The issue of economic offenders having large tax liabilities fleeing the country over the past several years has added undue pressure to the exchequer’s coffers. To curb this menace several measures have been undertaken including the requirement to obtain an Income Tax Clearance Certificate (‘ITCC’) before leaving the country.

Recently, the Finance (No. 2) Act, 2024 sought to extend the requirement to obtain an ITCC by a person domiciled in India to cover liabilities under the Black Money Act. However, it has raised some pertinent questions around the provision itself including who really constitutes to be a ‘person domiciled in India’. In an article published on Taxsutra, Ritesh Thakkar, Director – Direct Tax, and Mansi Parikh, Articled Assistant – Direct Tax, provide their thoughts around the Tax Clearance conundrum!

Ritesh Thakkar Director – Direct Tax , CBV & Associates

Mansi Parikh Articled Assistant, CBV & Associates

Non-payment of tax dues is a problem that has plagued the Income-tax department since many decades. As on February 1, 2024 the total disputed tax liabilities stood at a whopping INR 35 lakh crores arising from a staggering 2.68 crore Income-tax, Wealth tax and Gift tax cases. Further, the surge in economic offenders having large tax liabilities fleeing the country over the past several years has added undue pressure to the exchequer’s coffers. Reports indicate that more than INR 40,000 crores are owed to the government/ institutions/ public by individuals who have absconded since 2015.

Various measures have been implemented to address and curb the menace of fugitive economic offenders including the requirement to obtain an Income Tax Clearance Certificate (‘ITCC’) before leaving the country. The ITCC confirms that the person has no outstanding liabilities under the Income-tax Act, 1961, (‘the Act’) Wealth-tax Act, 1957, Gift-tax Act, 1958 or the Expenditure-tax Act, 1987 or that satisfactory arrangements have been made to pay any such liabilities. This is the position till September 30, 2024.

I. Amendment vide Finance (No. 2) Act, 2024

Section 230(1A) of the Act required a person ‘domiciled’ in India to obtain an ITCC from the tax authorities before leaving India, where, in the opinion of the tax authority such circumstances exist which render it necessary for the person to obtain such certificate.

Further, approval of the Principal Chief Commissioner (‘Principal CCIT’) or Chief Commissioner of Income- tax (‘CCIT’) is to be mandatorily taken by the tax authority prior to requiring any person to obtain such certificate.

The above provision did not cover liabilities arising under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’). Therefore, vide Finance (No. 2) Act, 2024 the above section has been amended to cover liabilities arising under the Black Money Act under section 230(1A) of the Act in addition to liabilities arising under other Acts to safeguard the interest of Revenue. The amendment is effective from October 1, 2024.

II. Clarifications issued by CBDT

The CBDT, vide Instruction No. 1 of 2004 clarified that an ITCC may be required to be obtained by persons domiciled in India under section 230(1A) only in the following circumstances:

i. Where the person is involved in serious financial irregularities and his presence is necessary in investigation of cases under the Income-tax Act/ Wealth-tax Act and it is likely that a tax demand will be raised.

ii. Where the person has direct tax arrears exceeding INR 10 lakhs which have not been stayed by any authority.

The higher authorities, after recording due satisfaction that the departure of such persons from India will prejudicially affect the interest of revenue, may authorize the Assessing Officer to require that such persons should obtain an ITCC. The Assessing Officer, thereafter, shall inform the immigration authorities accordingly.

Therefore, the provision does not require all persons to obtain a Tax Clearance Certificate. Instead, it only applies to specific cases where circumstances necessitate such clearance. The amendment, vide Finance (No. 2) Act, 2024 does not affect the circumstances prescribed vide CBDT Instruction No. 1 of 2004 and instead only includes outstanding liabilities under the Black Money Act under the ambit of the ITCC.

This has now been clarified by the CBDT vide Press Release dated August 20, 2024, wherein it has been reiterated that an ITCC is required only in the two circumstances mentioned above and not by every Indian domiciled person.

III. The Dilemma of ‘Domicile’

The term ‘domicile’ is not explicitly defined under the Income-tax Act, 1961 or other related statutes. Generally, it refers to a permanent home or the place where a person resides with the intention of staying for a prolonged or indefinite period. However, Part II of the Indian Succession Act, 1925 broadly recognizes three primary types of domiciles which are discussed below:

i) Domicile of Origin – This is the initial domicile a person acquires at birth, usually derived from the domicile of one’s parents. This domicile persists unless it is changed by acquiring a new domicile. Essentially, it represents the legal starting point of one’s domicile status and remains in effect until it is replaced by another type of domicile.

ii) Domicile of Choice – This is established when an individual moves to a new country or region with the ‘intention’ of making it their permanent home. This form of domicile supersedes the domicile of origin, reflecting the individual’s intention to settle in a new jurisdiction. iii) Domicile of dependents – There are some special circumstances prescribed for various situations which would determine the domicile based on some relationships viz. minor’s domicile, domicile acquired by a woman on marriage, etc.

While Article 5 of the Indian Constitution refers to ‘domicile’, it does not ascribe any meaning to the term. The term ‘domicile’ has been interpreted by various courts across the globe. The Hon’ble Supreme Court of India in case of Central Bank of India v. Ram Narain held that the term domicile lends itself to illustrations but not to definition. However, two constituent elements are necessary for the existence of domicile, (i) a residence of a particular kind and (ii) an intention of a particular kind.

The Hon’ble Apex Court went on to hold that the residence need not be continuous but it must be indefinite, not purely fleeting. The intention must be a present intention to reside forever in the country where the residence has been taken up.

In the above case of Ram Narain, the Hon’ble Court also referred to the decision of the House of Lords (United Kingdom) in case of Craignish v. Craignish [1892] wherein it was held that “that place is properly the domicil of a person in which his habitation is fixed without any present intention of removing therefrom”.

Further, the Hon’ble Supreme Court of India as well as various Hon’ble High Courts in the following cases have elucidated the concept of domicile and affirmed the above position:

  • Abdul Sattar Haji Ibrahim Patel v. State of Gujarat (SC)
  • Mohamed Reza Debestani v. The State of Bombay (C.A. No. 289 of 1964) (SC)
  • Michael Anthony Rodrigues v. State of Bombay (Bombay High Court)
  • Firoz Meharuddin v. Sub-Divisional Officer (Madhya Pradesh High Court)

IV) Concluding Thoughts

The recent clarification by the CBDT helps assuaging the apprehension and misconceptions emanating from various media reports wherein it has been erroneously stated that every person domiciled in India will have to obtain an ITCC before travelling abroad.

As one can see from the above interpretations and judicial pronouncements, it may be deduced that the concept of domicile integrates physical presence with the intention to establish a permanent residence. However, in the absence of any specific definition under the Act as to what constitutes a person’s ‘domicile’, one will have to continue to place reliance on domestic and international jurisprudence, thereby leaving scope for interpretation.

While the amendment vide Finance (No. 2) Act, 2024, only sought to extend the requirement to obtain an ITCC to cover liabilities under the Black Money Act, it has raised some pertinent questions around the provision itself. One can only hope that the lawmakers take cognizance of the ambiguity surrounding the term ‘domicile’ and clarify the same.