Family pension under the India-U.K. DTAA was treated as residuary income taxable only in the source State.

Family pension received from the employer of a deceased spouse in the U.K. was treated as family pension, not ordinary pension, because treaty pension refers to payment for past employment, while family pension is paid to a spouse or dependants. On that basis, Article 23(1) of the India-U.K. DTAA was found inapplicable. The receipt, having arisen in the U.K. and already suffered tax there, was covered by Article 23(3) as residuary income not dealt with elsewhere in the treaty. The phrase "may be taxed in that other State" was read as giving taxing rights to the source State and excluding taxation in India.

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Issues: Whether family pension received from the employer of the deceased spouse in the U.K. was taxable in India under Article 23(1) of the India-U.K. DTAA or fell within Article 23(3) as residuary income not dealt with in the preceding articles.

Analysis: The payment was held to be family pension and not ordinary pension, since pension under the treaty refers to payment in consideration of past employment, whereas family pension is received by the spouse or dependants of the deceased employee. The income arose in the U.K. and had already suffered tax there. Article 23(1) was found inapplicable because the receipt was treated as income paid out of the trust or estate of a deceased person in the course of administration and was not beneficial income in the relevant sense. Article 23(3), being the residuary provision, was applied to income not otherwise dealt with in the convention, and the expression "may be taxed in that other State" was construed to confer taxing right on the source State and to preclude taxation in the State of residence.

Conclusion: The family pension was not taxable in India and was covered by Article 23(3) of the India-U.K. DTAA, not Article 23(1).

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