1. These three appeals, relating to three different assessees are, because the points for our decision are common, consolidated for disposal. Out of the three appeals one is by the assessee for the assessment year 1977-78 and the other two by the department for the assessment years 1978-79 and 1979-80. All the three assessees are HUFs and resident in India. All of them have income from Malaysia. These and other similar assessees contended before the ITO that Malaysian income is not includible in the total income in India because of the Agreement for Avoidance of Double Taxation between India and Malaysia issued by notification dated 1-4-1977- 107 ITR (St.) 36. The ITO held that it is taxable in India subject to relief of double taxation. But the Tribunal in various other cases had uniformly held the view that it is not includible in total income of taxable in India. However, a conflict arose in the Tribunal as to whether such Malaysian income is includible for rate purpose or not. That is how these appeals came to be heard by a Special Bench.
2. In the appeal of the assessee for the assessment year 1977-78, the assessee had business profits (share income) and property income from Malaysia. The assessee appealed only against the business income. The Commissioner (Appeals) held that the foreign income is includible only for rate purposes. The department appeal against the exclusion from assessment has been already dismissed. The appeal of the assessee is against the inclusion for rate purposes.
3. In the departmental appeal for the assessment year 1978-79, the ITO treated the foreign income as income from rubber estate. He held that the assessee is resident in India and as control is exercised from India, the income is taxable in India. The Commissioner (Appeals) held that unless the Malaysian enterprise carries on business in India, its profits in Malaysia cannot be taxed in India. Hence, the departmental appeals for inclusion in assessment or in any event for rate purposes.
The departmental grounds disclosed that the assessee has income from rubber garden, share income from partnership concern and house properties accruing or arising in Malaysia and claims to have incurred losses by way of interest on moneys lent and borrowed.
4. In the departmental appeal for the assessment year 1979-80, the ITO did not specify the character of foreign income. The Commissioner (Appeals) also without specifying its character deleted the assessment.
The department appeals for inclusion in assessment or in any event for rate purposes. The departmental grounds disclose that the assessee has income from garden, house properties and by way of interest accruing or arising in Malaysia.
5. The standing counsel for the department mentioned that at the instance of the department the Madras High Court has required the Tribunal to state a case on the question of assessability of Malaysian income. He then argued that Malaysian income, whether it be property, business or interest, is assessable in India and that what the assessee is entitled is only for double taxation relief. The standing counsel added that the agreement has not taken away the right of the Government of India provided under Section 5(1)(c) of the Income-tax Act, 1961 ('the Act'), to tax the Indian resident of this type of income accruing or arising outside India. The standing counsel relied particularly on Article 22 (Elimination of Double Taxation) paragraph 2, which provides that the amount of Malaysian tax payable 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 and also paragraph 3 of the same article, which provides similar relief to a resident of Malaysia in respect of Indian tax payable by him and stated that these two sub-paragraphs clearly indicated that the agreement provided only for double taxation relief and did not provide that such income shall not be taxed in India. It was pointed out that the contemplation (even after execution of agreement) of double taxation and the insertion of provision for the remedy by way of relief from double taxation positively and affirmatively indicated that the parties to the agreement visualised the scheme of double taxation and intended to perpetrate it. The standing counsel also argued that under the agreement what is done is only that the exclusive right to tax income arising or accruing in Malaysia by the Government of India is agreed to be diluted and Malaysia is also given the right to tax the income of the Indian resident under certain circumstances. He clarified that the grant of a right to Malaysia to tax, did not whittle down the right of the Government of India to tax the same income. The standing counsel also argued further that the agreement entered into by virtue of Section 90 of the Act, is not only for avoidance of double taxation but also for prevention of fiscal evasion with respect to taxes on income which prevention can be achieved only by retention by the Government of India of powers of inclusion of Malayian income in the total income provided under Section 5. The standing counsel concluded by stating that the Income-tax Act continues to govern the taxation in India except where provisions to the contrary are made in the agreement itself and that there are no such contrary provision in the agreement.
Shri Srinivasan, counsel for the assessee, argued that the relevant article like Article 6, Article 7, etc., are provisions to the contrary and that, therefore, such income covered by those articles cannot be included in the total income and if it cannot be so included, he found no other provisions in the law relating to income-tax to support the inclusion for rate purposes.
8. We are not inclined to agree with the standing counsel. The expressions like 'relief from double taxation' indicated in Sub-clause (a) of Section 90 and incorporated in paragraphs 2 and 3 of Article 22, 'avoidance of double taxation' indicated in Clause (b) of Section 90 and 'prevention of evasion or avoidance of income-tax' indicated in Clause (c) of Section 90, are all well-known concepts. The argument that the prevention of fiscal evasion which is mentioned in the preamble to agreement as an object to the agreement can be achieved only by retention of taxing power is not at all sound. Clause (c) of Section 90 empowers the Central Government to enter into agreement with the Government of any country outside India for exchange of information for prevention of evasion and for avoidance of income-tax or investigation of cases of such evasion or avoidance. So, the appropriate provision for prevention of evasion is Article 25 of the Agreement (Exchange of Information) and the like in Article 2 (taxes covered) where it is provided that at the end of the each year the contracting State shall notify to each other, any other significant change which have been made in their respective taxation laws. Such exchange of information is the method adopted in the agreement for prevention of evasion and not retention of the taxation power with the Government of India in respect of the Malaysian income. So, the argument that the agreement must be so interpreted as to retain the taxation power with the Government of India in order to prevent fiscal evasion has only to be rejected. The agreement is mainly for avoidance of double taxation. That means the income shall not be taxed at the same time in both the countries in India and Malaysia. So, if we interpret the agreement to mean that the Indian Government and the Malaysian Government both still retain even after the execution of the agreement the power to tax at the same time the same income it will only frustrate the object with which the agreement is executed. We will, therefore, in this background consider the principal argument of the standing counsel that the Income-tax Act, 1961 with full force of Section 5 of that Act continues to govern the taxation in India except where provision to the contrary is made in the agreement itself and that the agreement contains no such contrary provisions.
7. As regards the property income Article 6 provides that income from immovable properties may be taxed in the contracting State in which such property is situated. In this case, the immovable properties admittedly is situate in Malaysia. So, Article 6 empowers Malaysia to tax the income from those properties. Considering that the object of the agreement is avoidance of double taxation and not relief from double taxation which well-known expression, does not find a place in the preamble, the necessary interpretation should be that it is only Malaysia, that can levy the tax. If India can also levy tax, it will only frustrate the object of avoidance of double taxation with which the agreement is made Even without the agreement, Malaysia can tax the property income which arises in Malayia to the assessee who will be a non-resident as far as Malaysia is concerned. So, the object cannot be to confer Malaysia with power to tax which power it already possesses.
The object can only be to take away or restrict the existing power of Indian Government to tax income from such properties, so that double taxation can be avoided. So, we hold that Article 6 is provision to the contrary, so far as the Income-tax Act, 1961 is concerned.
8. As regards business profits paragraph 1 of Article 7 provides that the income or profits of an enterprise of one of contracting State shall be taxable only in that contracting State. We will take it that the assessee being a resident of India, the enterprise is an Indian enterprise. So, the profits are taxable in India. But this power of India to tax, as further provided in the article, exists only where the enterprise does not carry on business in Malaysia through a permanent establishment situate in Malaysia. These enterprises carry on business in the other contracting State of Malaysia through a permanent establishment situate in Malaysia. That is an undisputed fact. So, the right of the Indian Government to levy tax in respect of business profits of these types of Indian enterprise as provided in opening paragraph of Article 7 is taken away because a permanent establishment is situate in Malaysia. The first paragraph of the article further provides that where the Indian enterprise carries on business in Malaysia through a permanent establishment situate in Malaysia as in these cases, the tax may be imposed in Malaysia only on so much of the business income attributable to that permanent establishment in Malaysia. Para 2 of Article 7 provides for computation of profits attributable for the permanent establishment. In these cases, the whole income is attributable to that permanent establishment. No portion is attributable to establishment other than permanent establishment in Malaysia. The department has no case before us that at least a small portion of the business profits is not attributable to the permanent establishment in Malaysia or that some portion is attributable to other establishment. All business profit of the Indian enterprise brought to assessment in these assessments, is attributable only to the permanent establishment in Malaysia. In that event, what Article 7 provides is the tax may be imposed by Malaysia. Then, the rest of the reasons which we have given for property income to hold that it is only Malaysia that can tax and that the power of India is taken away applies with equal force to the business profits. So, Article 7 is also a provision to the contrary. As regards interest income, Article 12 provides that interest derived by a resident of one of the contracting States from the other contracting State may be taxed that other contracting State. So, that interest income by the same process of reasoning adopted for property income is taxable only by Malaysia. So, Article 12 also is a provision to the contrary. So, we hold that the property income, business profits and interest income is assessable only in Malaysia. It is only Malaysia that can tax. The power of India is taken away.
9. A pertinent question now arises as to what then is the meaning of paragraphs 2 and 3 of Article 22 which provide for double taxation relief. Though under the agreement each country is given the right to tax certain types of income, still by bona fide error of interpretation some assessees in jurisdiction of some authorities may run the risk of their income being doubly taxed. Such a contingency cannot be ruled out. Necessary provision has to be made to meet such a situation. So, what paragraphs 2 and 3 provide is only to meet such situation where the same income unauthorisedly gets doubly taxed in Malaysia and India.
The double taxation visualised in paragraphs 2 and 3 is certainly not a double taxation as now contended by the department to be legitimately made under the article of agreement. Further, the agreement published in 1977 only takes effect from the assessment year 1973-74. Many assessments would have been completed in India by 1977 including Malaysian income in the total income. So, these paragraphs may be to cover those cases also by providing double taxation relief.
10. Then the next point is whether it is includible for rate purposes.
The stand of the department is that the income is first includible in the total income and what the agreement provides is that no income-tax is payable on that income so included so that Section 110 of the Act, which provides for inclusion for rate purposes is straightaway attracted to the facts of this case. It was also argued by the department that if the income were totally excluded even for rate purposes, it should not be taxable in India at all or exemption under Section 10 of the Act should have been provided. We cannot agree with the department. We have already held that because of provisions to the contrary, Section 5, which ordinarily provides for inclusion of this type of income in the total income of a resident, is not applicable to the facts of this case. So, when Section 5, invoked to include this type of income in the total income of a resident, is not applicable, the question of inclusion for rate purpose does not arise at all for consideration.
11. In the result, the appeal of the assessee for the assessment year 1977-78 [IT Appeal No. 616 (Mad.) of 1981] is allowed. The direction of the Commissioner (Appeals) to include the foreign income for rate purpose is cancelled. The two departmental appeals are dismissed.