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2004 (5) TMI 8 - SC - Income TaxTaxability 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.
Issues Involved:
1. Whether the Malaysian income cannot be subjected to tax in India based on the Agreement for Avoidance of Double Taxation between India and Malaysia. 2. Whether capital gains should be taxable only in the country where the assets are situated. Issue-wise Detailed Analysis: 1. Taxation of Malaysian Income in India: The core issue is whether Malaysian income can be taxed in India under the Agreement for Avoidance of Double Taxation between India and Malaysia. The respondent, a firm owning immovable properties in Malaysia, earned income from rubber estates and short-term capital gains from property sales. The Income-tax Officer assessed these incomes in India, but the Commissioner of Income-tax (Appeals) ruled that, under Article 7(1) of the Agreement, business income from Malaysia cannot be included in the total income of the assessee unless there is a permanent establishment in India. The Tribunal and the High Court upheld this view, emphasizing that the Agreement's provisions override local tax laws and that the liability to tax must be worked out as per the Agreement. The High Court also rejected the Revenue's argument that the determination of total income should include income from Malaysia for rate purposes. 2. Taxation of Capital Gains: The second issue concerns whether capital gains should be taxable only in the country where the assets are situated. The respondent argued that since the property is in Malaysia, the capital gains should not be taxed in India. The High Court agreed, stating that the provisions of Article VI of the Agreement apply to income derived from immovable property, including capital gains. The High Court rejected the Revenue's contention that the expression "may be taxed" implies that Indian authorities can also tax such income. The High Court clarified that the Agreement's provisions should be interpreted to avoid double taxation and that the local tax law applies only if there is no specific provision in the Agreement. Legal Position on Double Taxation: The traditional view of double taxation involves the same property being taxed by the same state during the same period for the same purpose. However, Indian law, under Section 90 of the Income-tax Act, provides for agreements with foreign countries to grant relief from double taxation. Such agreements override local tax laws if they are more beneficial to the assessee. The Agreement between India and Malaysia specifies that income from immovable property and business profits are taxable only in the country where the property is situated or where the permanent establishment exists. Arguments by the Attorney-General: The Attorney-General argued that the Agreement allows for different types of reliefs, either by avoidance or by credit. He contended that the expression "may be taxed" does not prohibit Indian authorities from taxing such income and that the Agreement should not be interpreted to exclude the jurisdiction of Indian tax authorities unless explicitly stated. He also argued that capital gains are not covered by the Agreement and that the fiscal jurisdiction to tax arises from either the location of the income source or the residence of the assessee. Counterarguments by the Respondents: The respondents argued that the Agreement allocates taxing rights to avoid double taxation and that income from immovable property in Malaysia should be taxed only in Malaysia. They emphasized that the Agreement implies a surrender of taxing power by each state for mutual benefit. They also argued that the term "may" in the context of the Agreement should be interpreted as "must" or "shall" to ensure that income from property situated in Malaysia is taxed only in Malaysia. The respondents highlighted the practical difficulties in claiming tax credits and the historical application of the Agreement in their assessments. Supreme Court's Conclusion: The Supreme Court upheld the High Court's view that the Agreement's provisions override local tax laws and that income from immovable property in Malaysia, including capital gains, should not be taxed in India. The Court emphasized that the Agreement must be interpreted to avoid double taxation and that the fiscal domicile should be determined based on closer personal and economic relations. The Court rejected the Attorney-General's argument that capital gains are not covered by the Agreement, stating that capital gains are treated as income under the Income-tax Act and are therefore covered by the Agreement. The appeals were dismissed, affirming the High Court's judgment.
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