2006 (8) TMI 449 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the residential status of the assessee.
2. Interpretation of Section 6(6) of the Income-tax Act regarding "not ordinarily resident" status.
3. Applicability of the amendment to Section 6(6) introduced by the Finance Act, 2003.

Detailed Analysis:

1. Determination of the Residential Status of the Assessee:

The primary issue in this case revolves around the correct determination of the residential status of the assessee. The Assessing Officer (AO) found that the assessee's status varied over the years, with periods of both "resident" and "non-resident" status. The AO's analysis of the passport and continuous discharge certificate revealed the following pattern of stay in India:

- For the assessment years 1998-99 and 1999-2000, the assessee had a mix of resident and non-resident statuses over the preceding years.

2. Interpretation of Section 6(6) of the Income-tax Act:

The core of the dispute lies in the interpretation of Section 6(6) of the Income-tax Act, which defines "not ordinarily resident." According to the assessee's counsel, the criteria for being "not ordinarily resident" include:
- Being a resident in nine out of ten preceding years.
- Staying in India for more than 730 days in the preceding seven years.

The CIT(A) accepted the assessee's argument that the conditions under Section 6(6) were met, thus directing the AO to consider the assessee as "not ordinarily resident." The CIT(A) observed that the assessee was non-resident in certain financial years, fulfilling the condition under Section 6(6).

However, the Ld. D.R. argued that the correct interpretation of Section 6(6) requires verifying if the assessee was a resident in nine out of ten previous years. The Gujarat High Court's decision in Pradip J. Mehta v. CIT was cited, emphasizing that both conditions in Section 6(6) must be considered.

3. Applicability of the Amendment to Section 6(6) Introduced by the Finance Act, 2003:

The amendment to Section 6(6) by the Finance Act, 2003, clarifies the definition of "not ordinarily resident." The amended section specifies that an individual is "not ordinarily resident" if:
- They have been a non-resident in nine out of ten previous years.
- They have been in India for 729 days or less during the seven preceding years.

The memorandum explaining the amendment indicates that it is clarificatory in nature, intended to remove doubts and provide clear legislative intent. This amendment, effective from April 1, 2004, was deemed relevant for interpreting the unamended provisions.

Conclusion:

The tribunal concluded that the CIT(A)'s interpretation of Section 6(6) was flawed. The assessee was found to be a resident in all ten preceding years based on the criteria in Section 6(1)(c), which requires a stay of 60 days or more in a year and 365 days or more in the preceding four years. Thus, the assessee did not meet the conditions to be considered "not ordinarily resident."

The tribunal reversed the CIT(A)'s decision, holding that the AO was justified in taking the status of the assessee as "resident and ordinarily resident." The appeals filed by the revenue were allowed.