COMMISSIONER OF INCOME TAX versus P.V.A.L. KULANDAGAN CHETTIAR (DEAD) THROUGH LRS.

Citation: [2004] SUPP. 2 S.C.R. 697 · Decided: 26-05-2004 · Supreme Court of India · Bench: S. RAJENDRA BABU · Disposal: Dismissed

Judgment (excerpt)

COMMISSIONER OF INCOME TAX 
v. 
P.V.A.L. KULANDAGAN CHETTIAR (DEAD) THROUGH LRS. 
MAY 26, 2004 
[S. RAJENDRA BABU, CJ. AND G.P. MATHUR, J.] 
Agreement of Avoidance of Double Taxation of Income and Prevention 
of Fiscal Evasion of Tax between India and Malaysia: 
A 
B 
Article V//(1)-Income Tax-Double Taxation-Assessee, who was a C 
resident of India, owned rubber estates in Malaysia-Assessee had 
permanent establishment in Malaysia but not in India-Assessee derived 
business income and capital gains in Malaysia-Liability to income tax 
Held: In view of the closer economic relationship between the assessee and 
Malaysia where his permanent establishment is set up, such business D 
income and capital gains could not be taxed in India. 
Income Tax Act, 1961: 
Section 90-Scope and ambit of-Held: Enables the Government to E 
formulate its policy through treaties entered into by it-The Avoidance of 
Double Taxation Treaty which treats the fiscal domicile in one State or the 
other prevails over other provisions of the Income Tax Act-Hence, it is 
not necefsary to refer to the terms of Organisation for &onomic Cooperation 
and Development. 
F 
Words & Phrases: 
"May be"-Meaning of-In the context of Art. VII(J) of Agreement 
of Avoidance of Double Taxation of Income and Prevention of Fiscal 
Evasion of Tax between India and Malaysia. 
G 
The respondent-assessee was a firm owning immovable properties 
at Malaysia. During the course of the assessment year, the respondent 
assessee earned a certain income from rubber estates at Malaysia. The 
respondent-assessee also earned a certain amount as short-term capital H 
697 
698 
SUPREME COURT REPORTS (2004] SUPP. 2 S.C.R. 
A gains from sale of property at Malaysia. 
The Income Tax Officer assessed that both the incomes are 
assessable in India and brought the same to tax. Tbe respondent filed 
an appeal before the Commissioner of Income Tax (Appeals) who held 
B that under Article VIl(l) of the Agreement of Avoidance of Double 
Taxation of Income and Prevention of Fiscal Evasion of Tax between 
India and Malaysia unless the respondent had a permanent 
establishment of the business in India such business income in Malaysia 
could not be included in the total income of the assessee and, therefore, 
no part of the capital gains arising to the respondent in the foreign 
C country could be taxed in India. The Income Tax Appellate Tribunal 
(IT AT) confirmed this order. The High Court upheld the findings of 
the ITAT. 
D 
The following questions arose before the Court: 
(a) Whether the Malaysian income cannot be subjected to tax in 
India on the basis of the Agreement of Avoidance of Double Taxation 
of Income and Prevention of Fiscal Evasion of Tax between India and 
Malaysia? 
E 
(b) Whether the capital gains should be taxable only in the 
country in which the assets are situated? 
Dismissing the appeals, the Court 
HELD: 1. The traditional view in regard to the concept of'double 
F taxation' is that to constitute double taxation, objectionable or 
prohibited, the two or more taxes must be (I) imposed on the same 
property, (2) by the same State pr Government, (3) during the same 
taxing period, and (4) for the same purpose. There is no double 
taxation strictly speaking where (a) the taxes are imposed by different 
G States, (b) one of the impositions is not a tax, (c) one tax is against 
property and the other is not a property tax or (d) the double taxation 
is indirect rather than direct. [703-G-H) 
2. But the Indian law has developed in that regard. Section 90 of 
H the Income Tax Act, 1961 provides for "Agreement with foreign 
C.l.T. v. P.V.A.L.K. CHETTIAR 
699 
countries" for the purposes specified in Section 90(l)(a), (b), (c) and A 
(d). By virtue of the provisions of Section 90(2), in relation to the 
assessee to whom such agreement applies, the provisions of the Act 
would apply to the extent they are more beneficial to that assessee. 
(704-A-D) 
3. The provisions of an agreement as stipulated in Section 90 of 
the Act cannot fasten a tax liability where the liability is not imposed 
by a local Act. (704-F) 
B 
4. The immovable property in question is situate in Malaysia and C 
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 au

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