I am resident in India but my rubber estate and my business are in Malaysia. The treaty says that income may be taxed there. Can India tax it as well?
No, on this treaty. The Supreme Court dismissed the Revenue's appeals and held that neither the business income from the Malaysian rubber plantations nor the capital gain on the sale of the Malaysian property could be taxed in India. The property was in Malaysia, the permanent establishment was in Malaysia and there was none in India, so the closer personal and economic relations determined fiscal domicile and residence in India became irrelevant. Capital gains is income arising out of immovable property for the purposes of the Act, so Article 6 covered it. The Court declined to decide the semantic question whether may be taxed allocates the taxing power or merely permits it.
Decided by the Supreme Court (Supreme Court of India - S. Rajendra Babu, CJI and G.P. Mathur, J; judgment of the Court delivered by S. Rajendra Babu, CJI) on 2004-05-26, reported as (2004) 267 ITR 654; (2004) 6 SCC 235; AIR 2004 SC 3411; (2004) 6 SCALE 36. It bears on section 90, section 90(2), section 5, section 4 of the Income Tax Act 1961, in Residence & Treaty Benefit and Capital Gains matters.
This is the case that made the argument that a treaty allocating taxing rights to the source state removes the income from Indian tax altogether, rather than merely giving a credit. It is also the clearest statement of the relationship between the treaty and the charge: sections 4 and 5 impose tax on global income subject to any agreement under section 90, and such an agreement operates as an exception to or modification of those sections; a treaty cannot fasten a liability the Act does not impose, but where the Act does impose one the treaty may reduce or remove it, and on conflict the treaty prevails by force of section 90(2). It further holds that capital gains is income for treaty purposes because the treaty takes undefined expressions from the Act, and that Article 6 on income from immovable property extends to the gain on alienation. The Court's fiscal domicile reasoning is what makes the decision distinctive and also what a reader must check against later developments.
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The respondent was a firm owning immovable property at Ipoh in Malaysia. In the year in question it earned income of Rs 88,424 from rubber estates there and made a short term capital gain of Rs 18,113 on the sale of property. The Income Tax Officer held both amounts assessable in India and taxed them. The Commissioner (Appeals) held that under Article 7(1) of the India-Malaysia agreement the Malaysian business income could not be included in the total income unless there was a permanent establishment in India, and that no part of the foreign capital gain could be taxed in India. The Tribunal confirmed that, holding that there was no permanent establishment in India and that as the property was situated in Malaysia the capital gain could not be taxed here. On reference the High Court agreed, holding among other things that where the agreement provides to the contrary there is no scope for applying either State's law, that the Revenue could not take the Malaysian income into account for rate purposes, that the words may be taxed do not leave the Indian authorities free to assess, that the OECD commentaries were not a safe guide, and that disposal of immovable property is a form of use of it so that Article 6 governed the capital gain as well. The Revenue appealed, the Attorney General arguing that may be taxed signals the credit method, that a residence State has inherent jurisdiction to tax global income and that any bar must be express, and that capital gains arises from transfer and not from use so Article 6 could not apply.
The appeals were dismissed. The business income from the rubber plantations could not be taxed in India, because the closer economic relations between the assessee and Malaysia, where the property is located and where the permanent establishment was set up, determine the fiscal domicile. The concurrent finding that there was no permanent establishment in India was not re-examined. Reading the treaty as a whole, where a person could be taxed under sections 4 and 5 but is deemed to be a resident of the contracting State with which his personal and economic relations are closer, his residence in India becomes irrelevant, and the treaty prevails over sections 4 and 5. The High Court's conclusion was upheld though for different reasons. The Attorney General's contention that capital gains is not income and so falls outside the treaty was rejected: for the purposes of the Act capital gains is treated as income arising out of immovable property, the treaty takes undefined expressions from the Act, and Article 6 is therefore attracted; Article II(2) also extends the agreement to taxes of substantially similar character.
The Court set out the framework first. Section 90 permits agreements for relief in respect of doubly taxed income, for avoidance of double taxation, for exchange of information and for recovery, and section 90(2) provides that where such an agreement applies the Act shall apply only to the extent more beneficial to the assessee. Sections 4 and 5 charge global income, but they operate subject to any agreement made under section 90, which acts as an exception to or modification of them. An agreement cannot fasten a liability where the local Act imposes none; where the Act imposes one, the agreement may reduce or remove it, and on conflict the agreement prevails. Turning to the treaty, Article IV fixes fiscal domicile where a person is resident in both States by reference to the State with which his personal and economic relations are closer and where he has a habitual abode. The property was in Malaysia, the income was derived from it, and there was no permanent establishment in India. On those facts the fiscal domicile was Malaysian for this income and residence in India ceased to matter. The Court expressly declined to enter on the semantics of may be taxed - whether it allocates the power to tax or merely permits it so that relief follows only on tax actually paid - holding that the treaty read as a whole gave the answer. On capital gains, since the treaty adopts the Act's definitions where it supplies none, and the Act treats capital gains as income arising from immovable property, Article 6 applied. Because taxation policy is for the Government and section 90 lets it be expressed through treaties which then prevail over the Act, it was unnecessary to refer to the OECD material or to foreign decisions.
business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located
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Handle my notice → Ask a CA on WhatsAppNo, on this treaty. The Supreme Court dismissed the Revenue's appeals and held that neither the business income from the Malaysian rubber plantations nor the capital gain on the sale of the Malaysian property could be taxed in India. The property was in Malaysia, the permanent establishment was in Malaysia and there was none in India, so the closer personal and economic relations determined fiscal domicile and residence in India became irrelevant. Capital gains is income arising out of immovable property for the purposes of the Act, so Article 6 covered it. The Court declined to decide the semantic question whether may be taxed allocates the taxing power or merely permits it. This was decided by the Supreme Court (Supreme Court of India - S. Rajendra Babu, CJI and G.P. Mathur, J; judgment of the Court delivered by S. Rajendra Babu, CJI) and bears on section 90, section 90(2), section 5, section 4 of the Income Tax Act 1961. It is reported as (2004) 267 ITR 654; (2004) 6 SCC 235; AIR 2004 SC 3411; (2004) 6 SCALE 36. This is the case that made the argument that a treaty allocating taxing rights to the source state removes the income from Indian tax altogether, rather than merely giving a credit. It is also the clearest statement of the relationship between the treaty and the charge: sections 4 and 5 impose tax on global income subject to any agreement under section 90, and such an agreement operates as an exception to or modification of those sections; a treaty cannot fasten a liability the Act does not impose, but where the Act does impose one the treaty may reduce or remove it, and on conflict the treaty prevails by force of section 90(2). It further holds that capital gains is income for treaty purposes because the treaty takes undefined expressions from the Act, and that Article 6 on income from immovable property extends to the gain on alienation. The Court's fiscal domicile reasoning is what makes the decision distinctive and also what a reader must check against later developments. If it applies to you, the first step is this: Start with the domestic charge: a treaty cannot create a liability, so identify the section that charges the income before arguing about the treaty.
The respondent was a firm owning immovable property at Ipoh in Malaysia. In the year in question it earned income of Rs 88,424 from rubber estates there and made a short term capital gain of Rs 18,113 on the sale of property. The Income Tax Officer held both amounts assessable in India and taxed them. The Commissioner (Appeals) held that under Article 7(1) of the India-Malaysia agreement the Malaysian business income could not be included in the total income unless there was a permanent establishment in India, and that no part of the foreign capital gain could be taxed in India. The Tribunal confirmed that, holding that there was no permanent establishment in India and that as the property was situated in Malaysia the capital gain could not be taxed here. On reference the High Court agreed, holding among other things that where the agreement provides to the contrary there is no scope for applying either State's law, that the Revenue could not take the Malaysian income into account for rate purposes, that the words may be taxed do not leave the Indian authorities free to assess, that the OECD commentaries were not a safe guide, and that disposal of immovable property is a form of use of it so that Article 6 governed the capital gain as well. The Revenue appealed, the Attorney General arguing that may be taxed signals the credit method, that a residence State has inherent jurisdiction to tax global income and that any bar must be express, and that capital gains arises from transfer and not from use so Article 6 could not apply. The matter was decided on 2004-05-26 by the Supreme Court (Supreme Court of India - S. Rajendra Babu, CJI and G.P. Mathur, J; judgment of the Court delivered by S. Rajendra Babu, CJI). On those facts the Supreme Court held as follows. The appeals were dismissed. The business income from the rubber plantations could not be taxed in India, because the closer economic relations between the assessee and Malaysia, where the property is located and where the permanent establishment was set up, determine the fiscal domicile. The concurrent finding that there was no permanent establishment in India was not re-examined. Reading the treaty as a whole, where a person could be taxed under sections 4 and 5 but is deemed to be a resident of the contracting State with which his personal and economic relations are closer, his residence in India becomes irrelevant, and the treaty prevails over sections 4 and 5. The High Court's conclusion was upheld though for different reasons. The Attorney General's contention that capital gains is not income and so falls outside the treaty was rejected: for the purposes of the Act capital gains is treated as income arising out of immovable property, the treaty takes undefined expressions from the Act, and Article 6 is therefore attracted; Article II(2) also extends the agreement to taxes of substantially similar character.
The Court set out the framework first. Section 90 permits agreements for relief in respect of doubly taxed income, for avoidance of double taxation, for exchange of information and for recovery, and section 90(2) provides that where such an agreement applies the Act shall apply only to the extent more beneficial to the assessee. Sections 4 and 5 charge global income, but they operate subject to any agreement made under section 90, which acts as an exception to or modification of them. An agreement cannot fasten a liability where the local Act imposes none; where the Act imposes one, the agreement may reduce or remove it, and on conflict the agreement prevails. Turning to the treaty, Article IV fixes fiscal domicile where a person is resident in both States by reference to the State with which his personal and economic relations are closer and where he has a habitual abode. The property was in Malaysia, the income was derived from it, and there was no permanent establishment in India. On those facts the fiscal domicile was Malaysian for this income and residence in India ceased to matter. The Court expressly declined to enter on the semantics of may be taxed - whether it allocates the power to tax or merely permits it so that relief follows only on tax actually paid - holding that the treaty read as a whole gave the answer. On capital gains, since the treaty adopts the Act's definitions where it supplies none, and the Act treats capital gains as income arising from immovable property, Article 6 applied. Because taxation policy is for the Government and section 90 lets it be expressed through treaties which then prevail over the Act, it was unnecessary to refer to the OECD material or to foreign decisions. In the words reproduced by the source cited on this page: "business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located"
It was decided by the Supreme Court on 2004-05-26 and is reported as (2004) 267 ITR 654; (2004) 6 SCC 235; AIR 2004 SC 3411; (2004) 6 SCALE 36. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 90, section 90(2), section 5, section 4, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed. The business income from the rubber plantations could not be taxed in India, because the closer economic relations between the assessee and Malaysia, where the property is located and where the permanent establishment was set up, determine the fiscal domicile. The concurrent finding that there was no permanent establishment in India was not re-examined. Reading the treaty as a whole, where a person could be taxed under sections 4 and 5 but is deemed to be a resident of the contracting State with which his personal and economic relations are closer, his residence in India becomes irrelevant, and the treaty prevails over sections 4 and 5. The High Court's conclusion was upheld though for different reasons. The Attorney General's contention that capital gains is not income and so falls outside the treaty was rejected: for the purposes of the Act capital gains is treated as income arising out of immovable property, the treaty takes undefined expressions from the Act, and Article 6 is therefore attracted; Article II(2) also extends the agreement to taxes of substantially similar character. It arises in Residence & Treaty Benefit and Capital Gains matters, on section 90, section 90(2), section 5, section 4 of the Income Tax Act 1961, and was decided by Supreme Court of India - S. Rajendra Babu, CJI and G.P. Mathur, J; judgment of the Court delivered by S. Rajendra Babu, CJI. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where a treaty article assigns income to the source state, plead section 90(2) and put the treaty against sections 4 and 5 rather than treating the treaty as a credit mechanism only. Establish the facts that fix fiscal domicile - where the property is, where the permanent establishment is, and where personal and economic relations are closer. Check what has happened since to the meaning of may be taxed in Indian law and in the particular treaty before running this argument; the Court expressly declined to settle that question.
Still good law. A citator search returns 142 later decisions citing this judgment, and the Supreme Court has since returned to it: in Deputy CIT v Torqouise Investment and Finance Ltd (20 February 2008) it followed this decision and recorded that the review petition filed against it had been dismissed. The Chennai Tribunal drew on it in M.Ct.M. Corporation Pvt Ltd v DCIT (28 November 2008) and the Delhi Tribunal states that it followed it in Microsoft Regional Sales Corporation v ACIT. Nothing overruling or doubting it was found. Two live qualifications should travel with it. It construes the India-Malaysia agreement as it then stood and is regularly distinguished where the treaty or the facts differ - the Mumbai Tribunal did so in Essar Oil Ltd v ACIT (15 February 2007) and the Delhi Tribunal in Telecommunications Consultants India Ltd v ACIT (6 February 2009). And its reasoning on 'may be taxed' has been the subject of argument about the effect of a notification under section 90(3); the Mumbai Tribunal in Bank of India v ACIT (11 December 2020) records the contention that no such notification is in force under the present section 90. Verify both points for the year and treaty in hand. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment does not state the assessment year in issue. One passage refers to the assessment year 1970-80, which is not a valid year and appears to be a transcription error for 1979-80, and another says the treaty came into force from assessment year 1973-74 though signed in October 1976, which is also difficult to reconcile as printed. The harvested page names G.P. Mathur as author and sole bench, while the text records that the judgment of the Court was delivered by Rajendra Babu, CJI, sitting with G.P. Mathur, J; the text is followed. The batch line lists section 6; the Court decides fiscal domicile under Article IV of the treaty and not under section 6, which is not discussed, so section 6 is left out and sections 4 and 5 are given. The Court expressly left undecided the meaning of may be taxed, so this judgment is not authority on that question. Several case citations in the text are incomplete or garbled. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed. The business income from the rubber plantations could not be taxed in India, because the closer economic relations between the assessee and Malaysia, where the property is located and where the permanent establishment was set up, determine the fiscal domicile. The concurrent finding that there was no permanent establishment in India was not re-examined. Reading the treaty as a whole, where a person could be taxed under sections 4 and 5 but is deemed to be a resident of the contracting State with which his personal and economic relations are closer, his residence in India becomes irrelevant, and the treaty prevails over sections 4 and 5. The High Court's conclusion was upheld though for different reasons. The Attorney General's contention that capital gains is not income and so falls outside the treaty was rejected: for the purposes of the Act capital gains is treated as income arising out of immovable property, the treaty takes undefined expressions from the Act, and Article 6 is therefore attracted; Article II(2) also extends the agreement to taxes of substantially similar character.
TaxSphere, “CIT v P.V.A.L. Kulandagan Chettiar”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-p-v-a-l-kulandagan-chettiar/ (validity last checked 2026-08-29)
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