Income Tax Appellate Tribunal - Madras
Income-Tax Officer vs A.K.N. Govindaswamy Chettiar on 27 August, 1992
Equivalent citations: [1993]44ITD138(MAD)
ORDER
S. Kannan, Accountant Member
1. This departmental appeal is directed against the order dated 30-12-1987 of the CIT (Appeals), Madurai relating to the assessment year 1983-84.
2. The facts of the case are that the assessee is a Resident Individual. Besides having Indian Income which are chargeable to tax, the assessee was also having foreign income. The details of the foreign income earned by the assessee during the relevant previous year ending on 31-3-1983 are abstracted below:
1. Property Rent from building at No. 77, Leboh Ampang, Kuala Lumpur : Rs. 17,376
2. Business
(a) Net income from M/s. A.K. Muthan Chettiar and Sons, Singapore (own) : Rs. 3,892
(b) 25 per cent share of income from the firm of M/s. A.K. Muthan Chettiar & Sons, Kuala Lumpur : Rs. 2,13,568
3. Other Sources
(a) Dividend from United Asian Bank, Kaula Lumpur : Rs. 1,728
(b) Net winnings from welfare lottery : Rs. 19,732
(c) Compensation received for vacating the premises at No. 69, Leboh Ampang, Kuala Lumpur : Rs. 67,008 : Rs. 3,23,304
3. One of the issues that arose for consideration in the proceedings relating to the said assessment year was whether Indian income-tax was chargeable on the foreign income. The assessee's case was that by virtue of the Agreement between Government of India and the Government of Malaysia for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, Indian Income-tax was not exigible on the foreign income. The Assessing Officer negatived the assessee's claim and brought to tax in its entirety the aforesaid aggregate foreign income of Rs. 3,23,304.
4. Predictably, the exigibility issue relating to the assessee's foreign income was one of the subject matters of appeal. The CIT (Appeals) allowed the assessee's claim observing: "In regard to exclusion of foreign income the assessee relies on the order of the Tribunal in the assessee's own case in ITA No. 403/Mds/86 assessment year 1982-83 dated 28-10-1987. In view of the order of the Tribunal the foreign income including compensation received shall be excludable.
5. It is in these circumstances that the Department is now before us.
6. The Department's objection to the impugned order of the CIT (Appeals) on this issue is, first, that by virtue of Article XXII.I the Agreement for Avoidance of Double Taxation the foreign income of the assessee has to be included in his total income. The CIT (Appeals) has ignored the provisions of the said Article. Secondly, the decision of the ITAT referred to and relied upon by the CIT (Appeals) has not become final.
On his part, Shri D.V. Jayaraman, the learned counsel for the assessee strongly supported the impugned order of the CIT (Appeals) on the issue under consideration.
7. We have looked into the facts of the case. We have considered the rival submissions.
8. At the outset, we may indicate the plane on which Double Taxation Avoidance Agreements operate and their effect on the assessment of income to Indian income-tax. For determining the total income of an Indian Resident and computing his tax liability, one has to look only to the Income-tax Act, 1961. In other words, the income of an Indian Resident must be determined in the ordinary way under the Indian law. This is the first stage.
In the second stage, the Double Taxation Avoidance Agreement comes into play. It is at this stage that the contents of the Agreements must be looked into with a view to see whether each item of income are covered by the Agreement and what is the treatment to be given to such items of income. It will also be necessary to ascertain whether any item of income are not covered by the Agreement and the treatment to be given to them under the terms of the Agreement.
One thing will be clear from the foregoing analysis and that is that a Double Taxation Avoidance Agreement cannot be construed as modifying or superseding, in any manner, the provisions of the taxation laws of the countries concerned. The said laws operate with full force in the respective territories. The Agreement has a limited role to play, namely the avoidance of double taxation.
If any authority for the aforesaid propositions is needed, it is found in the Supreme Court case of CIT v. Mahalaxmi Sugar Mills Co. Ltd. [1986] 160 ITR 920.
9. He may now examine the exigibility issue taking each seriatim:
(1) Income from Kuala Lumpur property- Art. VII. 1 of the Agreement between India and Malaysia governs the taxation of income from immovable property. The said Article lays down that "Income from Immovable Property may he taxed in the contracting State in which such property is situated." (Emphasis supplied). The focus of this Article thus is the situs of the property, and the situs of the property in its turn determines contracting State which is empowered to levy tax. In the case before us, the property in question being situated in Kuala Lumpur, it is the Malaysian Government, which is competent to levy tax on the income from property.
True, the Article uses the term "may be taxed". As we see it, the term "may be taxed" has been advisedly used. It is one thing to identify the contracting State which will levy tax on income from immovable property, but it is totally a different thing to say that that contracting State should invariably levy tax on income from immovable property. The choice is with the contracting State in question.
Even if that contracting State should decide not to levy any tax on income, it does not follow that the other contracting State gets a right to levy tax on the income from immovable property by that reason alone. Once the Agreement vests the right to levy tax on income from immovable property in the contracting State in which the property is situated, the matter ends there. There is no call either in law or in logic to draw an inference that since the term "may be taxed" will also mean "may not be taxed", the other contracting State gets a right to tax income from immovable property.
In view of the foregoing, therefore, we hold that no tax is exigible in India under the Indian Income-tax Act on the net rental income of Rs. 17,376 derived by the assessee from the building situate at No. 77, Laboh Ampang, Kuala Lumpur.
(2) Income from business -- As already pointed out, the assessee has two sources of income under this head, namely, own business in Singapore, and 25 per cent share of income of a firm situate in Malaysia.
Here Article VII.I of the Double Taxation Avoidance Agreement between India on the one hand and Malaysia and Singapore on the other is relevant. In both the Agreements the said Article contains identical provisions. It contemplates two situations: the first situation is one in which an enterprise is carried on in one of the contracting States. In such a situation, the contracting State concerned gets the right to levy the tax on the income and profit of the enterprise.
The second situation is one in which an enterprise of one of the contracting States carries on business in the other contracting State also througn a permanent establishment situate therein.
In the case before us there is no dispute about the situs of the two enterprises in question. One is situate in Singapore and the other in Malaysia. But the said data is inadequate to decide the exigibility issue under Article VII.I. We have no information on the point whether the said two enterprises carry on business in India also through a permanent establishment situate in India. We, therefore, remit this aspect of the matter to the Assessing Officer for fresh consideration and decision after ascertaining whether the aforesaid two enterprises were at the relevant point of time carrying on business in India also through a permanent establishment situate in India.
(3) Income under the head 'Other sources'
(a) Dividend from a Malaysian Bank- Here Article XI.I of the Agreement comes into play, which states that the Malaysian Government may tax the dividend income. For the detailed reasons given while dealing with the exigibility issue relating to income from house property, we hold that the dividend income in question cannot be brought to tax to Indian income-tax.
(b) Winnings from Welfare Lottery- The Double Taxation Avoidance Agreement between India and Malaysia is silent on the treatment to be given to winnings from lottery. But as pointed out earlier, the assessee being an Indian resident, the first stage is to decide whether the winnings from lottery are chargeable to tax under the Indian Income-tax. Under Section 2(24) of the Income-tax Act, 1961 winnings from lotteries are income chargeable to tax, subject of course to the provisions of Section 80-TT of the Act.
But the matter does not rest there.
It will have to be ascertained whether Malaysian income-tax is exigible on the winnings from lottery. If at the relevant point of time no Malaysian tax was exigible, the question of invoking the provisions of Article XXII.2 will not arise. If, on the contrary, winnings from lottery are chargeable to Malaysian tax, then the assessee will be entitled to a credit against the Indian tax payable on the winnings from lottery to the extent stipulated in Article XXII. 2.
We, however, do not have the requisite data. ('Phis is because the lower authorities have simply short circuited the entire matter). Be that as it may, we hold first that the winnings from lottery in question are chargeable to Indian Income-tax; and secondly, that the assessee would be entitled to the credit contemplated by and under Article XXII.2 only if he demonstrates that Malaysian tax had been levied on the winnings in question.
(C) Compensation far vacating the premises at No. 69, Leboh Ampang, Kuala Lumpur It is common ground that the assessee was a tenant of the aforesaid premises; that he vacated the said premises; and that he received a sum of Rs. 67,008 as and by way of compensation.
The case before us is clearly one of receipt of certain amount on capital account as compensation for surrendering tenancy right. True, the Double Taxation Avoidance Agreement between India and Malaysia does not contain a specific provision relating to such receipts. Even so, tenancy right being a right in property, compensation for surrendering the right, though received on capital account, is to be treated as income from property- see Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 (SC). This being the legal position, this receipt will be governed by Article VI.I of the Agreement. And for the reasons given by us while dealing with the rental income received by the assessee from the Kuala Lumpur property, we hold that the sum of Rs. 67,008 cannot be brought to charge under the Indian Income-tax Act.
10. In the result, the departmental appeal is treated as partly allowed for statistical purposes.