Treaty override of domestic tax law excluded Malaysian income from Indian total income under the India-Malaysia agreement.

Section 4 and section 5 of the Income-tax Act, 1961, permit taxation of global income, but that general charging power yields to a double taxation avoidance agreement under section 90 where the treaty specifically allocates taxing rights. On that basis, income arising in Malaysia was treated as taxable in Malaysia under the India-Malaysia agreement, and therefore not includible in the resident assessee's total income in India. Article 22 on tax credit applied only where the same income was actually taxed in both States, which was not the position here. The CBDT circular was noted as confirming that a specific treaty provision prevails over the Act.

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Issues: Whether, for the assessment year 1982-83, income earned by a resident assessee in Malaysia was liable to be included in total income in India, or whether the Double Taxation Avoidance Agreement between India and Malaysia excluded Indian tax liability on that income.

Analysis: Sections 4 and 5 of the Income-tax Act, 1961, confer a general power to tax global income, but that power is subject to an agreement entered into under section 90. Where the agreement specifically allocates taxing rights to the Contracting State in which the income arises or is situated, the agreement prevails over the general charging provisions of the Act. Article 6 of the agreement recognises that income from immovable property in Malaysia may be taxed in Malaysia, and the same principle was treated as governing the relevant categories of income in the case. Clause 2 of article 22, which deals with credit for tax paid in both countries, applies only where the same income is actually subjected to tax in both States. The CBDT circular also states that a specific provision in a double taxation avoidance agreement prevails over the Income-tax Act.

Conclusion: The income arising in Malaysia was not liable to be included in the assessee's total income in India, and the question was answered in favour of the assessee and against the Revenue.

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