Section 9: Incomes which Accrue or Arise in India or are Deemed to Accrue or Arise in India

Section 9, Income Accrue or Deemed to Accrue or Arise in India :

Section 9 describes the Incomes which Accrue or Arise in India or are Deemed to Accrue or Arise in India for the purpose of computation of Taxable Income according to Residential Status of an Assessee as per Income Tax Act.

Table of Contents

(1) Accrue or Arise in India

‘Accrue’ means ‘to arise or spring as a natural growth or result’, to come by way of increase. ‘Arising’ means ‘coming into existence or notice or presenting itself. ‘Accrue’ connotes growth or accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words together mean ‘to become a present and enforceable right’ and ‘to become a present right of demand’.

Frequently, in the context of ‘accrual’ or ‘arisal’, the word ‘earned’ is used. The two are different concepts. A person may be said to have ‘earned’ his income in the sense that he has contributed to its production by rendering services or otherwise and the parenthood of the income can be traced to him. But in order that the income may be said to have ‘accrued’ to him, an additional clement is necessary, that he must have created a debt in his favor.

(2) Incomes which are Deemed to Accrue or Arise in India [Section 9]

The following incomes shall be deemed to accrue or arise in India:

(2A)     Income from a Business Connection in India:

Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India.

Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non-resident which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India.

Inclusive meaning of “Business Connection”

(I)    Business connection to include any business activity carried out through a dependent agent [Explanation 2 to section 9(1)]

“Business connection” shall include any business activities carried through a person who, acting on behalf of the non-resident, -—

—        has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or
habitually concludes contracts or

—        habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are—

(i)         in the name of the non-resident; or

(ii)        for the transfer of the ownership of. or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or

(iii)       for the provision of services by the non-resident.

(II)   “Business connection” to include “Significant Economic Presence” also [ Explanation 2A inserted under Section 9(1)(i)]

For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose. shall mean—

(a)        transaction in respect of any goods, services or property carried out by a nonresident with any person in India including provision of download of data or software in India. if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

See also  Sum received by a Member from HUF [Section 10(2)]

(b)       systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—

(i)         the agreement for such transactions or activities is entered in India; or

(ii)        the non-resident has a residence or place of business in India; or

(iii)       the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall he deemed to accrue or arise in India.

(III) Income attributable to (lie operations carried out iii India, as referred to in Explanation 1, shall include certain incomes I Explanation 3A]

For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from

(i)         such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;

(ii)        sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India and

(iii)       sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India:

In the case of a Non-Resident, the following shall not, however, be treated as business connection in India:

(i)         Operations confined to purchase of goods in India for purpose of exports;

(ii)        Operations confined to collection of news and views for transmission outside India by or on behalf of Non-Resident who is engaged in the business of running news agency or of publishing newspapers. magazines or journals;

(iii)       Operations confined to shooting of cinematograph films in India if such Non-Resident is:

(a)       an individual—he should not be a citizen of India; or

(b)       a firm- the firm should not have any partner who is a citizen of India or who is resident in India; or

(c)        a company — the company does not have any shareholder who is a citizen of India or who is resident in India.

In the case of a business of which all the operations are not carried out in India. only such part of the income as is reasonably attributable to operations carried out in India shall be treated as deemed to accrue or arise in India.

(iv)       In the case of a foreign company engaged in the business of mining of diamonds, no income shall he deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamond in any Special Zone notified by the Central Government in the Official Gazette in this behalf.

(2B)      Income from any property, asset or source of income situated in India:

Any income which arises from any property movable or immovable, tangible or intangible which is situated in India, is deemed to accrue or arise in India.

Example: R who lives in London, has a house property situated in India which has been given by him on rent. Rent derived by R shall be taxable in India whether such rent is received by him in India or outside India as the house property is situated in India.

(2C)      Income from the transfer of any capital asset situated in India:

 Where the capital asset is situated in India. regardless of the residential status of the transferor or the transferee, capital gain, arising on its transfer, would be deemed to be income accruing or arising in India and hence would be taxable.

(2D)     Any income which falls under the head ‘Salaries’ if it is earned in India:

 Any income payable for services rendered in India shall be regarded as income earned in India though it may he paid in India or outside.

(2E) Salary payable by the Government to an Indian Citizen / National for services rendered outside India:

The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India:

(i)         Income should be chargeable under the head Salaries’;

(ii)        The payer should be Government of India;

(iii)       The recipient should be an Indian Citizen — whether Resident or Non-Resident;

(iv)       The services should be rendered outside India.

While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all allowances or perquisites paid outside India by the Government to the above Indian citizens for their rendering services outside India are exempt under section 10(7).

(2F)  Interest Payable by:

(i)         Government; or

See also  Residential Status of an Individual [Section 6(1) & 6(1A)]

(ii)        A person who is a resident in India, except where interest is payable in respect of money borrowed and used by the purpose of business or profession carried on outside India or earning any income from any source outside India; or

(iii)       A person who is a non-resident in India provided interest is payable in respect of money borrowed and used for a business or profession carried on in India.

shall be income which is deemed to accrue or arise in India in the hands of the recipient.

(2G) Royally Payable by:

(i)         Government; or

(ii)        A person who is a resident in India except where it is payable in respect of any right/information/ property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India; or

(iii)       A person who is a non-resident provided royalty is payable in respect of any right/information/ property used for the purpose of the Business or Profession carried on in India or earning any income from an source in India.

shall be income which is deemed to accrue or arise in India in the hands of the recipient.

(2H) Fees for Technical Services Payable by:

(i)         Government; or

(ii)        A person who is a resident in India, except where services are utilized for a business or profession carried on outside India or earning any income from any source outside India; or

(iii)       A person who is a non-resident provided fee is payable in respect of services for a business or profession carried on in India or earning any income from any source in India,

shall be income which is deemed to accrue or arise in India in the hands of the recipient.

(2I) Deemed Accrual of Gift made to a Non-Resident [Section 9(viii)]

Income arising outside India, being any sum of money exceeding Rs. 50,000 paid on or after 5.7.2019 by a person resident in India to a non-resident, not being a company, or to a foreign company, shall be deemed to accrue or arise in India.

Where income is deemed to accrue or arise in India under clause (f), (g) or (h) above, such income shall he included in the total income of the non-resident, whether or not the non-resident:

(a)       has a residence or place of business or business connection In India: or

(h)       has rendered services in India, [Explanation to section 9j

(3).     Fund management activities not to constitute business connection in India [Section 9A]

(1)       ‘Fund Management Activity’ in case of an ‘eligible investment fund’ carried out through an ‘eligible fund manager’ shall not constitute business connection in India [Section 9A (1)]

Notwithstanding anything contained in section 9(1) and subject to the provisions of this section, in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund.

(2)       ‘Eligible investment fund will not be treated as resident in India even if ‘Eligible Fund Manager’ is situated in India [Section 9A (2)]

Notwithstanding anything contained in Section 6, an ‘eligible investment fund’ shall not be said to be resident in India for the purpose of that section merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

(3)       Meaning of ‘Eligible Fund Manager’ [Section 9A (4)]

The eligible fund manager, in respect of an eligible investment fund, means any person who is engaged in the activity of fund management and fulfils the prescribed conditions.

(4).     Income on receipt of Capital Asset or Stock in Trade by Specific Person from Specified Entity. [Section 9B]

Where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.

Further, any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be—

(i)         deemed to be the Income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person and

(ii)       chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains”, in accordance with the provisions of this Act.

(5).     The Provisions regarding Incidence Of Tax above may be summarised in the following table

Particulars of Income Whether taxable
Resident
and
ordinarily
Resident
Not-
ordinarily
Resident
Non-
Resident
1. Income received or deemed to be received in India whether earned in India or elsewhere. Yes Yes Yes
2. Income which accrues or arises or is deemed to accrue or arise in India during the previous year, whether received in India or elsewhere. Yes Yes Yes
3. Income which accrues or arises outside India and received outside India from a business controlled from India. Yes Yes No
4. Income which accrues or arises outside India and received outside India in the previous year from any other source. Yes No No
5. Income which accrues or arises outside India and received outside India during the years preceding the previous year and remitted to India during the previous year. No No No

Highlights of provisions of incidence of tax

An analysis of the above provisions would highlight the following:

(a)       Any income which is either received in India or deemed to be received in India is taxable in India, irrespective of the residential status.

(b)       Any income which is either earned in India or is deemed to be earned in India is taxable in India, irrespective of the residential status.

(c)        For a Resident in India (for individual & HUF, resident and ordinarily resident in India) all global income, wherever earned/received is taxable in India.

(d)       For a non-resident, an income is taxable only if it is either earned in India or it is received in India.

(e)       For not ordinarily resident, income earned and received outside India will be taxable, only when it is from a business or profession controlled or set up in India.

(6).     Tax Planning for Residential Status

As we know that non-resident in India is not liable to pay income-tax on incomes which accrue or arise and also received outside India, whereas a resident in India is liable to pay income-tax on such incomes. Therefore, every assessee would like to be a non-resident in India, if he has any income which accrues or arises outside India.

If any individual other than an individual who is deemed resident as per newly inserted section 6(1A) wishes to be a non-resident in India. he should be careful about the facts given below:

  1. If an individual is a citizen of India and visits India in any previous year, he should not stay in India for more than 181 days (119 days, w.e.f. A.Y. 2021-22) in that previous year. Where he wishes to stay in India for more than 181 days (119 days, w.e.f. A.Y. 2021-22) at a stretch, he should plan his stay in such a manner that his stay in one previous year does not exceed 181 days (119 days, w.e.f. A.Y. 2021-22).

For example, he can stay from 2nd October of a particular previous year to 28th September of next previous year aggregating to 362 days at a stretch, still he will be called non-resident in India as the period of stay in each year will not exceed 181 days.

The above also hold good in case of a person of Indian Origin.

W.e.f. A.Y. 2021-22, the individual who is a citizen of India or person of Indian origin who can come to India and stay from 3rd January of a particular previous year to 28th July of next previous year aggregating to 238 days at a stretch, provided he was in India for not more than 364 days in the preceding 4 previous years.

Notes. —One should however, in the above case be careful regarding leap year as thy number of days for the month of February in that ca.sc shall he 29 instead of 28.

  1. The citizen of India who wishes to leave India in any previous year for employment abroad. should leave India by 28th September so that his stay in India does not exceed 181 days and he may he called non-resident in India for that previous year.
  2. A citizen of India, who does not leave India for employment abroad, should leave India by 29th May of the previous year if he had been in India for 365 days or more in the 4 preceding previous years.
  3. Foreign national can stay in India for ll days in the previous year and he will still he nonresident in India provided his stay in India during the 4 preceding previous years immediately preceding the relevant previous year does not exceed 364 days. if it exceeds 364 days, then, in such a case, he cannot stay in India for more than 59 days in that previous year. However, he can stay at a stretch of 59 + 59 days if these fall in two previous years. Thus, such person can come to India in the first week of February and stay up to May 29th of the next year.
  4. If an individual cannot become non-resident in India. he can still escape the liability of tax on all foreign incomes which accrue or arise and are received outside India except if such incomes accrue or arise from a business or profession set up or controlled from India provided he is not ordinarily resident in India.
  5. The HUF will be non-resident in India only when entire control and management of its affairs is situated outside India. If it is not possible, HUF can claim the status of “not ordinarily resident in India” provided the Karta of HUF satisfies both or any of the two additional conditions.
  6. There cannot be any planning of residential status in case of an Indian company because it is always a resident in India irrespective of its control and management. However, a non-Indian company can be non-resident in India if any part of the control and management of its affairs is situated outside India.
  7. A non-resident in India can bring his income to India. which accrued or arose to him outside India in any previous year, after the previous year of accrual because in that case it will not be treated as received in India. It will be called as remitted to India.

The same holds good in case of “not ordinarily resident in India” provided such income is not from the business or profession which is set up or controlled from India.

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