Double taxation not a precondition for relief

Section 90 of the Income-tax Act, which empowers the Central government to enter into agreements for avoidance of double taxation with other countries, is intended to grant relief to a taxpayer whose income has been taxed both in the foreign country and in India.

This power can be exercised only for avoidance of double taxation of the same income under the Income-tax Act and the corresponding laws in the foreign country.

Thus the liability to pay tax both in India and the foreign country entitles a taxpayer to claim relief under the tax treaty. It, therefore, follows that if a taxpayer is liable to pay tax in one country alone, he cannot claim any relief under the tax treaty.

In a case before the Authority for Advance Ruling (Cyril Eugene Pereiro (1999) 239 ITR 650 AAR), the applicant sought a ruling whether he was entitled to the benefit of the AADT between India and the UAE. It was contended before the authority that the applicant's income was not liable to tax in Dubai. So the authority held that the applicant is not entitled to any relief in India.

Similar views were expressed by the authority in a more recent case of Abul Razak A Meman (2005) 276 ITR 306 (AAR).

But the Mumbai Income-tax Tribunal, in ADIT versus Green Emirate Shopping and Travels 286 ITR 60 (AT), has dissented from the view taken by authority.

The hon'ble tribunal has based its judgment on the observations in the Union of India versus Azadi Bachao Andolan case in which the Supreme Court held that "the test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income but by taking into consideration the totality of the provisions of the income-tax law that prevails in either of the contracting states. Merely because, at a given time, there may be an exemption from income "�tax in respect of any particular head of income, it cannot be contended that the taxable entity is not liable to taxation."

The tribunal observed: "Therefore there is no meeting ground between the ruling given by the Authority for Advance Ruling in Cyril Eugene Pereia case (1999) 239 ITR 650 and the judgment delivered by the Hon'ble Supreme Court in Azadi Bachao Andolan's case (2003) 263 ITR 706. The choice, however, poses no difficulty in the light of the elementary legal position that the judgments of the Supreme Court are binding on all of us. Much as we respect the Hon'ble Authority for Advance Ruling, we regret our inability to follow the ruling which, in our humble understanding, has been clearly disapproved by the Hon'ble Supreme Court."

In view of the conflicting decisions on such an important subject, which directly affects foreign enterprises and individuals, the following advice of the tribunal is worth quoting:

"Before parting with the matter, we may add that instead of allowing such matters, as is the dispute before us, to be subjected to confusing signals resulting in uncertainty and prolonged litigation, it is certainly more desirable for the government to take a clear cut stand on the issue or let the matter be resolved at the level of governments of the contracting states."