Double taxation treaty overrode domestic tax law, keeping Malaysia-sourced income outside the Indian tax net.

Where an India-Malaysia double taxation avoidance agreement applied, income received in Malaysia was held outside the Indian tax net even though it might otherwise have been taxable under the Income-tax Act, 1961. The agreement governed chargeability, so income not chargeable under the treaty could not be taxed in India merely by reference to domestic law. The referred question was answered against the Revenue, and the assessee succeeded on taxability.

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Issues: Whether income received in Malaysia was taxable in India in view of the agreement for avoidance of double taxation between India and Malaysia.

Analysis: The income was held to be outside the Indian tax net by reason of the agreement for avoidance of double taxation, following the earlier binding decision on the same question. The agreement governed the chargeability of such income even though it might otherwise have been taxable under the Income-tax Act, 1961.

Conclusion: The income received by the assessee in Malaysia was not taxable in India.

Final Conclusion: The referred question was answered against the Revenue and the assessee succeeded on the taxability issue; a certificate of fitness for appeal to the Supreme Court was also granted.

Ratio Decidendi: Where a double taxation avoidance agreement applies, income not chargeable under the agreement cannot be taxed in India merely because it may otherwise be taxable under the Income-tax Act, 1961.

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