Treaty residence for a UK partnership barred reassessment in India on shipping income under the India-UK tax convention.

A UK-based partnership firm was treated as a person and enterprise of a Contracting State for treaty purposes, even though it was not taxed as such in the UK. Construing Articles 3 and 9 of the India-UK tax treaty liberally and in light of the earlier decision on the same assessee, the Court held that the firm had fiscal domicile in the UK. Its income from operation of ships in international traffic was therefore taxable only in that State, and domestic law could not be used to reopen the assessment in India through Section 148 notices. The reassessment notices were set aside.

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Issues: Whether reassessment notices issued under Section 148 of the Income-tax Act, 1961 to a UK-based partnership firm were sustainable in view of the India-UK tax treaty and the character of the partnership as a person and enterprise of a Contracting State.

Analysis: The partnership was based in the UK and its shipping income had been assessed as nil. The treaty definitions, particularly Article 3 and Article 9, had to be construed in light of the earlier decision on the same assessee and the principle that tax treaties receive a liberal interpretation to give effect to their object. The Court held that a partnership based in the UK, though not taxed as such there, was covered by the convention and had fiscal domicile in the UK for treaty purposes. As an enterprise of a Contracting State, its income from operation of ships in international traffic was taxable only in that State, and domestic law could not be invoked to tax the same income in India through reassessment notices.

Conclusion: The reassessment notices were unsustainable and were set aside in favour of the assessee.

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