Place of Effective Management, a Poem not so well Understood

Adv Sherry Samuel Oommen: This article is authored by Adv Sherry Samuel Oommen. Adv Oommen, who specializes in constitution, tax and corporate laws has also cleared the final exams of the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India and the Institute of Company Secretaries of India. He has also completed his Masters Degree in Commerce, apart from obtaining a Post Graduate Diploma in Business and Corporate Laws from Symbiosis Pune. The views expressly are personal and should not be construed as a legal [e-mail].

-  Adv Sherry Samuel Oommen

1. Setting the context

Taxability of income under the Income-tax Act, 1961 (“the Act”) is fundamentally dependent upon the residential status of a person. Depending on the residential status, the scope of income chargeable to tax is determined having regard to the provisions of section 5 of the Act. Further, the residential status of a person is determined based on the provisions of section 6 of the Act.

In the context of a “company”, once the said entity qualifies as a “resident” under the Act, it becomes liable to tax in India on its world-wide income. The question therefore that arises is when does a company become a “resident” under the Act?

1.1 Determination of residential status

Prior to Finance Bill, 2015, a company qualified as a “resident” during a previous year, if it satisfied any of the following conditions:

• It is an Indian company; or

• During the year concerned, the control and management of its affairs is situated wholly in India.