Not Ordinary Resident - How to determine the residential status of a person for the purpose of Income Tax "

Section 6 of the Income Tax Act, provides the provisions for determination of residential status of a person. Clause (a) Sub section (6) of section (6) is read as under:

""(6)A person is said to be ""not ordinarily resident"" in India in any previous year if such person is—

(a)an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or""

This clause was substituted by the Finance Act, 2003 with effect from 1-4-2004. Prior to its substitution it was read as under:

""(6) A person is said to be ""not ordinarily resident"" in India in any previous year if such person is—

a) an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to,  seven hundred and thirty days or more ; or""

In the explanatory memorandum to the Finance Act, 2004, it was explained that this amendment is clarificatory in nature.

In the present case, (Reported in 2008 -TMI - 3594 - Supreme Court)  since  the assessee was not resident in India in 9 out of 10 previous years preceding that year (which is finding of fact), he claimed the status of ""not ordinarily resident""  for the relevant year 1982-83.

The Assessing Officer refused to grant the assessee the status of ""not ordinarily resident"" for the relevant year, on the ground that the assessee was a non-resident in India for only 3 years during the last 10 years and during the past 7 years he had stayed in India for more than 730 days. 

The Assessing Officer found that the assessee had resided in India for the period which is shown below, in the last nine previous years:

 

Sr. No.	Financial year	Stay in India
(1)	1980-81	91
(2)	1979-80	62
(3)	1978-79	272
(4)	1977-78	50
(5)	1976-77	197
(6)	1975-76	365
(7)	1974-75	365
(8)	1973-74	365
(9)	1972-73	365

Interestingly, the Commissioner (Appeals), Tribunal (ITAT) and High Court did not give any relief to the assessee and answered in favor of revenue.

Dissatisfied with the decision, the appellate (assessee) has preferred an appeal before the Apex Court. The apex court has final granted due relief to the assessee by interpreting the scope of Clause (a) of Sub Section (6) of Section 6.

After analyzing the issue in detail, the Apex court has observed that:

""While dealing with a taxing provision, the principle of ""Strict Interpretation"" should be applied. The Court shall not interpret the statutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which are not attracted. It is also trite that while two interpretations are possible, the Court ordinarily would interpret the provisions in favour of a tax-payer and against the Revenue.""

Finally the Honorable Supreme Court decided that:

In these circumstances, a person will become an ordinarily resident only if

(a) he has been residing in nine out of ten preceding years; and

(b) he has been in India for at least 730 days in the previous seven years.

Accordingly, this appeal is accepted. The order passed by the High Court and the Authorities below are set aside.  It is held that the High Court in the impugned judgment has erred in its interpretation of Section 6(6) of the Act and the view taken by Patna High Court, Bombay High Court and Travancore-Cochin High Court has laid down the correct law.  The two questions of law referred to above are answered in favour of the assessee and against the revenue.  No costs. 

(For full text of judgment - visit 2008 -TMI - 3594 - Supreme Court)

Residential status rules clarified: two independent presence tests define not ordinarily resident, construed in taxpayer's favour. Determination of residential status under section 6(6) centres on two independent factual tests for an individual to be not ordinarily resident: being a non-resident in nine out of the ten previous years preceding the relevant year, and the alternative seven-year presence threshold requiring limited total days in India. The provision must be strictly construed in favour of the taxpayer, treating the nine-out-of-ten test and the seven-year presence test as distinct enquiries and avoiding interpretations that add fiscal burden.