TMI Blog1994 (3) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... cases. Though the terms of reference in different cases vary, the core of the problem and the basic issues involved for adjudication are similar and identical and, consequently, these cases are taken up for consideration together. Tax Case No. 264 of 1983 : The assessee in this case is a firm owning certain rubber estates in Malaysia. During the assessment year 1977-78, the assessee earned an income of Rs. 88,424. The assessee also sold an item of property, the short-term capital gains of which resulted in a sum of Rs. 18,113. On the ground that both the items of income are assessable in India, the Income-tax Officer assessed the assessee on an income of Rs. 1,06,540 to a tax of Rs. 12,727 and adding interest under section 139(8) in a sum of Rs. 10,775, a total demand of Rs. 23,502 was raised against the assessee. Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), Madurai. The appellate authority allowed the appeal applying article 1 read with articles 7 and 6, respectively, of the agreement for avoidance of double taxation. The matter was pursued on appeal before the Appellate Tribunal by the Department and the Tribunal also rejected the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of reference dated September 28, 1983, the following question of law has been referred for the adjudication of this court : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's decision that the Malaysian income cannot be subjected to tax in India is in accordance with the Agreement for Avoidance of Double Taxation entered into between the Government of India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 ?" Tax Case No. 790 of 1984 : The assessee in this case is a Hindu undivided family and a resident in India. It earned income from the rubber estates owned in Malaysia. The Assessing Officer was of the view that, since the assessee is a resident and has been exercising control over the foreign business from within India having regard to article 6(2)(a) of the agreement, the profit attributable to such control in India can be taxed in India and double taxation relief will be available only in terms of article 22(1)(c) of the agreement. On appeal, the first appellate authority ordered the deletion of the entire income of Rs. 1,68,330 from Malaysia on the view that unless the Malaysian enterprise carries on business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and also interest on deposits, dividends and income from lands in Malaysia. The Income-tax Officer computed the assessee's income inclusive of the foreign income in a sum of Rs. 41,608 and inclusive of capital gains and assessed the assessee to tax, holding at the same time that the assessment will be subject to levy under avoidance of double taxation agreement on production of necessary tax receipts for having paid the tax in Malaysia. The assessee filed an appeal before the first appellate authority contending that the assessee did not exercise any control over the Malaysian affairs and that the entire income from Malaysia ought to have been excluded from its taxable income. Though the said appellate authority partly allowed the appeal holding that the income derived from dividends and interest are not taxable in India in view of article 8 of the agreement, he also held that they are includible for rate purposes and subject to the production of certificates that the incomes referred to in the order have been taxed in Malaysia, the orders of the Assessing Officer may be revised. Not satisfied with the nature of relief accorded, the assessee pursued the matter further before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India is in accordance with the agreement for avoidance of double taxation between India and Malaysia (Notification No. G. S. R. 167(E), dated April 1, 1977 ?" Tax Case No. 72 of 1987 : The assessee in this case is a firm and a resident in India. The assessee owns certain rubber estates in Malaysia and during the assessment year 1977-78 it earned an income of Rs. 88,424 and from the sale of an item of property a short-term capital gain of a sum of Rs. 18,113 also accrued. The Income-tax Officer assessed both the incomes as assessable in India. When the assessee pursued the matter on appeal before the first appellate authority, the said authority applied article 7(1) of the avoidance of double taxation agreement and ordered the exclusion of the business income from Malaysia. Likewise, it was held that no capital gains in respect of a property situated in Malaysia can be taxed in India. The Department pursued the matter on appeal before the Tribunal. The Tribunal rejected the appeal of the Department and concurred with the order of the first appellate authority. Thereupon, at the instance of the Department, the following question of law was referred to this court for adjudicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net of taxation, even for rate purposes. While reliance was placed upon the decisions in CIT v. Carew and Co. Ltd. [1979] 120 ITR 540 (SC) and A. C. Paul v. CIT [1974] 97 ITR 652 (Mad), it was contended that the decision of the Division Bench of the Karnataka High Court in CIT v. R. M. Muthaiah [1993] 202 ITR 508 does not consider the issue from all relevant angles and, therefore, the same does not merit the acceptance of this court. Mr. K. R. Ramamani, learned senior counsel appearing on behalf of the assessees, contended that the use of mandatory or enabling language in some of the articles of the agreement is neither relevant nor indicative of the absence of a prohibition as claimed for the Revenue, that there is clear cut difference conceptwise between avoidance and relief, that the agreement entered into with Malaysia in substance belongs to an avoidance category though in respect of some special cases tax relief clauses have been employed, that wherever what is obvious is to be dealt with for exclusion, the enabling language has been liberally adopted and in respect of area of doubtful understanding, the mandatory language has been used to place matters beyond doubt or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same as income from such immovable property. In controverting the stand of the Revenue that the income from Malaysia is liable to be taken into account for arriving at the total income of the resident for rate purposes, it is contended that when the provisions of section 5 itself stood excluded on account of a provision to the contrary made in the agreement which is as much a law by itself, there is no scope whatsoever to take into account the income from Malaysian sources even for rate purposes. Mr. Balasubramaniam, one of learned counsel appearing for the assessees, while adopting the submissions of learned senior counsel for the assessees, contended that if the interpretation sought to be placed upon the articles of the agreement by the Revenue is accepted, it would lead to all sorts of anomalies and practical difficulties resulting in total negation of the purpose of the agreement itself. The other learned counsel appearing for the assessees adopted the above submissions on behalf of the assessees. The charge of income-tax is in respect of the total income of the previous year and the total income of any previous year of a person who is a resident includes all income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included and where any income on which no tax is payable under the provisions of the Act is included in the total income of an assessee, he shall be entitled to a deduction from the amount of income-tax with which he is chargeable on his total income of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable. So far as the batch of cases now for consideration before us is concerned, there is no dispute that they all pertain to the taxability of the various categories of income derived from Malaysia and there exists an agreement between the Government of India and the Government of Malaysia for the avoidance of double taxation. Equally there is no dispute over the fact that all the assessees under consideration are residents in India and the issue relates to one or the other or more than one of the categories of income derived such as income from immovable property, capital gains arising out of sale of an item of immovable property, business income, dividend income, interest on deposits, etc., from sources situated in Malaysia. Equally, there is no dispute about the accounting of the income or the quantificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the Government of Malaysia is concerned there is no specific stipulation or provision with reference to the treatment of capital gains and this has led to keen debate among counsel appearing on either side at the time of hearing. Article XXII deals with the elimination of double taxation and it provides that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective contracting States "except where provisions to the contrary are made in this agreement". Paragraph 2(a) of this article also provides that the amount of Malaysian tax payable under the laws of Malaysia and in accordance with the provisions of the agreement whether directly or by deduction by a resident of India in respect of income from sources within Malaysia which has been subjected to tax both in India and Malaysia shall be allowed as credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. It is the language of his sub-article which is mainly availed of by the Revenue to justify its claim and stand in this batch of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of section 16(3)(a)(iii) was 'the income from the assets', i.e., the income which the asset produces while it continues to remain in the hands of the assessee and does not include the gain which the assessee makes by selling the asset and parting with possession of it. We see no justification for this argument. In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, the income arises or springs from the asset ; the operation, which causes the income to spring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the asset is parted with. Although the processes involved in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainly on the construction of article III of the agreement between the Government of India and Government of Ceylon wherein it is postulated specifically that each country shall make assessment in the ordinary way under its own laws and where either country under the operation of its laws charges tax on any income from the sources or categories of transactions specified in column I of the Schedule to the agreement in excess of the amount calculated according to the percentages specified in the other part of the Schedule, that country shall allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country. The decision in CIT v. Carew and Co. Ltd. [1979] 120 ITR 540 (SC) is one involving consideration by the Supreme Court of an agreement entered into for avoidance of double taxation entered into between India and Pakistan and particularly article 4 of the said agreement. In deciding the issue raised therein, the learned judges of the apex court noticed the distinction between the avoidance of double taxation and relief from double taxation in the following terms : "Before parting with this case, it is appropriate to point out that a distincti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aysia itself would demonstrate the distinguishing disparity in the pattern of agreements adopted. The agreement with Ceylon which fell for the consideration of this court and the apex court provides that each country shall make assessment in the ordinary way under its own laws and then only provides for abatement of a portion of the tax liability in the manner and to the extent stipulated (vide articles II and IV). Per contra, article XXII(1) of the agreement with Malaysia under the caption of elimination of double taxation, would declare that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective States except where provisions to the contrary are made in the agreement. Therefore, it is obvious and inevitable that where there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting States to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement. In cases where perhaps there is no specific provision to the contra, the local tax law governing the levy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. That this should be the indisputable position envisaged by the Governments of the contracting States has been made amply clear by the legislative will also be disclosed by Parliament enacting sub-section (2) of section 90 of the Act, though in 1991, but with effect from April 1, 1972, that in cases where the Central Government has entered into an agreement with the Government of any country outside India, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax Act, 1961, shall apply only to the extent they are more beneficial to that assessee, and obviously, therefore, are not attracted in other cases or circumstances. Tax treaties are for that matter considered to be mini legislations containing themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. Such variations are in some cases in addition to the existing local tax laws and in other cases in lieu thereof. That being the legal position, the exposition of the said position also by the Central Board of Direct Taxes in their Circular No. 333 dated April 2, 1982, assumes significance and importance inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the commentaries relied upon can be of no use and utility and cannot also afford a safe or reliable guide or aid for such construction. Coming to the categories or classes of income to be dealt with in these cases and the relevant clauses of articles in the agreement under consideration the first item for consideration is the income from immovable property. Sections 22 to 27 of the Income-tax Act, 1961, broadly deals with the taxability in this regard under the Act. But, in view of paragraph 1 of article VI, income from immovable property can be taxed only in and by the contracting State in which such property is situated. There is no scope for the other contracting State dealing with such income. As to what constitutes immovable property for the purposes of the article has also been stated in detail. The article further stipulates that the provisions of paragraph (1) shall apply to income derived from the direct use, letting or use in any other form of immovable property. Controversies and conflicting claims have been made by the parties before us regarding the capital gains which is derived on account of the sale, exchange or transfer of the capital asset itself. Sections 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, be it that of the company, individual or Hindu undivided family, firm including the share of partnership attributable to business is taxable only in Malaysia where the permanent establishment is situated and the authorities under the Act in this country cannot also assess the same in this country. As far as the taxability of dividend income is concerned, the provisions of sections 8 and 9 of the Income-tax Act, 1961, deal with the same. But at the same time, article XI of the agreement provides for the same stating that dividends paid by a company which is a resident of a contracting State to a resident of the other contracting State may be taxed in the first mentioned contracting State. This article also provides for various contingencies and the formula to be adopted in enforcing the same. But, suffice it to notice that the basic tenet or principle underlying the same is the situs of the company which pays or declares the dividend. Likewise, article XII of the agreement provides that interest derived by a resident of one of the contracting States from the other contracting State may be taxed in the other contracting State and the term "interest" has been given meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Officer to allow the benefit of double income-tax relief without insisting upon the production of a certificate from the Malaysian Revenue authorities to show that the Malaysian income of the assessees has already actually suffered tax. Tax Case No. 135 of 1985 : The question of law referred for our consideration is answered in the affirmative holding that the decision of the Appellate Tribunal that the capital gains arising in Malaysia cannot be subjected to tax in India is in accordance with the terms of the agreement for avoidance of double taxation entered into between the Governments of India and Malaysia notified in the Notification No. G. S. R. 167(E), dated April 1, 1977. Tax Case No. 72 of 1987: The question of law referred for our consideration is answered in the affirmative holding that the direction of the Appellate Tribunal ordering the exclusion of the income from capital gains arising on the sale of a property in Malaysia is quite in accordance with law and well justified in view of the provisions contained in article VI of the agreement for avoidance of double taxation entered into between the Governments of India and Malaysia, notified in Notification No ..... 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