuals 847
286. Taxable income - How computed 847
I-15 Contents
PAGE

PAGE
Contents I-16
287. Tax liability 848
288. Problems on computation of taxable income 852
14 Tax treatment of Hindu undivided families
295. Meaning of Hindu undivided family 863
296. Hindu coparcenary 863
297. Different schools of Hindu law 863
298. Jain and Sikh families 864
299. Assessment as Hindu undivided family - Basic conditions 864
300. Taxable income - How to compute 865
301. Rates of tax 867
302. Partition of a Hindu undivided family 867
303. Problems on Hindu undivided families 869
15
Special provisions governing assessment of firms and association
of persons
313. Meaning of partnership 876
314. Scheme of taxation of firms 876
315. When remuneration/interest is deductible 876
316. What are the conditions a firm should fulfil under section 184 877
317. What are the conditions for claiming deduction of remuneration to
partners under section 40(b) 878
318. What are the conditions for claiming deduction of interest to
partners under section 40(b) 884
319. Carry forward and set-off of loss in the case of change in the constitution of firm 885
320. Computation of income of firm 888
321. Computation of tax of firm 890
322. Assessment of partners of a firm 897
323. How to compute income of an association of persons (AOP) or
body of individuals (BOI) 900
324. Computation of income of an AOP/BOI 902
325. Computation of tax of AOP or BOI 902
326. Assessment of member of AOP/BOI 904
328. Problems on computation of taxable income of firms/partners and
association of persons 916
16 Taxation of companies
333. Definitions 922
334. Taxable income and tax liability - How computed 924
335. Carry forward and set-off of losses in the cases of certain companies 926
336. Minimum alternate tax 928
337. Tax on distributed profits of domestic companies 950
337A. Tax on income distributed to unitholders 951
337B. Tax on income received from venture capital companies and
venture capital funds 952

I-17 Contents
PAGE
337C. Additional income-tax on distributed income by company for buy-back of
unlisted shares 952
338. Problems on computation of taxable income of a corporate-assessee 953
17 Assessment of co-operative societies
339. Meaning of co-operative society 978
340. Taxable income and tax liability - How computed 978
341. Deduction in respect of income of co-operative societies 979
342. Problems on computation of income of a co-operative society 987
18 Assessment of charitable and other trusts
343. Meaning of trust 989
344. Tax exemption 989
345. Charitable purpose 989
346. Essential conditions for exemption 993
347. How to find out exemption u/s 11 998
348. Accumulation of income 1005
349. Forfeiture of exemption 1007
350. Public charitable/religious trust - How chargeable to tax 1016
351. Private discretionary trust 1019
352. Income from property held under trust partly for religious
purposes and partly for other purposes 1020
352A. Oral trust 1021
352B. Tax on distributed income by securitization trusts 1022
352C. Special provisions pertaining to business trust 1023
352D. Pass through status to Category I and Category II Alternative Investment Funds 1024
19 Return of income and assessment
353. Voluntary return 1029
354. Return of loss 1033
355. Extension of time 1033
356. Belated return 1033
357. Revised return 1034
358. Defective or incomplete return 1036
359. Scheme to facilitate submission of returns through Tax Return Preparers 1038
359A. Power of Board to dispense with furnishing of documents 1038
359B. Filing of return in electronic form 1039
360. Return by whom to be verified 1039
361. Permanent Account Number (PAN) 1040
361A. Quoting of Aadhaar number 1044
362. What is self-assessment 1045
363. Inquiry before assessment 1047
364. Summary assessment without calling the assessee 1051
365. Assessment in response to notice under section 143(2) 1053
366. Best judgment assessment 1064

Contents I-18
PAGE
366A. Reference to dispute resolution panel 1066
367. Reassessment 1068
368. Issue of notice for reassessment 1077
369. What are the provisions regarding rectification of mistake 1086
370. Time limit for completion of assessments/reassessments 1091
371. Provisions of section 155 1097
372. Problems on return of income and assessment 1098
372A. Obligation to furnish annual information return pertaining to financial
transactions 1102
372B. Submission of statement by a non-resident having liaison office in India 1104
372C. Furnishing of information or document by an Indian concern 1104
20 Penalties and prosecutions
373. Penalties for defaults in brief 1105
374. Penalty for concealment/under-reporting of Income 1116
375. Who can levy penalty 1142
376. Power of Commissioner to reduce or waive penalty 1143
377. Procedure for imposition of penalty 1147
378. Time-limit for completion of penalty proceedings 1148
379. Offences and prosecutions 1150
380. Onus of proof 1154
21 Advance payment of tax
381. Income liable for advance tax 1156
382. Advance tax liability - Under different situations 1157
383. Interest payable by the assessee or Government 1158
384. Problems illustrating advance tax provisions 1158
22 Interest
385. Interest payable by the assessee 1160
386. Interest payable to assessee 1175
387. Procedure to be followed in calculation of interest 1180
388. Waiver or reduction of interest under sections 234A, 234B and 234C 1180
389. Chief Commissioner/Director General (Investigation) to reduce
penal interest in certain cases 1180
390. Power of CBDT and Settlement Commission to reduce/waive interest 1181
391. Writ petition 1181
392. Problems illustrating computation of interest 1181
23 Tax deduction or collection at source
404. Scheme of tax deduction at source 1189
405. Deduction of tax from salaries 1192
405A. Tax deduction at source from withdrawal from employees provident fund scheme 1197
406. Deduction of tax at source from interest on securities 1201
407. Deduction of tax at source from dividends 1202
408. Deduction of tax at source from interest other than interest on securities 1203

I-19 Contents
PAGE
409. Deduction of tax at source from winnings from lotteries or
crossword puzzles 1208
410. Deduction of tax at source from winnings from horse races 1208
411. Deduction of tax at source from payments to contractors or sub-contractors 1208
412. Deduction of tax at source from insurance commission 1215
412A. Tax deduction from payment of life insurance policy 1215
413. Payment to non-resident sportsman or sports association 1216
414. Deduction of tax from payments in respect of National Savings Scheme 1217
415. Deduction of tax at source on payments on account of repurchase
of units by Mutual Funds or UTI 1217
416. Deduction of tax from commission, etc., on sale of lottery tickets 1217
417. Deduction of tax at source from commission or brokerage 1218
418. Deduction of tax at source from income by way of rent 1220
418A. Tax deduction at source on purchase of immovable property 1225
418B. Tax deduction from payment of rent by certain individuals/HUFs 1225
418C. Tax deduction from payment under joint development agreement 1226
419. Tax deduction at source on fees for professional or technical
services, royalty or directors fees 1227
419A. Tax deduction at source in respect of income from units 1231
420. Tax deduction from payment of compensation in certain cases 1231
420A. Deduction of tax at source from interest payable on infrastructure debt fund 1232
420AA. Tax deduction from income from units of business trust 1232
420AB. Tax deduction from income in respect of units of investment fund 1233
420ABB. Tax deduction from income in respect of investment in Securitization fund 1233
420B. Tax deduction by an Indian specified company or business trust from interest
to a non-resident/foreign company 1234
420C. Tax deduction at source on interest on bonds/Government securities 1235
420D. TDS on certain payments by individual/HUF 1236
420E. TDS on payments of certain amounts in cash 1237
420F. TDS on payment by e-commerce operator to e-commerce participants 1240
421. Deduction of tax at source from other sums 1242
422. Tax deduction from any income payable to non-resident unit-holders of
Mutual Fund 1248
423. Deduction of tax at source in respect of units referred to in section 115AB 1249
424. Deduction of tax from income or long-term capital gain from
foreign currency bonds/Global Depository Receipts 1249
425. Deduction of tax at source from income of Foreign Institutional
Investors from securities 1249
426. Payment without tax deduction or with deduction at lower rate 1250
427. Processing of statements of tax deducted at source 1255
428. Other points for consideration 1255
429. Tax collection at source 1264
24 Refund of excess payments
430. Right to claim refund - When arises 1276
431. Who can claim refund 1276
432. How to claim refund 1276
25 Appeals and revisions
435. Meaning of appeal 1279

Contents I-20
PAGE
436. Appellate hierarchy 1279
437. Appeal to the Commissioner (Appeals) 1280
438. Revision by the Commissioner of Income-tax 1294
439. Appeal to the Appellate Tribunal 1302
440. Appeal to High Court 1314
441. Appeal to the Supreme Court 1320
442. Provision for avoiding repetitive appeals 1321
443. Procedure for appeal by revenue when an identical question of law is
pending before Supreme Court 1321
444. Consequence of non-filing of appeal in respect of cases where the tax
effect is less than the prescribed monetary limit 1322
26 Income-tax authorities
445. Tax authorities 1324
446. Central Board of Direct Taxes 1324
27 Settlement of cases
457. Introduction 1328
458. Meaning of case 1328
459. Settlement Commission 1329
460. Application for settlement of cases 1329
461. Procedure on receipt of application under section 245C 1332
462. Power of Settlement Commission to order provisional attachment to
protect revenue 1336
463. Power of Settlement Commission to reopen completed proceedings 1336
464. Powers and procedure of Settlement Commission 1337
465. Inspection, etc., of reports 1337
466. Powers of Settlement Commission to grant immunity from prosecution, etc. 1337
467. Abatement of proceeding before Settlement Commission 1338
468. Order of settlement to be conclusive 1339
28
Special measures in respect of transactions with persons located in notified
jurisdictional area
471. Special measures in respect of certain transactions 1341
472. Notified jurisdictional area 1341
473. Applicability of transfer pricing provisions 1341
474. Disallowance of payment to financial institutions located in notified
jurisdictional area 1342
475. Disallowance of other expenditure 1342
476. Amount received to be treated as income in some cases 1342
477. TDS at higher rate 1342
478. Provisions illustrated 1342

I-21 Contents
PAGE
29 General Anti-avoidance Rule
480. Applicability of general anti-avoidance rule 1345
481. Impermissible avoidance arrangement 1345
482. Procedure for invoking GAAR 1347
483. Clarifications given by Board 1347
30 Advance ruling for non-residents
486. Advance ruling 1349
487. Procedure for filing application 1350
488. Procedure on receipt of application 1352
489. Applicability of advance ruling 1354
490. Advance ruling to be void in certain circumstances 1355
491. Powers of authority 1355
491A. Authority for advance rulings 1355
31 Search, seizure and assessment
492. Powers regarding discovery, production of evidence, etc. 1357
493. Search and seizure 1358
494. Requisitioning of books of account, etc. 1366
495. Application of assets seized or requisitioned 1367
496. Power to call for information 1369
497. Power of survey 1370
498. Power to collect certain information 1372
498A. Power to call for information by prescribed income-tax authority 1373
499. Scheme of assessment in case of search or requisition 1373
500. Prior approval in the case of search 1380
32 Transfer pricing
506. Taxation of international transaction 1381
507. Computation of the arm’s length price 1385
508. Arm’s length price - Computation of 1386
509. Computation of arm’s length price in cases where more than one price is
determined under most appropriate method 1393
510. Reference to transfer pricing officer 1403
510A. Power of Board to make Safe Harbour Rules 1407
511. Maintenance of books of account and furnishing of report in respect of
international group 1409
512. Report from accountant 1414
513. Specified domestic transactions 1414
514. Advance Pricing Agreement (APA) 1415
514A. Secondary adjustment in certain international transactions 1417

Contents I-22
514B. Provisions pertaining to thin capitalisation 1421
514C. Important judicial rulings 1424
33 Business restructuring
515. Restructuring business 1425
516. Amalgamation 1425
517. Demerger 1433
518. Conversion of sole proprietary business into company 1443
519. Conversion of firm into company 1444
520. Slump sale 1446
521. Transfer of assets between holding and subsidiary companies 1452
522. Amalgamation or demerger of co-operative banks 1457
523. Conversion of private company/unlisted public company into Limited Liability
Partnership (LLP) 1459
34 Alternative tax regime
531. Alternative tax regime available under different sections 1464
532. Manufacturing domestic companies under section 115BA 1466
533. Tax on income of certain domestic companies 1467
534. Conditions and restrictions 1467
535. Tax rate 1468
536. Option 1468
537. MAT not applicable 1468
538. Case studies 1468
539. New manufacturing domestic companies 1472
540. Conditions 1472
541. Mode of computation of income 1473
542. Computation of tax liability under section 115BAB 1473
543. Option 1474
544. MAT not applicable 1474
545. Case study 1475
546. Income of individuals and Hindu undivided family 1475
547. Rate of income-tax under the alternative tax regime 1476
548. Conditions and restrictions 1476
549. Option 1478
550. Case studies 1479
551. Tax on certain resident co-operative societies 1482
552. Conditions and restrictions under section 115BAD 1482
553. Tax rate 1483
554. Option 1483
35 Tax planning
565. Tax planning 1484
PAGE

566. Tax planning with reference to setting up of a new business 1486
567. Tax planning with reference to financial management decisions 1488
568. Tax planning with reference to specific managerial decisions 1489
569. Tax planning in respect of employees’ remuneration 1493
570. Tax planning in respect of non-residents 1495
571. Tax planning in respect of amalgamation or demerger of companies
or business restructuring 1500
36 Miscellaneous
572. Introduction of Tonnage Tax 1501
573. Securities Transaction Tax 1504
574. Tax clearance certificate 1506
575. Equalisation levy 1507
577. Income-tax on fringe benefit 1512
578. Commodities transaction tax 1512
580. Facility for electronic communication 1512
581. Introduction of Document Identification Number 1513
582. Power to withdraw approvals 1513
583. Restriction on cash transactions 1513
ANNEXURES
1. Tax rates 1517
2. Rates of depreciation 1540
3. The Eleventh Schedule, Thirteenth Schedule, Fourteenth Schedule/
Investment ceiling in the case of small scale industrial undertaking 1547
4. Notified backward districts 1554
5. Questions set for CA (Final) examinations and answers from November
2010 to January 2021 1556
PAGE
I-23 Contents

CHAPTER TWO
Residential status and tax incidence
What is relevance of residential status
22. There are two types of taxpayers—resident in India and non-resident in India. Indian income is
taxable in India whether the person earning income is resident or non-resident. Conversely, foreign
income of a person is taxable in India only if such person is resident in India. Foreign income of a
non-resident is not taxable in India.
Residential status - General norms
23. One has to keep in mind the following norms while deciding the residential status of an
assessee :
23.1 Different taxable entities - Section 6 lays down the test of residence for the following taxable
entities :
a. an individual ;
b. a Hindu undivided family ;
c. a firm or an association of persons or a body of individuals ;
d. a company ; and
e. every other person.
23.2 Different kinds of residential status - Assessees are either (a) resident in India, or (b) non-
resident in India. As far as resident individuals and Hindu undivided families are concerned, they
can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident
but not ordinarily resident. All other assessees (viz., a firm, an association of persons, a company and
every other person) can simply be either a resident or a non-resident.
23.3 Different residential status in respect of different previous years of the same assessment
year not possible[Sec. 6(5)]-Ifapersonisresidentinapreviousyearrelevanttoanassessmentyear
in respect of any source of income, he shall be deemed to be resident in India in the previous year(s)
relevant to the same assessment year in respect of each of his other sources of income [see problem
24-P9].
23.4 Different residential status for different assessment years - An assessee may enjoy different
residential status for different assessment years. For instance, an individual who has been regularly
assessed as resident and ordinarily resident, has to be treated as non-resident in a particular
assessment year if he satisfies none of the conditions of section 6(1) in that year [see para 24.1].
23.5 Resident in India and abroad - It is not necessary that a person who is resident in India, cannot
become resident in any other country for the same assessment year. A person may be resident in
more than one country at the same time for tax purposes, though he cannot have two domiciles
simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be non-
resident for all other countries for the same assessment year.
23.6 Onus of proof - Whether an assessee is a resident or a non-resident is a question of fact and
it is the duty of the assessee to place all relevant facts before the Income-tax authorities—Rai
Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.).
In the case of V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168, the Supreme Court held that
section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons
has to be a resident in India and the onus of proving that they are not residents is on them. However,
55

the burden of proving that an individual or a company is resident in India lies on the department—
Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC).
Residential status of an individual [Sec. 6]
24. An individual may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident,
or (c) non-resident.
24.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)] - To find out whether an individual is
“resident and ordinarily resident” in India, one has to proceed as follows —
Step 1 First find out whether such individual is “resident” in India. See para 24.1-1
Step 2 If such individual is “resident” in India, then find out whether he is “ordinarily See para 24.1-2
resident” in India. However, if such individual is a “non-resident” in India, then no
further investigation is necessary.
24.1-1 BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS RESIDENT IN INDIA - Under section 6(1) an
individualissaidtoberesidentinIndiainanypreviousyear,ifhesatisfiesatleastoneofthefollowing
basic conditions—
Basic condition (a) He is in India in the previous year for a period of 182 days or more.
Basic condition (b) He is in India for a period of 60 days or more during the previous year and 365 days or more
during 4 years immediately preceding the previous year.
24.1-1a EXCEPTIONS - The aforesaid rule of residence is subject to the following exceptions—
■ Exception one (Special Case 1) - In Special Case 1, the period of “60 days” referred to in (b) above
has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case
1 is available in the case of an Indian citizen who leaves India during the previous year for the
purpose of employment outside India or an Indian citizen who leaves India during the previous year
as a member of the crew of an Indian ship‡. For this purpose, the requirement is not leaving India
for taking employment outside India but leaving India for the purposes of employment (the
employment may be in India or may be outside India). To put it differently, the individual need not
be an unemployed person—British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR - New
Delhi). He may be employed in India and leave India during the previous year on a foreign
assignment of his employer company. Travelling abroad on business visa to take up any employ-
ment or for any business carried outside India, is sufficient to prove this condition—K. Sambasiva
Rao v. ITO [2014] 42 taxmann.com 115 (Hyd.). Alternatively, he may be an unemployed person who
goes outside India to take an employment outside India.
In Special Case 1, an individual will be resident in India only if he is in India during the relevant
previous year for at least 182 days.
■ Exception two (Special Case 2) - In Special Case 2, the period of “60 days” referred to in (b) above
has been extended to 182 days#
by virtue of Explanation 1(b) to section 6(1). However, Special Case
2 covers an Indian citizen or a person of Indian origin who comes on a visit to India during the
previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his
grand-parents, was born in undivided India. It may be noted that grand-parents include both
maternal and paternal grand-parents.
In Special Case 2, an individual will be resident in India only if he is in India during the relevant
previous year for at least 182 days#
.
Para 24 Income-tax - Residential status and tax incidence 56
‡In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India,
the period or periods of stay in India shall, not include the period given in rule 126. Under rule 126, the period beginning
on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for
the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off
by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.
# This provision is subject to one exception. It is applicable from the assessment year 2021-22. For this exception, see
para 24.3-1.

■Exceptionthree-Exceptionthreeisgivenbysection6(1A).Itisapplicablefromtheassessmentyear
2021-22. For the provisions of this section, see para 24.3-1.
24.1-2 ADDITIONAL CONDITIONS TO TEST WHEN A RESIDENT INDIVIDUAL IS ORDINARILY RESIDENT IN INDIA - Under
section6(6),aresidentindividualistreatedas“residentandordinarilyresident”inIndiaifhesatisfies
the following two additional conditions—
Additional condition (i) He has been resident† in India in at least 2 out of 10 previous years immediately
preceding the relevant previous year.
Additional condition (ii) He has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he
satisfies at least one of the basic conditions and the two additional conditions [i.e., (i) and (ii)].
■ Exceptions - For a few exceptions, see para 24.3-1.
24.1-3 OTHER POINTS - In determining the residential status of an assessee, the following settled
propositions have to be borne in mind :
■ Stay at the same place not necessary - It is not essential that the stay should be at the same place—
Kinloch v. IRC 14 TC 736. It is equally not necessary that the stay should be continuous. Similarly
place of stay or purpose of stay is not material.
■ Stay in territorial waters - A stay by an individual on a yacht moored in the territorial waters of
India would be treated as his presence in India for the purpose of this section—Baryard Brown v.
Burt 5 TC 667.
■ Presence for a part of a day - Where a person is in India only for a part of a day, the calculation of
physical presence in India in respect of such broken period should be made on an hourly basis. A
total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the
stay of one day—Walkie v. IRC [1952] 1 AER 92. If, however, data is not available to calculate the
period of stay of an individual in India in terms of hours, then the day on which he enters India as
wellasthedayonwhichheleavesIndiashallbetakenintoaccountasstayoftheindividualinIndia—
Advance Ruling P. No.7 of 1995, In re [1997] 90 Taxman 62 (AAR - New Delhi).
■ Involuntary stay - Involuntary stay of a person in India caused by unauthorized impounding of
passport must be excluded for determining his residential status under section 6—CIT v. Suresh
Nanda [2015] 233 Taxman 4 (Delhi).
24.2 Resident but not ordinarily resident [Sec. 6(1), 6(6)(a)] - An individual who satisfies at least
one of the basic conditions mentioned in para 24.1-1 but does not satisfy the two additional
conditions [i.e., conditions (i) and (ii) mentioned in para 24.1-2], is treated as a resident but not
ordinarily resident in India. In other words, an individual becomes resident but not ordinarily
resident in India in any of the following circumstances :
Case 1 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] but none of the
additional conditions [i.e., (i) and (ii) of para 24.1-2].
Case 2 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 24.1-1] and one of the
two additional conditions [i.e., (i) and (ii) of para 24.1-2].
■ Exceptions - For a few exceptions, see para 24.3-1.
24.3 Non-resident-Anindividualisanon-residentinIndiaifhesatisfiesnoneofthebasicconditions
[para 24.1-1]. In the case of non-resident, the additional conditions [i.e., (i) and (ii) of para 24.1-2] are
not relevant.
24.3-1 EXCEPTIONS - Even if an individual satisfies none of the two basic conditions, he is deemed to
be resident but not ordinarily resident in the cases given below –
57 Non-resident Para 24.3
†According to basic conditions given in para 24.1-1.

■ Firstexception- Thisexceptionisgivenundersection6(1A)readwithsection6(6)(d)andapplicable
fromtheassessmentyear2021-22.Underthisexceptionanindividualshallbedeemedtoberesident
but not ordinarily resident in India, if he satisfies the following 3 conditions –
a. he is an Indian citizen;
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000†
during the
relevant previous year, and
c. he is not liable to tax in any other country or territory by reason of his domicile or residence or
any other criteria of similar nature.
This exception is not applicable in the case of a foreign citizen, even if he is a person of Indian origin.
■ Second exception - This exception is given by section 6(6)(c) read with Explanation 1(b) to section
6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall
be deemed to be resident but not ordinarily resident in India if he satisfies the following 4
conditions –
a. he is an Indian citizen or a person of Indian origin;
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000†
during the
relevant previous year;
c. he comes to India on a visit during the relevant previous year, and
d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and
365 days (or more) during 4 years immediately preceding the relevant previous year.
Incomefromforeignsources-“Incomefromforeignsources”meansincomewhichaccruesorarises
outside India (except income derived from a business controlled in or a profession set up in India).
Person of Indian origin - A person is deemed to be of Indian origin if he, or either of his parents or
any of his grand-parents, was born in undivided India.
24.4 Rule of residence in brief - The Table given below summarises the rule of residence for the
assessment year 2021-22—
RULE OF RESIDENCE
Who is resident and ordinarily He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same
resident in India time, he should also satisfy the two additional conditions.
Who is resident but not He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may
ordinarily resident in India satisfy one or none of the additional conditions.
Who is non-resident resident He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a)
in India andbasiccondition(b)*].Additionalconditionsarenotrelevantinthecaseofanon-
resident.
*In the two special cases mentioned in para 24.1-1, basic condition (b) is not relevant.
BASIC CONDITIONS AT A GLANCE
In the case of an Indian citizen who
leavesIndiaduringthepreviousyear
for the purpose of employment or
who leaves India as a member of the
crew of an Indian ship
(1) (2) (3)
a. Presence for at least 182 days in
India during the previous year
2020-21
† For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into
consideration even if it is derived/received in India.
Para 24.4 Income-tax - Residential status and tax incidence 58
In the case of an Indian citizen or a
person of Indian origin (who is
abroad) who comes to India on a visit
during the previous year
2020-21.
In the case of an individual
[other than that mentioned in col-
umns (1) and (2)]
2020-21.

b. Not functional
ADDITIONAL CONDITIONS AT A GLANCE
i. Resident in India in at least 2 out of 10 years immediately preceding the previous year [i.e., he must satisfy at
least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., during previous years
2009-10 and 2018-19)].
ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year (i.e., during April
1, 2012 and March 31, 2019).
24.5 Clarification in respect of residency under section 6 - In order to avoid genuine hardship due
to suspension of international flights, CBDT vide Circular No. 11/2020, dated May 8, 2020 has
decided that for the purpose of determining the residential status under section 6 during the
previous year 2019-20 in respect of an individual who has come to India on a visit before March 22,
2020 and –
a. has been unable to leave India on or before March 31, 2020, his period of stay in India from March
22, 2020 to March 31, 2020 shall not be taken into account; or
b. has been quarantined in India on account of outbreak of COVID-19 on or after March 1, 2020 and
hasdepartedonanevacuationflightonorbeforeMarch31,2020orhasbeenunabletoleaveIndia
on or before March 31, 2020, his period of stay from the beginning of his quarantine to his date
of departure or March 31, 2020, as the case may be, shall not be taken into account; or
c. has departed on an evacuation flight on or before March 31, 2020, his period of stay in India from
March 22, 2020 to his date of departure shall not be taken into account.
24-P1 X, a foreign national (not being a person of Indian origin), came to India for the first time from USA on July
11, 2014. He stayed here for a stretch of 3 years and left for Japan on July 11, 2017. He returned to India on April
10,2018andremainedheretillAugust17,2018,whenhewentbacktoUSA.HeagaincamebacktoIndiaonJanuary
30, 2021 at 11.59 p.m. and continued to stay in India thereafter. Determine his residential status for the assessment
year 2021-22.
SOLUTION : For the assessment year 2021-22, financial year 2020-21 is previous year. During the previous year
2020-21, X is in India for a period of 60 days (i.e., January 2021 : 1 + February 2021 : 28 days + March 2021 :
31 days). Moreover, during 4 years immediately preceding the previous year 2020-21, he is in India for 597 days
(i.e., 2016-17 : 365 days, 2017-18 : 102 days, 2018-19 : 130 days and 2019-20 : Nil). Thus, he satisfies condition
(b) mentioned in para 24.1-1 (namely, presence of at least 60 days during the previous year and 365 days during
4 years preceding the previous year). He, therefore, becomes resident in India. A resident individual may either be
ordinarily resident or not ordinarily resident in India. To determine it, one has to apply the test of two additional
conditions mentioned in para 24.1-2.
During 7 years immediately preceding the previous year 2020-21, X is in India for 1227 days and during 10 years
immediately preceding the previous year 2020-21, he is resident in India for 5 years as follows :
59 Clarification in respect of residency Para 24.5
b. Not functional† b. Presence in India for at least 60
days during the previous year
2020-21 and 365 days during 4
years immediately preceding
the previous year (i.e., during
April1,2016andMarch31,2020).
In the case of an Indian citizen who
leavesIndiaduringthepreviousyear
for the purpose of employment or
who leaves India as a member of the
crew of an Indian ship
(1) (2) (3)
In the case of an individual
[other than that mentioned in col-
umns (1) and (2)]
In the case of an Indian citizen or a
person of Indian origin (who is
abroad) who comes to India on a visit
during the previous year
† However, this condition has been activated from the assessment year 2021-22, in a few cases. See para 24.3-1.

Year Presence in India Resident (R) or non- Which of the condition (a), or
(number of days) resident (NR) (b) of para 24.1-1 is satisfied to
become resident or non-resident
2019-20 Nil NR None
2018-19 130 R (b)
2017-18 102 R (b)
2016-17 366 R (a) as well as (b)
2015-16 365 R (a)
2014-15 264 R (a)
2013-14 Nil NR None
2012-13 Nil NR None
2011-12 Nil NR None
2010-11 Nil NR None
Thus, he satisfies one of the basic conditions and the two additional conditions. He will, therefore, be treated as
resident and ordinarily resident in India for the assessment year 2021-22. If X comes to India at any time after zero
hour on January 30, 2021, he will be non-resident for the assessment year 2021-22.
24-P2 X, a chief executive of a company had undertaken foreign tour on various occasions for company’s work and
was out of India for a total number of 255 days during the previous year ending March 31, 2021. He submits his
return of income for the assessment year 2021-22 in the status of non-resident. Is he justified? He visited a foreign
country for the first time during May 2019.
SOLUTION : By virtue of section 6(1)(c), an individual will be resident in India in any previous year if he has been
in India for a period of at least 60 days during the previous year and at least 365 days during 4 years preceding the
previous year. However, as per Explanation (a) where an Indian citizen leaves India for the purpose of employment
outside India, the above period of 60 days has been extended to 182 days.
In the given problem, X had left India for purposes of employment outside India. In other words, Explanation (a) will
beapplicable.Accordingly,Xwillbetreatedasnon-residentfortheassessmentyear2021-22.Hence,thesubmission
of his return of income for the assessment year 2021-22 in the status of non-resident is justified.
24-P3 During his 196 days’ stay in India in the previous year 2020-21, X, a citizen of U.K. is all the time moving from
one place to another. He claims that he is non-resident in India for the assessment year 2021-22 on the following
grounds :
1. He had never visited India before April 1, 2020.
2. During 2020-21, though he is in India for 196 days, he could not spend two consecutive nights at any one place.
3. For the assessment year 2021-22, he is resident in U.K. according to the English Income-tax Act. He insists that
he cannot be resident of two countries for the same assessment year. Do you agree with him?
SOLUTION : TheclaimofXisnottenable,asheisinIndiafor196daysduringthepreviousyear2020-21.Hesatisfies
one of the two basic conditions (namely, presence of 182 days or more during the previous year 2020-21) and
none of the additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year
2021-22. The fact that he could not spend two consecutive nights at any one place is immaterial. Moreover, a person
who is resident in India, may become resident of any other country according to the tax laws of that country for the
same or a different assessment year.
24-P4 X, after about 30 years’ stay in India, returns to America on January 29, 2018. He returns to India in June
2020 to join an American company as its overseas branch manager. Determine his residential status for the
assessment year 2021-22.
SOLUTION : For the assessment year 2021-22, the year 2020-21 is the previous year. During 2020-21, X is in
India for more than 275 days. He is, therefore, resident in India. He is resident in India for 2 years out of 10 years
(i.e., 2010-11 to 2019-20), and he has stayed for more than 730 days during the seven years preceding the previous
year 2020-21. He is, therefore, resident and ordinarily resident in India for the assessment year 2021-22.
24-P5 X sets up a new profession on January 14, 2020 and keeps his books of account on the basis of financial
year.ThoughhehasnevergoneoutofIndia,heclaimsthatheisresidentandnotordinarilyresidentfortheassessment
year 2021-22. For the support of his claim, he submits that he does not fulfil one of the additional conditions (i.e.,
he is not resident in India for at least 2 out of 10 preceding years), as he has not been assessed as resident during
2 out of the preceding 10 years due to absence of taxable income. Comment on the claim of X and determine his
residential status for the assessment year 2021-22.

SOLUTION : The claim of X is not acceptable. Section 6(6) prescribes additional conditions for deciding whether or
not a resident individual is ordinarily resident. These conditions are based upon physical presence in the preceding
7 years and residential status during preceding 10 years. Residential status during preceding 10 years is to be
determined, whether or not an individual is assessed as resident in the past. In other words, an individual who does
not have taxable income during preceding 10 years, does not become non-resident (in preceding 10 years) merely
because of the fact that he was not assessed as resident during these years. Claim of X is, therefore, not justified. As
X has never gone out of India, he will satisfy basic as well as additional conditions and, accordingly, he will be resident
and ordinarily resident for the assessment year 2021-22.
24-P6 X is a foreign citizen, not being a person of Indian origin. Determine his residential status for the assessment
year 2021-22 on the assumption that during financial years 2006-07 to 2020-21 he was present in India as follows :
2006-07 221 days 2013-14 160 days
2007-08 22 days 2014-15 96 days
2008-09 50 days 2015-16 286 days
2009-10 72 days 2016-17 100 days
2010-11 130 days 2017-18 182 days
2011-12 340 days 2018-19 85 days
2012-13 30 days 2019-20 280 days
2020-21 86 days
SOLUTION : For the assessment year 2021-22, financial year 2020-21 is the previous year. During 2020-21, X
is in India for a period of 86 days and during four years preceding the previous year 2020-21, he is in India for 647
days. Thus, he satisfies one of the two basic conditions laid down by section 6(1) [i.e., condition (b) mentioned in
para 24.1-1] and, consequently, he becomes resident in India. A resident individual may either be an ordinarily
resident or not ordinarily resident. To determine whether X is ordinarily resident or not ordinarily resident, one has
to test the two additional conditions as laid down by section 6(6)(a) [see conditions (i) and (ii) in para 24.1-2].
Information presented in the Table given below may be used to test the additional conditions :
Year Presence in India Status Which of condition (a) or (b)
(number of days) [para 24.1-1] is satisfied
to become resident or
non-resident
2019-20 280 Resident (a) or (b)
2018-19 85 Resident (b)
2017-18 182 Resident (a) or (b)
2016-17 100 Resident (b)
2015-16 286 Resident (a) or (b)
2014-15 96 Resident (b)
2013-14 160 Resident (b)
2012-13 30 Non-resident None
2011-12 340 Resident (a)
2010-11 130 Resident (b)
2009-10 72
2008-09 50 Not necessary to determine
2007-08 22
2006-07 221
Condition (i) of para 24.1-2 - This condition requires that an individual should be resident in India for at least 2 out
of 10 years immediately preceding the relevant previous year. X, in the present case, is resident in India in 9 years
out of 10 years (i.e., during 2010-11 to 2019-20, he is resident in India in all the years except 2012-13). He, thus,
satisfies this condition.
Condition (ii) of para 24.1-2 - This condition requires that an individual should be present in India for at least 730
days during 7 years immediately preceding the relevant previous year. X is in India for 1189 days during 2013-14
to 2019-20. He, thus, satisfies this condition.
X satisfies one of the two basic conditions and the two additional conditions. He is, therefore, resident and ordinarily
resident in India for the assessment year 2021-22.
61 Clarification in respect of residency Para 24.5

24-P7 X, an Indian citizen, who is appointed as Senior Taxation Officer by the Government of Iran, leaves India, for
the first time on September 10, 2019 for joining his duties in Iran. During the previous year 2020-21, he
comes to India on a visit for 119 days. Determine the residential status of X for the assessment years 2020-21 and
2021-22.
SOLUTION : During the previous year 2019-20, X is in India for 163 days (and during four years immediately
preceding the previous year 2019-20, he was in India for more than 365 days). Though he satisfies one of the
conditions laid down in section 6(1), yet by virtue of Explanation to section 6(1), he will be non-resident for the
assessment year 2020-21 (an Indian citizen, leaving India for the purpose of employment, will be treated as resident
in India only if he has been in India in that year for at least 182 days).
During the previous year 2020-21 (for the assessment year 2021-22), X comes to India for 119 days. Therefore, X
does not satisfy one of the conditions laid down by section 6(1) [read with Explanation to section 6(1)]. He will,
accordingly, be treated as non-resident in India for the assessment year 2021-22.
24-P8 X is a foreign citizen (not being a person of Indian origin). Since 1981, he visits India every year in the month
of April for 100 days. Find out the residential status of X for the assessment year 2021-22.
SOLUTION : During the previous year 2020-21, X is in India for 100 days and during 4 years preceding the year
2020-21 (i.e., 2016-17 to 2019-20), he is in India for 400 days. Thus, he satisfies basic condition (b) to become
resident in India. To determine, whether a resident individual is ordinarily resident or not ordinarily resident, one has
to test two additional conditions as laid down by section 6(6)(a).
Condition (i)ofpara24.1-2- Every year X satisfies basic condition (b), as he is in India for 100 days during the relevant
previous year and 400 days during 4 years preceding the previous year. Therefore, he satisfies this condition.
Condition (ii) of para 24.1-2 - X is in India for 700 days during 7 years prior to the previous year 2020-21. He does
not satisfy this condition.
X satisfies one of the basic conditions and one of the two additional conditions. He is, therefore, resident but not
ordinarily resident in India for the assessment year 2021-22.
24-P9 X (a foreign citizen, not being a person of Indian origin) comes to India for the first time on September 1, 2020.
On September 15, 2020, he joins a company on monthly salary of Rs. 60,000, as a part-time production consultant
(duty hours : 6.30 PM to 9.30 PM). Prior to September 15, 2020, X does not have any source of income. On October
9, 2020, he starts a trading business in computer hardware after obtaining approval of his employer. For the previous
year ending March 31, 2021, he has the following income :
Salary from the part-time employment : Rs. 3,90,000, income from the business of trading in computer hardware in
India : Rs. 7,86,000 ; and foreign income from the same business : $ 40,000. Find out the residential status of X for
the assessment year 2021-22.
SOLUTION : For the assessment year 2021-22, X has the following sources of income in India :
Sources of income Previous year Number of days when
X was in India
Salary income September 15, 2020 to March 31, 2021 198 days
Business income October 9, 2020 to March 31, 2021 174 days
For the first source of income, X becomes resident in India by satisfying one of the basic conditions. As he comes to
India for the first time in 2020, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not
ordinarily resident in India for the first previous year.
For the second source of income, X is a non-resident, as he satisfies none of the basic conditions. It may be noted
that he is non-resident in India for the business income and resident but not ordinarily resident for the salary income.
In view of section 6(5), if a person is resident in India for one of the sources of income, he will be deemed to be resident
in India for all other sources of income in the same assessment year. In respect of the assessment year 2021-22, X
will, therefore, be regarded as resident but not ordinarily resident for all sources of income.
24-P10 X is an Indian citizen. Currently, he is in employment with an overseas company located in Dubai. During
different years, he is in India as follows –

Previous year Presence in India Previous year Presence in India Previous year Presence in India
2020-21 55 days 2017-18 170 days 2014-15 70 days
2019-20 190 days 2016-17 200 days 2013-14 71 days
2018-19 200 days 2015-16 250 days 2012-13 72 days
For the previous year 2020-21, X is not taxable in Dubai or in any other country/territory by reason of his domicile
or residence. Income of X (other than income from foreign sources) for the previous year 2020-21 is Rs. 16,00,000.
Find out the residential status of X for the assessment year 2021-22.
SOLUTION : X is in India for 55 days during the previous year 2020-21. He is unable to satisfy any of the basic
condition given by section 6(1). However, he satisfies the following 3 conditions given by section 6(1A) –
a. X is an Indian citizen;
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous
year, and
c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria
of similar nature.
He is deemed to be resident but not ordinarily resident in India [as per section 6(1A) read with section 6(6)(d)]. The
information given in the above table pertaining to earlier years, is not relevant in this case.
24-P11 X is an Indian citizen. Currently, he is in employment with a multinational company and posted in Singapore.
During the previous year 2020-21, he comes to India for a visit of 145 days. In earlier 4 years, he is in India for more
than 900 days. X wants to know his residential status for the assessment year 2021-22. His annual income for the
previous year 2020-21 is as follows –
Rs.
Income from salary, rent, consultancy and interest earned and received in Singapore 29,00,000
Income from business (accrued and received outside India, controlled from Singapore) 21,00,000
Income from another business (accrued and received outside India, controlled from India) 8,00,000
Interest on bank fixed deposits in India 11,00,000
Any other income in India or outside India Nil
Life insurance premium paid in India 2,60,000
SOLUTION : In the previous year 2020-21, X is in India for 145 days. Total income of X (other than income from
foreign sources) is Rs. 17,50,000 (i.e., Rs. 8,00,000 + Rs. 11,00,000 – deduction under section 80C : Rs.
1,50,000). X satisfies 4 conditions of second exception [see para 24.3-1] as follows –
a. X is an Indian citizen or a person of Indian origin;
b. totalincomeofX(otherthantheincomefromforeignsources)exceedsRs.15,00,000duringtherelevantprevious
year;
c. he comes to India on a visit during the previous year 2020-21, and
d. he is in India for 175 days (i.e., his Indian visit is for 120 days or more but less than 182 days) during the relevant
previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.
Consequently, for the previous year 2020-21 (i.e., assessment year 2021-22), X is resident but not ordinarily
resident in India.
Residential status of a Hindu undivided family [Sec. 6(2)]
25. A Hindu undivided family (like an individual) is either resident in India or non-resident in India.
A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
25.1 When a Hindu undivided family is resident or non-resident - A Hindu undivided family is
said to be resident in India if control and management of its affairs is wholly or partly situated in
India. A Hindu undivided family is non-resident in India if control and management of its affairs is
wholly situated outside India.
63 HUF is resident or non-resident Para 25.1

The table given below highlights the same proposition —
Place of control Residential status of family Ordinarily resident or not
Control and management of the affairs of a Hindu
undivided family is —
■ Wholly in India Resident See para 25.2
■ Wholly out of India Non-resident —
■ Partly in India and partly outside India Resident See para 25.2
Note - In order to determine whether a Hindu undivided family is resident or non-resident, the residential
status of the karta of the family during the previous year is not relevant. Residential status of the karta during
the preceding years is considered for determining whether a resident family is “ordinarily resident”—see
para 25.2.
25.1-1 WHAT IS “CONTROL AND MANAGEMENT” - Different courts have defined the term “control and
management” as follows —
■ De facto control - Control and management means de facto control and management and not
merely the right to control or manage—CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC).
■ Place of control and management - Control and management is situated at a place where the head,
the seat and the directing power are situated. The head and brain is situated where vital decisions
concerning the policies of the business, such as, raising finance and its appropriation for specific
purposes, appointment and removal of staff, expansion, extension, or diversification of business,
etc., are taken—San Paulo (Brazilian) Railway Co. v. Carter [1886] AC 31 (HL).
■ Residence of HUF in India - The mere fact that the family has a house in India, where some of its
members reside or the karta is in India in the previous year, does not constitute that place as the seat
of control and management of the affairs of the family, unless the decisions concerning the affairs
of the family are taken at that place. The mere fact of the absence of karta from India does not make
the family non-resident—Annamalai Chettiar v. ITO [1958] 34 ITR 88 (Mad.).
■ Broad propositions - The following propositions can be stated on the basis of the rulings given
in Subbayya Chettiar v. CIT [1951] 19 ITR 163 (SC) and Narasimha Rao Bahadur v. CIT [1950] 18
ITR 181 (Mad.)—
1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs
is situated wholly outside India.
2. HUF may be residing in one place and doing a great deal of business in other place.
3. Occasional visit of a non-resident karta to the place of HUF’s business in India would be
insufficient to make HUF ordinarily resident in India.
25.2 When a resident Hindu undivided family is ordinarily resident in India - A resident Hindu
undivided family is ordinarily resident in India if the karta or manager of the family (including
successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b) :
Additional Karta has been resident in India in at least 2 out of 10 previous years [according to the basic
condition (i) condition mentioned in para 24.1-1] immediately preceding the relevant previous year
Additional Karta has been present in India for a period of 730 days or more during 7 years immediately
condition (ii) preceding the previous year.
If the karta or manager of a resident Hindu undivided family does not satisfy the two additional
conditions, the family is treated as resident but not ordinarily resident in India.
25-P1 The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since
1980) who is resident in India in only 3 out of 10 years preceding the previous year 2020-21 and he is present in
India for more than 729 days during the last 7 years. Determine the residential status of the family for the assessment
year 2021-22 if the affairs of the family’s business are (a) wholly controlled from Hong Kong, (b) partly controlled
from India.

65 Residential status of a company Para 27
SOLUTION : If affairs of a Hindu undivided family are controlled from a place outside India, the family will be non-
resident. Accordingly XY Hindu undivided family is non-resident for the assessment year 2021-22 under situation (a).
Under situation (b), affairs of the family’s business are partly controlled from India during the previous year
2020-21. Therefore, the family is resident in India. However, it would be ordinarily resident in India if karta satisfies
the following two conditions laid down by section 6(6)(b) :
1. He has been resident in India in at least 2 out of 10 years preceding the previous year.
2. He has been present in India for at least 730 days during seven years preceding the previous year.
As the karta is resident in India in 3 out of 10 years preceding the previous year, the family would be resident and
ordinarily resident in India for the assessment year 2021-22 in situation (b).
25-P2 A Hindu undivided family (X is karta, A, B and C are other coparceners) carries on cloth business in Burma.
A comes to India and starts a cloth business at Bombay in partnership with some other persons. The capital supplied
by A to this firm is found to have come from the family. Subsequently, B joins the firm as partner. Later on another
business is started at Banaras with the same persons and one outsider as partner. C joins this firm. The Assessing
Officer wants to treat the family as resident on the ground that its coparceners are partners in
the firms, financed out of the family funds, and the firms are resident in India. Is the Assessing Officer legally correct ?
SOLUTION : AcaseonsimilarfactswasexaminedbytheSupremeCourtofIndiainthecaseofCITv. NandlalGandalal
[1960] 40 ITR 1, wherein the Court pointed out that both under the Hindu law and under the law of partnership, the
Hinduundividedfamilyassuchcouldexercisenocontroloverthemanagementofafirminwhichsomeofitscoparceners
were partners, even if capital contributed by coparceners was found to have come from the family.
The position in Hindu law with regard to coparcener who has entered into partnership with others is well settled. The
partnership is a contractual partnership and is governed by the Indian Partnership Act, 1932. The partnership is
between the coparcener individually and partners and not between the family and other partners. This remains so
even if the coparcener is accountable to the family for the income received. Thus, control and management over the
firm’s business lies in the hands of individual coparceners and not in the hands of the family. The Assessing Officer
is, therefore, not justified while holding the Hindu undivided family as resident in India.
Residential status of the firm and association of persons [Sec. 6(2)]
26. A partnership firm and an association of persons are said to be resident in India if control and
management of their affairs are wholly or partly situated within India during the relevant previous
year. They are, however, treated as non-resident in India if control and management of their affairs
are situated wholly outside India.
■ The above rule may be summarised as follows —
Place of control Residential status
Control and management of the affairs of a firm/association of persons is —
❑ Wholly in India Resident
❑ Wholly outside India Non-resident
❑ Partly in India and partly outside India Resident
Note - A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential
status of the partners/members of the firm/association is not relevant in determining the status of the firm/
association.
26.1 What is “control and management” - While in the case of a firm, control and management
is vested in partners, in case of an association of persons it is vested in the principal officer. Control
and management means de facto control and management and not merely the right to control or
manage. Control and management is usually situated at a place where the head, the seat and the
directing power are situated. Where the partners of a firm are resident in India the normal
presumption is that the firm is resident in India. This presumption can, however, be effectively
rebutted by showing that the control and management of the affairs of the firm is situated wholly
outside India. The onus of rebutting the presumption is on the assessee.
Residential status of a company [Sec. 6(3)]
27. Residential status of a company is determined as follows –

Section Company Residential status
6(3)(i) Indian company Always resident in India [Note 1]
6(3)(ii) A foreign company (whose turnover/gross It will be resident in India if its place of effec-
receipt in the previous year is more than tive management (POEM), during the
Rs. 50 crore) relevant previous year, is in India [Note 2]
6(3)(ii) A foreign company (whose turnover/gross Always non-resident in India [Note 3]
receipt in the previous year is Rs. 50 crore
or less)
Notes –
1. An Indian company is always resident in India. Even if an Indian company is controlled from a place
located outside India (or even if shareholders of an Indian company controlling more than 51 per cent
voting power are non-resident and/or located outside India), the Indian company is resident in India. An
Indian company can never be non-resident.
2. A foreign company (with effect from the assessment year 2017-18) is resident in India if its place of
effective management (POEM), during the relevant previous year, is in India. For this purpose, the place
of effective management means a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose,
a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in
Circular No. 6/2017, dated January 24, 2017. These guiding principles are briefly explained in para 27.1.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of
Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a
foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India
from the assessment year 2017-18 onwards.
27.1 Place of effective management (POEM) as per Circular No. 6/2017 - “Place of effective
management” (POEM) is an internationally recognised test for determination of residence of a
company incorporated in a foreign jurisdiction. Any determination of the POEM will depend upon
the facts and circumstances of a given case. The POEM concept is one of substance over form. An
entity may have more than one place of management, but it can have only one place of effective
management at any point of time. Since “residence” is to be determined for each year, POEM will
also be required to be determined on year to year basis. The process of determination of POEM
would be primarily based on the fact as to whether or not the company is engaged in active business
outside India.
27.1-1 COMPANY ENGAGED IN ACTIVE BUSINESS OUTSIDE INDIA - The place of effective management in case
of a company engaged in active business outside India shall be presumed to be outside India if the
majority meetings of the board of directors of the company are held outside India.
■ Active business outside India - A company shall be said to be engaged in “active business outside
India” if –
a. the passive income is not more than 50 per cent of its total income;
b. less than 50 per cent of its total assets are situated in India;
c. less than 50 per cent of total number of employees are situated in India or are resident in India;
and
d. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll
expenditure.
■ Passive income - “Passive income” of a company shall be aggregate of, —
a. incomefromthetransactionswhereboththepurchaseandsaleofgoodsisfrom/toitsassociated
enterprises; and
b. income by way of royalty, dividend, capital gains, interest or rental income;

However, any income by way of interest shall not be considered to be passive income in case of a
company which is engaged in the business of banking or is a public financial institution, and its
activities are regulated as such under the applicable laws of the country of incorporation.
27.1-2 MANAGEMENT POWER EXERCISED IN INDIA - If on the basis of facts and circumstances it is
established that the Board of directors of the company are standing aside and not exercising their
powers of management and such powers are being exercised by either the holding company or any
other person(s) resident in India, then the place of effective management shall be considered to be
in India. For this purpose, merely because the Board of Directors follows general and objective
principles of global policy of the group laid down by the parent entity which may be in the field of
Payroll functions, Accounting, Human resource (HR) functions, IT infrastructure and network
platforms, Supply chain functions, Routine banking operational procedures, and not being specific
to any entity or group of entities per se; would not constitute a case of Board of Directors of
companies standing aside.
Moreover, the Board has clarified in its Circular No. 25/2017, dated October 23, 2017 that if the
RegionalHeadquarteroperatesforsubsidiaries/groupcompaniesinaregionwithinthegeneraland
objective principles of global policy of the group laid down by the parent entity in the field of Pay
roll functions. Accounting, HR functions, IT infrastructure and network platforms, Supply chain
functions, Routine banking operational procedures (and not being specific to any entity or group
of entities per se); it would, in itself, not constitute a case of Board of Director of companies standing
aside and such activities of Regional Headquarter in India alone will not be a basis for establishment
of POEM for such subsidiaries/group companies†.
27.1-3 OTHER CASES - In cases of companies other than those discussed above, the determination of
POEM would be a two stage process, namely –
- First stage would be identification or ascertaining the person or persons who actually make the
key management and commercial decision for conduct of the company’s business as a whole.
- Second stage would be determination of place where these decisions are in fact being made.
The place where these management decisions are taken would be more important than the place
where such decisions are implemented. For the purpose of determination of POEM it is the
substance which would be conclusive rather than the form.
■ Guiding principles - Some of the guiding principles which may be taken into account for
determining the POEM are as follows –
1. The location where a company’s Board regularly meets and makes decisions may be the
company’s place of effective management provided, the Board –
a. retains and exercises its authority to govern the company; and
b. does, in substance, make the key management and commercial decisions necessary for the
conduct of the company’s business as a whole.
2. If a board has de facto delegated the authority to make the key management and commercial
decisions for the company to the senior management or any other person including a shareholder,
promoter, strategic or legal or financial advisor, etc., and does nothing more than routinely ratifying
the decisions that have been made, the company’s place of effective management will ordinarily be
the place where these senior managers or the other person make those decisions.
3. A company’s board may delegate some or all of its authority to one or more committees such as
an executive committee consisting of key members of senior management. In these situations, the
location where the members of the executive committee are based and where that committee
develops and formulates the key strategies and policies for mere formal approval by the full board
will often be considered to be the company’s place of effective management.
67 Place of effective management Para 27.1
† The provisions of General Anti-Avoidance Rule contained in Chapter XA may get triggered in such cases where the
above clarification is found to be used for abusive/aggressive tax planning – Circular No. 25/2017, dated October 23,
2017.

4. The location of a company’s head office will be a very important factor in the determination of
the company’s place of effective management because it often represents the place where key
company decisions are made.
5. The use of modern technology impacts the place of effective management in many ways. It is no
longer necessary for the persons taking decision to be physically present at a particular location.
Therefore, physical location of board meeting or executive committee meeting or meeting of senior
management may not be where the key decisions are in substance being made. In such cases the
place where the directors or the persons taking the decisions or majority of them usually reside may
also be a relevant factor.
6.Thedecisionsmadebyshareholderonmatterswhicharereservedforshareholderdecisionunder
thecompanylawsarenotrelevantfordeterminationofacompany’splaceofeffectivemanagement.
Such decisions may include sale of all or substantially all of the company’s assets, the dissolution,
liquidation or deregistration of the company, the modification of the rights attaching to various
classesofsharesortheissueofanewclassofsharesetc.Thesedecisionstypicallyaffecttheexistence
of the company itself or the rights of the shareholders as such, rather than the conduct of the
company’s business from a management or commercial perspective and are therefore, generally
not relevant for the determination of a company’s place of effective management.
7. Day to day routine operational decisions undertaken by junior and middle management shall not
be relevant for the purpose of determination of POEM.
8. The determination of POEM is to be based on all relevant facts related to the management and
control of the company, and is not to be determined on the basis of isolated facts that by itself do
not establish effective management, as illustrated by the following examples –
- ThefactthataforeigncompanyiscompletelyownedbyanIndiancompanywillnotbeconclusive
evidence that the conditions for establishing POEM in India have been satisfied.
- The fact that there exists a Permanent Establishment of a foreign entity in India would itself not
be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
- The fact that one or some of the directors of a foreign company reside in India will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
- The fact of, local management being situated in India in respect of activities carried out by a
foreign company in India will not, by itself, be conclusive evidence that the conditions for
establishing POEM have been satisfied.
- The existence in India of support functions that are preparatory and auxiliary in character
will not be conclusive evidence that the conditions for establishing POEM in India have been
satisfied.
27.1-4 PRIOR APPROVAL OF PRINCIPAL CIT/CIT REQUIRED - In case the Assessing Officer proposes to hold
a foreign company, on the basis of its POEM, as being resident in India then any such finding
shall be given by the Assessing Officer after seeking prior approval of the collegium of three
members consisting of the Principal CITs or CITs, as the case may be, to be constituted by the
Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted
shall provide an opportunity of being heard to the foreign company before issuing any directions
in the matter.
27.1-5 SPECIAL PROVISIONS PERTAINING TO FOREIGN COMPANY WHICH BECOMES RESIDENT IN INDIA ON THE BASIS
OF POEM [SEC. 115JH] - In a case where a foreign company is said to be resident in India on account
of its POEM being in India (and such foreign company has not been resident in India in any of the
preceding years), then a few special provisions are applicable for the computation of total income,
treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and
recovery,etc.Suchmodificationsaregiveninsection115JHreadwithNotification No. SO 3039(E),
dated June 22, 2018.
27-P1 X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in India. The
businessofthecompanyisfullycontrolledfromoutsideIndia.FindouttheresidentialstatusofXLtd.fortheassessment
year 2021-22.

SOLUTION : XLtd.isanIndiancompany.AnIndiancompanyisalwaysresidentinIndia.Thisruleisequallyapplicable
even if shareholders are foreign citizens as well as non-resident or even if business is controlled from outside India.
27-P2 Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 crore). It has 10 shareholders who
are Indian citizens and resident in India. The company has active business outside India and is controlled wholly from
outside India by a team of professionals. What is the residential status of Y Ltd. for the assessment year 2021-22.
SOLUTION : Y Ltd. is a foreign company. It is controlled wholly from outside India (POEM is outside India). It is,
therefore, non-resident in India for the assessment year 2021-22. Residential status of shareholders is irrelevant.
Likewise, the nationality of shareholders is not taken into consideration.
27-P3 Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian citizens and resident in India).
The company has no active business in Japan. Gross annual turnover of the company for the previous year
2020-21 is Rs. 48 crore mainly from operations conducted from Korea, Sri Lanka and India. The company is managed
by a team of professionals from India. Find out the residential status of Z Ltd. for the assessment year 2021-22.
SOLUTION : ZLtd.isaforeigncompany.GrossturnoverofthecompanyfortherelevantpreviousyearisRs.48crore.
A foreign company (whose turnover/gross receipts is not more than Rs. 50 crore) is treated as non-resident in India.
22-P4 B Ltd. is an Indian company. A Ltd. is a Mauritius company and it is 100 per cent subsidiary of B Ltd. The assets
of A Ltd. are situated in Mauritius. All employees of A Ltd. are also located in Mauritius. The average income wise
break-up of total income of A Ltd. for the current year and last 2 years is as follows –
- 32 per cent of income is from transaction where purchases are made from parties which are non-associated
enterprises and sold to associated enterprises;
- 34 per cent of income is from transaction where purchases are made from associated enterprises and sold to
associated enterprises;
- 27 per cent of income is from transaction where purchases are made from associated enterprises and sold to non-
associated enterprises; and
- 7 per cent of the income is by way of interest, royalty, dividend, capital gain and rent.
Find out the residential status of A Ltd. for the assessment year 2021-22 (turnover of A Ltd. is more than
Rs. 100 crore).
SOLUTION : Passive income of A Ltd. is 41% (i.e., 34% + 7%). Passive income of A Ltd. is not more than 50% of
its total income. Besides, A Ltd. satisfies the following condition –
a. less than 50 per cent of its total assets are situated in India;
b. less than 50 per cent of total number of employees are situated in India or are resident in India; and
c. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure.
ALtd.isengagedinactivebusinessoutsideIndia.POEMofALtd.isoutsideIndia.Consequently,ALtd.isnon-resident
in India.
27-P5 Make the following changes in Problem 27-P4 and determine the residential status of A
Ltd. –
1. A Ltd. has 90 employees. 87 employees manage accounts, store and warehouse in Mauritius. Managing
director, Chief Executive Officer and Sales Head are posted in Mumbai. Total payroll expenditure of 87 employees
is Rs. 3.3 crore. Annual payroll expenditure of managing director, Chief Executive Officer and Sales Head is Rs. 3.8
crore.
2. Tax is deducted under section 192 out of salary of Rs. 3.8 crore.
SOLUTION : Only 41% of total income of A Ltd. is passive in nature. Further, more than 50% of the employees are
also situated outside India. All the assets are situated outside India. However, the payroll expenditure in respect of
the managing director, Chief Executive Officer and Sales Head (being employees resident in India) exceeds 50% of
the total payroll expenditure. Therefore, A Co. is not engaged in active business outside India. The Assessing Officer
may conclude that POEM of A Ltd. is situated in India and, consequently, A Ltd. is resident in India. However, before
recording this finding the Assessing Officer will have to take prior approval of the collegium of three members
consisting of the Principal CITs or CITs, as the case may be, to be constituted by the Principal Chief Commissioner
of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to
A Ltd. before issuing any directions in the matter.
27-P6 In Problem 27-P4, assume that A Ltd. has 5 directors. These directors are Indian citizens and resident in India.
During the relevant previous year, 2 meetings of board of directors are held in India, 3 meetings are held in Mauritius
and 1 meeting is held in Maldives. Determine the residential status of A Ltd.
69 Place of effective management Para 27.1

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point manner – with the help of suitable illustrations, without resorting to paraphrasing of sections and
legal jargons.
This book will be helpful for students appearing in CA, CS, ICWA, M.Com., LL.B., and MBA examinations. It
will also be helpful for those appearing in the income-tax departmental examination.
The Present Publication is the 65th Edition, authored by Dr. Vinod K. Singhania & Dr. Kapil Singhania. This
book is amended as per the following:
u Finance Act, 2020
u Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020
The noteworthy features of this book are as follows:
u [Self-Learning/Practice Book] Features learn-yourself-technique enabling students to learn & apply
the Law faster
u [Treatment of Text is To-The-Point] The matter is arranged in paras and sub-paras with distinct
numbers to save time and energy. Also, debatable issues have been deliberated to their logical con-
clusion
u [Well-Thought-Out-Original-Problems] Each para starts with analytical discussions supported by
600+’ well-thought-out-original-problems’. A unique style of illustrating all complex provisions has
been adopted. Hints are also given wherever tax planning can be resorted to
u [Most Amended] Latest Circulars, Notifications, Amendments & Case Laws (up to January 31st, 2021)
are included in all discussions. All recent citations of Court Rulings, Circulars and Notifications have
been highlighted
u [Past Exam Questions with Answers] Question set for CA (Final) examination and answers from No-
vember 2010 to January 2021
u [Follows Six-Sigma Approach] to achieve the benchmark of ‘Zero-Error.’
Rs. 1795 | USD 65
AUTHOR : VINOD K. SINGHANIA,
KAPIL SINGHANIA
PUBLISHER : TAXMANN
DATE OF PUBLICATION : JULY 2021
EDITION : 65TH EDITION
ISBN NO : 9789390831760
NO. OF PAPERS : 1744
ORDER NOW
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