Basis of charge and scope of total

Income
Sujith Surendran

CHARGE OF TAX
SECTION 4
1. Income tax is an annual Tax.
2. Income of the previous year is assessed to tax in
the assessment year at the rates applicable for that
assessment year.
3. Rate of Tax for an assessment year is fixed by the
Finance Act every year and not by the income tax
Act. If on a particular 1st. April of any assessment
year the Finance Act has not got the assent of the
president of India then for that assessment year the
rates as proposed in the Finance Bill or the rates
applicable to immediately preceding assessment
year , whichever is beneficial to the assessee will
apply until the new provision become effective.

4. Tax is charged on a person and on his total

income.
5. Provisions which are applicable on 1 st. April
will apply for computing the and if any
amendment is made on 2nd day of April
onwards that will have no bearing on the
Computation of Income of the assessee.
This law is applicable only for the computation
of total income and for other purposes the
amendment will taken place from the date of
its enactment.

Scope of Total Income

Section 5

The scope of Taxation on total Income is

dependent on the nature of Income and after
ascertaining the nature of income, the
taxability will depend on the Residential status
of the assessee. For this purpose the income
can be classified in two parts:

Indian income
Foreign income

Indian Income
(i). Income which is received in India or deemed to be
received in India.
(ii). Income which is accrues or arises or deemed to
accrue or arise in India.
Foreign Income
Income which is accrues and arise outside India:Income under this head should naturally be an
Income which is not received in India also because if
it is received in India then it will become Indian
income by virtue of first condition of Indian Income
i.e. Income which is received in India or deemed to
be received in India.

Dispatch of Income by post

If income is sent through cheque or any other mode from the
foreign country on the request of the recipient in India
then the post office in foreign country is working as an
agent of the receiver and income is received by the post
office in foreign country hence it is not a receipt in India.
If income is sent through cheque or any other mode from the
foreign country without any request of the recipient in
India then the post office in foreign country is working as an
agent of the payer and income is delivered by the post
office in India as an agent of the foreign payer and received
by the Indian person in India hence it is a receipt in India.

INCOME DEEMED TO BE RECEIVED IN

India (SECTION 7)
This is statutory fiction i.e. only as mentioned
in law. Three types of Incomes have been
mentioned in the Section 7 of Income Tax Act,
1961 which are deemed to be received in
India:-

(i).Interest credited in excess of 7.5% in a recognised

provident fund
(ii).Employers contribution in excess of 12% of the salary
of the employee in a recognised provident fund.
(iii). Transfer balance of the unrecognized provident
fund:- In a particular previous year if unrecognized
provident fund is converted in the recognised provident
fund then the part of the balance which represent the :(a). Interest in excess of 7.5%.
(b). Employers contribution in excess of 12% of the
salary of the employee, From the date of establishment
of the unrecognized provident fund to the date of its
Recognisition.

INCOME DEEMED TO ACCRUE OR ARISE IN India(SECTION 9)

1. Income accruing or arising through or from any

business connection in India: - Here see that there
should be a Business Connection and by virtue that
business connection the Income accrues or arises
outside India.
If all the business operation are not carried in India , that
the reasonable part of Income, the accrual of which is
resultant from the India connection will only form part
of income which is deemed to accrue in India.
2. Income through or from any property, any assets or
source of Income in India:Ex.:- Mr. Sunil Gulati, living in UK has let out his property
at Ahemdabad to a Company Called Jems and company
and the rent is payable in UK.

3. Income through the transfer of capital assets

situated in India: Ex.:- Mrs. Neelam Kothari, a resident of Hong
Kong has transferred her property in Jaipur to
a citizen of Japan.
4. Salaries earned in India and the salary paid
for rest period preceding or succeeding the
period for which salary earned in India.
5. Salary paid by Government to a citizen for
services rendered outside India.

6. Any Interest, Royalty and fees for Technical services :(a). Paid by Any state or Central Government.
(b). Paid by resident of India except in the condition
when used for business or profession carried on outside
India or for any source outside India.
Ex.:- Exis-2 company a Singapore based company has
been paid the following amount as technical services :(a). Government of India 10 Lakhs- Taxable
(b). Chennai based company has paid Rs. 12 lakhs (i).
Rs. 6 lakhs for project in India- Taxable. (ii). Rs. 6 Lakhs
for import of designs to be used for a project in UKNon- Taxable.

Residential Status and Taxability

Income

ROR

NOR

NR

Received in
India

Deemed to be
received in
India

Accrued in India Y

Deemed to be
accrued in India

Received and
Y
accrued outside
from business
controlled and
profession set
up in India

outside
India

Earned and

The vodafone case

The main companies involved were as under :

HTILHutchison-Telecommunications
International Ltd. a company incorporated in
Cayman Island in 2004. It was listed on Hong
Kong and New York Stock Exchanges. It was
thesellerand earner of Capital Gain.
Vodafone International Holdings BV a
company incorporated in Netherlands. It was
thepurchaserof the shares of CGP.

CGP Investments (Holdings) Ltd. (CI) a

company incorporated in Cayman Islands in
1998. It is the company whoseshare has
been transferred.
Hutchison Essar Ltd. a company
incorporated in India. It is the main business
company.Controlling share holdingin the
same has beentransferred by virtue of
Share Purchase Agreementand several
related documents. Transfer of CGP share was
one of several documents.

A normal view would be that if one nonresident sells shares of a foreign company to
another non-resident of India; and the
transaction takes place outside India, there
can be no tax on the same.

Departments claim, in essence was: CGP is a

nullity, a sham entity. Transfer of CGPs shares
has no substance.The parties to the
transfer themselves laid bare the real
transaction that of sale of HEL stake. Real
transfer is: The transfer of substantial interest
(67% stake) in HEL. This controlling
shareholding has its situs in India. Since the
transferred asset is situated in India, the
capital gains arising on the same is liable to
tax in India. VIH was therefore required to
deduct tax at source.

Honourable Supreme Courthas given a

ruling that only the legal transaction sale of
CGP share - is to be considered. By selling
CGP share, the seller may have transferred its
interests in HEL. However, Indian interest
arises due to sale of CGP share. It does not
arise out of the SPA (which recorded the real
facts). All the arguments of the revenue were
rejected.

Post vodafone case

TheGovernment of India, instead of accepting

the Supreme Court verdict, made
retrospective amendments in the income-tax
act to nullify the effect of Vodafone's case.
The Act was amended to provide that:
Section 9 includes indirect transfers.

Section 2(14), "property" includes any rights in

or in relation to an Indian company, including
rights of management or control or any other
rights whatsoever.
Section 2(47), "transfer" includes transfer of
controlling interest of an Indian company by
way of transfer of shares of foreign company.
"Situs of shares" of a company incorporated
outside India shall be deemed to be in India if
the share derives, directly or indirectly, its
value substantially from the assets located in
India.

However, it may be emphasised that the

impact of the amendments that the
transaction between two non-residents would
be taxed in India is not universally applicable.
Reference in this regard may be made to the
decision of the Andhra Pradesh HC in the case
of Sanofi Pasteur Holding SA, 354 ITR 316.

There is a company in India which is being

held by a company incorporated in France, SH.
The said French company was ultimately held
by other French companies. The ultimate
French holding company entered into
agreement with another French company,
Sanofi, to buy the shares of SH.

Applying the amended provisions of the Act,

the Income Tax Department took the view that
the transaction between the two French
companies liable to tax in India. However, the
AP High Court has observed that the
amendments made in the I-T Act do not
override the tax treaties India has with other
countries.

It was held by the Court that provisions of

Article 14 (relating to taxability of capital
gains) of the Indo-France tax treaty does not
provide for dual taxation.
Under Article 14(5), where shares of a
company which is a resident of France are
transferred, representing a participation of
more than 10 per cent in such entity, the
resultant capital gain is taxable only in France.

http://law.incometaxindia.gov.in/DIT/intDtaa.a
spx