DT: Amendments in "Period of Holding" and "Residential Status"

In the series of Income Tax amendments, Sanjay Jain Classes has provided the amendments to the section 2(15) and 2(24) here. Today, we are posting the amendments related to “Period of Holding” and “Residential Status”.

Amendment in section 2(42A)

Section 2(42A) defines the tern “short-term capital asset”. Explanation 1 to the said clause provides for determining the period for which the capital asset is held by the assessee. Clause (i) to the said Explanation has been amended by the Finance Act, 2015. The amended provision provides that –

a.      in the case of unit or units, which become the property of the assessee in consideration of a transfer referred to in section 47(xviii), there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee;

b. in the case of shares in a company [acquired by the non-resident assessee on redemption of GDRs referred to in section 115AC(1)(b) held by such assessee], the period shall be reckoned from the date on which a request for such redemption was made.

Analysis

In order to encourage the investment in the above mentioned units and shares, the government has amended the clause (i) to the Explanation 1 of section 2(42A) so that such  units and shares could become long-term capital asset and ultimately the tax liability of the assessee get reduced.

Section 6(3) before the amendment

According to section 6(3), a company is said to be resident in India in any previous year, if-

a.       it is an Indian company; or

b.      during that year, the control and management of its affairs is situated wholly in India.

Amendment in section 6(3)

With effect from the assessment year 2016-17, a company shall be said to be resident in India in any previous year, if-

a.       it is an Indian company; or

b.      its place of effective management, in that year, is in India.

Analysis

Before the amendment, even if the company is not an Indian company, it shall be treated as resident in India in any previous year, if during that year the control and management of its affairs is situated wholly in India.  Even a partial control of the company outside India was sufficient to hold the foreign company as a non-resident. The Apex Court has given guidelines as to how the expression “control and management” would operate in different cases. It has held that “the head and brain of a company is the Board of Directors, and if the Board of Directors exercises complete local control, then the company is also deemed to be resident”. Due to the requirement that whole of control and management should be situated in India and that too for whole of the year, the condition has been rendered to be practically inapplicable. A company can easily avoid becoming a resident by simply holding a board meeting outside India. This facilitates creation of shell companies which are incorporated outside but are controlled from India. After the amendment to the clause (b) of section 6(3), the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.