CA Inter Cost & Mgmt

Residential Status Analysis for AY 2022-23 (FY 2021-22)

Step 1: Determine Residential Status

Under Section 6 of the Income Tax Act, 1961, an Indian citizen is classified as Resident if:
(a) In the FY, the person is in India for 182 days or more, OR
(b) In the FY, the person is in India for 60 days or more AND in the 4 preceding FYs, the person was in India for 365 days or more in aggregate.

For FY 2021-22:
- Days in India: 157 days (< 182, so condition (a) not met)
- Condition (b) check: 157 days (≥ 60) ✓
Sum of preceding 4 FYs: 200 + 100 + 76 + 45 = 421 days (≥ 365) ✓

Mrs. Shruti is RESIDENT for AY 2022-23.

Step 2: Determine Ordinarily Resident Status

Under Section 6(6), a Resident is Ordinarily Resident if:
(a) Was resident in 9 or more of the 10 preceding FYs, OR
(b) Was in India for 9 months (270 days) or more in aggregate during the 7 preceding FYs.

For condition (b): 7 preceding FYs are FY 2014-15 to FY 2020-21. Available data (FY 2017-18 to 2020-21) totals 421 days. Even with zero days in the 3 years without data, aggregate exceeds 270 days.

Mrs. Shruti is Resident AND Ordinarily Resident (ROR) for AY 2022-23.

Step 3: Determine Taxable Income

For ROR, all income from worldwide sources is taxable. Categorizing the income:
- Salary earned and received in UAE: ₹2,00,000 → Taxable
- House property income from UAE property: ₹5,00,000 → Taxable
- Income deemed to accrue and arise in India: ₹5,00,000 → Taxable
- Retail business income (accrued and received outside India, controlled from India): ₹10,00,000 → Taxable (for ROR, place of control/receipt is immaterial)
- Income accrued and arising in India: ₹3,00,000 → Taxable

Total Income: ₹25,00,000

Deductions under Section 80C:
Life Insurance Premium paid by cheque in India: ₹1,50,000 (within statutory limit)

Net Taxable Income: ₹25,00,000 − ₹1,50,000 = ₹23,50,000

The Assessing Officer will invoke Section 69 of the Income Tax Act, 1961 — Unexplained Money, Bullion, Jewellery, etc. — to address the disparity between the recorded expenditure of ₹10,00,000 and the market value of ₹50,00,000.

Procedure by AO:
The AO will call upon the assessee to satisfactorily account for the gold and provide evidence of: (a) the source of the ₹10,00,000 spent (whether from salary, business income, savings, loans, gifts, etc.); (b) documentary proof of purchase (bills, invoices, bank statements); and (c) the legitimacy of the acquisition.

Burden of Proof:
Under Section 69, the burden lies on the assessee to demonstrate satisfactory evidence. Failure to do so will result in the unexplained portion being treated as income.

Two Possible Outcomes:

Case 1 — If Source of ₹10,00,000 is Explained: If the assessee proves that ₹10,00,000 was spent from legitimate sources, it becomes the cost base. The difference of ₹40,00,000 (₹50,00,000 market value minus ₹10,00,000 cost) represents unrealized appreciation or capital gain on the asset. This gain will NOT be treated as unexplained income under Section 69. Instead, when the gold is eventually sold, the capital gain will be taxed as either long-term or short-term capital gains depending on the holding period. No issue arises under Section 69.

Case 2 — If Source Cannot Be Explained: If the assessee cannot satisfactorily prove the source of the ₹10,00,000, the unexplained amount of ₹40,00,000 (or the entire ₹50,00,000 if the full source is unproven) will be treated as income under Section 69. This amount will be added to the taxable income of FY 2021-22 at its market value as determined on the date of discovery.

Tax Treatment:
The unexplained portion shall be assessed as income of that financial year. The assessee has the right to file a response with supporting documentation within the prescribed time to establish the legitimate source of acquisition.

Note: The solution addresses facts (xii) and (xiii) only. Complete computation of total income and tax payable requires details of all income sources (salary, business, capital gains, etc.).

Fact (xii) - Life Insurance Premium (₹50,000): Mrs. Nisha's annual life insurance premium of ₹50,000 deposited with the Life Insurance Corporation of India for the maintenance of her mother (aged 70 years) is deductible under Section 80C of the Income Tax Act 1961. The premium qualifies for deduction because the insured person is the assessee's parent, satisfying the eligibility criteria under Section 80C. The amount of ₹50,000 is within the overall limit of ₹1,50,000 under Section 80C. This deduction reduces the taxable income.

Deduction Allowed: ₹50,000

Fact (xiii) - Stamp Duty and Registration Fees (₹1,55,000): The stamp duty and registration fees of ₹1,55,000 paid for registration of the residential property are capital expenditures incurred to acquire the property. Under Section 37 of the Income Tax Act 1961, deductions are restricted to expenses incurred in earning income, and capital expenditures are explicitly excluded. These costs do not qualify as a deduction in the year of purchase. Instead, they form an integral part of the cost of acquisition of the property and will increase the cost base for capital gains calculation when the property is sold in the future.

No Deduction in AY 2022-23: ₹0

Overall Impact: The net impact on total income is a reduction of ₹50,000 through the Section 80C deduction. The stamp duty and registration fees are capitalized and do not affect the taxable income for AY 2022-23.