SCOPE OF TOTAL INCOME AND RESIDENTIAL STATUS

1.    RESIDENTIAL STATUS :

Tax liability of an assessee varies with his residence or residential status. Hence, the first inquiry should be about residence of the assessee. Tests of residence as specified in Sec. 6 are based on his territorial connection in previous year and are different in case of different assessable units, e.g., individual, Hindu undivided family, firm and company.It is important to note that “residential status” is absolutely different from the term “citizenship”. A person may be Indian citizen but may not be resident in India. Similary, a person may be a foreign citizen, but may be resident in India.The assessee are divided into following three categories :

(i)    Resident
(ii)    Not Ordinary Resident
(iii)    Non Resident

The residential status of a person is required to be determined for each assessment year  to determine the scope of total income. Residential status will be determined on the basis of certain conditions for each person separately.

2.    INDIVIDUAL
    CONDITION NO. 1
Resident : An individual is said to be resident in India in any previous year if he fulfills any one of the following two basic conditions :
(1)    He is in India in that year for a period 182 days or more :
(2)    He is in India for a period 60 days or more during the previous year and 365 days or more during the 4 years preceding that previous year.
Exception :
Under the following circumstances the period of 60 days as mentioned above will be extended to 182 days.
accordance with sec. 6 of the Income-Tax Act, the income chargeable to tax as part of total income shall be identified as follows :—

 S.       Particulars     Resident &    Resident    Non-   ordinarily     but not    Resident  resident  ordinarily    resident

(i)    Income received or deemed to be    Taxable    Taxable    Taxable  received in India.
(ii)    Income accruing or arising or    Taxable    Taxable    Taxable deemed to accrue or arise in India. 
(iii)    Income accruing or arising outside
    India from—
    a)    Business controlled in India     Taxable    Taxable    Not Taxable
        or Profession set up in India.                
    b)    Any other source    Taxable    Not Taxable    Not Taxable
(iv)    Income which accrue or arises    Not Taxable    Not Taxable    Not Taxable
    outside India and received outside
    India during the year preceding the
    previous year and remitted to India
    during the previous year
7.    INCOME DEEMED TO BE RECEIVED (Sec. 7) :
    The following income shall be deemed to be received in the previous year :
(i)    Employer’s contribution to recognized provident fund in excess of 12% of salary.
(ii)    Interest credited to the recognized provided fund balance at the credit of the assessee in excess of 9.5%.
(iii)    The taxable transferred balance from unrecognized to recognized provident fund.
(vi)    Contribution made by the Central Govt. in the previous year, to the account of employee under pension scheme referred to in section 80CCD (w.e.f. A.Y. 2005-06).
(v)    Tax deducted at source.
(vi)    Investment, expenditure, cash credit, cash, gold etc. detected during the previous year which are unexplained [Sec. 68, 69, 69A, 69B and 69C]
8.    DIVIDEND INCOME (Sec. 8) :
    Dividend is includible in the total income of the assessee on the following basis :
    S. No.    Type of dividend    Year of chargeability in the hands of the assessee
    (i)    Final dividend    Previous year in which the dividend is declared by the company
    (ii)    Interim dividend    Previous year in which the dividend is unconditionally made available by the company.
    (iii)    Deemed dividend    Previous year in which such dividend is distributed or
        u/s 2(22)    paid.
Important :
The taxability of dividend income declared by domestic companies are exempted in the hands of shareholders u/s 10(34). According to Sec. 115-O, every domestic company is liable to pay dividend distribution tax of 12.5%. It is important to mention that Sec. 115-O does not apply to a foreign company and deemed dividend covered by Sec.2(22)(e). Therefore, a shareholder continues to be liable to tax in respect of such dividends.
9.    INCOME DEEMED TO ACCRUE OR ARISE IN INDIA (Sec. 9) :
    The following incomes shall be deemed to accrue or arise in India :
(i)    Income accruing or arising through or from any business connection in India. If all the operations of a
business are not carried out in India, only a reasonable part of the Income from such business shall be deemed to accrue or arise in India.
(ii)    Income through or from any property, any asset or source of income in India.
(iii)    Income through the transfer of a capital asset situated in India.
(iv)    Income chargeable under the head “Salaries” earned for services rendered in India. Income which falls under the head “Salaries” shall be regarded as income earned in India if the income is payable for :
a.    Service rendered in India; and
b.    the rest period or leave period which is preceded and succeeded by service rendered in India and forms part of the service contract of employment.
    This provision should be read along with sec. 10(6) which grants exemption in respect of salary earned by Foreign Nationals under certain circumstances and subject to certain conditions.
(v)    Salary paid by the Government to a citizen of India for service rendered outside India. It may be noted that allowances and perquisites paid outside India by the Government is exempt by virtue of sec. 10(7).
(vi)    Dividend paid by an Indian company outside India.
(vii)    Interest, Royalty and fees for technical services as indicated below :


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