Ruling On NOR May Open Pandoras Box

Updated: Aug 26 2002, 05:30am hrs
The concept of the term not ordinarily resident (NOR) had, over the years, attained a definite meaning in the minds of tax payers. However, a recent decision, in the case of Pradip J. Mehta vs. CIT, 256 ITR 647 (Guj), has turned the concept on its head and has unsettled the long standing interpretation of the term. Under section 6 of the Income-tax Act, 1961 (the Act), a persons residential status is determined. A person would be a resident if he satisfies certain conditions during the financial year. Under section 2(30) of the Act, non-resident means a person who is not a resident. However, there is an intermediate status of a not ordinarily resident (NOR) person. This status is available, under section 6(6) only to individuals [clause (a)] and to Hindu Undivided Families [clause (b)]. In the case of an individual, he would achieve the status of NOR, if he has (i) not been resident in India in 9 out of the 10 previous years preceding the concerned year or (ii) he has not, during the 7 previous years preceding the concerned year, been in India for 730 days or more. An HUF achieves the status of NOR if the manager of the HUF satisfies one of these two conditions.

It is evident from the above, that if either of the two conditions is satisfied, the individual, who is otherwise a resident, would become NOR. So far, the interpretation of condition (i) of the sub-section has been that, if a person is resident in only 8 out of the 10 preceding previous years, he has not been resident in 9 out of 10 preceding previous years and, therefore, the condition (i) would be satisfied. Thus, a status of non-resident in 2 out of 10 preceding previous years would satisfy the required condition. However, the Gujarat High Court in the decision of Pradip J. Mehta, supra, has taken the view that the first condition of section 6(6) mentioned above would require a person to be non-resident for 9 out of the 10 preceding previous years to get the benefit of NOR.

In the concerned case the person was an individual and had stayed in India in excess of 730 days in the 7 preceding previous years and, therefore, did not satisfy condition (ii).

However, he was a non-resident for two financial years in the 10 preceding previous years and claimed that condition (i) was satisfied, since he was not resident in 9 out of the 10preceding previous years and claimed his status as NOR. Decisions cited at the bar included: (i) C.N. Townsend vs. CIT, 97 ITR 185 (Pat) (ii) (ii) Advance Ruling A. No. P-5 of 1995, In re, 223 ITR 379 (AAR) (iii) Manibhai S. Patel vs. CIT 23 ITR 27 (Bom); and P.B.I. Bava vs. CIT, 27 ITR 463 (Travancore-Cochin), both under the 1922 Act and (iv) The Commentary of Kanga and Palkhivalas the Law and Practice of Income-tax Seventh Edition, Volume 1, page 192. All these have expressed the conventional view that a person has not to be resident in 9 out of 10 preceding previous years in order to attract condition (i). The Gujarat High Court, however, at page 654, brushed aside the above view for the applicability of condition (i) in the following words: 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 the criteria are 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 ten preceding years of not being a resident in India before an individual could be said to be not ordinarily resident in India, ... 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.

The Court relied on the decision in K.M.N.N. Swaminathan Chettiar vs. CIT, 15 ITR 418 (Mad), which has taken a contrary view. The Court goes on to state that Under the second part of clause (a) of sub-section (6) of section 6, during the seven preceding years, if any individual has not for seven hundred and thirty or more days been in India, he would qualify for being treated as not ordinarily resident in India in the relevant previous year. It would, therefore, be strange to treat a person who has been resident in India in eight years out of ten preceding years as an individual who is not ordinarily resident in India. This misconception that has also crept in the commentaries of some learned authors on which reliance was placed, arises, because, one tries to search for a definition of ordinarily resident in India in section 6(6)(a), which as observed above, only lays down the condition of not being resident in India for nine out of ten preceding years for being treated as not ordinarily resident of India besides the other condition of not being in India for seven hundred and thirty or more days in the preceding seven years. With respect, the High Court has misguided itself.

Firstly, it says that the term ordinarily resident has not been defined. However, the term used in the section in the clause is has not been resident in India. The term resident has been defined in section 6(1) and this is the same meaning which should have been employed in interpreting clause (a) of section 6(6).

Secondly, the Court has interpreted the term has not been resident in nine out of ten previous years as has been non-resident in nine out of ten previous years.

Thirdly, the Court has unsettled a settled interpretation which has been widely resorted to over the past several decades both by the assessees as well as by the Department.

Fourthly, it is undisputed that the other view, which has been frowned upon by the Court, was also a possible view. In such an event, the view which is favourable to the assessee should have been taken. One can only hope and pray that this decision of the High Court does not open out a Pandoras box.