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Total Income of Assessee (Sections 4 & 5); Income Deemed to Accrue or Arise in
India (Section 9); and Incidence of Tax Varies with Residential Status
1. Section 4 – Charge of Income-tax
• Section 4(1) is the charging section of the Income-tax Act, 1961.
• It declares that income tax shall be charged for every assessment year in
respect of the total income of the previous year of every person, at the rates
laid down by the Finance Act.
• The charge extends to all persons defined under Section 2(31) – individual, HUF,
company, firm, AOP/BOI, local authority, and artificial juridical person.
• Thus, this section answers three key questions:
what (total income), when (assessment year), and from whom (every person).
2. Section 5 – Scope of Total Income
Section 5 determines the extent of income chargeable to tax in India.
Taxability depends on the residential status of the assessee as per Section 6.
2.1 For Resident (Section 5(1))
Total income includes:
1. Income received or deemed to be received in India;
2. Income accruing or arising in India; and
3. Income accruing or arising outside India.
Hence, a Resident and Ordinarily Resident (ROR) is taxed on global income.
2.2 For Non-Resident (Section 5(2))
Total income includes only:
1. Income received or deemed received in India; and
2. Income accruing or arising or deemed to accrue/arise in India.
Therefore, a Non-Resident (NR) is taxed only on Indian-sourced income.
2.3 For Resident but Not Ordinarily Resident (RNOR)
Taxable income covers:
• Income received or deemed received in India;
• Income accruing or arising in India; and
• Income from business or profession controlled or set up in India, even if
earned abroad.
3. Section 9 – Income Deemed to Accrue or Arise in India
Section 9 creates a legal fiction by treating certain foreign-earned incomes as if they
arise in India.
This prevents avoidance of Indian tax where there is an economic nexus with India.
3.1 Main Categories (Sec. 9 (1))
1. Business Connection in India – Income from any business connection,
property, asset, or source in India.
2. Salary for Services Rendered in India – Taxable even if paid abroad.
3. Salary Paid by Government to Citizen for Services Outside India – Taxable in
India.
4. Dividend Paid by Indian Company – Always deemed to accrue in India.
5. Interest – Payable by Government or by a resident (unless used for business
outside India).
6. Royalty – Payable by Government or resident (unless used for business outside
India).
7. Fees for Technical Services (FTS) – Payable by Government or resident (unless
used for business outside India).
3.2 Important Explanations
• Explanation 2: defines “business connection” – includes activities through
dependent agents and significant economic presence (digital nexus).
• Explanation 5 (Vodafone amendment): covers indirect transfer of Indian
assets by foreign companies.
• Explanation 6 (2018): introduces Significant Economic Presence (SEP) for
digital and online businesses.
3.3 Key Case Law
• CIT v. Toshoku Ltd. (1980) – Commission earned abroad by non-resident not
taxable; no business connection in India.
• Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) – Off-shore services
not taxable unless both rendered and earned in India.
• Vodafone International Holdings BV v. UOI (2012) – Indirect transfer outside
Indian jurisdiction (later overridden legislatively).
4. Incidence of Tax and Residential Status
4.1 Concept
“Incidence of tax” means the extent or scope of income chargeable to tax in India.
It varies according to the residential status of the assessee.
4.2 Comparative Table
Nature of Income ROR RNOR NR
Received or deemed to be received in India
Accruing or arising in India
Deemed to accrue or arise in India (Sec. 9)
Accruing/arising outside India – from business controlled in India
Accruing/arising outside India – from business controlled outside India
= Taxable = Not taxable
4.3 Illustrations
1. ROR: Global income taxable (Indian + foreign).
2. RNOR: Indian income + income from business controlled in India taxable.
3. NR: Only income arising or received in India taxable.
5. Conclusion / Summary
• Section 4 – Imposes the charge of income tax.
• Section 5 – Defines the scope of total income depending on residential status.
• Section 9 – Expands tax coverage to incomes deemed to accrue or arise in
India.
• Residential status (Sec. 6) determines how far the charge extends.
Hence, the incidence of tax varies as follows:
• Resident and Ordinarily Resident (ROR): Taxed on global income.
• Resident but Not Ordinarily Resident (RNOR): Taxed on Indian income + India-
controlled foreign income.
• Non-Resident (NR): Taxed only on Indian-sourced income.
Together, Sections 4, 5, 6 and 9 establish the fundamental framework of taxability and
scope of total income under Indian law.