[Opinion] Breaking the Tie of Tax Residential Status

CA Abhishek Worah – [2024] 169 taxmann.com 534 (Article)

1. Introduction

In a sports match (specially the knock outs) it is important to get a result and determine a winner and loser. Scores in these matches can be tied (it can be goals in football/hockey or runs in cricket) i.e. equal. In that case the sports rules provide for mechanism to ‘break’ the tie and get eventual winner (so it can be shoot out in football or a super over in a T20). Whosoever scores maximum (runs or goals) wins.

One tie breaker rule also exists in international taxation space which is used to determine deadlock where a taxpayer is tax resident of two countries.

The Income Tax Appellate Tribunal (ITAT) in the case of Ashok Kumar Pandey v. ACIT1 has held an individual’s worldwide income to be taxable in India since he was eventually held to be tax resident of India under the tie breaker rule.

This Article discusses various aspects regarding residential status of an individual and the findings of the ITAT.

2. Residential status the very basis of taxation

Before analysing the ITAT’s findings that it is important to understand what is residential status in tax terminology and its impact of taxation of income.

Many tax jurisdictions including India have what is called source based taxation rule. Under this income is taxed in the country from where it is sourced (earned). So business income is taxed where business is carried on. Royalty is taxed where IPR is exploited. Property income is taxed where it is situated. Source countries have primary or first right to tax the income earned within their jurisdiction. This right is there irrespective of the tax resident status of the income earner.

The above can be seen from the provisions of section 5 of the Income tax Act (ITA) which provides for scope of taxation of incomes.

So in case of individual who is resident and ordinary resident2 in India not only the income sourced from India but also the income which accrues or arises to him outside India during a year is taxable in his hands in India.

However in case of a non-resident only the income sourced from India (received/deemed to be received/accruing or arising/deemed to accrue or arise to him in India) is taxable in his hands.