1982 (12) TMI 88 - AT - Income Tax

Summary

Issues involved: Interpretation of Agreement for Avoidance of Double Taxation between India and Malaysia, assessability of Malaysian income, inclusion of income for rate purposes.

Assessment Year 1977-78:
The assessee appealed against the inclusion of business income from Malaysia for rate purposes. The Commissioner (Appeals) held that foreign income is includible only for rate purposes. The departmental appeal against exclusion was dismissed. The Special Bench allowed the appeal of the assessee, canceling the direction to include foreign income for rate purposes.

Assessment Year 1978-79:
The ITO treated foreign income as income from a rubber estate, asserting that as control is from India, the income is taxable in India. The Commissioner (Appeals) held that unless the Malaysian enterprise operates in India, its profits in Malaysia cannot be taxed in India. The departmental appeal for inclusion in assessment or rate purposes was dismissed.

Assessment Year 1979-80:
The ITO did not specify the character of foreign income. The Commissioner (Appeals) deleted the assessment without specifying. The departmental appeal for inclusion in assessment or rate purposes was dismissed.

Interpretation of Agreement:
The standing counsel argued that Malaysian income is assessable in India for double taxation relief. The counsel contended that the agreement did not preclude India from taxing such income. The standing counsel emphasized that the agreement aims to avoid double taxation, not to exempt income from taxation. The counsel highlighted that the agreement does not restrict India's right to tax Malaysian income.

Decision and Analysis:
The Special Bench held that property income, business profits, and interest income are assessable only in Malaysia as per the agreement. The Bench reasoned that the agreement takes away India's power to tax such income. The Bench interpreted that the agreement provides relief from double taxation, not for legitimate double taxation. The Bench rejected the department's argument for inclusion of income for rate purposes, as section 5 is not applicable due to provisions in the agreement. The appeal of the assessee for the assessment year 1977-78 was allowed, canceling the inclusion of foreign income for rate purposes. The two departmental appeals were dismissed.