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2004(5) Supreme 402
SUPREME COURT OF INDIA
(From Madras High Court)
Rajendra Babu, CJI and G.P. Mathur, J.
Commissioner of Income Tax -Appellant
versus
P.V.A.L. Kulandagan Chettiar (dead) through Lrs. -Respondents
Civil Appeal Nos. 5752, 5754-5756/1997
With
Civil Appeal Nos. 5761/1997, 5760/1997, 6229/1997, 2006/2000, 2451/2000, 5746/1997
Decided on 26-5-2004
Counsel for the Parties :
For the Appearing Parties : Soli J. Sorabjee, Attorney General, R.P. Bhatt, T.L.V. Iyer, Joseph Vellapally, Sr. Advocates and Prateesh Kapur, Y.P. Mahajan, B.V. Balramdas, K.K. Mani, R. Balasubramanian, Ms. Manika Pandey, Ms. Maya J. Nichani, Thomas Vellapally, Sanjeev Kapoor, Kamal Budhiraja, Umesh Kumar Khaitan, Sanjay Kunur, Ramesh N. Keshwani, Ramlal Roy, P.P.S. Janardhana Raja, V. Ramasubramaniam and F.R. Kumar, Advocates.
Held : Here in these appeals we are concerned with income arising from immovable property. We will proceed on the basis that fiscal connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. In the clauses which we have set out above fiscal domicile is set out in Article IV which states that in a case where the person is a resident in both the contracting States fiscal domicile will have to be determined with reference to the fact that if the contracting State with which his personal and economic relations are closer he shall be deemed to be a resident of the contracting State in which he has an habitual abode. This implies that tax liability arises in respect of a person residing in both the contracting State has to be determined with reference to his close personal and economic relations with one or the other. The immovable property in question is statute in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income is derived and that finding of fact has been recorded by all the authorities and affirmed by the High Court. We, therefore, do not propose to re-examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile. On the first issue, the view taken by the High Court is correct. (Paras 16 and 17)
For purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of Treaty wherever any expression is not defined the expression defined in the Income Tax Act would be attracted. The definition of income would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore Article 6 would be attracted. (Para 19)
JUDGMENT
Rajendra Babu, CJI.-These appeals involve following two questions for our consideration although several other questions were considered by the High Court:-
(a) Whether the Malaysian income cannot be subjected to tax in India in the basis of the agreement of avoidance of double taxation entered into between Government of India and Government of Malaysia?
(b) Whether the capital gains should be taxable only in the country in which the assets are situated?
2. The facts leading to these appeals are that the respondent is a firm owning immovable properties at Ipoh, Malaysia; that during the course of the assessment year the assessee earned income of Rs. 88,424/- from rubber estates; that the respondent sold property, the short term capital gains of which came to Rs. 18,113/-; that the Income Tax Officer assessed that both the incomes are assessable in India and brought the same to tax; that the respondent filed an appeal before the Commissioner of Income Tax (Appeals) who held that under Article 7(1) of the Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion of Tax unless the respondent has a permanent establishment of the business in India such business income in Malaysia cannot be included in the total income of the assessee and, therefore, no part of the capital gains arising to the respondent in the foreign country could be taxed in India.
3. This order was carried in appeal to the Tribunal. The Tribunal, after examining various contentions raised before it, confirmed the order of the Commissioner of Income Tax (Appeals) and held that (i) since the respondent has no permanent establishment for business in India, the business income in Malaysia cannot be included in his income in India, and (ii) the property is situated in Malaysia, capital gains cannot be taxed in India. Thereafter, the matter was carried by way of a reference to the High Court.
4. The High Court held that the finding of the Tribunal is in accordance with the provisions of the Avoidance of Double Taxation of income. The High Court took the view that:-
(i) where there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting States to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement.
(ii) if there is no specific provision, the local tax law governing the levy of income tax in the respective States shall be applicable and if in the course of such application, assessment and determination of the tax liability double taxation results or has been brought about of the entirety of the particular category of income in both countries, than the tax credit or relief contemplated in the other provision of Article XXII would get attracted and have to be applied.
(iii) In respect of some categories of income total exemption or elimination is not contemplated and in certain other cases, the exemption depends upon the fulfilment of certain conditions and in all such cases, the exemption depends upon the fulfilment of certain conditions and in all such cases only tax credit or relief can only be accorded to the extent permissible under the various provisions of the agreement in order to avoid double taxation.
(iv) The stand taken by the Revenue that for rate purposes and the determination of the total income derived from a source in Malaysia shall first be taken into consideration in computation does not merit acceptance and allowing the Department to do so would amount to permitting flagrant violation of law as also the agreement entered into in these cases with the Government of Malaysia.
(v) The contention urged on behalf of the Revenue that wherever the enabling words such as "may be taxed" are used there is no prohibition or embargo upon the authorities
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