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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.