1993 (6) TMI 135 - AT - Income Tax

Agreement For Avoidance Assessing Officer Business Transactions Chargeable To Tax Expenditure Incurred Foreign Exchange Income From Other Sources Interest Income Rubber Estate Set Off

Issues Involved:
1. Exigibility of Malaysian income to Indian income-tax.
2. Treatment of interest income earned in India.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia.
4. Set-off of Indian losses against Malaysian income and interest income.

Detailed Analysis:

1. Exigibility of Malaysian Income to Indian Income-tax:
The assessee, a resident company with its registered office and most shareholders in India, owns and exploits a rubber estate in Malaysia. The Assessing Officer initially charged Malaysian income to Indian tax, setting off Indian losses against Malaysian income for the assessment year 1984-85 but not for 1985-86. The CIT(A) ruled in favor of the assessee, stating that Malaysian income is not chargeable to Indian tax under the DTAA between India and Malaysia. The Tribunal upheld this view, noting that under Article 7 of the DTAA, the income from the Malaysian enterprise is taxable only in Malaysia and not in India.

2. Treatment of Interest Income Earned in India:
The assessee argued that interest income earned in India should be set off against Indian losses. The Assessing Officer and CIT(A) treated this interest income as "Income from other sources" and not as business income, rejecting the set-off against Indian losses. The Tribunal upheld this decision, stating that under Article 12 of the DTAA, interest income is dealt with separately and cannot be treated as business profits. Consequently, the interest income earned in India is chargeable to tax under the head "Income from other sources" without any deductions for Indian losses.

3. Applicability of the Double Taxation Avoidance Agreement (DTAA):
The Tribunal emphasized that the DTAA introduces new dimensions that must be considered. Article 7 of the DTAA stipulates that the income of an enterprise of one contracting state (India) is taxable only in that state unless the enterprise carries on business in the other contracting state (Malaysia) through a permanent establishment. Since the assessee's business operations and income are primarily in Malaysia, the Malaysian income is not chargeable to Indian tax. Article 7(6) further clarifies that interest income, even if connected to business operations, is to be treated separately under Article 12 and not as business profits.

4. Set-off of Indian Losses Against Malaysian Income and Interest Income:
The assessee contended that Indian losses should be set off against both Malaysian income and interest income earned in India. The Tribunal rejected this claim, stating that the so-called Indian losses were actually expenses incurred for running the Malaysian plantation and should be adjusted against Malaysian income. The Tribunal also noted that under the DTAA, no part of the Malaysian income could be apportioned to India, and therefore, the question of inter-head adjustments does not arise. The Tribunal referred to the ITAT decision in the case of P.V.A.L. Kulandayan Chettiar, which held that no part of the Malaysian income could enter into the computation of the total income for Indian tax purposes.

Conclusion:
The Tribunal dismissed both appeals by the assessee, upholding the CIT(A)'s decisions. The Malaysian income is not chargeable to Indian tax under the DTAA, and the interest income earned in India is taxable under "Income from other sources" without any set-off for Indian losses. The DTAA provisions override general principles, and the specific articles dealing with business profits and interest income must be adhered to.

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