Full Judgment Text
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CASE NO.:
Appeal (civil) 4291 of 2002
PETITIONER:
Pradip J. Mehta
RESPONDENT:
Commissioner of Income Tax,Ahmedabad
DATE OF JUDGMENT: 11/04/2008
BENCH:
ASHOK BHAN & DALVEER BHANDARI
JUDGMENT:
J U D G M E N T
Reportable
Civil Appeal No. 4291 of 2002
BHAN, J.
1. Assessee is the appellant herein.
2. In this appeal the assessee has challenged the final
judgment and order dated 3rd May, 2002 passed by the High
Court of Gujarat in ITR No. 7 of 1988. The High Court has
disposed of the Reference upholding the view taken by the
Income Tax Appellate Tribunal, Ahmedabad Bench-A (for short
"the Tribunal") that the status of the assessee for the
assessment year 1982-83 was not that of "not ordinarily
resident". The High Court also recorded that the Tribunal
has not committed any error in interpreting the provisions
of Section 6(6) of the Income Tax Act, 1961 (for short
"1961 Act").
3. Brief facts of the case culminating into filing of the
present appeal, are as under:
4. The assessee was appointed as Marine Engineer by
Wallem Shipping Management Ltd., Hong Kong on 5th October,
1976 and, during the course of his employment, he was
posted to work on high seas and paid abroad for many years.
The assessee while filing his return for the assessment
year 1982-83 (for short "relevant year") claimed the status
of "not ordinarily resident in India" as defined in Section
6(6)(a) of the 1961 Act and to exclude income accruing
outside India under Section 5(1)(c ) of the 1961 Act, which
provides that in the case of a person not ordinarily
resident in India within the meaning of sub-section (6) of
Section 6, the income which accrues or arises to him
outside India shall not be so included in his total income.
5. Relevant portion of Sections 5 and 6 of 1961 Act is
quoted as under:
"Section 5 - Scope of total income
(1) Subject to the provisions of this Act, the
total income of any previous year of a person who
is a resident includes all income from whatever
source derived which\027
(a) \005\005
(b) \005\005
(c) accrues or arises to him outside India during
such year:
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Provided that, in the case of a person not
ordinarily resident in India within the meaning
of sub-section (6) of section 6 the income which
accrues or arises to him outside India shall not
be so included unless it is derived from a
business controlled in or a profession set up in
India."
"Section 6 - Residence in India
For the purposes of this Act,-
Xxxx
[(6)A person is said to be "not ordinarily
resident" in India in any previous year if such
person is-
(a) an individual who has not been resident in
India in nine out of the ten previous years
preceding that year, or has not during the seven
previous years preceding that year been in India
for a period of, or periods amounting in all to,
seven hundred and thirty days or more ; or \005."
6. As the assessee was not resident in India in 9 out of
10 previous years preceding that year (which is finding of
fact), he claimed the status of "not ordinarily resident"
for the relevant year.
7. The Assessing Officer by his Order dated 3rd September,
1984 refused to grant the assessee the status of "not
ordinarily resident" for the relevant year, on the ground
that the assessee was a non-resident in India for only 3
years during the last 10 years and during the past 7 years
he had stayed in India for more than 730 days. The
Assessing Officer found that the assessee had resided in
India for the period which is shown below, in the last nine
previous years:
Sr.
No.
Financial year
Stay in
India
(1)
1980-81
91
(2)
1979-80
62
(3)
1978-79
272
(4)
1977-78
50
(5)
1976-77
197
(6)
1975-76
365
(7)
1974-75
365
(8)
1973-74
365
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(9)
1972-73
365
8. The Assessing Officer further found that in view of
the provisions of Section 6(6)(a) of the 1961 Act, the
assessee was required to fulfil either of the following two
conditions to claim the status of "not ordinarily
resident":
"(1) in nine out of ten previous years, he
should not be resident in India, or
(2) he should not have stayed in India for
a period of seven hundred thirty days
or more during the last seven previous
years."
The Assessing Officer came to the conclusion that, during
the last 9 previous years, the assessee was non-resident
for only three years and during the last seven previous
years, he had stayed in India for a period of 1,402 days.
It was held that the status claimed by the assessee of ’not
ordinarily resident’ was not acceptable.
9. Assessee being aggrieved by the order of the Assessing
Officer, filed an appeal before the CIT (Appeals), who, by
his order dated 13th of August, 1985 while concurring with
the view taken by the Assessing Officer, dismissed the
appeal. Further appeal filed by the assessee before the
Tribunal was also dismissed on 24th of July, 1987.
10. The assessee thereafter filed an Application before
the Tribunal under Section 256(1) of the 1961 Act (as it
existed at the relevant time) seeking following two
questions of law to be referred to the jurisdictional High
Court for its opinion:
"(1) Whether on the facts and in the
circumstances of the case, the Tribunal
was justified in law in holding that
the status of the assessee for the year
in question was not that of ’resident
but not ordinarily resident’ as claimed
by him?
(2) Whether the Tribunal has erred in law
in interpreting provisions of section 6
of the Act while holding that the
assessee’s case did not fall within the
purview of section 6(6) of the Act as
claimed by him in view of undisputed
position of his status in relation to
preceding ten years?"
11. Accordingly, the aforesaid two questions were referred
to the High Court for its opinion. The High Court by the
impugned judgment and order upheld the orders impugned
before it and answered the reference in favour of the
Revenue and against the assessee.
12. The High Court refused to grant the status of "not
ordinarily resident" as contemplated under Section 6(6)(a)
of the 1961 Act by observing thus:
"12. The short contention raised for the
assessee was that section 6(6)(a) was
applicable to this assessee who must be
treated to be ’not ordinarily resident’ in
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India, because, he was resident in India in
eight out of ten years preceding the
previous year 1981-82 and not nine out of
ten years. In other words, he would be an
individual who is ’not ordinarily resident’
in India even if for all the remaining eight
years he is a resident in India within the
meaning of section 6(1) of the Act. Only if
the assessee, has been resident in India for
nine out of ten years, he will be ordinarily
resident in India, otherwise he will be ’not
ordinarily resident’ in India. This
contention though appearing to be attractive
at first blush, is not at all warranted by
the provisions of section 6(6)(a) of the
Act. Section 6(6) does not define
’ordinarily resident in India’ but describes
’not ordinarily resident’ in India. It
resorts to the concept of ’resident in
India’ for which criteria is laid down in
section 6(1) of the Act. On its plain
construction clause (a) of section 6(6)
would mean that if an individual has in all
the nine out of ten previous years preceding
the relevant previous year not been resident
in India as contemplated by section 6(1), he
is a person who is ’not ordinarily resident’
in India. To say that an individual who has
been resident in India for eight years out
of ten preceding years should be treated as
’not ordinarily resident’ in India, does not
stand to reason and such contention flies in
the face of the clear provision of clause
(a) of section 6(6) which contemplates the
period of nine years out of ten preceding
years of not being a resident in India
before an individual could be said to be
’not ordinarily resident’ in India, which
position will entitle such person to claim
exemption under section 5(1)(c) of the Act
in respect of his foreign income. An
individual who has not been resident in
India, within the meaning of section 6(1),
for less than nine out of ten preceding
years does not satisfy that statutory
criteria laid down for treating such
individual as a person who can be said to be
’not ordinarily resident’ in India, as
defined by section 6(6). A resident of India
who goes abroad and is not a resident in
India for two years during the preceding
period of ten years will therefore, not
satisfy the said condition of not being a
resident of India for nine out of ten
years."
13. It may be mentioned here that the Assessee had cited
the following judgments before the High Court to support
his claim:
(A) The decision of the Patna High Court in C.N.
Townsend v. CIT (1974) 97 ITR 185 (Pat), for the
proposition that, if any of the conditions
mentioned in clauses (a), (b) or (c) of section
6(1) of the 1961 Act is fulfilled, the assessee
will be a ’resident’ within the meaning of the
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1961 Act and if he comes within the mischief of
either of the two conditions mentioned in section
6(6)(a), he will be treated as ’not ordinarily
resident’. In that case, the assessee came to
India in April, 1964, and continued to stay in
India till the end of March, 1965, and therefore,
it was held that he clearly fulfilled the
condition laid down in sub-section (6)(1)(a) of
the 1961 Act and as such, was a ’resident in
India’ during the previous year in question. It
was held that the assessee, however, could not be
treated as ’ordinarily resident’ in India as he
fell within the first condition in section
6(6)(a) namely, that he was not resident in India
in nine out of ten previous years preceding the
year 1964-65 even though he did not come within
the mischief of the second condition.
(B) The decision of the Authority for Advance
Rulings, In re Advance Ruling A. No. P-5 of 1995
[(1997) 223 ITR 379 (AAR)], to point out that the
said authority while construing the meaning of
the expression ’resident but not ordinarily
resident’, held that the correct construction of
Section 6(6)(a) of the 1961 Act was that, a
person would become ‘ordinarily resident’ only if
(a) he has been "resident" in nine out of ten
preceding previous years; and (b) has been in
India for at least 730 days in the seven
preceding previous years and that, he will be
treated as resident but not ordinarily resident
if either of these condition is not fulfilled.
(C) The decision of the Bombay High Court in Manibhai
S. Patel v. CIT (1953) 23 ITR 27 (Bom), for the
proposition that, in order, that an individual is
‘not ordinarily resident’ in the taxable
territories, he should satisfy one of the two
conditions laid down in Section 4B(a) of the
Indian Income Tax Act, 1922 (which corresponded
to Section 6(6)(a) of the 1961 Act). It was held
that, under Section 4B(a), what was required to
be considered was the assessee’s residence in the
’taxable territories’ and not his residence
outside the ’taxable territories’. If the
assessee had been in the ’taxable territories’
for more than two years in the preceding seven
years, then he does not satisfy the second
condition laid down in Section 4B(a) and would,
therefore, not be ’not ordinarily resident’ in
the taxable territories. In that case, the
assessee was living in Africa for four years out
of the preceding seven years and he was in the
’taxable territories’ for about three years and
the question was whether he was ’not ordinarily
resident’ in ’taxable territories’ under the
second part of Section 4B(a). It was held that,
he did not satisfy the second condition.
(D) The decision of the Travancore-Cochin High Court
in P.B.I. Bava v. CIT (1955) 27 ITR 463 (Trav. &
Coch), to point out that, in the context of
section 4B(a) of the Indian Income Tax Act, 1922,
the High Court had held that a person was not
ordinarily resident in any year unless he
satisfies both of the conditions of the said
provision which make a person ordinarily
resident, namely, (i) the condition that he must
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have been resident, in nine out of ten years
preceding that year, and (ii) the condition that
he must have been, here for periods of more than
two years during the seven years preceding that
year. It was held that a person is ’not
ordinarily resident’ in India in the previous
year if he has not been ’resident’ in nine out of
the ten years preceding that year; he need not
establish that he was ’not resident’ in nine out
of the ten years. It was observed that ’not
resident’ and ’not ordinarily resident’ are not
positive concepts but only the converse of
’resident’ and ’ordinarily resident’ and a
category of persons ’not resident and not
ordinarily resident’ is impossible to imagine and
unknown to the Act.
14. The aforesaid decisions cited by the assessee have
been noted by the High Court. The High Court answered the
reference in favour of the revenue and against the
assessee, without either agreeing or disagreeing with the
view taken by the various High Courts and the Authority for
Advance Ruling, which is presided over by a retired Judge
of the Supreme Court.
15. Section 6(6)(a) of the 1961 Act corresponds to and is
pari materia with Section 4B of the Income Tax Act, 1922
(for short "1922 Act"). Section 4B of 1922 Act reads thus:
"4B. Ordinary Residence \026 For the purpose of
this Act \026
(a) an individual is ‘not ordinarily
resident’ in British India in any year if he
has not been resident in British India in
nine out of the ten years preceding that
year or if he has not during the seven years
preceding that year been in British India
for a period of, or for periods amounting in
all to, more than two years."
16. The proposed definition of "resident" and "not
ordinarily resident" was enacted by the British Rulers,
i.e., the officers of the Indian Civil Services and those
in armed forces serving in India, who were absent from
India on furlough for a year out of every four years so
that they could be treated as "not ordinarily resident"
and avoid tax on income in their home country,
notwithstanding continuous stay and service in India.
17. The High Court of Travancore and Cochin in PBI Bava v.
CIT [supra] while interpreting Section 6(a) of the
Travancore Income Tax Act, corresponding to Section 4B(a)
of the 1922 Act, relying upon the speech of Sir James Grigg
during the assembly debates on Section 4B, where he had
said:
"a man is not ordinarily resident unless he
satisfies both of those conditions amount to
saying that he must have been resident in
nine out of ten years and he must have been
here for substantial periods in the
preceding seven years."
and the notes embodied in the Travancore Income Tax Rules:
"An individual is ordinarily resident in
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Travancore if he has been resident as
defined above in 9 out of 10 years preceding
that year and has been in Travancore for
periods amounting in all to more than 2
years during the 7 years preceding that
year".
held that:
"The clause no doubt is a model of ambiguous
and obscure drafting" as observed by Sir
Jamshedji Kanga in his "Law and Practice of
Income-tax" (p.362) but the basic outlines
are clear enough to support the conclusion
reached by the Appellate Assistant
Commissioner of Income-tax, Trivandrum. His
approach was right when he said :
"In my opinion, the only direct way of
deciding whether the appellant was ’not
ordinarily resident’ in the relevant years
is to formulate and answer the direct
question, ’Has the appellant been resident
in Travancore in 9 out of such 10 years?’
This question permits of only one answer and
that answer is an emphatic ’No’. When such
is the answer to the question, how can I
help treating the appellant as ’not
ordinarily resident’? The answer which the
Income-tax Officer seeks to get can be
obtained only if the question could be
framed as ’Has the appellant been not
resident (or non-resident) in Travancore in
9 out of such 10 years?’ But this is not the
direct question but very indirect and
roundabout and is, in my opinion, quite
inappropriate."
18. The Bombay High Court in Manibhai S. Patel v.
Commissioner of Income Tax [supra], held:
"...the Legislature is primarily concerned
with the residence of the assessee in the
taxable territories, and in order that an
assessee should be "not ordinarily resident"
in the taxable territories what has got to
be considered is his residence in the
taxable territories..."
19. The Patna High Court in C.N. Townsend v. CIT, Bihar
[supra] where the assessee came to India in April, 1964 and
continued to stay in India till the end of the March 1965,
held:
"he clearly fulfilled the conditions laid
down in Sub-section (1)(a) of Section 6 of
the Act and as such he has been rightly held
to be a "resident" in India during the
previous year in question. The assessee,
however, could not be treated as "ordinarily
resident" in India as he came within the
mischief of the first condition laid down in
Sub-section (6)(a) of Section 6, namely,
that he was not resident in India in nine
out of the ten previous years preceding the
year 1964-65, though he did not come within
the mischief of the second condition."
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20. In the decision of the Authority for Advance Ruling In
re Advance Ruling A. No. P-5 of 1995 [supra), it was held:
"\005 It seems correct to construe the
definition as providing that a person will
become resident and ordinarily resident only
if (a) he has been "resident" in nine out of
the ten proceeding previous years, and (b)
has been in India for at least 730 days in
the seven preceding previous years and that
he will be treated as resident but not
ordinarily resident if either of these
conditions is not fulfilled\005"
21. The Income Tax Act of 1922 was replaced by the Income
Tax Act of 1961. The Law Commission of India has
recommended the total abolition of the provisions of
Section 4B of the 1922 Act defining "ordinary residence" of
the taxable entities. The Income-tax Bill, 1961 (Bill No.
27 of 1961) did not contain any such provision. On the
legislative anvil, it was felt necessary to keep the
provisions of Section 4B of the 1922 Act in tact and,
therefore, Section 6(6) had to be enacted in the 1961 Act.
Referred to Chaturvedi & Pithisaria’s Income Tax Law, Fifth
Edition, Volume I, 1998 page 565.
22. Further, in the same book the departmental circular
being C.I.T., W.B.’S Circular letter No.
J/28320/4A/10/5/58-59, dated Calcutta, the 5th December,
1962, addressed to the Secretary, Indian Chamber of
Commerce, Calcutta, has been cited, which states as under:
"I am directed to refer to the
correspondence resting with the Ministry of
Finance (Department of Revenue) letter No.
4/22/61-IT(AT), dated 25th November, 1961,
and to state that the Department’s view has
all along been that an individual is "not
ordinarily resident" unless he satisfies
both the conditions in section 4B(a), i.e.,
--
(i) he must have been a resident in nine
out of ten preceding years; and
(ii) he must have been in India for more
than two years in the preceding seven
years.
Thus, a person will be "resident and
ordinarily resident" if both these
conditions are satisfied but he will be
"resident but not ordinarily resident" if
either of those conditions is not
satisfied."
23. It may be noted here that the Parliament has amended
Section 6(6) of the 1961 Act by Finance Act 2003 w.e.f. 1st
April, 2004, which reads as under:
"Section 6
(6) A person is said to be "not ordinarily
resident" in India in any previous year if
such person is-
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(a) an individual who has not been resident
in India in nine out of the ten previous
years preceding that year, or has not during
the seven previous years preceding that year
been in India for a period of, or periods
amounting in all to, seven hundred and
thirty days or more ; or
\005\005\005\005"
However, the said amendment will not be applicable to the
present case as the notes on clauses of the Finance Bill,
2003 provide that the said amendment will have effect only
from 1st April, 2004.
24. Although the judgments referred to above, were cited
at the bar in the High Court, which were taken note of by
the learned Judges of the Bench of the High Court, but
without either recording its agreement or dissent answered
the two questions referred to it in favour of the Revenue.
Judicial decorum, propriety and discipline required that
the High Court should, especially in the event of its
contra view or dissent, have discussed the aforesaid
judgments of the different High Courts and recorded its own
reasons for its contra view. We quite see the fact that the
judgments given by a High Court are not binding on the
other High Court(s), but all the same, they have persuasive
value. Another High Court would be within its right to
differ with the view taken by the other High Courts but, in
all fairness, the High Court should record its dissent with
reasons therefor. The judgment of the other High Court,
though not binding, have persuasive value which should be
taken note of and dissented from by recording its own
reasons.
25. Otherwise also, we find ourselves in agreement with
the view taken by the three High Courts, namely, the Patna
High Court in C.N. Townsend v. CIT, Bihar [supra], the
Bombay High Court in Manibhai S. Patel v. Commissioner of
Income Tax [supra] and the High Court of Travancore and
Cochin in PBI Bava v. CIT [supra].
26. The Law Commission of India had recommended that the
provisions of Section 4B of 1922 Act defining "ordinary
residence" of the taxable entities be deleted but the
suggestion was not accepted by the Legislature. Rather, on
the legislative anvil, it was felt necessary to keep
Section 4B of 1922 Act in tact and, accordingly, Section
6(6), which corresponds to and is pari materia with Section
4B of 1922 Act, was enacted in 1961 Act. This shows the
legislative will. It can be presumed that the legislature
was in the know of the various judgments given by the
different High Courts interpreting Section 4B but still the
legislature chose to enact Section 6(6) in the 1961 Act, in
its wisdom, the legislature felt necessary to keep the
provisions of 4B of 1922 Act in tact. It shows that the
legislature accepted the interpretation put by the various
High Courts prior to enactment of 1961 Act. It is only in
the year 2003 that the Legislature amended Section 6(6) of
the 1961 Act, which came into effect from 1st April, 2004.
27. It is well settled that when two interpretations are
possible, then invariably, the Court would adopt the
interpretation which is in favour of the tax payer and
against the Revenue. Reference may be made to the decision
in Sneh Enterprises v. Commissioner of Customs, New Delhi
[(2006) 7 SCC 714], of this Court wherein, inter alia, it
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was observed as under:
"While dealing with a taxing provision, the
principle of "Strict Interpretation" should
be applied. The Court shall not interpret
the statutory provision in such a manner
which would create an additional fiscal
burden on a person. It would never be done
by invoking the provisions of another Act,
which are not attracted. It is also trite
that while two interpretations are possible,
the Court ordinarily would interpret the
provisions in favour of a tax-payer and
against the Revenue."
28. This Court in a catena of decisions, has held that the
circulars issued by the Department are binding on the
Department. See: K.P. Varghese v. ITO [(1981) 4 SCC 173],
UCO Bank v. CIT, W.B. [(1999) 4 SCC 599], Collector of
Central Excise Vadodra v. Dhiren Chemical Industries
[(2002) 2 SCC 127], etc. In all these cases it has been
held that the circulars issued under the Income Tax Act or
Central Excise Act are binding on the Department. It may
be noted that in the circulars issued by the Commissioner
of West Bengal, reference has been made to the
correspondence resting with the Ministry of Finance
(Department of Revenue) letter No. 4/22/61-IT(AT), dated
25th November, 1961, wherein it is stated that the
department’s view has all along been that an individual is
"not ordinarily resident" unless he satisfies both the
conditions in Section 4B(a), i.e., (i) he must have been a
resident in nine out of ten preceding years; and (ii) he
must have been in India for more than two years in the
preceding seven years. In the present case, the Circular
issued by the Board in which the opinion of the Central
Government the Ministry of Finance (Department of Revenue)
letter No. 4/22/61-IT(AT), dated 25th November, 1961 has
been noted, the interpretation similar to the one put by
the various High Courts on Section 4B has been accepted to
be the correct position.
29. In these circumstances, a person will become an
ordinarily resident only if (a) he has been residing in
nine out of ten preceding years; and (b) he has been in
India for at least 730 days in the previous seven years.
30. Accordingly, this appeal is accepted. The order passed
by the High Court and the Authorities below are set aside.
It is held that the High Court in the impugned judgment has
erred in its interpretation of Section 6(6) of the Act and
the view taken by Patna High Court, Bombay High Court and
Travancore-Cochin High Court has laid down the correct law.
The two questions of law referred to above are answered in
favour of the assessee and against the revenue. No costs.