The Income-tax Appellate Tribunal (ITAT) in Mumbai has ruled in favor of an individual who claimed non-resident status for tax purposes. The taxpayer, M Gulati, spent 210 days abroad for work and job search, and the tribunal emphasized that tax residency must be determined based solely on the number of days spent in India.
Tax Department’s Argument Rejected
Gulati did not report his foreign income of Rs 1.2 crore for the financial year 2015-16, arguing that he stayed in India for less than 182 days. However, the Income-tax department contested this, claiming that 28 of the 210 days were spent searching for a job and should not count. Based on this, officials treated him as a tax resident and taxed his global income.
ITAT Clarifies Employment Purpose Rule
The ITAT dismissed this argument, affirming that job search days qualify under the ‘purpose of employment’ clause in the Income-tax Act. The tribunal referred to Explanation 1 of Section 6(1), which states that individuals leaving India for employment are considered tax residents only if they stay in India for 182 days or more.
Tax Officer’s Decision Overturned
The tax officer had recalculated Gulati’s overseas stay, excluding 28 days, and concluded that he spent more than 182 days in India. As a result, the officer taxed his foreign salary of Rs 86.2 lakh and interest income of Rs 2.8 lakh. The Appellate Commissioner upheld this view, citing Gulati’s unemployment during the job search period. However, ITAT overruled both decisions, stating that tax residency should be based only on the total days spent in India.
Impact of the Ruling
This decision provides relief to individuals traveling abroad for job searches before securing employment. Under tax laws, non-residents must pay tax only on income sourced in India, such as rent or bank interest, but not on foreign earnings.
Residency Rules Have Changed
From the financial year 2020-21, the residency threshold has been lowered to 120 days for those earning over Rs 15 lakh in India. However, during the assessment year 2016-17, the 182-day rule applied.
The ITAT’s ruling sets a significant precedent for determining the tax status of individuals who combine job searches with employment abroad.
