Tax Incidence on Companies by Residential Status

Understand Tax Incidence on Companies by Residential Status

Key rules to remember

Resident person: scope of total income

Section 5(1): income received or deemed received in India + income accruing or arising (or deemed) in India + income accruing or arising outside India

Worldwide income. For a person who is "not ordinarily resident" under section 6(13), foreign income is included only if derived from a business controlled in or a profession set up in India.

Non-resident person: scope of total income

Section 5(2): income received or deemed received in India + income accruing or arising (or deemed) in India

Foreign income not received in India is not taxed.

Balance sheet rule

Section 5(3): foreign-accruing income is not deemed received in India only because it is shown in a balance sheet prepared in India

Use this to reject the argument that book entries in India create receipt in India.

No double inclusion

Section 5(4): income taxed on accrual or deemed accrual is not taxed again on receipt or deemed receipt in India

The same income is counted once.

Quick scope grid

Indian income (received or accrued) = taxable for all companies; foreign income received abroad = taxable only for resident (subject to the NOR limit)

Use this as a first-pass classification of each item.

How to solve Tax Incidence on Companies by Residential Status questions

1. 1Fix the residential status of the company for the tax year. If the question gives it, accept it. If not, decide it first.
2. 2List every income item separately. Do not judge the total as one lump.
3. 3For each item, ask where it was received (India or abroad) and where it accrued or arose (India or abroad). Note any deemed receipt or deemed accrual.
4. 4If the company is resident, include all items, whether Indian or foreign, subject to the special NOR rule if the question says the company is not ordinarily resident.
5. 5If the company is non-resident, include only items received in India or accruing or arising in India, including deemed ones. Exclude the rest.
6. 6Apply section 5(3): ignore the balance-sheet argument for foreign-accruing income. Apply section 5(4): count an item once.
7. 7Total the included items and write a one-line conclusion for each excluded item, with a reason.
8. 8Close with the answer: state the amount taxable in India, citing section 5(1) or 5(2).

Quickest way: Two-column tick method

Common mistakes in Tax Incidence on Companies by Residential Status

• Taxing a non-resident company on its foreign income received abroad.

  Students remember that residents pay on global income and apply it to everyone.

  Fix: Check status first. Section 5(2) limits a non-resident to income received or accruing in India.

• Treating foreign income as received in India because it is shown in the Indian balance sheet.

  The book entry looks like proof of receipt.

  Fix: Section 5(3) says income accruing outside India is not deemed received in India only for that reason.

• Counting the same income twice, once on accrual and once on receipt in India.

  Students tick both columns and add both.

  Fix: Under section 5(4), income taxed on accrual is not taxed again on receipt. Count it once.

• Ignoring deemed receipt and deemed accrual.

  Students read only the words received and accrued.

  Fix: Both sections 5(1) and 5(2) include income deemed to be received or deemed to accrue in India. Look for such facts in the question.

• Applying the NOR limit without being told the status.

  Students recall the NOR exception and use it on any company.

  Fix: Use the exception only when the facts say the person is not ordinarily resident under section 6(13). Otherwise a resident is taxed on global income.

• Giving only a number without the provision and a conclusion.

  Students treat this as a numerical topic.

  Fix: Write the provision, apply it to each item, then state a conclusion. ICSI marks all three.

Worked examples