Facts

Assessee, a firm, earned business income from rubber estates in Malaysia. During the year, assessee also sold an immovable property situated at Malaysia   and earned short term capital gains. The Assessing Officer charged the business income as well as capital gains to tax in India. CIT(A) and Tribunal held that

(i) business income earned in Malaysia was not taxable in India as the assessee   did not have a permanent establishment in India (ii) capital gain was also not taxable in India as the property was situated in Malaysia. High Court upheld the view of the Tribunal and held that where a DTAA contains a specific provision, laws of any one of the respective Contracting States cannot be applied. High Court also held that as the DTAA provided that the aforesaid incomes ‘may be taxed’ in Malaysia, the tax authorities in India did not have the right to assess the same income.

Issue

Whether income from business carried on in Malaysia and from sale of an immovable property in Malaysia would be taxable only in Malaysia and not in India?

Views

Section 90(2) of the Act provides that in relation to an assessee to whom a DTAA applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee.

Held

With respect to the meaning of the term ‘may be taxed’, Supreme Court did 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.” Supreme Court, however, held that if an Indian resident is deemed to be

a resident of other Contracting State where his personal and economic relations   are closer, then his residence in India will become irrelevant and the provisions of  the DTAA will prevail over sections 4 and 5 of the Act. Supreme Court observed that the immovable property from which income was derived was situated in Malaysia. Similarly, assessee earned business income from the business of rubber plantations which was carried out  in  Malaysia  and  the  assessee did not  have a permanent establishment in India. Supreme Court, therefore, held that the business income and capital gains cannot be taxed in India because the assessee has closer economic relations with Malaysia where the permanent establishment has been set up and where the immovable property is situated. Supreme Court   also rejected the argument of the revenue that capital gain is not income and therefore not covered by the DTAA. Supreme Court held that capital gain derived from immovable property is income and covered under Article 6 of the DTAA.   (CA No. 5746/5752 & Ors of 1997/2006/& 2451 of 2000 dt. 26-5-2004)

Editorial: Review petition against CIT v. Kulandagan Chettiar (P.V.A.L.) (2004) 267 ITR 654 dismissed on account of delay as well as on merits CIT v. Kulandagan Chettiar (P.V.A.L.) (2008) 300 ITR 5 (SC).

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– Mahatma Gandhi