2016 (7) TMI 460 - AT - Income Tax

Taxability in India - capital gain arising on the sale of immovable property in Colombo, Sri Lanka - DTAA - Held that - The income of the assessee earned on capital gains on sale of immovable property situated in Sri Lanka during relevant previous year shall be chargeable to tax only in Sri Lanka by Government of the Democratic Socialist Republic of Sri Lanka, while the same income shall be included in the income of the assessee chargeable to tax in India under the provisions of the Act and the relief shall be granted in the manner laid down in the notification no 91 of 2008 dated 28-08-2008 issued by the Central Government read with DTAA entered into by India and Sri Lanka and provisions of the Act to avoid double taxation and prevention of fiscal evasion of the taxes.

Issues Involved:
1. Taxability of capital gains arising from the sale of immovable property situated in Sri Lanka.
2. Determination of residential status of the assessee under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka.
3. Interpretation of Article 13 and Article 4 of the DTAA.
4. Applicability and effect of Notification No. 91 of 2008 dated 28-08-2008 issued by the Central Government under Section 90(3) of the Income Tax Act, 1961.
5. Granting of relief to avoid double taxation under the DTAA and the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue was whether the capital gains arising from the sale of immovable property located in Sri Lanka are taxable in India. The assessee argued that under Article 13 of the DTAA between India and Sri Lanka, such gains should be taxed in Sri Lanka. The AO, however, held that since the assessee is a resident of India under Section 6 of the Income Tax Act, 1961, the income is taxable in India as per Section 5 of the Act.

2. Determination of Residential Status:
The assessee contended that she is a resident of Sri Lanka for the purposes of the DTAA, despite being a resident of India under the Income Tax Act. The assessee claimed that her fiscal domicile is in Sri Lanka as she is a Sri Lankan national and has a permanent home there. The AO and CIT(A) determined that the assessee is a resident of India under Section 6 of the Act, making her global income taxable in India.

3. Interpretation of Article 13 and Article 4 of the DTAA:
Article 13 of the DTAA states that gains from the sale of immovable property situated in one Contracting State may be taxed in that State. The term "may be taxed" was interpreted by the assessee to mean "shall be taxed" in Sri Lanka, citing judicial precedents. Article 4 deals with the determination of residential status under the DTAA, where the assessee argued that her permanent home and center of vital interests are in Sri Lanka.

4. Applicability and Effect of Notification No. 91 of 2008:
The AO relied on Notification No. 91 of 2008, which clarifies that income which "may be taxed" in another country under a DTAA should still be included in the total income chargeable to tax in India, and relief should be granted as per the DTAA. The assessee argued that this notification is prospective and should not apply to the assessment year 2007-08.

5. Granting of Relief to Avoid Double Taxation:
The Tribunal considered whether the capital gains, if not taxed in Sri Lanka, could still be taxed in India. The Tribunal held that the income should be taxed in Sri Lanka as per the DTAA, and relief should be granted in India to avoid double taxation, even if the tax rate in Sri Lanka is zero.

Tribunal's Findings:

1. Residential Status:
The Tribunal held that the assessee is a resident of India under the Income Tax Act, 1961, as she stayed in India for more than the prescribed period under Section 6. However, for the purposes of the DTAA, the Tribunal found that the assessee's permanent home and center of vital interests are now in India due to her marriage to an Indian national and her subsequent move to India.

2. Interpretation of DTAA Articles:
The Tribunal agreed with the assessee's interpretation that Article 13 of the DTAA allows Sri Lanka to tax the capital gains from the sale of immovable property situated there. The term "may be taxed" was interpreted to mean that Sri Lanka has the exclusive right to tax such income, precluding India from taxing it.

3. Notification No. 91 of 2008:
The Tribunal held that Notification No. 91 of 2008 is clarificatory in nature and applies retrospectively. It clarified the procedure for granting relief from double taxation but did not expand the scope of taxability. Thus, the capital gains should be included in the total income in India, and relief should be granted as per the DTAA.

4. Relief from Double Taxation:
The Tribunal directed that if the capital gains are not taxed in Sri Lanka due to zero tax rates, they should not be taxed in India either. The AO was instructed to verify the taxability of the gains in Sri Lanka and grant relief accordingly.

Conclusion:
The Tribunal allowed the appeal, holding that the capital gains from the sale of immovable property in Sri Lanka are taxable only in Sri Lanka under the DTAA. The income should be included in the total income in India, and relief should be granted to avoid double taxation, even if the tax rate in Sri Lanka is zero. The order pronounced on 7th July 2016 reflects a comprehensive analysis of the DTAA provisions and the Income Tax Act, 1961, ensuring that the assessee is not subject to double taxation.

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