Case: Commissioner Of Income Tax Vs. P.V.A.L. Kulandagan Chettiar (Dead) Through Lrs

2. The facts leading to these appeals are that the respondent is a firm owning immovable properties at Ipoh, Malaysia, that during the course of the assessment year the assessee earned income of Rs.88,424/from rubber estates; that the respondent sold property, the short term capital gains of which came tothat the Income Tax Officer assessed that both the incomes are assessable in India and brought the same to tax; that the respondent filed an appeal before the Commissioner of Income Tax (Appeals) who held that under Article 7(1) of the Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion of Tax unless the respondent has a permanent establishment of the business in India such business income in Malaysia cannot be included in the total income of the assessee and, therefore, no part of the capital gains arising to the respondent in the foreign country could be taxed in India.3. This order was carried in appeal to the Tribunal. The Tribunal, after examining various contentions raised before it, confirmed the order of the Commissioner of Income Tax (Appeals) and held that (i) since the respondent has no permanent establishment for business in India, the business income in Malaysia cannot be included in his income in India, and (ii) the property is situated in Malaysia, capital gains cannot be taxed in India. Thereafter, the matter was carried by way of a reference to the High Court.4. The High Court held that the finding of the Tribunal is in accordance with the provisions of the Avoidance of Double Taxation of income. The High Court took the view thatwhere 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.(ii) if there is no specific provision, the local tax law governing the levy of income tax in the respective States shall be applicable and if in the course of such application, assessment and determination of the tax liability double taxation results or has been brought about of the entirety of the particular category of income in both countries, than the tax credit or relief contemplated in the other provision of Article XXII would get attracted and have to be applied.(iii) In respect of some categories of income total exemption or elimination is not contemplated and in certain other cases, the exemption depends upon the fulfilment of certain conditions and in all such cases, the exemption depends upon the fulfilment of certain conditions and in all such cases only tax credit or relief can only be accorded to the extent permissible under the various provisions of the agreement in order to avoid double taxation.(iv) The stand taken by the Revenue that for rate purposes and the determination of the total income derived from a source in Malaysia shall first be taken into consideration in computation does not merit acceptance and allowing the Department to do so would amount to permitting flagrant violation of law as also the agreement entered into in these cases with the Government of Malaysia.(v) The contention urged on behalf of the Revenue that wherever the enabling words such as may be taxed are used there is no prohibition or embargo upon the authorities exercising powers under the Indian Income Tax Act, 1961 from assessing the category or class of income concerned cannot be accepted as of substance or merit.(vi) The High Court rejected the application of commentaries on the Articles of the Model Convention of 1977 presented by the Organisation for Economicand Development (for short OECD) as it would not be a safe or acceptable guide or aid for such construction.(vii) Disposal of the property or the capital asset itself is as much a form or method of use of the immovable property as such, and the words direct use... or use in any other form are sufficiently wide enough to include within its scope the transfer, sale orof the property.(viii) The provision of Article VI alone would apply and govern the assessment of capital gains also derived from the immovable property situated at Malaysia.Before we embark upon the examination of contentions raised in these cases, we shall briefly notice the legal position in regard to the provisions relating to double taxation and the reliefs granted therein.

Court's reasoning:
10. So far as business income is concerned, the learned Attorney general submitted that the argument that income attributable to a permanent establishment is taxable only in the State where the permanent establishment is situated is incorrect; that even in the case of business income the power to tax given to Malaysia is in permissive language, that is, may and it is therefore not correct to contend that in such a case tax can be imposed only by Malaysia; that there is no dispute that the assessees are resident and enterprises of India and in such a situation a reading of Article 7(1) makes it clear that ordinarily income of an Indian enterprise shall be taxable only in India unless the enterprise carries on business in Malaysia through a permanent establishment situated therein in which case tax may be imposed in Malaysia though only to the extent of income attributable to that permanent establishment; that the Treaty in question employees different expressions in respect of different forms of income under different situation and there is intrinsic evidence in the Treaty that where the Treaty sought to bar the jurisdiction of one State in respect of a particular item of income it has said so expressly; that the argument of the respondent that the expression may be taxed in means shall be taxed only in a particular State is not permissible. He further contended that the Treaty does not confer power on any State to levy tax because the power to tax being derived from the domestic laws of the respective States including the power to tax the global income of a resident; that thus, in the absence of clear bar or exclusion of jurisdiction to levy tax by virtue of the Treaty tax can always be imposed by either State under its domestic laws and bar or embargo on the jurisdiction of a country to levy tax has to be express and cannot be read into a Treat by implication; that, moreover, when a Treaty specifically employees different expressions such as shall only be taxable and may be taxed such expressions will necessarily have to be given different meanings. He further urged that in any event capital gains is not one of the aspects covered by the Treaty inasmuch as there is no specific provision under the Treaty providing for the treatment of such income and the High Court has sought to bring the same within the ambit of Article 6. Further, he contended that it may be noted that scope of Article 6(1) is restricted by the words of Article 6(3) which provides that the provisions of the said Article shall apply only to income derived from the use of immovable property; that the expression capital gains is a well defined concept and the taxable event is transfer or alienation of property and capital gains cannot arise from the use of property because transfer and use being different legal concepts since use of property postulates the continues existence of the property whereas on transfer of property, the property ceases to be the property of the owner. Therefore, he contended, capital gains is the profit arising from the transfer of the property as distinct from the profits arising from the use of the property.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 tothe question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of 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. On the first issue, the view taken by the High Court isthe 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. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.19. 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 immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of 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.Taxation policy is within the power of the Government and Section 90 of the Income Tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income Tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements.22. In this view of the matter, it is unnecessary to refer to the decisions cited before us since we have taken the view with reference to clauses set out under the Agreement.