Scope of Total Income Under Section 5 – A General Perspective

PROJECT REPORT ON-

SCOPE OF TOTAL INCOME UNDER SECTION 5 – A GENERAL

PERSPECTIVE
PROJECT SUBMITTED TO-

MS. VARENDYAM J. TIWARI

(FACULTY OF PRINCIPLES OF TAXATION LAW)

PROJECT SUBMITTED BY-

ARINDAM NERAL
ROLL NO – 27
SEMESTER – V
SECTION – “C”

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR

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 Scope of Total Income Under Section 5 – A General Perspective

CERTIFICATE OF DECLARATION

I hereby declare that the project work entitled “Scope of Total Income Under Section 5 – A
General Perspective” submitted to HNLU, Raipur, is record of an original work done by me
under the able guidance of Ms. Varendyam J. Tiwari, Faculty Member, HNLU, Raipur.

Arindam Neral
Roll No. - 27
Semester – V
Section – “C”
Batch - XIV
Date- 16th August, 2016

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 Scope of Total Income Under Section 5 – A General Perspective

ACKNOWLEDGEMENTS

This is not just a customary acknowledgement of help that I received but a sincere expression of
gratitude to all those who have helped me to complete this project and made it seem apparently
more readable than otherwise it would have been.

I am in debt to my faculty advisor MS. VARENDYAM J. TIWARI for giving such an interesting and
wonderful topic “SCOPE OF TOTAL INCOME UNDER SECTION 5 – A GENERAL PERSPECTIVE” and
who has been extremely kind to make space for all my enthusiasm & endeavours and making it
seem easy by clearly explaining its various aspects.

I am also grateful to all my friends and seniors who have given their valuable suggestions
pertaining to the topic and have been a constant source of help and support.

Thanking everyone.

ARINDAM NERAL

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 Scope of Total Income Under Section 5 – A General Perspective

CONTENTS

CERTIFICATE OF DECLARATION.......................................................................................2
ACKNOWLEDGEMENTS .......................................................................................................3
INTRODUCTION .....................................................................................................................5
RESEARCH METHODOLOGY ............................................................................................... 6
OBJECTIVES OF THE STUDY ............................................................................................... 6
SCOPE OF TOTAL INCOME UNDER SECTION 5............................................................... 7
1) THE RESIDENTIAL STATUS OF THE ASSESSEE........................................................ 7
2) THE PLACE OF ACCRUAL OR RECEIPT OF INCOME, WHETHER ACTUAL OR
DEEMED .................................................................................................................................... 9
3) THE POINT OF TIME AT WHICH THE INCOME HAD ACCRUED TO OR WAS
RECEIVED BY OR ON BEHALF OF THE ASSESSEE ......................................................... 9
SCOPE OF TOTAL INCOME ON THE BASIS OF RESIDENTIAL STATUS ...................11
1. Ordinarily Resident Assessee ............................................................................................ 11
2. Non Ordinarily Resident In India ...................................................................................... 12
3. Non-Resident ..................................................................................................................... 12
NON RESIDENTS UNDER INCOME TAX ACT .................................................................12
1. Individual ........................................................................................................................... 12
2. Partnership firm ................................................................................................................. 13
3. Company ............................................................................................................................ 13
CONCLUSION ........................................................................................................................ 14
BIBLIOGRAPHY ....................................................................................................................15
WEB REFERENCES ...............................................................................................................15

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 Scope of Total Income Under Section 5 – A General Perspective

INTRODUCTION

A country has the right to tax all income of its residents. The same is the case with India where the
government has the right to tax all income of the citizen of India. But, a country has the right to
tax only such income of the non-residents which in some way or the other is connected to that
country and not all income. Country provides welfare, security, basic amenities, infrastructure and
other benefits to the residents and in return expects Residents to pay tax. Whereas, a country
provides opportunity/source to earn income and in return expects the non-residents to pay tax on
income earned from that country. Only after determining the residential status of a person one can
decide what income is taxable in that country.

Total Income refers to the sum of all money received by an individual or organization, including
income from employment or providing services, revenue from sales, payments from pension plans,
income from dividends, or other sources. Total income may be calculated for purposes of assessing
taxes, evaluating the net worth of a company, or determining an individual or organization's ability
to make payments on a debt.

The concept and scope of Total Income and the residential status of an individual is enshrined
under Section 5 to 9 of the Income Tax Act, 1961 which will be dealt comprehensively further in
the project report.

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 Scope of Total Income Under Section 5 – A General Perspective

RESEARCH METHODOLOGY

The paper is descriptive in nature and doctrinal in approach. It is largely based on secondary and
electronic sources. The researcher has mainly resorted to several online articles for the completion
of the project. However the documentary material in the form of books and articles in the library
has also been referred to for the subject matter at hand. The mode of citation used in the project is
Bluebook (19th Ed.) Citation Format.

OBJECTIVES OF THE STUDY

 The general objective of this project report is to discuss about the scope of Total Income
under section 5 of the Income Tax Act.
 To understand the difference in collection of taxes from residents and non-residents.
 To discuss and understand the concept of residential status.
 To discuss about who are the non-residents of a country.

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 Scope of Total Income Under Section 5 – A General Perspective

SCOPE OF TOTAL INCOME UNDER SECTION 5

Section 5 provides the scope of total income in terms of the residential status of the
assessee because the incidence of tax on any person depends upon his residential status.1 The scope
of total income of an assessee depends upon the following three important considerations:

1) THE RESIDENTIAL STATUS OF THE ASSESSEE

An individual is resident in India if he satisfies any one of the following two conditions:

i. He is in India for 182 days or more in the relevant previous year or

ii. He is in India for 60 days or more during the relevant previous year and for 365 days or
more during 4 years immediately preceding the previous year.

If he does not satisfy any one of the conditions above, he shall be non-resident.

Condition (ii) above is not applicable in following cases (means in following cases a person shall
be resident of India only when he is in India for 182 days or more in the previous year):

a) If Indian Citizen leaves India during the previous year for employment outside India or as
a member of crew of an Indian Ship.
b) If Indian citizen or person of Indian origin visits India during previous year.2

Other points:
• Residential status is determined for every year separately
• India includes territorial waters of India.
• Employment includes self-employment
• In computing the period of 180 days, the day of entry into India and the day of exit from India
shall be included.
• Person of Indian origin is a person who himself or any of his parents or any of his grandparents
was born in undivided India before 15th August 1947.

1
Taxmann, Income Tax Act, 60th Ed., Pg. 59
2
http://www.incometaxindia.gov.in/acts/income-tax%20act,%201961/2016/1018.htm, Retrieved on 13th August
2106.

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 Scope of Total Income Under Section 5 – A General Perspective

• After determining the residential status of individual/HUF, these persons are further checked
whether they are ordinarily resident or not ordinarily resident.

Resident and ordinarily resident (ROR)

An individual who is resident in India shall be resident and ordinarily resident (ROR) in India if
he satisfies both the following conditions:
i. He has been resident in India for at least 2 out of 10 previous years immediately preceding
the relevant previous year.
ii. He has been in India for 730 days or more during 7 previous years immediately preceding
the relevant previous year.
If he does not satisfy any or both of the above conditions, he shall be resident but not ordinarily
resident (RNOR) in India.

Residential Status of HUF – Sec 6(2)

A HUF is said to be resident in India when during that year control and management is situated
wholly or partly in India. In other words it will be non-resident in India if no part of the control
and management of affairs is situated in India.
Control and management lies at the place where decision regarding the affairs of the HUF are
taken.
A resident HUF is said to be resident and ordinarily resident in India if the karta of the HUF
satisfies both the following conditions:
i. He has been resident in India for at least 2 out of 10 previous years immediately preceding
the relevant previous year.
ii. He has been in India for 730 days or more during 7 previous years immediately preceding
the relevant previous year.
If the Karta of HUF does not satisfy any or both of the above conditions, then HUF shall be resident
but not ordinarily resident in India.

Residential Status of Firms, AOP, BOI etc.– Sec 6(2), 6(4)

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 Scope of Total Income Under Section 5 – A General Perspective

A Firm, AOP, BOI etc is said to be resident in India when during that year control and management
is situated wholly or partly in India. In other words it will be non-resident in India if no part of the
control and management of affairs is situated in India.
Control and management lies at the place where decision regarding the affairs of the firms etc are
taken.

Residential Status of Companies – Sec 6(3)

1. Indian Company is always resident in India.
2. Foreign Company is resident in India if control and management of its affairs is situated
wholly in India during relevant previous year i.e. if all the board meetings of the foreign
company is held in India, then it shall be resident, otherwise non-resident.3

2) THE PLACE OF ACCRUAL OR RECEIPT OF INCOME, WHETHER ACTUAL

OR DEEMED

Section 7 lays down Income received or deemed to be received in India.

Income received in India: Any income which is received in India is liable to tax in India,
whether the person receiving income is resident or non- resident. ‘Received in India’ means
first receipt.
Income deemed to be received in India: Following incomes shall be deemed to be
received in India even in the absence of actual receipt:
i. Contribution by employer to recognized provident fund in excess of 12% of salary
of employee
ii. Interest credited to RPF in excess of 9.5%
iii. Transferred balance from unrecognized PF to RPF
iv. Contribution by Government/Employer to notified pension scheme

3) THE POINT OF TIME AT WHICH THE INCOME HAD ACCRUED TO OR

WAS RECEIVED BY OR ON BEHALF OF THE ASSESSEE
Following income shall be deemed to accrue or arise in India:

3
http://taxguru.in/income-tax/residential-status-scope-total-income.html, Retrieved on 13th August 2016.

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 Scope of Total Income Under Section 5 – A General Perspective

i. Income from any property, asset or source of income in India

ii. Income from the transfer of any capital asset situated in India
iii. Any income from salary if it is payable for services rendered in India
iv. Salary (not allowances) payable by the government of India to an Indian citizen for services
rendered outside India
v. Interest payable by:
a) Government or
b) Resident in India if money is used by the borrower for the purpose of business or profession
or earning any income from any source in India or
c) Non-resident in India if money is used by the borrower for the purpose of business or
profession in India

vi. Royalty payable by

a) Government or
b) Resident in India if services are utilized for the purpose of business or profession or earning
any income from any source in India or
c) Non-resident in India if services are utilized for the purpose of business or profession or
earning any income from any source in India

vii. Fees for technical services payable by

a) Government or
b) Resident in India it services are utilized for the purpose of business or profession or earning
any income from any source in India or
c) Non-resident in India it services are utilized for the purpose of business or profession or
earning any income from any source in India

viii. Income from a business connection in India

Any income which arises, directly or indirectly, from any activity or a business connection in India
is deemed to be earned in India. If all business activities are not carried out in India, then only such
part of income, as is reasonably attributable to the operations carried out in India, is taxable

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 Scope of Total Income Under Section 5 – A General Perspective

Examples of business connection includes

a) branch office in India,

b) agent of non-resident entering into contracts,
c) Subsidiary in India
d) maintaining stocks etc

However in case of non-resident, following shall not be treated as business connection in India:

i. Purchase of goods in India for purpose of exports.

ii. Collection of news and views for transmission outside India by non-resident who is
engaged in the business of running news agency or of publishing newspapers, magazines
or journals.
iii. Shooting of films in India if
a) In case of individual – he is not a citizen of India
b) In case of Firm – none of the partner is citizen or resident of India
c) In case of company – none of the shareholder is citizen or resident of India4

SCOPE OF TOTAL INCOME ON THE BASIS OF RESIDENTIAL STATUS

The ambit of total income of the three classes of assessees would be as

follows:

1. Ordinarily Resident Assessee

Section 5(1) of the Act the total income of a resident and ordinarily resident assessee would
consist of:
i. Income received or deemed to be received in India during the accounting year by or on
behalf of such person;
ii. Income which accrues or arises or is deemed to accrue or arise to him in India during
the accounting year;
iii. Income which accrues or arises to him outside India during the accounting year.5

4
https://www.taxmanagementindia.com/visitor/case_laws_for_sections.asp?Prov=005, Retrieved on 14 th August
2016.
5
Bharat’s, Income Tax Act, 25th Ed, 2016, Pg. 125

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 Scope of Total Income Under Section 5 – A General Perspective

2. Non Ordinarily Resident In India

Proviso to Sub section (1) of section 5 the total income in case of resident but not ordinarily
resident in India
i. Income received or deemed to be received in India during the accounting year by or on
behalf of such person;
ii. Income which accrues or arises or is deemed to accrue or arise to him in India during the
accounting year;
iii. Income which accrues or arises to him outside India during the previous year if it is
derived from a business controlled in or a profession set up in India.

3. Non-Resident
Section 5(2) provides that the total income of a non-resident would comprise of:

(i) Income received or deemed to be received in India in the accounting year by or on behalf of
such person;
(ii) Income which accrues or arises or is deemed to accrue or arise to him in India during the
previous year.

It is to be noted that all assessees, whether resident or not, are chargeable to tax in respect of
their income accrued, arisen, received or deemed to accrue, arise or to be received in India
whereas residents alone are chargeable to tax in respect of income which accrues or arises
outside India.6

NON RESIDENTS UNDER INCOME TAX ACT

Section 2(30) defines non-resident as a person who is not a resident. Section 6 lays down the test
of residency for different taxpayers as under: -

1. Individual

An individual is said to be non-resident in India if he is not a resident in India. An individual shall

be deemed to be resident in India if he satisfies any of the following conditions:

6
http://www.taxdose.com/scope-of-total-income-income-tax/, Retrieved on 14th August 2016.

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 Scope of Total Income Under Section 5 – A General Perspective

i. If he is in India for a period of 182 days or more during the previous year; or
ii. If 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.7

Condition no. 2 is not taken into consideration in cases given below:

a) If an Indian citizen leaves India during the previous year for the purpose of employment
outside India;
b) If an Indian citizen leaves India during the previous year as a member of the crew of an
Indian ship; or
c) If an Indian citizen or a person of Indian origin comes on a visit to India during the previous
year.

2. Partnership firm

A partnership firm is treated as non-resident in India if control and management of its affairs are
situated wholly outside India.8

3. Company

An Indian company is always resident in India. A foreign company is treated as resident if, during
the previous year, control and management of its affairs is situated wholly in India. In other words,
a foreign company is treated as non-resident if control and management of its affairs is
situated wholly or partly outside India.

With effect from Assessment Year 2016-17, a company is said to be resident in India in any
previous year, if:

i. it is an Indian company; or
ii. its place of effective management, at any time in that year, is in India.

7
http://www.taxlawsonline.com/news/DTC/chap2/dtc003.asp, Retrieved on 14 th August 2016.
8
Chaturvedi & Pithalia, Income Tax Law, 2004 Ed., Pg. 291

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 Scope of Total Income Under Section 5 – A General Perspective

CONCLUSION

As a country provides welfare, security, basic amenities, infrastructure and other benefits to the
residents and in return expects Residents to pay tax. Whereas, a country provides
opportunity/source to earn income and in return expects the non-residents to pay tax on income
earned from that country. Therefore, a country has the right to tax all income of its residents. The
same is the case with India where the government has the right to tax all income of the citizen of
India. But, a country has the right to tax only such income of the non-residents which in some way
or the other is connected to that country and not all income.

It can be concluded that Section 5 provides the scope of total income which depends upon the
following three important considerations: (i) the residential status of the assessee (ii) the place of
accrual or receipt of income, whether actual or deemed (iii) the point of time at which the income
had accrued to or was received by or on behalf of the assessee.

Further, residential status play a very important role as only after determining the residential status
of a person one can decide what income is taxable in that country. Residential status consists of
three classes: (i) Ordinarily Resident Assessee (ii) Non-Ordinarily Resident Assessee (iii) Non-
Resident. Hence, the taxable income of the individuals of a country differ from their residential
status.

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 Scope of Total Income Under Section 5 – A General Perspective

BIBLIOGRAPHY

1. Taxmann, Income Tax Act, 60th Edition

2. Bharat’s, Income Tax Act, 25th Edition
3. Chaturvedi & Pithalia, Income Tax Law, 2004

WEB REFERENCES
1. http://taxguru.in/income.tax/residential.status.scope.total.income.html
2. http://www.incometaxindia.gov.in/acts/incometax%20act,%201961/2016/102120000000058
018.html
3. https://www.taxmanagementindia.com/visitor/case_laws_for_sections.asp?Prov=005
4. http://www.taxlawsonline.com/news/DTC/chap2/dtc003.asp
5. http://www.taxdose.com/scope-of-total-income-income-tax/
6. https://www.taxmanagementindia.com/visitor/case_laws_for_sections.asp?Prov=005

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