Treaty allocation of taxing rights barred Indian assessment and rate-purpose inclusion of Malaysian income.

The India-Malaysia double taxation agreement was read as allocating taxing rights exclusively to Malaysia for Malaysian immovable property income, business profits attributable to a Malaysian permanent establishment, and Malaysian interest income of resident assessees. Those treaty provisions were treated as overriding the general charging rule under the Income-tax Act, so the income was not assessable in India. Because the income was excluded from Indian total income, it also could not be brought in merely for rate purposes; the rate-adjustment mechanism could not operate independently where the income itself was not chargeable in India.

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Issues: (i) Whether Malaysian property income, business profits and interest income of resident assessees were assessable in India or only in Malaysia under the India-Malaysia double taxation agreement. (ii) Whether such foreign income, if not includible in total income, could nevertheless be included for rate purposes under the Income-tax Act, 1961.

Issue (i): Whether Malaysian property income, business profits and interest income of resident assessees were assessable in India or only in Malaysia under the India-Malaysia double taxation agreement.

Analysis: The Agreement was construed as one primarily for avoidance of double taxation. Articles dealing with immovable property, business profits through a permanent establishment, and interest were treated as provisions to the contrary to the general charging rule under section 5(1)(c) of the Income-tax Act, 1961. Since the property was situated in Malaysia, the business profits were attributable to a permanent establishment in Malaysia, and the interest also arose from Malaysia, the Indian taxing power was held to be displaced to that extent. Article 22 dealing with double taxation relief was read as an ancillary mechanism to meet cases of unauthorised or unintended double taxation, not as preserving concurrent taxing power in both States.

Conclusion: The Malaysian property income, business profits and interest income were assessable only in Malaysia and not in India.

Issue (ii): Whether such foreign income, if not includible in total income, could nevertheless be included for rate purposes under the Income-tax Act, 1961.

Analysis: Once the relevant treaty articles were held to exclude the income from Indian assessment, section 5 could not be invoked to bring it into the total income of a resident. Since inclusion for rate purposes presupposes inclusion in total income, the rate-purpose adjustment could not be applied independently. Section 110 was therefore inapplicable on the facts as the income itself was not chargeable in India.

Conclusion: The foreign income could not be included for rate purposes in India.

Final Conclusion: The assessee succeeded on the substantive taxability question and the departmental appeals failed, resulting in cancellation of the rate-purpose inclusion and confirmation that the Malaysian income was taxable only in Malaysia.

Ratio Decidendi: Where a double taxation agreement contains provisions allocating taxing rights exclusively to the other contracting State, those provisions override the general charging provisions of the Income-tax Act and preclude both assessment and rate-purpose inclusion in India.

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