The specific provisions of a Double Taxation Avoidance agreement take precedence over the general provisions of the Income Tax Act in determining tax liability for income covered by the agreement.

K. Shivashankar Bhat, J.—In respect of the assessment year 1982-83, the following question has been referred under section 256(1) of the Income Tax Act, 1961 ("the Act" for short) :

"Whether, on the facts and in the circumstances of the case, the appellate Tribunal is right in law in upholding the orders of the Commissioner of Income Tax (Appeals) who held that the income of Rs. 1,99,970 arising in Malaysia was not liable to be included in the total income of the assessee for the assessment year 1982-83 ?"

2. The assessee is an individual and resident in India. During the previous year relevant to the assessment year 1982-83, which is now under consideration, the assessee had earned income in Malaysia and had claimed it as exempt from tax in India in view of the Double Taxation Avoidance agreement between India and Malaysia. The Income Tax Officer did not accept the contention of the assessee; he included the income earned by the assessee in Malaysia in the total income of the assessee and stated that credit would be given after the assessee had paid tax on this income in Malaysia. The assessee appealed before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), following the decision of the Special Bench of the Tribunal, Madras, in the case of Kulandayan Chettiar (3 ITD 426), held that the income earned in Malaysia was exempt from tax in India by virtue of the double taxation avoidance agreement. The Department felt aggrieved by the decision of the commissioner of Income Tax (Appeals) and came up in appeal before the Tribunal. The Tribunal, following the above-stated decision of the Special Bench of the Tribunal, upheld the order of the Commissioner of Income Tax (Appeals).

3. Mr. Raghavendra Rao, learned counsel for the Revenue, referred to sections 4 and 5 of the Income Tax Act, 1961, and contended that the assessee being a resident in India, his income from whatever source is liable to be taxed under the said Act. As per the agreement entered into between the Government of India and the Government of Malaysia "for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes", (referred to hereinafter as "the agreement"), income received from the immovable properties situated in Malaysia could be taxed by the said country and the position is the same with regard to the business profits and other income of the assessee in the instant case (like dividend income).

4. The combined effect of sections 4 and 5 of the Income Tax Act and the aforesaid agreement is vesting of powers in the two Governments to levy the tax on such income; therefore, according to learned counsel, article 22 of the agreement would operate, Clause 2(a) of the said article, which is relevant, reads thus :

"The amount of Malaysian tax payable under the laws of Malaysia, and in accordance with the provisions of this agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Malaysia, which has been subjected to tax both in India and Malaysia, shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax".

5. Therefore, the assessee can claim the benefit of the avoidance of double taxation only by proving that he has paid tax in respect of the income in question in Malaysia.

6. It is true that, under sections 4 and 5, the global income of an assessee could be brought under the net of taxation, but the question is whether the agreement in question entered into between the Government of India and the Government of Malaysia takes away the power of the Indian Government to levy a tax in respect of the income received from various sources referred to in the said agreement. Learned counsel for the Revenue referred to article 2 under Chapter I of the said agreement which refers to Income Tax as one