By Ms. Shriya Maini*
This is one of my earlier writings from law school and hence, it is straight from the heart. I must admit that I was rather hesitant to share this draft for it might at the outset, appear a bit sketchy and rough. However, I have chosen to keep the draft just as it was prepared to not take away from the invaluable analysis and legal research that was contributed by my Nani Palkhiwala mooting teammates and my late grandfather. Perhaps, that’s why this draft is even more special. Diving straight into the technical aspects of this draft, I aim to answer the question: “Can an Assessee opt for the same assessment year to be governed by the provisions of the Act in so far as assessment of one type of income is concerned but by the provisions of the Agreement in so far as another type of income is earned due to the widely worded language of section 90(2) of the Act hauling the language read as – “to the extent that the provisions thereof are more beneficial to the Assessee”?
DTAA OR THE INCOME TAX ACT?
Double Taxation Avoidance Agreement (“DTAA/Treaty”) – a well negotiated contract between two sovereign governments evolved with divergent schools of thought imposing taxation on both, residence and source based countries. In simpler terms, the income of one nation was to get sourced in another. Organically, the lacunae of Double Taxation paved way for fundamental discussions.
I believe that such inter-nation contractual agreements ought to be placed at a much higher parlance in comparison to the other contracts because recourse to specific enforcement on its breach by a Government is categorically absent. The Indian Government has signed more than seventy comprehensive tax treaties with various countries to date. For maintenance of good international relations, the cogent principles of Article 2(6) of the UN Charters  pacta sunct servanda are nevertheless deemed followed in letter and spirit.
One of the prime disputes that arise in the interpretation of a DTAA is the impending conflict between the provisions of the statute (“the Act”) and the provisions of the applicable DTAA. In simpler terms, the prevalence of one over another. The present law on the point is crystal clear and is often termed as the “Treaty Over-ride”. It states that in case of a conflict, the DTAA supersedes the Act. This is distinct from an Assessee being given a choice at the beginning of the assessment year to be charged as per the Act or the Treaty, whichever is more beneficial to him. Thus, the two concepts must not be blurred to signify the same as is often the case unfortunately.
A question irks me often. Can a single Assessee with two different kinds of incomes (falling under different heads, for instance capital gains and house property income) be allowed to claim benefit simultaneously under the Act as well as the treaty under the same assessment year for computation of tax of each income, to the extent more beneficial to him? This question reverberates the insatiable appetite of both the countries for taxation arising from one single transaction.
Another one irks me even more. If this dual benefit is allowed to be charged, then how and to what extent? The crucial role of the definition and jurisdiction of the DTAA being vested in certain kinds of income (and not the others) is also raised as a contentious issue. In the Act, the term income may be defined in the alternative, distinct from the language used in DTAAs. In simpler terms what one may call income from capital gains under the Act may not even fall as a capital gain sourced income under the applicable DTAA. Thus to the Assessee, it may sound favourable to be governed by the provisions of the Act in so far as income from house property is concerned but not for the capital gains raised, on which exemption could plausibly be gained under the provisions of the applicable DTAA. But the meaty question is, can an Assessee do so?
And this irks me the most. Can the Assessee be permitted to claim computation of his income under the Act but the relevant tax rates be determined by the DTAA? It is interesting to note that this is not permissible because a lower rate is often prescribed where, as per the applicable provisions of the Treaty, expenditure is not allowed in computing the particular type of income. This discussion however would fall beyond the scope of this article and I promise to write something sooner or later on the same.
INTERPRETATION OF SECTION 90(2): ANALYSIS OF “TO WHAT EXTENT BENEFICIAL TO THE ASSESSEE?”
The prime objective of a treaty is to confer a benefit or advantage and not levy a charge or arraign. Hence, it can be readily inferred that any provision in the treaty must not be detrimental to the interests of an Assessee — as Section 90(2)of the Act makes it apparent that where an agreement for granting relief of tax or for avoidance of double taxation has been entered into, then, in relation to the Assessee to whom such agreement applies, the provisions of the Act “to the extent that they are more beneficial to the Assessee” as compared to the provisions of the DTAA would be applicable. However, this is subject to certain specific exceptions e.g., the taxation of a foreign company at a rate higher than that of a domestic company is not considered as a less favourable charge in respect of the foreign company.
Where the provisions of the applicable DTAA are more kind to the Assessee in comparison to the Act, most evidently, the provisions of the DTAA are bound to prevail over and above the Act. Section 90(2) is a statutory acknowledgement of the law laid down by the Hon’ble Andhra Pradesh High Court in CIT vs. Visakhapatnam Port Trust which has now been categorically accepted by the Supreme Court in the historic decision of Union of India vs. Azadi Bachao Andolan. It is interesting that the CBDT had infact conventionalized this position earlier in its Circular No. 333 dated April 2, 1982 reproduced in 137 ITR 1 (st.). The Finance (No. 2) Act, 1991 which inserted sub-section (2) in section 90 with retrospective effect from 1-4-1972 also inserted clause (iii) in section 2(37A) providing that in case of tax being deductible at source from payments made to a non-resident, the payer would have the prerogative to apply the rate as prescribed in the Act or the rate applicable under the relevant Treaty, whichever was lower.
There is an ongoing tussle between the insatiable hunger of source-residence countries aiming for treasures of taxation under the DTAA and the primacy of the Assessee under the Act which is pro-bono legislation. In the absence of a defined law or the silence of the legislative lyrics, I have to resort to the tools of legal research and analysis to interpret legislative intent.
The clinical question is: “Can an Assessee opt for the same assessment year to be governed by the provisions of the Act in so far as assessment of one type of income is concerned but by the provisions of the Agreement in so far as another type of income is earned due to the widely worded language of section 90(2) of the Act hauling the language read as – “to the extent that the provisions thereof are more beneficial to the Assessee”?
One of the two starkly divergent views is that an Assessee is entitled to relief partly under the Treaty and partly under the Act in the same assessment year. A simple argument in support of the same is that there is no law in India which specifically prohibits/bars or prevents such a relief for taxation from being claimed. On the contrary, the words used in Section 90(2) “to the extent beneficial to the Assessee” have clear and wide import.
I believe treaties must be respected alongside a rigid interpretation that may be adopted to not take away the intended benefit in the backdrop of the fact that the single object of DTAA is to give immediate relief. The tax provisions and the treaties should be interpreted in good faith so as to provide maxium benefits to the Assessee and protect him from double taxation. In the case of Union of India vs. Azadi Bachao Andolan the Hon’ble Supreme Court of India categorically held that the principles to be adopted in interpreting tax treaties were not identical to those deployed in the interpretation of statutory legislations. Even in the case of CIT vs. J. H. Gotla, it was held that where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court would be bound to modify the language used by the legislature so as to give effect to its bonafide intent.
Similarly in the landmark case of in IRC vs. Duke of Westminister, the Hon’ble Court held that “in cases where there are two interpretations possible, the one which is beneficial to the Assessee would be preferred. An Assessee may arrange his affairs within the bounds of the law so as to minimize the incidence of tax.”
Furthermore, in the case of CIT vs. Chandanben Maganlal, the Hon’ble Bombay High Court held that when any provision of a taxing statute is interpreted, it must be so constructed that the meaning of such provision must harmonize with the intention of the Legislature behind the provision in particular and the enactment in general. Hence, in the cases of Poddar Cement Pvt. Ltd. and Vegetable Products Ltd., it was mentioned that Section 90 (2) must be construed keeping in mind legislative intent behind its enactment which was no more than avoiding double taxation to benefit the Assessee.
Notably, the aim of Section 90(2) – providing relief from Double Taxation could not have possibly meant to impose any excessive taxation to begin with. The prime objective of the legislature while drawing this section could not have been to impose any unwarranted taxation aimed at prejudicing the Assessee. To me the section prima facie looks like an abettor to the Assessee if he is earning income from two different nations on the globe, as far as the Principles of residence and source are concerned. He must not be jeaopardised by tax being levied by both the nations, one under the domestic Act and the other under it’s country’s internationally signed DTAA. Hence, he must be allowed to choose either of the above, whichever exempts him from paying the tax to the extent favourable to him. If the incomes are clearly falling under different heads, priority must be given to the Assessee’s relief claiming case and he be allowed to opt for either. Also, this choice must be kept open and he must not be bound by the Act or the DTAA (whichever he opts for at the beginning of the assessment year) to continue being governed by the predetermined option in case any future income is earned. This must be done keeping in mind the latent legislative intent behind the enactment of Section 90(2).
In the absence of any prior legal precedents and strongly asserted views on the subject, it is one of the grey areas of Laws of Taxation. Hence, I chose to dwell deeper into it. One of the scholarly articles by Mr. Sohrab Erach Dastur inspired me the most. He strongly advocated that the DTAAs must be interpreted very carefully to address the peculiar question of whether the doors were truly open for an Assessee to opt for the Act as well as the DTAA simultaneously in a single year of assessment or he had to choose either one of them in its entirety at the beginning of the assessment year itself, and once opted, he had to be governed in toto by the same all throughout the year. In other words, under no circumstances, was he allowed to deviate from this proposition even upon earning of a different kind of income. Sir Dastur tried to express a personal viewpoint in the affirmative. I have extracted and reverberated his opinion herein below:
“The more intricate problem is whether an Assessee can choose for the same assessment year to be governed by the provisions of the Act in so far as assessment of a particular type of income is concerned, say, business income, but by the provisions of the Agreement in so far as another type of income is concerned, say, capital gain. In my view this would be permissible as one would, in the language of section 90(2), apply the Act to the extent that the provisions thereof are more beneficial to the Assessee.”
COUNTER – ARGUMENTS: SUPREMACY OF DTAA AND/OR THE ACT?
To a lawyer, counter-arguments are mouth-watering. The flipside to the coin is that an Assessee cannot claim relief partly under the Treaty and the Act in the same assessment year in the light of Section 90(2) of Income Tax Act. It is incumbent for him to make a choice between either. As a rule, benefits that are derived from any legislation or treaty must be uniformly followed. A bare perusal of this Section leads to an inference that the provisions of both the Act and the Treaty have to be taken as a whole and whichever is more beneficial to the Assessee, taking into account all the provisions of either the Treaty or the Act would be applicable.
This line of argument is corroborated by the fact that part utilization of Treaty benefits and Act benefits within the same financial year is not allowed, i.e. benefit of only one of the two can be taken in one financial year. The basis of continuity and standard systemization needs to be implemented wherein benefits of any one systems, either DTAA (which follows permanent establishment principle) or the Act (which follows business connection principle) are claimed by the Assessee. A view to the contrary could lead to deleterious results thereby causing grave difficulty to the evaluation pattern of Income Tax in all the Anglo-Saxon countries. Proposing a virtual hypothesis is easy but the allowance of such part and dual benefit would lead to further tax evasion, which would in turn make the actual mechanical calculation of income tax stupendously arduous especially in a country like India. I completely understand and appreciate this concern.
Additionally, the terminology ‘provision’ used in Section 90 (2) of Income Tax Act is plural and not singular. In the case of CIT vs. T.V. Sundaram Iyyengar, the Hon’ble Supreme Court held that if the language of the statute is clear and unambiguous, the Courts shall not discard its plain meaning, even if it leads to injustice. Thus, if the Assessee wants to be governed by the Act then all the provisions (and not provision) of the Act are applicable to him. Hence, the interpretation and language of Section 90 (2) is cogent enough to elucidate that the entire Act is applicable to the Assessee should he make an informed choice, yet again suggesting that a claim of partial relief cannot be allowed.
In the case of Keshavji Ravji & Co. vs. CIT, the Hon’ble Court held that as long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. Here, the term “provisions” is sufficient to depict the intent of the legislature. Besides, in the case of Gursahai Saigal vs. CIT, the Hon’ble Supreme Court categorically stated that those sections which impose an arraign should be strictly construed. Since Section 90 (2) of the Act imposes a tax on the Assessee, it must be construed strictly i.e. such a relief certainly does not follow.
In the case of Elphinstone Spinning and Weaving Mills Co. Ltd. vs. CIT, the Hon’ble Bombay High Court reiterated that the language of Section 90(2) was clear and not capable of any other construction and then, however illogical the position and absurd, the statute would still have to be construed according to the plain language used by the then Legislature. In Mathuram Agrawal v. State of MP,  the Court held that in a taxing act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language and it is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. It also asserted that an interpretation which does not follow from the plain, unambiguous language of the statute is equally impermissible and that words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. Hence, it is true that if the words are ambiguous and reasonably open to two interpretations, benefit of doubt would be given to the subject. This distinction was upheld in the case of Express Mill v. Municipal Committee, Wardha. However, it is also settled law that hardship or equity have no role to play in determining the eligibility to be taxed. It is for the legislature to determine the same, as was reinstated in the case of Kapil Mohan v. Commissioner of Income-tax, Delhi. Even in Cape Brandy Syndicate v. IRC, it was held that in a taxation statute, one has to look at what is clearly said and there is no room for any intendment, no equity about a tax or a presumption as to tax. The Court specifically said that nothing is to be read in, nothing is to be implied and one can only look fairly at the language used. This view was also confirmed in the cases of State of WB v. Kesoram Industries Ltd.30 and CCE v. Acer India Ltd. and St. Aubyn v. A.G. wherein the Courts clarified that the Assessee is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words.
Besides, no tax in terms of Article 265 of the Constitution of India may be imposed except by the authority of law. However in case it is taxable, an equitable construction cannot be made, especially in light of a string of precedents which mandate adherence to the strict interpretation rule as uphled by the House of lords in Ransom (Inspector of Taxes) v. Higgs . The same principle has been adopted in India by the Apex Court in the case of A.V. Fernandes v. State of Kerala.
In the landmark case of Jiwandas vs. CIT, it was upheld that one cannot and must not extend the scope of a statute by analogy or place upon it what is called a beneficial or equitable construction in order to prevent a real or supposed anomaly. Hence, just because the Assessee would be at a paying position if such a construction is allowed cannot qualify as a substantial reason to disallow these counter-arguments.
STANCE OF THE DTC A PROPOS THE DTAA: AN OLD CONCEPT WITH NEW FLAVOUR.
Based on well-established principles and settled practices the current provisions of the Income-tax Act provide that between the domestic law and relevant DTAA, the one which is more beneficial to the Assessee would most naturally apply.
The Direct Tax Code mirrored in the Direct Tax Code Bill, 2010 (“DTC”) suggested some prime and essential modifications that were set to metamorphosize the regime of International Taxation. The original draft of the Tax Code had provided for the ‘treaty override’ principle stating that the applicability of the DTAA treaty or the domestic tax laws would primarily depend upon the enactment, whichever was later in time, in comparison to the existing provisions under the Act that an Assessee could choose to be governed by either a tax treaty or the domestic tax laws, depending upon whichever was more favourable to him.
However, this treaty override principle as contemplated in the original draft had opened a Pandora’s Box as far as controversies among the tax experts and foreign investors was concerned. The foreign investment industry complained that the treaty override principle would result in a higher rate of taxation on royalty, fees for technical services and interest income, which were taxed in the source country at a concessional rate according to DTAA provisions. It was argued that uncertainty over the cost of doing business in India could also affect foreign direct investment. Besides, tax consultants revolted that the proposal was against international norms.
Owing to the speculations about the adverse impact on foreign investment in India, the treaty override principle contemplated in the original draft of the Tax Code was modified. The Revised Discussion Paper on the Direct Tax Code maintained the present position of the Income Tax Act, 1961 with slight modifications with regard to the Double Taxation Avoidance Agreement.
The Revised Discussion Paper in addition to the present ‘more beneficiary rule’ also provided for the ‘limited treaty override’ principle. It provided that the treaty would not have the preferential status over the domestic laws in the following three circumstances, namely: (a) When the General Anti Avoidance Rules were invoked, or (b) When the Controlled Foreign Corporations were invoked, or (c) When Branch Profit Tax was levied.
The controversy with regard to the benefit partly under the treaty and partly under the act in the same assessment year was also not put to rest in the proposed Direct Tax Code, 2010 which maintained the present position as enshrined in Section 90 (2) of the Income Tax Act, 1961. However, it provided for the treaty override principle under certain extraordinary circumstances.
The cogent fallacy of which would prevail during conflict, the treaty or the act was further ignited by the proposed DTC. Currently, a more sound view under the Act appears to be in the affirmative, i.e. pro-Assessee. In the backdrop of the above elucidated legislative intent, an Assessee must be allowed to take benefit of the treaty as well as the Act simultaneously in the same assessment year for different types of incomes earned. No doubt an initial choice must be made by the Assessee at the beginning of the assessment year but this does not in any way specifically prohibit or bar a withdrawal from the choice of treaty/act and subsequently substitute one for the other. Moreover, the use of the term “provisions” instead of the singular substantiates the argument further. Any interpretation to the contrary must and would lead to effective double taxation which would stand in complete contradiction to the very prime objective of the section itself that is to provide relief against double taxation. The position has been substantiated with the help of various case laws, interpreting the sections concerned. However, the apparent lack of literature and prior jurisprudence on the issue leaves ample scope for legal research and analysis.
* (Shriya is a practicing advocate at the Supreme Court of India, the Delhi High Court and district courts at New Delhi and writes regularly on the issues of public international law. She is a graduate of Gujarat National Law University, India and University of Oxford. At Oxford, she completed her Bachelor of Civil Law programme on a full scholarship and obtained a Master’s in Law majoring in International Crime. A recipient of the Oxford Global Justice Award 2015 for Public International Law, she is currently assisting the President of the International Residual Mechanism for the Criminal Tribunals (MICT).)