Friday, February 27, 2015

Section 6 should clarify meaning of 'Going abroad for the purpose of employment'


As per section 6(1)(c) of the Income-tax Act, 1961 ('the Act')an individual is said to be resident in India in any previous year, if he was in India for a period or periods amounting in all to 365 days or more in four years immediately preceding that year and is in India for a period or periods amounting in all to sixty days or more in that year.

However, in view of the Explanation (a) to section 6(1)(c), an Individual leaving India, for the purposes of employment during the previous year, shall be treated as resident in India only if he is in India for 182 days or more during the previous year.

In other words, restriction of short stay of 60 days or more is not applicable to an Individual, leaving India for the purposes of employment during the previous year.

II. Interpretational issue:

Unfortunately, the term leaving India for the purposes of employment is subjective and prone to multiple interpretations, as can be seen from the recent litigations on the subject matter.

In the ever-changing process of globalization, the number of individuals seeking employment abroad has increased, we also have a fast increasing class of entrepreneurs'/ artists/ sportsmen etc. who work/perform abroad while keeping their base/roots in India. Accordingly, all these aspiring Indians travel frequently outside India and are facing difficulties before the I-T authorities while deciding their residential status, which is very crucial for deciding tax implications of their global income.

III. Representative judicial views:

For the purpose of Explanation (a) the individual need not be an unemployed person who leaves India for employment outside India. The fact that person was already an employee at the time of leaving India was neither material not relevant [British Gas India P. Ltd. In re, [2006] 155 Taxman 326 (AAR – New Delhi)

Going abroad for purpose of employment (assessee, a world known professional golfer, pursued vocation of sportsman) also means going abroad to take up employment or any avocation which takes in self-employment like business or profession[ACIT vs. Jyotinder Singh Randhawa [2014] 46 taxmann.com 10 (Delhi)]

For the purpose of determining the residential status in India under Sec. 6, going abroad for purposes of 'employment' includes self-employment to determine residential status under I-T Act. It is not necessary to establish employer-employee relationship to prove travelling abroad [K. Sambasiva Rao v. ITO, [2014] 42 taxmann.com 115 (Hyd. - Trib.)]

While deciding as above, CBDT circular No. 346 Dated 30-06-1982 was referred to wherein the words "employed or engaged in other avocations outside India" are used to explain the term 'leaving India for the purposes of employment'.

Further, on the aspect of whether an individual needs to be stationed abroad on permanent/semi-permanent basis for availing of the benefit of the relevant provision (benefit of 182 day test), the ITAT, Hyd. (supra) prevented revenue from applying new tests of domicile/permanent home under section 6(1) of the Act. As noted by the Tribunal, the only relevant test for determining residential status of individuals in India is their physical presence in India for the stipulated number of days and visit and stay abroad should not be for other purposes other than business (business VISA) such as a tourist or for medical treatment or for studies, etc..

However, contrary to above, Hon'ble ITAT, Mumbai in the case of ITO vs. K. Y. Patel 33 ITD 714, held that the meaning of the term 'leaving' should not only be physical one but also with the intention of staying abroad on a permanent or semi-permanent basis. It is only a temporary or permanent posting outside India which could fall in the purview of such a phrase and any stay abroad in connection with one's employment in India could not be treated as equivalent of employment outside India.

IV. Legislative intent behind the explanation (a) to section 6(1)(c):

Firstly, the amendment by way of explanation (a) to section 6(1)(c) was made by the Finance Act, 1982with a view to avoid hardship in the case of Indian citizens who are employed or engaged in other avocations outside India. [CBDT Circular No. 346 dated 30.06.1982] The words "employed or engaged in other avocations outside India "used by CBDT in circular No. 346 (supra) clearly indicate that the test of residence envisaged in Clause (a) of Explanation to Section 6(1) was not limited only to Indian citizens going out on contract of service as salaried employees but also to Indian citizens who go out of India and are engaged in other avocations i.e.,other than as salaried employees.

V. Logical interpretation:

In view of the clarification by CBDT and majority judicial views on the interpretation of the term leaving for the purposes of employment,the reasonable and logical conclusion is employment includes self-employment. The only relevant test for determining residential status of individuals in India is their physical presence in India for the stipulated number of days andvisit and stay abroad should not be for other purposes other than employment/ business.

VI. Expectations from the budget:

To put the controversy at rest and to avoid the futile litigation, a clarificatory amendment below the explanation (a) in the following manner is welcome:

"For the removal doubts, it is hereby declared that, employment outside India shall include self employment of such nature as may be prescribed"

It should be left to CBDT to precisely define the nature and extent of self-employment which is eligible for Explanation (a) to section 6(1)(c) having regard to the nature of business/profession of various class of assessees' such as entrepreneurs'/artists/sportsmen etc. and after due consideration of various judicial principles as above.
Post a Comment