RESIDENTIAL STATUS OF A PARTNERSHIP FIRM

RESIDENTIAL STATUS OF A PARTNERSHIP FIRM

(As per Section 6(2) of the Income Tax Act, 1961)

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 1. Relevant Legal Provision

                Section 6(2) of the Income Tax Act, 1961 states:

“A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.”

 2. Logical Interpretation

This means:

• If any part of the control and management of the firm’s affairs is in India →
  Firm is Resident in India

• If the whole of the control and management is outside India →
  Firm is Non-Resident

 Key principle:

A firm is non-resident only if its control and management is wholly outside India.

If even a part of management or decision-making occurs in India, the firm becomes resident.

  3. Meaning of Key Terms

(A) “Control and Management”

• Refers to the place where key management and commercial decisions that are necessary for the conduct of the firm’s business as a whole are made.

  The term “Control and Management” used in Section 6(2) of the Income Tax Act, 1961, is the decisive test for determining the residential status of a partnership firm. It refers to the place where the central management and key policy decisions of the firm are actually made. The words “control and management” do not mean the carrying on of day-to-day business operations, but rather the directing power, the head, and the brain of the firm which governs the entire affairs of the business. In simple terms, it denotes the place from which the affairs of the firm are directed, controlled, and supervised.

  This control and management must be understood in a real and practical sense and not merely in a legal or theoretical sense. The place of control is the place where strategic decisions, such as formulation of policies, approval of major contracts, financial planning, and overall supervision of business, are made. The place where routine clerical or administrative work like maintaining accounts or dispatching goods is carried out does not determine the place of control and management. The “control and management” must therefore be distinguished from the day-to-day execution of business activities.

• It is about central control, not day-to-day operations.

  Example:
If business decisions (policy, contracts, investments, financial decisions) are made in India → control in India.

(B) “Wholly Outside India”

• It means the entire control and management is outside India.

• Even if one partner in India participates in management decisions, it will be considered partly in India, making the firm Resident.

  4. Step-by-Step Determination Process

To determine the residential status of a partnership firm for a previous year:

Step 1: Identify where control and management lies.

• Review who takes policy and business decisions.

• Check where meetings and important communications are held.

• Examine where books of accounts are maintained.

Step 2: Apply Section 6(2).

• If control & management wholly outside India → Non-Resident

• If wholly or partly in India → Resident

Step 3: Confirm consistency annually.

• Residential status must be determined every year, depending on the facts of that particular previous year.

   5. No Sub-classification (Unlike Individuals or HUFs)

      For a partnership firm, there is no further classification like:

• Resident and Ordinarily Resident (ROR)

• Resident but Not Ordinarily Resident (RNOR)

It can be only:

• Resident, or

• Non-Resident

CASE STUDY: Residential Status of a Partnership Firm

Case Title:

M/s Sunrise Exports v. The Income Tax Officer

(This is a hypothetical case based on real principles applied in Indian tax rulings.)

      Facts of the Case

• M/s Sunrise Exports is a partnership firm registered under the Indian Partnership Act, 1932.

• The firm was formed by three partners:

  • Mr. Arjun (Indian citizen residing in Mumbai)

  • Mr. David (Indian citizen residing in Dubai)

  • Mr. Imran (Indian citizen residing in London)

• The registered office of the firm is in Mumbai, India.

• The nature of business: export of garments to Middle East countries.

• The books of account are maintained in Mumbai.

• However, major business decisions such as export contracts, pricing, and supplier agreements are made by Mr. David and Mr. Imran during meetings held in Dubai.

• The profits are received in an Indian bank account but are distributed partly abroad to partners’ accounts.

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    Issue for Determination

What is the residential status of M/s Sunrise Exports for the Previous Year 2024–25 under Section 6(2) of the Income Tax Act, 1961?

     Relevant Legal Provisions

      Section 6(2), Income Tax Act, 1961:

A firm or an association of persons (AOP) shall be resident in India, unless the control and management of its affairs is situated wholly outside India during the previous year.

    Therefore:

• If control and management is wholly outside India → Non-Resident

• If control and management is wholly or partly in India → Resident

Meaning of “Control and Management”:

It refers to the place where the key decisions concerning the management and business policies of the firm are made.

It is not the place where day-to-day operations are carried out, but where the central control and management actually lies.

Step-by-Step Analysis

Step 1: Identify where the control and management lies

We must examine who takes the key management and commercial decisions and where they are taken.