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TMI Blog2012 (7) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... under clause 4 which says that gains from alienation of shares "may be taxed" in the State of issue - when the term "may be taxed" is used in a treaty, there is an automatic exclusion of other State - power cannot be expanded or interpreted in such a way that it would include a power to define terms in a DTAA between countries as well. When a notification is issued exercising the powers conferred under sub-section (3) of Section 90A it can have effect only on those types of agreement mentioned in sub-section (1) thereof. If such a notification goes beyond that mandate, it will have to be ignored to the extent it goes overboard. Even if the term "may be taxed" has been given a meaning by the Government through a Notification No. 90A(3) so as to extend such meaning to terms used in DTAA, it will have to be ignored and the said Section 90A cannot come to the aid of the Revenue in any manner at all - Exclusion Method was the appropriate one and this was rightly used by the CIT(A). The capital gains arising on account of transfer of share in Sri Lanka would not exigible to tax in India in the given circumstances - in favour of assessee. - IT Appeal NOS. 1505, 1506 and 1573 & 1574 (MD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT (Appeals), there were no fresh borrowings made by the assessee during the previous year relevant to assessment year 2006-07. For the previous year relevant to assessment year 2007-08, own funds were available to the assessee which exceeded the investment. Therefore, according to him, there was no interest expenditure attributable to the earning of exempt income. Nevertheless, CIT (Appeals) was of the opinion that an addition to Rs. 10,25,638/- and Rs. 14,79,568/-, admitted by the assessee as attributable to the treasury department working was warranted. He also ruled that Rule 8D required a further % disallowance on the investments yielding the exempt income. The disallowances were thus restricted to Rs. 1,05,07,198/- and Rs. 1,63,78,457/- for the respective assessment years. 6. Now before us, learned D.R., strongly assailing the order of CIT (Appeals), submitted that Rule 8D was correctly applied by the Assessing Officer for the respective assessment years and interest disallowance were correctly made. The CIT (Appeals) had without any reason, deleted such interest disallowances based on the workings given by the assessee. According to him, the disallowances, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka. 11. Short facts apropos are that assessee was holding shares in a company called M/s The Lanka Hospitals Corporation Ltd., incorporated in Sri Lanka. The said shares were sold by the assessee during the relevant previous years. This resulted in a profit of Rs. 32,50,68,449/-. The amount was accounted by the assessee under the head "Extraordinary items". However, while computing the taxable income, assessee excluded such profits. The A.O., during the course of assessment proceedings, required the assessee to explain why the income from sale of shares should not be taxed in India as capital gains. Reply of the assessee was that the said sale of shares in the Sri Lankan company were governed by Article 13(4) of Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka, and such gains were taxable only in Sri Lanka. As per the assessee, Section 13(t) of the Inland Revenue Act No.10 of 2006 of Sri Lanka exempted the profits derived from sale of shares where such sale had attracted share transaction levy. Reliance was placed by the assessee on the decision of Hon'ble Apex Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706). As per the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he worked out the capital gains arising out of the sale of shares, which came to Rs. 32,46,30,249/- as long term and Rs. 4,38,200/- as short term. 12. In its appeal before CIT (Appeals), argument of the assessee was that Article 13(4) of the DTAA stood in favour of assessee. As per the assessee, Notification No. 90 of 2008 ( supra ) relied on by the Assessing Officer was not at all applicable in its case. Shares of The Lanka Hospitals Corporation Ltd., which were sold, was issued in Sri Lanka and therefore, the gains from transfer was taxable only in Sri Lanka. For trading done thorugh the Colombo Stock Exchange, the turnover was subjected to a levy called "share transaction levy" by the Finance Act No. 5 of 2005 of Sri Lanka. On account of imposition of the share transaction levy, by virtue of Section 13(t) of the Inland Revenue Act No. 10 of 2006 of Sri Lanka, the profits derived from sale of share on which such share transaction levy was charged, became exempt. Thus, the gains on transfer of share of The Lanka Hospitals Corporation Ltd. was exempt in the hands of the assessee-company in Sri Lanka. As per the assessee, the phrase "liable to taxation" was not same as "pay tax" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme of the DTAA clearly substantiated the contention of the assessee that the country of a resident did not get the right or mandate to tax capital gains arising in the other country, namely, Sri Lanka. Reliance was placed by the CIT (Appeals) on the decision of Hon'ble Apex Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar (267 ITR 654) and also the decision of Hon'ble Madhya Pradesh High Court in the case of DCIT v. Turquoise Investment Finance Ltd. (299 ITR 143), which was later affirmed by Hon'ble Supreme Court in 300 ITR 1. He approved the contention of the assessee that Article 24 of DTAA could be invoked only when income was taxable in both the countries. As for the reliance placed on the decision of co-ordinate Bench of this Tribunal in the case of Data Software Research Co. Ltd. ( supra ), CIT (Appeals) was of the opinion that the Indo-US Treaty was not at par with Indo-Sri Lanka Treaty on double taxation. In Indo-US Treaty, both the countries were empowered to tax business income, subject to certain conditions, while this was not the case in Indo-Sri Lanka Treaty. In this view of the matter, he held that capital gains on sale of shares of The Lanka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessee, there being no capital gains arising in Sri Lanka on account of the share transaction levy, there was nothing whatsoever given as tax credit. Hence, the learned D.R. submitted that the addition made by the A.O. under the head "capital gains" had to be sustained. 14. Per contra , learned A.R. submitted that the question here was whether the terms "may be taxed" appearing in Article 13(4) gave an exclusive right to the contracting State, excluding the other contracting State or give right to both the States for taxing the income. Relying on the decision of Hon'ble Apex Court in the case of P.V.A.L. Kulandagan Chettiar ( supra ), learned A.R. pointed out that the issue there was regarding taxing of income from immovable property in Malaysia. According to him, the terminology used in Double Taxation Avoidance Agreement with Malaysia was also "may be taxed" and Hon'ble Apex Court clearly held that the treaty had to be interpreted as though it prevailed over Section 4 and 5 of the Act. According to learned A.R., Hon'ble Apex Court held that residency in India would become irrelevant when DTAA applied. Placing reliance on the decision of Hon'ble Madhya Pradesh High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement mentioned in sub-section (1) of Section 90A of the Act and it could not be applied to a Double Taxation Avoidance Agreement between countries. In any case, according to him, the said notification was issued only on 28th August, 2008 and could be applied retrospectively. 15. We have perused the orders and heard the rival submissions. There is no dispute that assessee is a resident of India as per Income-tax Act. Assessee had capital gains which arose in Sri Lanka. Such capital gains arose on account of sale of shares of one company which was incorporated in Sri Lanka. Such sale of shares effected in Sri Lanka was subjected to share transaction levy imposed in that country, as per Finance Act 5 of 2005 of that country. It is also not disputed that under Section 13(t) of Inland Revenue Act No.10 of 2006 of that country, profits and income derived from sale of any share on which share transaction levy was charged, was exempt from income-tax. The question to be resolved is whether in such a situation, based on the DTAA between India and Sri Lanka, the capital gains arising to the assessee on account of sale of such shares, could be considered as part of its income for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No doubt, if we consider the term "may be taxed" as not excluding the power to tax such amount in India, then assessee would have to be given benefit of tax credit for taxes if any paid in Sri Lanka for elimination of double taxation. So, the entire issue hinges on the meaning to be attached to the words "may be taxed". If such term excluded the power of India to tax the amount of capital gains, arising out of transfer of shares of a company in Sri Lanka, then there was no question of application of Tax Credit Method. This is because such gain, by virtue of such an interpretation, will automatically get out of the ambit of "income" as per Income-tax Act, though Section 5 of the Act mandates otherwise. Hon'ble Apex Court in the case of Azadi Bachao Andolan ( supra ), as relying on Philip Baker's commentary on OECD Double Taxation Convention, noted that a person did not need to be actually paying tax to be "liable to tax". At para 64 of the judgment, their Lordship agreed with the view that merely because an exemption was granted in respect of taxability of a particular income, it cannot be postulated that the entity concerned was not "liable to tax". A person, who would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd art. 22 provide that income may be taxed in both the countries. The above analysis clearly shows that intention of parties to the DTAA is very clear. Wherever the parties intended that income is to be taxed in both the countries, they have specifically provided in clear terms. Consequently, it cannot be said that the expression "may be taxed" used by the contracting parties gave option to the other Contracting States to tax such income. In our view, the contextual meaning has to be given to such expression. If the contention of the Revenue is to be accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. The conjoint reading of all the provisions of articles in Chapter III of Indo-Canada treaty, in our humble view, leads to only one conclusion that by using the expression "may be taxed in the other State", the contracting parties permitted only the other State, i.e. State of income source and by implication, the State of residence was precluded from taxing such income. Wherever the contracting parties intended that income may be taxed in both the countries, they have specifically so provided. Hence, the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral Government hereby notifies that where an agreement entered into by any specified association in India with any specified association in the specified territory outside India and adopted by the Central Government by way of notification in the official Gazette, for granting relief of tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in such agreement. The notification having been issued under Section 90A(3) of the Act, it calls for a look at Section 90A. Said Section reads as under: Adoption by Central Government of agreement between specified associations for double taxation relief . 90A. (1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section; ( b ) "specified territory" means any area outside India which may be notified as such by the Central Government for the purposes of this section. It is clear that the above section enabled the Central Government to adopt an agreement entered into between specified associations, for according double tax relief. In other words, it was a methodology for giving official stamp to a private agreement entered between two parties. The agreement mentioned in sub-section (3) of said Section is that which is referred in sub-section (1). Sub-section (1) only deals with agreements between a specified association in a specified territory outside India and a specified association in India. Sub-section (3) gives the power to the Central Government to notify the meanings assigned to any term in such an agreement. The power given in sub-section (3) is limited to defining the terms in an agreement between specified persons. This power cannot be expanded or interpreted in such a way that it would include a power to define terms in a DTAA between countries a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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