INDEX CONTENTS

1. Scheme of Income-tax Act
   Section 4 is a charging section under which income of a previous year of every person is charged to income tax at the prescribed rates. Section 2(24) defines income. The "person" has been defined u/s 2(31) which includes inter alia, individual, HUF, company, firm etc. The previous year has been defined u/s 3. The income of a person is liable to tax on the basis of his residential status viz.
   1. Resident in India and
   2. Non-resident
       
2. Definition of the terms "Resident" and "Non-resident"
   At the outset let us understand as to how the term non- resident has been defined under the Income-tax Act. Section 2(30) of the Income-tax Act has defined the term "Non resident " as under :

   "non- resident " means a person who is not a resident, and for the purposes of sections 92, 93, and 168, includes a person who is not ordinarily resident within the meaning of clause (6 ) of section 6.

   From the above it becomes necessary for the reader to understand the definition of the term "resident". Section 2 (42) of the Income-tax Act has defined the term " resident "as under:

   "resident means a person who is a resident within the meaning of section 6."

   Section 6 deals with residence in India. Section 6 lays down the tests of residence in India for the purposes of the Income-tax Act. These tests of residence are purely on the basis of an individual’s period of stay or physical presence in India in a given particular previous year or in a set of previous years.

   Residential status under the Income-tax Act, being based on the physical presence test for individuals as also on the test of management and control for non-individuals, will have to be determined in respect of each previous year (1st April to 31st March next) separately. Indeed, it is likely that the residential status may vary from year to year.
    

3. Section 6 of the Income-tax Act
   As per section 6 of the Income-tax Act, an individual is treated as a resident in India in any previous year if he fulfils any of the following two conditions:
   1. He is in India in the previous year for a period or periods amounting in all is 182 days or more; or
   2. He is in India for a period of 60 days or more during the previous year and 365 days or more during the four years preceding the previous year.

   In order to remove the hardship being caused to persons leaving India for the purpose of employment and Non Residents visiting India, the aforesaid conditions are relaxed by the Explanation (a) and (b) to section 6 which states as under:

   1. As per Explanation (a) an Indian citizen who leaves India in any previous year for the purpose of employment outside India or as a crew member of an Indian ship would be treated as Resident in India if the period of his stay in India in that year amounts to 182 days or more (as against 60 days as stated above). In other words, his period of stay in India must be less than 182 days to be treated as non-resident whereby he can avoid Indian income tax on his foreign income.
   2. As per Explanation (b) an Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India shall be treated as resident in India if he stays in India in that year for 182 days or more (as against 60 days as stated above)

   It is pertinent to note here that the stay in India need not be continuous. What is important is total number of days of his stay in India during the relevant previous year.

   We have seen from the above that every person can be a resident or a non-resident as per the residential status. Further, the scope of taxation of income of a resident and a non-resident is quite different.
    

4. Section 5 of the Income-tax Act
   Section 5 of the Income-tax Act deals with the scope of total income. As per section 5 (2) of the Income-tax Act, 1961 the scope of taxation of income of a non-resident is that the non-resident is liable under the Indian Income-tax Act only in respect of income from whatever source which (a) is received or is deemed to be received in India in such year by or on behalf of such person or, (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

   Explanation 1 to section 5 (2) further states that income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2 to section 5 (2) further clarifies that the income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

   Section 10 of the Income-tax Act, 1961 deals with the incomes which are not included in total income. As per section 10 (4) (i) of the Income-tax Act, in the case of a Non resident certain securities or bonds as may be specified in the Official Gazette will not be included in the total income.
    

5. Section 48 of the Income-tax Act
   Section 48 of the Income-tax Act, 1961 deals with the mode of computation of income chargeable under the head "Capital Gains". As per this section, when income chargeable under the head "Capital Gains" is to be computed the following amounts are to be deducted:
   1. expenditure incurred wholly and exclusively in connection with such transfer;
   2. the cost of acquisition of the asset and the cost of any improvement thereto:

   Now let us understand as to what is stated in the first provisio to section 48 of the Income-tax Act, 1961 which is relevant to non residents:

   In the case of a non resident assessee, while computing the capital gains arising from the transfer of a capital asset being shares or debentures of an Indian company, one must convert (a) the cost of acquisition, (b) expenditure incurred wholly and exclusively in connection with such transfer and (c) the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency which was initially utilised in the purchase of the shares or debentures and the capital gains so computed in such foreign currency shall be reconverted into Indian currency. This manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment and sale of, shares in, or debentures of an Indian company. This special mode of computation of capital gains is provided for so that the non-resident does not suffer any loss on the devaluation of rupee.

   However, by the second proviso to section 48(ii), it is clarified that in the case of the abovestated gains by the non-resident, the benefit of the cost of indexation will not be available.

   Explanation (i) to section 48 has defined the terms foreign currency and Indian currency as follows : "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); Explanation (ii) to section 48 states that the conversion of Indian currency into foreign currency and the re-conversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf.

   The above can be clarified by the understated example.

   	In Rs.	In $
   Sale (US $ 1=Rs.43/-)	4300000	100000	in 1999
   Purchase (US $ =Rs.36/-)	3600000	100000	in 1996
   Long-term Capital Gain	700000	NIL

   You will observe from the above that though the Capital Gain amounts to Rs. 7,00,000/-, in terms of US $, it is NIL. The non-resident, under the circumstances, is not liable to any capital gain tax.

   Rule 115A of the Income-tax Rules, 1962 provides for conversions and reconversions as referred above at the rate prescribed on the following basis:

   1. Cost of acquisition — Average of T.T. buying and selling rate as on the date of acquisition.
   2. Expenses for transfer — Average of T.T. buying and selling Rate as on the date of transfer of the capital asset (not on the date of making the expenditure)
   3. Sale consideration — Same as in (ii) above
   4. Re-conversion of Capital Gains — T.T. buying rate as on the date of transfer.

   Explanation to rule 115A further defines the terms telegraphic transfer buying rate and Telegraphic Transfer selling rate. As per this explanation the telegraphic transfer buying rate shall have the same meaning as in Explanation to rule 26. Explanation to rule 26 states that this rate refers to the rate or rates of exchange adopted by the State Bank of India for buying currency as per guidelines specified by the Reserve Bank of India where such currency is made available through a telegraphic transfer. This Explanation as regards telegraphic transfer selling rate states that this rate means the rate of exchange adopted by the State Bank of India for selling currency when the same is made available by that bank through telegraphic transfer.

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