2004 (5) TMI 8 - SC - Income Tax

Taxability of Malaysian Business Income in India - Taxability of Capital Gains arising from Immovable Property situated in Malaysian - Scope of the term "may be taxed" as per DTAA - Overriding effect of DTAA over Provisions of Income Tax - Double Taxation Avoidance Agreement (DTAA) between India and Malaysia - Absence of permanent establishment in India - Whether the Malaysian income cannot be subjected to tax in India on the basis of the DTAA entered into between GOI and Government of Malaysia.

HELD THAT:- The immovable property in question is situate in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income is derived and that finding of fact has been recorded by all the authorities and affirmed by the High Court. We, therefore, do not propose to re-examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of the rubber plantations cannot be taxed in India, because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile.

We need not enter into an exercise in semantics as to whether the expression "may be" will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act.

Whether the capital gains should be taxable only in the country in which the assets are situated - HELD THAT:- The contention put forth by the learned Attorney-General that capital gains is not income and, therefore, is not covered by the treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovab1e property though subject to different kind of treatment. Therefore, the contention advanced by the leaned Attorney-General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of "income" would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore article 6 would be attracted.

Appeal of the revenue dismissed. Decided in favor of assessee.