Report No. 12
21. Residence.-
At present, there is no provision which determines the residence of an artificial juridical person. A new sub-clause1 has therefore been introduced in the section relating to 'Residence' providing that persons other than those for which a specific provision has been made would be resident in India, unless the control and management of their affairs is situate wholly outside India.
1. See clauses 6(4), App I.
22. The present Act (section 4) speaks of three categories of persons:
(i) Persons who are resident in India;
(ii) Persons who are not ordinarily resident in India; and
(iii) Persons who are not resident in India.
So far as the second category is concerned, certain incomes mentioned in section 4 accruing outside India are not to be included in their total incomes. This category is also of importance for the purpose of certain transactions mentioned in sections 42(2) and 44D but is of no importance for any other purpose. The Taxation Enquiry Commission1 considered the question whether the category of "not ordinarily resident persons" should be continued for the purpose of assessment, and expressed the view that there was no justification for continuing the exemptions given to this category of cases any longer. We are in entire agreement with the view expressed by the Taxation Enquiry Commission.
Our primary recommendation is, therefore, that this category should be abolished. If, however, the Government wishes to continue the exemptions, we would prefer to put in Chapter III the items which are to be excluded from the total income in the case of persons not ordinarily resident.2 We would also mention the other liabilities of persons not ordinarily resident at the appropriate place. We have not, therefore, referred to persons 'not ordinarily resident' in the section "Scope of total income". We would like the basis of charge to be determined only with reference to one question, namely, whether the person is resident in India or not resident in India.
1. Vide TEC Report, 1953-54, Vol II, Ch. II, para. 11, pp. 28-29.
2. Vide Clause 10(4)(iv), App I.
The definition of "ordinary residence" in section 4B is couched in a negative form, with the result that the section is ambiguous in its import. The view taken by the Madras and Travancore-Cochin High Courts1 is that residence in India for less than nine years out of the preceding ten years is sufficient to make the assessees "not ordinarily resident", whereas the view taken by the Bombay High Court2 is that in order to claim the status of "not ordinarily resident" the requisite condition is that the assessee should be non-resident in India in nine out of the ten years immediately preceding the relevant accounting year. Under the Madras view non-residence in one of the said nine years would make the assessee "not ordinarily resident", even if he has been resident in the remaining eight years.
Under the Bombay view non-residence in each of the nine years is required before the assessee can be regarded as "not ordinarily resident". We understand that the Central Board of Revenue has approved of the Madras view in some cases where the question arose for its consideration. If, contrary to our recommendation, the concept of ordinary residence is retained, it would be advisable to redraft the definition of "ordinary residence" so as to make it clear which of the two conflicting views is the one intended by the Legislature.
1. Marimuthu Pillai v. C.I.T., (1945) 12 ITR 186(188); Swaminathan Chettiar v. C.I.T., 1947 ITR 418(424); Bawa v. C.I.T, (1925) 27 ITR 463.
2. Manibhai Patel v. C.I.T, (1953) 23 ITR 27.
We would like to draw the attention of the Government to two provisions of the Income-tax Act which deserve to be deleted. The first is section 4(1)(b)(iii), taxing an assessee in respect of the remittances by him into India out of the income of past years (i.e., years prior to the relevant accounting year)'. Such a provision has only the effect of preventing capital being brought into this country at a time when the country badly needs capital.
It is true that the effect of this provision has been to a large extent counteracted down by the fourth and fifth provisos to section 4(1), which were inserted by the Indian Income-tax (Amendment) Act, 1953; but there is no reason why any tax on remittances out of past year's profits should be levied even in a modified form. To tax the aggregate of the profits of the past twenty years as the profits of the year in which they are remitted into India is unjustifiable on principle, apart from the fact that, as noted above, it results in capital being kept out of the country.
Another provision which we regard as still less supportable is section 4(1), Explanation 4, which makes an assessee liable to tax if he moves his past profits from one part of India into another, that is, from the erstwhile merged territories or Part B States, into another part of the country. India is one country and it is wrong on principle to tax the movement of money from one part of the country to another. Besides, a fairly long period has already elapsed since the integration of the former native States into the Republic of India, and it would be anachronistic to retain any longer provisions which were Appropriate at a time when the political map of India was different from what it is today.
We recommend that these two provisions, namely, section 4(1)(b)(iii) and section 4(1), Explanation 4, should be deleted. (We have not, however, given effect to this recommendation in the draft clauses in Appendix I, since this would affect the tax structure).
23. Chapter III: Income which do not form part of the total income.-
The exemptions in the Act are of several kinds. Some incomes are not liable to inclusion in the total income. Some incomes are liable to inclusion in the total income but are not liable to pay any tax.1 It was felt that this distinction should be brought out prominently by grouping together provisions pertaining to these two categories separately and putting them in different Chapters. Incomes which under the provisions of the Act, are not to be included in the total income have been put together in Chapter III.
1. See section 16(1)(a).
24. A few of the exemptions notified under section 60, under which the income is to be excluded from the total income, have been mentioned here,1 as it was felt that such important notifications should be prominently brought to the notice of the tax-payer, e.g., income of a University or other educational institution, scholarships and others.
1. Vide clause 11(17) and 11(24), App I.
The exemptions have, wherever possible, been classified into well-defined categories e.g., non-residents, foreign residents, interest and others.
25. The provision in existing section 4(1) 2nd Proviso, for incomes accruing outside India which are to be excluded from the total income of a person who is not ordinarily resident, has been retained in the draft proposed by us. If the Government accepts our primary recommendation,1 this provision2 would have to be omitted.
The provision in section 4(3) (xiv), relating to the exclusion of remuneration received by employees of foreign enterprises, is sought to be confined to foreigners, since there is no reason why the exemption should be enjoyed by Indian citizens.3
The provision in section 4(3) (xiva), relating to salary received by certain foreign technicians, is sought to be slightly widened so as to cover salary received for work done before the actual commencement of business.4
1. See para. 22, above.
2. Clause 11(4)(iv), App I.
3. See clause 11(8), App I.
4. See clause 11(9), App I.
26. Charity.-
The provisions of section 4(3) (i) and (ii) (income of religious and charitable trusts) have been the subject-matter of interpretation by various courts. It appears to us that the intention of the legislature is not clear from the present language of the Act. It also appears to us that the distinction between a trust and an institution has not been borne in mind in drafting section 4(3)(i). An institution is something different from a trust. A trust is not necessarily an institution.1
1. Minister of National Revenue v. Trusts and Guarantees Co. Ltd., (1939) 4 AER 149 (PC).
27. In our opinion1 the intention of the legislature in framing section 4(3)(i) was to exempt three categories of income:-
1. The notes to clause 12 may be perused for a detailed examination of the position.
(i) Income from property held under trust for charitable or religious purposes.
(ii) Income from business held under trust for religious or charitable purposes, subject to the conditions mentioned in proviso (b) to section 4(3)(i).
(iii) Income from a business carried on behalf of a religious or charitable Institution, subject to the conditions mentioned in proviso (b) to section 4(3)(i).
28. It appears to us that in view of the decision of the Supreme Court1 it will be difficult to exclude "business" from "property" which is the subject of a trust. But, it is also clear to our minds that income from business should be exempted only if the conditions mentioned in proviso (b) are fulfilled. We have, therefore, redrafted section 4 (3)(i) to make this position clear.2
1. J.K. Trust v. Commissioner of Income-tax, (1957) 32 ITR 535 (SC).
2. See clause 12(2) and 12(4), App I.
29. We are of the opinion that the legislature. intended also to exempt the income from a business carried on by a religious or charitable institution, if the conditions mentioned in proviso (b) are satisfied. As the exemption of the income from a business carried on behalf of a religious or charitable "institution" is not covered by the category of income from business held under "trust", we have provided,1 for the exemption of such income of a religious or charitable institution.
1. See clause 12(3), App I.
30. Chapter IV: Computation of total income.-
As stated above the provisions regarding computation of total income, computation of income under various heads, and other matters are contained in Chapter III of the present Act alongwith other provisions pertaining to exemptions and other matters. We consider that the provisions pertaining to the computation of income under each head specified in section 6 should all be grouped together under the Chapter "Computation of total income".
Though there are separate modes of computation under each head, we find a basic scheme underlying the method of computation under all the heads. The Act first provides for different categories of income being assessed under different heads of income. There is, then, a provision for deducting from the gross income under each head expenditure incurred for earning that income. There is, again, a provision which prohibits certain deductions in computing the income under that head.
Having regard to this basic scheme of the Act, we have provided under each head a section which deals with the categories of income or the nature of income which is assessable under that particular head, e.g., under salaries, property and business. Deductions to be allowed or not in computing the income under each head are separately provided. The sections pertaining to a head of income are grouped under sub-titles, for example, A-Salaries, B-Interest on Securities, C-Income from house property and so on.
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