deemed receipt and accrual of income in india. learning objectives which are the income deemed to be...

DEEMED RECEIPT AND ACCRUAL OF INCOME IN INDIA

Learning objectives

which are the income deemed to be received in India the meaning of income accruing or arising in India which are the income deemed to accrue or arise in India.

The taxability of a certain item as income would depend upon the method of accounting followed by the assessee. This is because under the cash system of accounting an income would be taxable only when it is received by the assessee himself or on his behalf. But under the mercantile system it would be taxable once the assessee gets the legal right to claim the amount.

However, it has been specifically provided that in the case of income from salaries, the liability to tax arises immediately when the income is due to the assessee irrespective of the method of accounting followed.

Likewise, in the case of dividends, the income would be included in total income of the shareholder under section 8 in the year in which the final dividend is declared and, in the case of interim dividend, in the year in which they are made unconditionally available to the shareholders.

1. MEANING OF INCOME RECEIVED OR DEEMED TO BE RECEIVED.

All assessees are liable to tax in respect of the income received or deemed to be received by them in India during the previous year irrespective of -

(i) their residential status, and (ii) the place of its accrual.

Income is to be included in the total income of the assessee immediately on its actual or deemed receipt.

The receipt of income refers to only the first occasion when the recipient gets the money under his control.

Therefore, when once an amount is received as income, remittance or transmission of that amount from one place or person to another does not constitute receipt of income in the hands of the subsequent recipient or at the place of subsequent receipt.

Income deemed to be received

Under section 7, the following shall be deemed to be received by the assessee during the previous year irrespective of whether he had actually received the same or not –

(i) The annual accretion in the previous year to the balance to the credit of an employee participating in a recognised provident fund (RPF). Thus, the contribution of the employer in excess of 12% of salary or interest credited in excess of 9.5% p.a. Is deemed to be received by the assessee.

(ii) The taxable transferred balance from unrecognised to recognised provident fund (being the employer’s contribution and interest thereon).

(iii) The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to under section 80CCD.

2. MEANING OF INCOME ACCRUING AND ARISING

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment of the same.

For e.g. salary for work done in December will accrue throughout the month, day to day, but will become due on the salary bill being passed on 31st December or 1st January.

Similarly, on Government securities, interest payable on specified dates arise during the period of holding, day to day, but will become due for payment on the specified dates.

Example: Interest on Government securities is usually payable on specified dates, say on 1st January and 1st July. In all such cases, the interest would be said to accrue from 1st July to 31st December and on 1st January and 1st July, it will fall due for payment.

Contd/-

Continued

It must be noted that income which has been taxed on accrual basis cannot be assessed again on receipt basis, as it will amount to double taxation.

For example, when a loan to a director has already been treated as dividend under section 2(22)(e) and later dividend is declared, distributed and adjusted against the loan, the same cannot be treated as dividend income again.

With a view to removing difficulties and clarifying doubts in the taxation of income, Explanation 1 to Section 5 specifically provides that an item of income accruing or arising outside India shall not be deemed to be received in India merely because it is taken into account in a balance sheet prepared in India.

Further, Explanation 2 to Section 5 makes it clear that once an item of income is

included in the assessee’s total income and subjected to tax on the ground of its accrual/ deemed accrual or receipt, it cannot again be included in the person’s total income and subjected to tax either in the same or in a subsequent year on the ground of its receipt - whether actual or deemed.

3. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9]

Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India. The categories of income which are deemed to accrue or arise in India are:

(i) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly

(a) through or from any business connection in India, (b) through or from any property in India, (c) through or from any asset or source of income in India or (d) through the transfer of a capital asset situated in India.

Contd/…

Continued

(ii) Income, which falls under the head ‘Salaries’, if it is earned in India. Any income under the head ‘Salaries’ payable for rest period or leave period which is preceded and succeeded by services rendered in India, and forms part of the service contract of employment, shall be regarded as income earned in India.

(iii) Income from .Salaries. which is payable by the Government to a citizen of India for services rendered outside India (However, allowances and perquisites paid outside India by the Government is exempt).

(iv) Dividend paid by a Indian company outside India.

(v) Interest (discussed in para 5 below)

(vi) Royalty (discussed in para 6 below)

(vii) Fees for technical services (discussed in para 7 below)

(1)(a) Income from business connection

The expression ‘business connection’ (BC) has been explained in Explanation 2 to section 9(1)(i).

(i) .BC shall include any business activity carried out through a person acting on behalf of the non-resident.

(ii) He must have an authority which is habitually exercised to conclude

contracts on behalf of the non-resident. However, if his activities are limited to the purchase of goods or merchandise for the non-resident, this provision will not apply.

(iii) Where he has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, a BC is established.

Contd/…

Continued

(iv) BC is also established where he habitually secures orders in India, mainly or wholly for the non-resident.

Further, there may be situations when other non-residents control the above-mentioned non-resident.

Secondly, this non-resident may also control other non-residents.

Thirdly, all other non-residents may be subject to the same common control, as that of the non-resident.

In all the three situations, BC is established, where a person habitually

secures orders in India, mainly or wholly for such non-residents. Contd/-

Continued

Exception:

BC, however, shall not be held to be established in cases where the non-resident carries on business through a broker, general commission agent or any other agent of an independent status, if such a person is acting in the ordinary course of his business.

A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly or wholly for the non-resident. He will however, not be considered to have an independent status in the three situations explained in (iv) above, where he is employed by such a non-resident.

Where a business is carried on in India through a person referred to in (ii), (iii) or (iv) mentioned above, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India.

(1) (b) &(c) Income from property, asset or source of income

Any income which arises from any property (movable, immovable, tangible and intangible property) would be deemed to accrue or arise in India eg. hire charges or rent paid outside India for the use of the machinery or buildings situated in India, deposits with an Indian company for which interest is received outside India etc.

(1)(d) Income from the transfer of a capital asset

Capital gains arising from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of the fact whether

(i) the capital asset is movable or immovable, tangible or intangible;

(ii) the place of registration of the document of transfer etc., is in India or outside; and

(iii) the place of payment of the consideration for the transfer is within India or outside.

(2) & (3) Income from salaries

Under section 9(1)(ii) income which falls under the head .salaries., would be deemed to accrue or arise in India, if it is in respect of services rendered in India.

Exception under section 9(2):

Pension payable outside India by the Government to its officials and judges who permanently reside outside India shall not be deemed to accrue or arise in India. It may however, be noted here that the salary of an employee in the United Nations Organisation (UNO) or in its constituent bodies is exempt under United Nations (Privilege and Immunity) Act.

(4) Income from dividends

All dividends paid by an Indian company must be deemed to accrue or arise in India. Under section 10(34), income from dividends referred to in section 115-O are exempt from tax in the hands of the shareholder. It may be noted that dividend distribution tax under section 115-O does not apply to deemed dividend under section 2(22)(e), which is chargeable in the previous year in which such dividend is distributed or paid.

(5) Interest

Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by -

(i) the Central Government or any State Government.

(ii) a person resident in India (except where it is payable in respect of any money borrowed and used for the purposes of a business or profession carried on by him outside India or for the purposes of making or earning any income from any source outside India)

(iii) a non-resident when it is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on in India by him. Interest on money borrowed by the non-resident for any purpose other than a business or profession, will not be deemed to accrue or arise in India. Thus, if a non-resident .A. borrows money from a non-resident .B. and invests the same in shares of an Indian company, interest payable by .A. to .B. will not be deemed to accrue or arise in India.

(6) Royalty

Royalty will be will be deemed to accrue or arise in India when it is payable by -

(i) the Government; or

(ii) a person who is a resident in India except in cases where it is payable for the transfer of any right or the use of any property or information or for the utilization of services for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(iii) a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on in India or for the purposes of making or earning any income from any source in India.

Contd/-

Continued

Lumpsum royalty payments made by a resident for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with computer hardware under any scheme approved by the Government under the Policy on Computer Software Export, Software Development and Training, 1986 shall not be deemed to accrue or arise in India.

Computer software. means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customised electronic data.

The term .royalty. means consideration (including any lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head .Capital gains.) for:

Contd/-

Continued

(i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

Contd/-

Continued

(vi) the transfer of all or any rights (including the granting of licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films;

(vii) the rendering of any service in connection with the activities listed above.

The definition of .royalty. for this purpose is wide enough to cover both industrial royalties as well as copyright royalties. The deduction specially excludes income which should be chargeable to tax under the head .capital gains..

(7) Fees for technical services

Any fees for technical services will be deemed to accrue or arise in India if they are payable by -

(i) the Government.

(ii) a person who is resident in India, except in cases where the fees are payable in respect of technical services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India.

(iii) a person who is a non-resident, only where the fees are payable in respect of services utilised in a business or profession carried on by the non-resident in India or where such services are utilised for the purpose of making or earning any income from any source in India.

Contd/-

Continued

Fees for technical services means any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including providing the services of technical or other personnel). However, it does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’.

Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee for technical services to be taxed irrespective of territorial nexus [Explanation to section 9]

Contd/-

Continued

(i) The Supreme Court, in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax (2007) 288 ITR 408, observed that in order to tax the income of a non-resident assessee under section 9(1)(vii), relating to fee for technical services, the income sought to be taxed must have sufficient territorial nexus with India i.e. the fees paid for technical services provided by a non-resident cannot be taxed in India unless the services were utilized in India and rendered in India. This observation is not in consonance with the source rule spelt out in the law and the stand taken by India in the bilateral treaties with different countries.

(ii) The Finance Act, 2007 has clarified that such income by way of interest, royalty or fee for technical services which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.

Self-examination questions

1. If Anirudh has stayed in India in the P.Y. 2008-09 for 181 days, and he is non-resident in 9 out of 10 years immediately preceding the current previous year and he has stayed in India for 365 days in all in the 4 years immediately preceding the current previous year and 420 days in all in the 7 years immediately preceding the current previous year , his residential status for the A.Y.2009-10 would be –

a) Resident and ordinarily resident

b) Resident but not ordinarily resident c) Non-resident


2. Raman was employed in Hindustan Lever Ltd. He received a salary at Rs.40,000 p.m. from 1.4.2008 to 27.9.2008. He resigned and left for Dubai for the first time on 1.10.2008 and got salary of rupee equivalent of Rs.80,000 p.m. from 1.10.2008 to 31.3.2009. His salary for October to December 2008 was credited in his Dubai bank account and the salary for January to March 2009 was credited in his Bombay account directly. He is liable to tax in respect of -

a) Income received in India from Hindustan Lever Ltd;

b) Income received in India and in Dubai;

c) Income received in India from Hindustan Lever Ltd. and income directly credited in India;


3. A company, other than an Indian company, would be a resident in India for the P.Y.2008-09 if, during that year, its control and management is situated -

a) wholly in India

b) partly in India

c) wholly or partly in India.


4. Income accruing in London and received there is taxable in India in the case of -

a) resident and ordinarily resident only

b) both resident and ordinarily resident and resident but not ordinarily resident

c) both resident and non-resident


5. When is an individual said to be .Resident and ordinarily resident. under the Income-tax Act, 1961?


6. How is royalty defined under section 9 of the Income-tax Act?


7. Write short notes on -

a) Business connection

b) Income deemed to accrue or arise in India.


8. Discuss the provisions relating to determination of residential status of individuals.


9. When are the following income deemed to accrue or arise in India?

a) Interest

b) Fees for technical services.


10. Araav, a citizen of India left India on 17-10-1992 for employment abroad. Thereafter, during previous year 2006-07, he visits India for the first time and stays in India for 156 days during that previous year. Again during 2007-08, he visited India for 183 days. In the previous year 2008-09 he came to India on 10.4.2008 and left on 28.11.2008. Determine his residential status for assessment year 2009-10.


11. During the previous year 2008-09, Abhinav had the following income Rs. (a) Salary income received in India for services rendered in Nepal 15,000 (b) Income from profession in India, but received in France. 10,000 (c) Property income in Belgium (out of which Rs.6,000 was remitted to India). 9,000 (d) Profits earned from business in Hyderabad. 8,000 (e) Profits from a business carried on at Nepal but controlled from India. 25,000 (f) Past untaxed profits remitted to India during the previous year 2008-09. 75,000

Compute his income for assessment year 2009-10 if he is (i) resident and ordinarily resident, (ii) Not ordinarily resident, and (iii) Non-resident in India.


12. Mrs. Geetha Srinivasan is a citizen of India residing in London for the past 12 years. During the previous year 2008-09, the particulars of her income are as follows:

(i) She owns a house (residential) in Mumbai which she has rented out. Her rental income is deposited in her bank account in Mumbai.

(ii) She also owns some agricultural land near Pune from which she earns agricultural income. This is remitted to her in London every year.

(iii) She works in a company in London and earns salary of £500 per month.

(iv) She owns shares in various Indian companies and receives dividend every year. These cheques are deposited in her bank account in Mumbai.

She also owns some fixed deposits in her bank in London, the interest from which is credited to her account in the same bank. This income is however remitted by her to her Mumbai bank account from time to time. During the financial year in question she has remitted Rs.22,300.

She visits India for the first time in February 2009 after she went abroad. She is under the impression that since she is an Indian citizen, she is liable to income tax in India. She seeks your advice in this regard. You are required to guide her regarding the taxability of her income under the provisions of the Income-tax Act, 1961.


13. Discuss the correctness or otherwise of the statement – “Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fees for technical services is to be taxed irrespective of territorial nexus”.

Answers

1. b; 2. b; 3. a; 4. a.

END

deemed receipt and accrual of income in india. learning objectives which are the income deemed to be...

Documents