Treaty interpretation on foreign rental income: "may be taxed" did not exclude India's taxing right over resident income.

Section 90 and the relevant DTAA were interpreted to mean that relief from double taxation applies only to the extent the treaty is more beneficial, and that the phrase income from immovable property "may be taxed" in the State where the property is situated does not, without an express exclusion, bar India from taxing a resident assessee. The notification implementing the treaty did not displace the substantive operation of section 90(2). On that basis, foreign rental income from properties in the United Kingdom and Australia was not excluded from Indian taxation, and the addition was not sustained on the assessee's treaty-based objection.

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Issues: Whether rental income from immovable properties situated in the United Kingdom and Australia was liable to be brought to tax in India in view of the Double Taxation Avoidance Agreement and section 90 of the Income-tax Act, 1961.

Analysis: The assessee, being resident in India, had also declared the rental income in the foreign jurisdictions. The dispute turned on the effect of section 90 of the Income-tax Act, 1961, read with the applicable treaty provisions and the notification issued for implementation. The relevant framework permits relief from double taxation and provides that the Act applies to the assessee only to the extent it is more beneficial. The expression used in the treaty, namely that income from immovable property 'may be taxed' in the State where the property is situated, was held not to exclude the taxing right of the resident State in the absence of an express provision to that effect. Section 90(3) was also noticed as enabling the meaning assigned through the notification, without displacing the substantive position under section 90(2).

Conclusion: The rental income from the foreign properties was not excluded from taxation in India, and the addition was not sustained on the assessee's contention.

Final Conclusion: The appeals were allowed on the ground that the treaty language did not oust India's right to tax the resident assessee, and the beneficial DTAA mechanism did not prevent inclusion of the foreign house-property income in the Indian assessment.

Ratio Decidendi: In the absence of an express exclusion, the phrase 'may be taxed' in a treaty does not prevent the resident State from taxing its resident, and section 90 applies only to the extent the treaty provisions are more beneficial to the assessee.

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