Madhya Pradesh High Court
Deputy Commissioner Of Income Tax vs Turquoise Investment And Finance Ltd. ... on 28 March, 2006
Equivalent citations: (2006)202CTR(MP)395, [2008]299ITR143(MP)
ORDER S.K. Kulshrestha, J.
1. The first appeals from serial Nos. 1 to 13 under Section 260A of the IT Act, 1961, have been filed by the Department, the Dy. CIT(2) Ujjain, against the order dt. 15th July, 2003 of the Tribunal in various income-tax appeals in the case of M/s Turquoise Investment & Finance Ltd., Nagda, and Trapti Trading & Investment Ltd. Since all these appeals raise similar questions, reference is being made to the facts contained in IT Appeal No. 96 of 2003. Insofar as the appeals of the assessees are concerned, being appeals from serial Nos. 14 to 26, the facts have been taken from IT Appeal No. 112 of 2003 which are common to all appeals.
2. Though the appeals filed by the Department have raised a large number of questions, the appeals have been admitted on the following questions of law :
1. Whether Tribunal was justified in holding that dividend income earned by the assessee amounting to Rs. 21,35,766 from a company called Pan Century Edible Oils SDN., BHD. Malaysia, is not liable to be taxed in the hands of assessee in India under any of the provisions of the IT Act ?
2. In view of Section 5(1)(c) of the IT Act, whether the finding recorded by the Tribunal that income earned out of dividend from the company outside the country is not liable to be taxed under the Act ?
3. Whether Tribunal was justified in law in recording a finding on an issue which was not raised by the assessee either before the AO or before the CIT(A) but was raised for the first time before the Tribunal and that too in an appeal filed by the Department ?
4. Having dismissed the cross-objection filed by the assessee, whether the tribunal was justified in then proceeding to decide the issue raised by the assessee on merits in their favour ?
3. The facts lie in a narrow compass. The assessee-company filed its return of income declaring income of Rs. 4,30,06,580 by showing its business as investment and finance, which was processed under Section 143(1)(a) on 18th Jan., 1996 on the same income and demand amounting to Rs. 1,07,370 was issued by rejecting the credit claimed by the assessee-company on the basis of deemed credit on dividend received from Pan Century Edible Oils Sdn., Bhd, Malaysia.
4. The company filed an appeal before the CIT(A) against the said order which was decided by order dt. 7th Aug., 1996, passed in IT/86/9697/204 with the finding that the claim of the appellant for credit of deemed TDS on dividend to be allowed towards TDS for the year under appeal. The Department, therefore, preferred an appeal before Tribunal which was decided by order dt. 15th July, 2003 with the observation that DTAA entered into with any country would override the provisions of IT Act, 1961, if they are at variance from the provisions of the Act. It held that from a plain reading of art. XI of the DTAA, it was clear that dividend income would be taxed only in the Contracting States where such income accrued. Aggrieved by the said judgment of the Tribunal, the Department has preferred this appeal.
5. Apropos the question No. 2 raised by the Department with reference to the taxability of the income accrued to an assessee with the resident status, learned counsel for the assessee has rightly contended that the question in the facts and circumstances of the present case, is redundant as it is not the case of the assessee that income of an assessee accrued outside the country, could not be taxed within the country under the provisions of Section 5(1)(c) of the IT Act. The controversy involved, in the present case, is quite different. The question posed for consideration is as to whether in the face of the agreement covered by the provisions of Section 90 of the IT Act, the income accruing outside the country made taxable only in the country where the income is earned, can be taxed in India. Under these circumstances, the question No. 2 raised by the Department does not require any answer in the facts and circumstances of the present case and in view of the concession of the learned counsel that law is well settled that the income accrued or arising outside India is part of the total income of the resident assessee.
6. It takes us to the core question with regard to the taxability of the dividend income in Malaysia of the assessee-company in the light of the Agreement for Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion of Tax between the Government of India and the Government of Malaysia. Though the learned counsel has submitted that no question has been formulated with regard to the effect and applicability of the said notification vis-a-vis the provisions of the Act, even otherwise, the said notification having already been construed by the Madras High Court in CIT v. VR. S.R.M. Firm (1994) 120 CTR (Mad) 427 : (1997) 208 ITR 400 (Mad) and the decision having already been affirmed by the apex Court in CIT v. P.V.A.L. Kulandagan Chettiar . the question does not survive for consideration. Though the Department has not raised any question with regard to the construction, applicability and effect of the said notification in relation to the dividend income accruing in Malaysia to which the notification applies and its effect when the income is not taxable on account of the exemption granted by that country, even assuming that for the purpose of question No. 1 that the Department is contesting the claim of the assessee that the said dividend income earned in Malaysia is not exigible to tax in India in view of the said notification, we have to examine whether the question is res Integra in the light of the decision of the Hon'ble Madras High Court (supra) in which the view of the Karnataka High Court in CIT v. R.M. Muthaiah has also been followed.
7. We may note at the outset that the Hon'ble Madras High Court was directly considering the effect of the very notification under which the assessee was claiming that the dividend income accrued in Malaysia was not taxable. Learned counsel for the assessee has taken us through the decision and invited our attention to some of its salient features and the contentions raised before the said Court for consideration. The contention raised before the High Court was that the claim of the assessee that the income accrued in Malaysia could not be assessed to tax in India was not tenable in view of Articles 6 and 7 of the agreement in view of the expression "may" used therein and, therefore, the country of 'resident' has the right to tax such income. In that case the income had been earned by the assessee from house property and business in India and also interest on deposits, dividends and income from lands in Malaysia. The question that was posed before the Court was :
Whether, on the facts and circumstances of the case, the Tribunal's decision that the Malaysian income cannot be subjected to tax in India is in accordance with the DTAA entered into between the Government of India and Malaysia ?
8. It was contended before the Madras High Court that the effect of DTAA did not have the effect of depriving the Department of assessing the income derived in Malaysia in all cases, that the right under Section 5(1)(c) of the Act to tax a resident on his global income cannot be denied to the State and that the object of the agreement was only to eliminate double taxation. In the above context, it was contended that it was only in cases where it was shown that the same income had been subjected to tax both in India and Malaysia, that tax payable in Malaysia shall be allowed as credit against the tax payable in respect of such income.
9. It was observed by their Lordships that art. XI of the agreement provided that dividends paid by the company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in the first mentioned Contracting State. Considering the submission of the counsel, it was observed that Section 90 enables the Government of India to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income on which income-tax has been paid under the Indian Act and the other country outside India and for the avoidance of double taxation of income under the Act, and under the corresponding law in force in the other country. Tax treaties are for that matter considered to be mini legislations containing themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. Such variations are, in some cases in addition to the existing local tax laws and in other cases in lieu thereof. That being the legal position, the exposition of the said position also by the CBDT in their Circular No. 333, dt. 2nd April, 1982 [(1982) 30 CTR (TLT) 18) assumes significance and importance inasmuch as they can also be traceable to the powers of the Board under Section 119 of the Act. Consequently, wherever the DTAA provides for a particular mode of computation of income, the said method alone is required to be followed, irrespective of the provisions of the IT Act and it is only where there is no specific provision in the agreement to the contrary, the basic law in force in the country will get attracted and govern the taxation of such income. The contention that wherever the words "may be taxed" are used there is no embargo upon the authorities exercising powers under the IT Act, 1961, from assessing the category or class of income concerned, cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and that the mandatory form of language has been used only where there is room or scope for doubts or more than one view possible, by identifying and fixing the position and placing it beyond doubt. The reliance sought to be placed on behalf of the Revenue on the Commentaries on the Articles of the Model Convention of 1977 presented by the Organisation for Economic Co-operation and Development (OECD) is inappropriate and unjustified. Further, it is not really the format adopted that really matters when basically they differ in their content and approach. A perusal and comparison of the content and purport of the articles in the Model Convention and those actually found in the agreement with Malaysia under consideration would go to show the wide range of difference which would per se render the Commentaries on the Model Convention wholly inapplicable and expose the unreasonableness and futility in seeking to apply the same as a guide for interpretation and construction of the articles in the agreement under consideration.
10. It was further observed that as far as the taxability of dividends income is concerned, the provisions of Sections 8 and 9 of the IT Act, 1961 deal with the same. But at the same time, art. XI of the agreement provides that dividends paid by a company which is a resident of a Contracting State may be taxed in the first mentioned Contracting State. In this view of the matter, their Lordships answered the question of law in the affirmative and held that the dividend income in Malaysia cannot be subjected to tax in India in view of the said agreement.
11. The Department had filed these appeals contending that Special Leave Petition against the said decision was pending before the apex Court. Learned counsel for the assessee has invited our attention to the decision of the Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar (supra) in which while considering the effect of the agreement between India and Malaysia, the decision in CIT v. VR. S.R.M. Firm and Ors. (supra) was cited with approval.
12. In the above case, the assessee carried on business of rubber plantation in Malaysia and it was held that he did not have a PE in India. The tax officer held that the income derived by the assessee was assessable in India and brought the same to tax against which an appeal filed to CIT(A) failed. The matter was carried to the Tribunal. The Tribunal after examining various contentions raised before it, confirmed the order of the CIT(A) and held that : (1) since the assessee had no PE for business in India, the business income in Malaysia could not be included in income in India, and (2) since the property was situated in Malaysia, capital gains cannot be taxed in India. Thereafter the matter was carried by way of a reference to the High Court. The High Court held that the finding of the Tribunal was in accordance with the provisions of the agreement for avoidance of double taxation of income.
13. After discussing the argument advanced before the Court, their Lordships made the following observations :
We need 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. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of Sections 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over Sections 4 and 5 of the Act. Therefore, we are of the view that High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.
14. Learned counsel for the Department has not been able to dispute that this decision of the Supreme Court squarely upholds the decision of the Madras High Court in CIT v. VR. S.R.M. Firm (supra). In view of the above decision, the question No. 1 is answered against the Department and in favour of the assessee.
15. Coming to the question Nos. 3 and 4, whether the issue could be raised by the assessee before the Tribunal for the first time and having dismissed the cross-objection, the Tribunal could proceed to give a finding on the same, the learned counsel for the assessee has invited our attention to the decision of the CIT(A) Ex./C in IT Appeal No. 112 of 2003 in which reference has been made to the decision of the Hon'ble Madras High Court in CIT v. VR. S.R.M. Firm (supra), but he has erroneously stated that it was held in the said decision that the said dividend is taxable in India under Sections 8 and 9 of the IT Act, 1961, though the decision holds to the contrary. Learned counsel, therefore, contends that the fact that the said decision was cited bears testimony to the fact that contention was raised with regard to the non-taxability of the dividend earned in Malaysia in India under the agreement in question. Learned counsel has further submitted that in the appeals filed by the respondents, they have clearly raised the questions that the Tribunal was not justified in dismissing the cross-objection filed by the assessee on the ground of limitation specially when it took the view that the dividend income was not taxable in India. Attention has also been invited to Rule 27 of the ITAT Rules, 1963. The said rule reads as under:
27. The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.
16. Reference has also been made to the decision of the apex Court in National Thermal Power Co. Ltd. v. CIT in which their Lordships have observed that the power of the Tribunal in dealing with appeals is expressed in widest possible terms. The purpose of assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. From the above position it is clear, that if the material is on record on the basis whereof objection can be raised, the parties to the appeal cannot be precluded from raising such contention, especially the respondent, in view of Rule 27 of the ITAT Rules, 1963, quoted above. We are, therefore, of the considered view that both questions No. 3 and No. 4 in the Department's appeal deserve to be answered against the Department. In view of the wide powers that the Tribunal is invested with, as clearly referred to and spelt out by their Lordships in their decision in National Thermal Power Co. Ltd. (supra), the Tribunal cannot be precluded from considering the questions of law arising in an assessment proceeding not raised earlier, and restricted to issues arising out of appeal before the CIT(A). The assessees have also filed appeal from item Nos. 14 to 26 captioned above. Though a large number of questions have been raised by the assessees, the appeals have been admitted on the following questions, as formulated in IT Appeal No. 112 of 2003.
(i) Whether the Tribunal was justified in dismissing the cross-objection filed by the appellant (assessee) on the ground of limitation and if so, whether such finding is sustainable in law ?
(ii) Having considered the case of the assessee on merits and recorded a categorical finding on the merits of the case to the effect that dividend income received from Pan Malaysia cannot be taxed in India, did it not result in allowing the cross-objection so submitted by the appellant/assessee ?
(iii) Having held in favour of the assessee that the dividend income in question is not taxable in the hands of assessee, was it not necessary for the Tribunal to have further recorded the finding that issue relating to grant of credit sought by the assessee has become redundant and hence need not be gone into ?
(iv). Having decided the issue in favour of the assessee, whether the Tribunal was justified in then allowing the appeal filed by the Department or the Tribunal should have then either dismissed the appeal filed by the Revenue or should have held it to have rendered infructuous in the light of a categorical finding recorded in favour of the assessee ?
17. Though in view of our answer to the questions formulated in the Revenue appeals, it is not necessary to decide the questions formulated in the appeals filed by the assessees, we may observe that since we have held that the dividend income is not chargeable under the Act in view of the agreement, the question with regard to the grant of credit for the TDS in relation therewith, is rendered redundant.
18. The above appeals are accordingly disposed of with no order as to cost.