Tax Residency In The Time Of COVID - What Does The Supreme Court Ruling In Gaurav Baid v. Union Of India Mean For NRIs?

Four-months after her arrival, she was certified as of unsound mind and thereafter, until her death fifty-four years later, she remained in England and did not recover.

Fifteen years prior to her death, however, the receiver of her estate had been authorized by an English Court to concur in the sale of certain real estate in Australia, of which she owned half. The proceeds of that sale were duly remitted to England and, in accordance with the directions of the Court, invested in certain interest-bearing war bonds floated by the British Government.

Upon her death, the administrator of her estate applied to the Court to determine, among others, if the deceased could, in the circumstances of her stay in England, be considered "ordinarily resident" in the United Kingdom for taxation purposes. The significance of this determination turned on the fact that section 47 of the Finance (No. 2) Act of 1915, under which the war bonds in question had been issued, stated that:

"The Treasury may, if they think fit (…) issue any securities which they have power to issue (…) with a condition that neither the capital nor interest thereof shall be liable to any taxation (…) so long as it is shown (…) that the securities are in the beneficial ownership of persons who are neither domiciled nor ordinarily resident in the United Kingdom (…)."

On behalf of the deceased, it was contented that a person who visited a country and was forthwith certified as a lunatic, and therefore made to remain there under constraint, unable to exercise any will of her own, could not be considered "ordinarily resident" in that country. By analogy, it was argued that however long a prisoner of war was a prisoner of war in a country, it could not be said that he had at any time become a "resident" of that country. For that reason, it was argued that neither the capital nor interest on the bonds could be subject to English taxes or duties.

This contention was rejected. Writing for the Court, Mr. Justice Morton ruled that the deceased's residence in England became permanent by reason of her condition and the fact that she required care and attention, in the ordinary course of her life, as events happened. In other words, if residence was initially taken up voluntarily, the fact that it later became involuntary would not count against the acquisition of ordinary residence. The Court also held that if the deceased was not ordinarily resident in England, during the last fifty-four years of her life, she was not ordinarily resident anywhere else. Since a person could not be "ordinarily resident" nowhere, in the circumstances of the case, the Court concluded that the deceased as "ordinarily resident" in England and therefore amenable to English taxes and duties.^[1]

Much water has flown under the bridge since the decision in that celebrated case, reported as Re Mackenzie. Yet, it could provide useful guidance today in answering a similar question that has vexed countless non-resident Indians (NRIs) who were forced to remain in India on account of international travel restrictions introduced to combat the spread of COVID-19: will they be considered "tax resident" in India for Indian income-tax purposes?

The incidence of income tax under the Income-tax Act, 1961 ("ITA") is based on the residence of the taxpayer and the source(s) of his or her income. While a person "resident" in India is taxed on his or her worldwide income, non-residents are only taxed on their India-sourced income.

Section 6 of the ITA treats an individual to be "resident" in India in any previous year if he or she is in India for:

• (a)182 days or more in that year; or
• (b)60 days or more in that year and has been in India for 365 days or more in the four years preceding that year.

The ITA also contains a specific relaxation in how the second of these tests applies to citizens of India and persons of Indian origin (PIOs) who, being outside India, came to visit India: such individuals are permitted to spend up to 120 days in India in a previous year without qualifying as "resident" in India.

When the country went into a general lockdown on account of COVID-19, several representations were made to the Central Board of Direct Taxes ("CBDT") highlighting the difficulties faced by NRIs and PIOs who, while on visit to India during FY 2019-20, were forced to remain in India due to the imposition the lockdown and the accompanying suspension of international flights. It was anticipated that this forced stay might unintentionally render them "resident" in India and therefore subject their worldwide income to Indian taxation.

To allay these concerns, on May 8, 2020, the CBDT issued Circular No. 11 of 2020 ("Circular") clarifying that the period from March 22, 2020 to March 31, 2020 (or a date prior to March 31, 2020 as applicable) would be excluded in determining the residential status of an individual under section 6 of the ITA for FY 2019-20. A press note released by the Ministry of Finance along with the Circular stated that as the lockdown had continued into FY 2020-21, a further circular excluding the period of stay of individuals stranded in India up to the date of normalisation of international flight operations, for determining the residential status during FY 2020-21, would be issued after such normalisation. Curiously, this statement was omitted from the text of the Circular itself; no such further circular has been issued so far for FY 2020-21.

In this background, a writ petition was filed before the Supreme Court by a UAE-based NRI who, having come to India in March 2020, was finally able to return to the UAE only after spending upwards of 182 days in India during FY 2020-21. It was submitted by the petitioner that his involuntary stay in India would result in him losing his "non-resident" status under the ITA, thereby subjecting his worldwide income to Indian taxation. The petitioner therefore sought a direction to the effect that he would be considered "non-resident" for Indian income tax purposes for FY 2020-21, irrespective of the duration of his stay in India, on account of the COVID-19 pandemic.

Taking note of the fact that certain relaxations had been granted by the CBDT for FY 2019-20 through the Circular, and the fact that the pandemic had continued beyond March 31, 2020, because of which many people had remained stranded in the country, the Supreme Court directed the petitioner to make a representation to the CBDT and further directed the CBDT to consider the same within three weeks of the receipt thereof.^[2]

The Supreme Court's order is a welcome one and it is hoped that the CBDT will provide relief to the many individuals who involuntarily remained or continue to remain in India in FY 2020-21, beyond the thresholds to be considered "resident" in India. Several countries and organisations have already issued detailed guidance on when physical presence in a country may be disregarded for determining residency on account of the exceptional situation caused by the COVID-19 pandemic. For instance, the Australian Tax Office has published guidance clarifying that a person not otherwise tax resident in Australia would not become tax resident purely on account of his or her temporary stay in Australia due to COVID-19. Similarly, the Irish Revenue Commissioners have issued guidance clarifying that where an individual is prevented from leaving Ireland on their intended day of departure because of COVID-19, planned days pf absence would be disregarded when determining residence in Ireland.

Moreover, as the decision in Re Mackenzie indicates, it is doubtful if taxpayers would obtain relief in such situations through the judicial route. This is not, however, a foregone conclusion: English courts have held since time immemorial that residence must be "adopted voluntarily and for settled purposes",^[3] and Indian courts have followed suit. For instance, in CIT v. Suresh Nanda,^[4] the Delhi High Court held that where a person was compelled to stay in India because his passport was impounded, the period for which his passport was impounded had to be excluded in determining whether he was "resident" in India for the relevant assessment year. In coming to this conclusion, the Court noted that the taxpayer had consciously chosen to be non-resident consistently since 1985 and had never visited India for more than 182 days in any given year. As the Court noted:

"23. (…) It naturally follows that the option to be in India, or the period for which an Indian citizen desires to be here is a matter of his discretion. Conversely put presence in India against the will or without the consent of the citizen, should not ordinarily be counted adverse to his chosen course or interest, particularly if it is brought about under compulsion or, to put it simply, involuntarily. There has to be, in the opinion of this Court, something to show that an individual intended or had the animus of residing in India for the minimum prescribed duration. If the record indicates that – such as for instance omission to take steps to go abroad, the stay can well be treated as disclosing an intention to be a resident Indian. Equally, if the record discloses materials that the stay (to qualify as resident Indian) lacked volition and was compelled by external circumstances beyond the individual's control, she or he cannot be treated as a resident Indian."

Similarly, in Re Spek and Lawson,^[5] a prisoner who was sentenced to life imprisonment and transferred to a prison in Ontario was held not be ordinarily resident in Ontario as she had been transferred there against her will for the sole purpose of serving her sentence.

Yet it should be remembered that the ITA does not permit a subjective determination of residence and even fraction of day spent in India for whatever reason, should, strictly construed, count towards a determination of residence. In that sense, the decision in Suresh Nanda stands as a useful counterpoint, preferring an equitable interpretation over a literal one to obviate the unjust result that that the latter would have produced. Nevertheless, as the Court itself noted in Suresh Nanda, the ruling in that case should not be treated as a thumb rule and each claim of involuntary stay should be examined on its own merits. Whether the exceptional justification of a COVID-19 enforced stay fits with this rationale remains to be seen. If the CBDT does not provide any relief in respect of FY 2020-21, it is likely that the higher judiciary would be asked to step in and adjudicate on the question of involuntary residence again soon!