Treaty allocation of taxing rights keeps Malaysian property income outside Indian tax, while lottery winnings remain taxable domestically.

A double taxation agreement allocates taxing rights for specified income streams and does not expand India's taxing power beyond the treaty article governing each receipt. Rental income from Malaysian immovable property and dividend income from a Malaysian bank were treated as taxable only in Malaysia, while compensation for surrender of tenancy rights in Malaysia was also excluded from Indian tax on the same situs-based principle. Lottery winnings were not covered by any specific treaty article, so domestic law applied and the winnings remained taxable in India; foreign tax credit was available only if Malaysian tax was actually levied.

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Issues: (i) Whether rental income from immovable property situated in Malaysia and dividend income from a Malaysian bank were chargeable to tax in India under the double taxation agreement; (ii) Whether compensation received for surrender of tenancy rights in Malaysia was taxable in India; (iii) Whether winnings from a welfare lottery were chargeable to Indian tax and, if so, whether foreign tax credit could be claimed.

Issue (i): Whether rental income from immovable property situated in Malaysia and dividend income from a Malaysian bank were chargeable to tax in India under the double taxation agreement.

Analysis: Income from immovable property is governed by the article dealing with immovable property, which allocates taxing to the State where the property is situated. The agreement operates after the income is determined under domestic law and does not enlarge India's taxing power over income assigned to the other contracting State. The same reasoning applied to dividend income governed by the relevant dividend article, under which taxing was given to Malaysia.

Conclusion: The rental income and dividend income were not chargeable to tax in India.

Issue (ii): Whether compensation received for surrender of tenancy rights in Malaysia was taxable in India.

Analysis: Compensation for surrender of tenancy rights was treated as a capital receipt, but tenancy rights were regarded as a right in property. On that basis, the receipt was brought within the article dealing with income from property, and the same treaty principle regarding situs controlled the taxing right.

Conclusion: The compensation receipt was not chargeable to tax in India.

Issue (iii): Whether winnings from a welfare lottery were chargeable to Indian tax and, if so, whether foreign tax credit could be claimed.

Analysis: The treaty contained no specific provision covering lottery winnings, so domestic law governed their chargeability. Under the Income-tax Act, lottery winnings constituted income chargeable to tax, subject to the statutory deduction framework. Foreign tax credit under the treaty could arise only if Malaysian tax had actually been levied on the winnings.

Conclusion: The lottery winnings were chargeable to tax in India, and foreign tax credit was available only upon proof of Malaysian taxation.

Final Conclusion: The decision granted relief on the foreign property-linked receipts, sustained Indian taxability of lottery winnings, and left the business-income aspect for further examination, resulting in only a partial allowance of the departmental appeal.

Ratio Decidendi: A double taxation agreement does not override domestic tax law at the stage of determining income, but allocates taxing rights for particular income streams according to the relevant treaty article and the situs or source rule applicable to that stream.

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