SHALINI SEEKOND,MUMBAI vs. ITO 3(2)(2), MUMBAI

सुनवाई क� तार�ख /Date of Hearing : 11-04-2016 घोषणा क� तार�ख /Date of Pronouncement : 07-07-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member

This appeal, filed by the assessee, being 28-03-2012 passed by learned Commissioner of Income Tax (Appeals)- 8, Mumbai (hereinafter called “the CIT(A)” ), for the assessment year 2007-08, the appellate proceedings before the CIT(A) arising from the assessment order dated 30-12-2009 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”).

ITA 3877/Mum/2012 2

2. The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:-

“On the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in coming to the conclusion that, despite the AADT between Sri Lanka and India, the capital gain arising on the sale of immovable property, situated at No. 15/3, Guildford Crescent, Colombo 07, Sri Lanka , was taxable in India.”

ITA 3877/Mum/2012 3 Therefore, it was submitted by the assessee that under Article 13 of the DTAA, the gains derived by a resident of even India from the sale of an immovable property situated in Sri-Lanka are required to be taxed in Sri- Lanka. Thus, in view of the above, it was the say of the assessee before the AO that the capital gains are not exigible to tax in India.

It was further submitted by the assessee before the AO that the assessee is resident of India under the provisions of the Act , but for the purposes of DTAA she is resident of Sri Lanka. The assessee referred to Article 4(2)(c) of the DTAA which stipulate the fiscal domicile of a person and it was the contention of the assessee that the assessee is deemed to be a resident of the State of which she is a national, namely Sri-Lanka , and if the fiscal domicile is Sri Lanka , the capital gain must be deemed to have arisen in Sri-Lanka and taxable only in Sri-Lanka.

The AO rejected the contentions of the assessee in view of the fact that the assessee is a Resident of India u/s. 6 of the Act and any income arising in India or outside India is fully taxable u/s. 5 of the Act. The AO held that the claim of the assessee is not found tenable considering the Notification No. 91 of 2008 dated 28.08.2008 issued by Central Government in respect of Double Taxation Relief which reads as under:

“ In exercise of the powers conferred by sub-section(3) of section 90 of the Income Tax Act,1961 (43 of 1961) , the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of the resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income Tax Act,1961 (43 of ITA 3877/Mum/2012 4

1961) , and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

Thus, the AO held that in view of the above notification dated 28-08-2008 issued by Central Government , the assessee should have included the income from capital gains in her total income chargeable to tax in India and accordingly claimed the relief thereof. Since no tax has been paid in Sri Lanka no relief can be granted to the assessee in India and accordingly capital gains arising thereof from sale of immovable property in Sri-Lanka is fully taxable in India.

The assessee made an application u/s 144A of the Act to the Additional Commissioner of Income-tax 3(3), Mumbai but however, the Additional Commissioner of Income-tax 3(3), Mumbai directed that the income from sale of immovable property situated in Sri-Lanka be taxed as Long Term Capital Gains .

The AO , thus, vide assessment orders dated 30-12-2009 passed u/s 143(3) of the Act brought to tax the Long Term Capital Gains arising from sale of immovable property at Sri-Lanka amounting to Rs.1,56,01,361/-.

“ Article 13(1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other State.

(2) to (5) ****

(6) The term “alienation” means the sale , exchange , transfer or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.”

It was submitted that the assessee is a resident under the Act, but for the purposes of DTAA she is resident of Sri Lanka . It was submitted that the fiscal domicile of a person for the purposes of DTAA is provided under Article 4 which reads as under:

“1. For the purpose of this Convention, the term ‘resident of a Contracting State’ means , any person who, under the law of that State, is liable to tax therein by reason of his domicile , residence, place of management or any other criteria of a similar nature. But this term does not include any person who is liable to tax in that State in respect of income from sources or capital situated therein.

ITA 3877/Mum/2012 6

(a) he shall be deemed to be a resident of the state in which he has a permanent home available to him. If he has a permanent home available to him in both States , he shall be deemed to be a resident of the State with which his personal and economic relations are closer ( centre of vital interests);

(b) if the State in which he has his centre of vital interest cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) If he has an habitual abode in both States or in neither of them , he shall be deemed to be a resident of the State of which he is national;

(d) If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph1 of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.”

Thus, the assessee submitted before the learned CIT(A) that the assessee is resident of Sri Lanka for the purposes of DTAA and therefore, treaty provisions will be applicable to her as if she is a Sri Lankan resident and the ITA 3877/Mum/2012 7 fact that she is resident under the Act is not relevant. The assessee submitted that she will be treated as resident of Sri Lanka as she also has permanent home available to her in Sri Lanka because of her parents residing there and also because she owned one immovable property in Sri Lanka which is now sold in this previous year. It was submitted that she was not the owner of any property in India. In any case , if there is any uncertainty on this issue , as per Article 4(2) , she must be deemed to be a resident of the State of which she is national, namely Sri-Lanka. Thus, the assessee submitted that if the assessee fiscal domicile is in Sri Lanka , then the capital gains must be deemed to have arisen in Sri-Lanka and is taxable only in Sri-Lanka. The assessee relied upon decision of Hon’ble Supreme Court in the case of CIT v. P.V.A.L.Kulandagan Chettiar , 267 ITR 654(SC) to contend that since immovable property is located in Sri-Lanka , the capital gains arising thereof could not be taxed in India.The assessee also relied upon decision of Hon’ble Madras High Court in the case of CIT v. S.R.M. Firm, 208 ITR 400(Mad. HC). The assessee also placed reliance on circular no 333 , dated April 2, 1982 , (1982) 137 ITR (St.)1 issued by CBDT. The assessee contended that even assuming without admitting that the assessee is a resident of India even under DTAA between India and Sri Lanka , still if when one read Article 13(1) of the DTAA , the gains derived by the assessee from the alienation of immovable property situated in Sri-Lanka, may be taxed in Sri-Lanka and the term ‘may be taxed’ should be interpreted as ‘shall be taxed’ as held by Hon’ble Madras High Court in the case of S.R.M. Firm(supra) which decision has been upheld by the Hon’ble Supreme Court in Kulandagan Chettiar’s (supra) case. The view is supported by decision of Hon’ble Karnataka High Court in the case of CIT v. R.M.Muthaiah , 202 ITR 508(Kar. HC) , which decision has been upheld by the Hon’ble Supreme Court in UOI v. Azadi Bachao Andolan, 263 ITR 706(SC). Thus, it was submitted whether the assessee is considered as resident of India or that of Sri-Lanka under DTAA , ITA 3877/Mum/2012 8 the capital gains on the sale of the immovable property located in Sri-Lanka by the assessee shall be taxed only in Sri-Lanka and not in India.

It was also contended that even if there is zero taxation in one country to DTAA, still the provisions of DTAA will be applicable and to contend that the relief will be available only when tax has been paid in both the countries which are party to DTAA is not correct and such view was over-ruled by Hon’ble Supreme Court in the case of UOI v. Azadi Bachao Andolan, 263 ITR 706(SC) whereby Hon’ble Supreme Court at page 744 held as under:

“ It is, therefore, not possible for us to accept the contentions so strenuously urged on behalf of the Respondents that avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States.”

It was also submitted that in the decision of the Federal Court of Australia in Commissioner of Taxation v. Lamesa Holdings, (1997) 785 FCA, the court held that it is not necessary that tax should be payable in both states to grant the benefit of DTAA. It was submitted that there is no need that tax should be levied or leviable in both countries in order to apply the provisions of the Treaty. Thus, if one country does not tax and other does, if the income is in the country which does not tax, then the country which taxes cannot take away the right of not taxing the concerned income. It was also contended that the notification no. 91 of 2008 dated 28-08-2008 issued by Central Government under the powers conferred u/s. 90(3) of the Act is prospective as the same has , in fact , come into effect only on 28.08.2008 and hence is applicable to income accruing on or after 28.08.2008, while the impugned assessment year is 2007-08 i.e. prior to coming into effect of the notification. It was also submitted that in case person is not resident of India as per DTAA, the taxation of immovable property can only be in Sri-Lanka and not in India, ITA 3877/Mum/2012 9 keeping in view provisions of Article 13(1) of the DTAA between India and Sri- Lanka , which view is supported by the decision of Hon’ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar , 267 ITR 654(SC) .

The learned CIT(A) rejected the contentions of the assessee and held that as per Section 6 of the Act, the assessee fulfills all the conditions in terms of its status that the assessee is a resident of India during the relevant previous year, which is also admitted by the assessee. The learned CIT(A) held that the assessee case falls u/s. 5(1)(c) of the Act whereby even the income accrues or arises outside India during such year shall be chargeable to tax under the provisions of the Act and the assessment order dated 30-12-2009 passed u/s. 143(3) of the Act passed by the AO was upheld by the learned CIT(A) vide appellate orders dated 28-03-2012.

6. Aggrieved by the appellate orders dated 28-03-2012 passed by the learned CIT(A), the assessee filed second appeal with the Tribunal.

On the other hand learned CIT DR submitted that the assessee is tax resident in India. He drew our attention to Section 6 of the Act to contend that the assessee is resident in India as per the conditions contained there-in Section 6 of the Act , which is an admitted position now as the assessee had admitted that she is resident in India during relevant previous year as per provisions of the Act. This was not disputed before the authorities below. The learned CIT DR would contend that tax residency and nationality are two different concepts and the assessee being tax-resident of India, the capital gains arising there-from sale of immovable property located in Sri-Lanka is taxable in India. He drew our attention to para 4.1 and 4.2 of the AO order and also drew our attention to the return of income filed by the assessee with the Revenue which is placed at paper book page 1-11 whereby the assessee declared her status as ‘Resident’ in the return of income filed with the Revenue. The said status has not been questioned during assessment and /or appellate proceedings before the learned CIT(A) and hence the assessee cannot be allowed to change its admitted and undisputed position of being Resident in India under the provisions of the Act. The learned CIT DR ITA 3877/Mum/2012 11 contended that the Article 4(2) of DTAA will come into play when the assessee is tax-resident of both the contracting states. The assessee being resident of India, global income is taxable in India.

The learned counsel for the assessee submitted in rejoinder that it is relevant and material to see the resident status under DTAA for chargeability of income to tax.

“5. Mrs Seekond is a Sri Lankan national though she is residing in India on the basis of her marriage to an Indian national, Shri Gurpreet Seekond. Also because she is residing in India for more than requisite period under Section 6 of the Act, which determines residence of an ITA 3877/Mum/2012 12 individual , she is resident of India for the purposes of the Income-tax Act,1961( “the Act”)”

The same contentions were repeated by the assessee during appellate proceedings before the learned CIT(A) vide written submissions no IT/S- 33/307 dated 06-12-2011 vide para 6 , which are placed in paper book page 82-83 filed before the Tribunal. The assessee has also declared her Residential status as being ‘resident in India’ during the relevant previous year in the return of income filed with the Revenue for the relevant assessment year which is placed in paper book filed with the Tribunal at pages 1-11.

The residential status of an individual under the Act is governed by provisions of Section 6 of the Act which are reproduced below :

“Residence in India.

6. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or (b) 29[* * *] ITA 3877/Mum/2012 13

(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty- five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. 30[Explanation.—In the case of an individual,— (a) ***** (b) *****

(2) to (4) *****

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

[(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is— (a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or (b) a Hindu undivided family whose manager has been a non- resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.]”

ITA 3877/Mum/2012 14 Nothing has been brought on record by the assessee to disprove this admitted position before the authorities below that the assessee is resident in India under the provisions of the Act except a bald statement that the assessee is not a resident in India during relevant previous year under the provisions of the Act , and now the assessee cannot be allowed to change its admitted position in the absence of cogent material and evidences brought on record to prove that the earlier admissions was not correct and the assessee duly complied with the conditions of Section 6 of the Act to be categorized as ‘non- resident’ during the relevant previous year as per provisions of the Act. No such cogent material or evidences have been brought on record by the assessee to prove her contention that she is not resident in India under the provisions of the Act during the relevant previous year. Thus, we hold that she is resident in India during the relevant previous year under the provisions of the Act keeping in view the provisions of Section 6 of the Act.

Now coming to the residential status of the assessee as per provisions of Article 4 of the DTAA, it clearly stipulates that for the purposes of DTAA, the term “resident of a Contracting State” means any person who , under the law of that State , is liable to tax therein by reason of his domicile, residence, place of management or any other criteria of a similar nature. Thus, as we had already held that the assessee is resident in India during the relevant previous year fulfilling condition of Section 6 of the Act is resident in India , it is to be seen that whether the assessee can be categorized as resident of Sri- Lanka under the provisions of DTAA. The conditions vide Article 4(2) of DTAA stipulates that the person shall be deemed to be resident of the State in which he/she has permanent home available to him/her , and if he/she has permanent home available to him/her in both States , he/she shall be deemed to be a resident of the State with which his/her personal and economic relations are closer( centre of vital interest). As it is emerging from the records, that the assessee is a married women , who is married to Indian ITA 3877/Mum/2012 15 national and living in India after her marriage with her husband Mr. Gurpreet Seekond who is an Indian National. She has now permanent home available to her in India being home of the husband after marriage and thence she moved to India to stay with her husband Mr Gurpreet Seekond , an Indian national after her marriage. Her economic and personal relations had moved to India post-marriage with an Indian national, however post marriage she continued to own one immovable property in Sri-Lanka which is the sole immovable property owned by her in Sri-Lanka which also in-fact was sold during the relevant previous year whose taxability of gain on sale of the afore- said immovable property is subject matter of the instant appeal. Her selling of the immovable property in Sri Lanka which is the sole property owned by her during relevant previous year for equivalent Indian Rs. 3.93 crores and buying of Mutual funds to the tune of Rs. 2.44 crores in India and buying of property in Goa for Rs 78.44 lacs clearly reflects strategic shift of vital economic interest to India from Sri Lanka while personal interest are in-fact closely linked with her settlement with her Indian husband in India after her marriage to stay permanently in India with husband and children, if any. Her parents continued to stay in Sri-Lanka but now due to her marriage with an Indian national and her actually moving to India to stay with her husband post marriage clearly indicates that her permanent home is now arranged, established and is available to her in India along with her husband and children, if any after marriage despite the fact she might not be owning an house in India as the condition as stipulated in Article 4 is regarding availability of permanent home in the state of residence and it no-where stipulates that the assessee should own an house in the State of residence. The availability of permanent home as is referred to in Article 4 has nothing to do with ownership of an home in the State of Residence but refers to a place of abode or dwelling in the State of Residence which is arranged and established by the assessee to have the dwelling and abode available to her at all times continuously being permanent home in India of the husband who is ITA 3877/Mum/2012 16 Indian national, and not occasionally for the purpose of a stay, which owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel , educational travel , attending a course at a school , etc) which in the instant case the permanent home is in India in the case of the assessee as she is staying now in India after her marriage with her husband who is an Indian national. The word 'house' has been defined in Blacks Law dictionary 7th edition, page 743 as 'a home, dwelling or residence' , which in the assessee case is India which is the place where she is now staying after marriage with her husband who is an Indian national. The assessee could not demonstrate by cogent evidences that her habitual abode now is in Sri-Lanka after her marriage with Indian national and more specifically in the relevant previous year except making a bald statement that her parents are living in Sri-Lanka and /or she also owned one immovable property in Sri-Lanka which also was sold during the relevant previous year. No details and /or description of actual stay in Sri Lanka or having economic and personal interests in Sri Lanka are demonstrated to prove her habitual abode in Sri Lanka. Her habitual abode in our considered view is in India as she has after her marriage have personal and economic relations which are of vital interest closer to India as under the factual matrix she has retained his centre of vital interest in India after her marriage with Indian national by moving to India to stay in India permanently with her husband who is an Indian national . She is also holding Certificate of Registration as Overseas Citizen of India issued by Ministry of Home Affairs, Government of India issued on 10-03-2006 under the provisions of Section 7A of Citizenship Act , 1955 and holding of life long validity multiple visa issued by Government of India to enable her to stay in India indefinitely with her husband which also is reflection of her intention to stay permanently in India with her husband who is an Indian national with an intention to permanently settle in India. Her selling of the immovable property in Sri Lanka which is the sole property owned by her during relevant previous year for equivalent Indian Rs. 3.93 crores and buying of Mutual ITA 3877/Mum/2012 17 funds to the tune of Rs. 2.44 crores in India and buying of property in Goa in India for Rs 78.44 lacs clearly reflects strategic shift of vital economic interest to India from Sri Lanka while personal interest are in-fact closely linked with her settlement with her Indian husband in India after her marriage to stay permanently in India with husband and children, if any. The word ‘habitual abode’ in our considered view requires actual living habitually, consistently and regularly in the State as contemplated under Article 4 of the DTAA. Mere ownership of one immovable property in the State or living of parents of a married women in that State will not make her habitual abode of that State unless it is demonstrated with cogent evidences that in-fact the assessee was living in both India and Sri-Lanka permanently, regularly and consistently to bring within meaning of ‘habitual abode’ as contained in Article 4(2)(c) of DTAA of both the States. Under these circumstances, the onus was on the assessee to have demonstrated with cogent evidences and material that her habitual abode is in Sri Lanka and she has retained centre of vital interest in Sri Lanka, which in our considered view, the assessee failed to demonstrate in the instant case rather the facts as set out above speaks opposite. As per facts emerging from records , she has an habitual abode in India and not at Sri-Lanka post her marriage with Mr. Gurpreet Seekond who is an Indian national and she moved to India to stay with him after her marriage and in- fact sold her only immovable property in Sri Lanka for equivalent Indian Rs. 3.93 crores during relevant previous year and made investment in Mutual Funds to the tune of Rs.2.44 crores in India and bought property in Goa in India for Rs. 78.44 lacs. The assessee in our considered view is resident in India during the relevant previous year under the DTAA between India and Sri-Lanka as she has after her marriage with Indian national on the facts and circumstances of the case as her vital personal and economic relations have now close proximity with India. The contention of the learned counsel that what will happen if the assessee divorce with her husband are all in realm of hypothetical situations which in our considered view does not warrant ITA 3877/Mum/2012 18 adjudication by us to adjudicate this instant appeal , as in that situations several other the then prevailing facts and surrounding circumstances as they will exist at that time will have to be considered and analyzed before arriving at the determination of residential status of the assessee which, in our considered view, is not now required to be decided to adjudicate this appeal and is totally irrelevant to the issue to be decided by us. The assessee in our considered view is resident in India both under the provisions of the Act and also under DTAA entered into between India and Sri-Lanka.

It is a well settled proposition of law that provisions of the Act or of the DTAA shall be applicable which-ever is beneficial to the assessee. The provisions of the Act as contained in Section 5 of the Act , inter-alia, stipulates that income of the resident which has accrued or arisen outside India during the relevant previous year shall be taxable in India. While Article 13 of the DTAA dealing with taxability of Capital Gains stipulates as under:

“ 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other State. 2 to 5 ****

Thus, as per Article 13(1) read with Article 13(6) of the DTAA between India and Sri-Lanka , the capital gain arisen to the assessee from sale of immovable property situated in Sri-Lanka is taxable in Sri-Lanka as the Government of Sri-Lanka has right to tax the same because the immovable property is ITA 3877/Mum/2012 19 situated in Sri-Lanka , and the Government of India cannot brought the same to tax under the provisions of the Act as the provisions of DTAA will prevail being beneficial to the assessee over the provisions of the Act, even though the word ‘may be taxed’ is used in Article 13(1) of DTAA between India and Sri-Lanka as the same is to be read in a manner that it takes away the power of the other Contracting State to tax the same income , of which power to tax is vested by virtue of DTAA in the Contracting State in which the immovable property is situated. The afore-said view’s has been consistently held by the courts in the cases cited by the assessee which are detailed in preceding para’s of this order which are not repeated. However, it will be pertinent to note at this stage that these cases are prior to the issue of notification no. 91 of 2008 dated 28.08.2008 by Central Government which is reproduced hereunder :

“ In exercise of the powers conferred by sub-section(3) of section 90 of the Income Tax Act,1961 (43 of 1961) , the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of the resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income Tax Act,1961 (43 of 1961) , and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

Before proceeding further , it is material and relevant to refer to Section 90(3) of the Act , under the provisions of said sub-section, the said notification was issued by the Central Government which is reproduced below:

ITA 3877/Mum/2012 20 “CHAPTER IX DOUBLE TAXATION RELIEF [Agreement with foreign countries. Section 90 (1) and (2) *****

[(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.] Explanation ***”

The above provisions of Section 90(3) of the Act clearly stipulates that the Central Government has powers to assign the meaning to any term used but not defined in the Act or DTAA provided the same shall not be inconsistent with the provisions of the Act or the DTAA or unless the context otherwise requires. The Central Government in exercise of its powers u/s 90(3) of the Act came out with notification no . 91 of 2008 dated 28.08.2008 whereby the Central Government specified that in DTAA whereby any income of resident of India “may be taxed” in the other country, such income shall be included in the total income chargeable to tax in India in accordance with the provisions of the Act and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement. It is pertinent to note that since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalization of treaty, the notification under section 90(3) of the Act gives a ITA 3877/Mum/2012 21 legal frame work for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force. The said notification no 91 of 2008 , dated 28.08.2008 as could be observed from the plain language used is merely procedural in nature and no additional liability is sought to be fastened on the tax-payer by issuance of the said notification. It is well established proposition of law that the tax-payer does not have vested right in the procedures and the same can be brought in retrospectively. Thus, by bringing the notification no. 91 of 2008, dated 28.08.2008, no prejudice is caused to the assessee nor the assesses’ capital gain income arising from the sale of immovable property situated in Sri-Lanka is sought to be brought to tax in India by the Central Government. The said notification merely stipulates the manner and procedure of granting the relief from tax to avoid double taxation without expanding scope of taxability of income from capital gains arising on sale of immovable property situated in Sri-Lanka nor is the same inconsistent with the provisions of the Act or the DTAA between India and Sri-Lanka and in our considered view, the said notification is merely clarificatory in nature and cannot be treated as prospective in nature and has to be read from the date of entering of DTAA between India and Sri-Lanka. Further, Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalization of treaty, the notification under section 90(3) of the Act gives a legal frame work for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force. It is also to be kept in mind that the DTAA entered into between India and Sri-Lanka sought to achieve twin objective as is reflected in its preamble that it sought to avoid double taxation and also the prevention of fiscal evasion with respect to taxes on income and on capital as under:

ITA 3877/Mum/2012 22

“ Convention between the Government of the Republic of India and the Government of the Democratic Socialist Republic of Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital”

Thus, the notification no 91 of 2008 dated 28-08-2008 issued by Central Government in exercise of powers u/s 90(3) of the Act has aimed at clarifying the manner of granting relief from double taxation , whereby in DTAA the term “may be taxed’ in other country is used while computing income of resident without expanding any scope of taxability of the said income and is aimed to achieve the twin objective of avoiding double taxation on the same income as in the instant case the income arising from capital gains on sale of immovable property situated in Sri Lanka shall continue to be taxable within the taxing powers of the Government of Sri Lanka to tax the same exclusively, while the Government of India shall grant the relief on the taxes so paid in Sri Lanka while computing income of the residents in India in the manner stipulated in the notification dated 28-08-2008 to avoid double taxation of the same income and also prevention of fiscal evasion which is the mandate of DTAA entered into between India and Sri Lanka.The said notification is also in consonance with Article 24-Elimination of Double Taxation of DTAA entered into between India and Sri Lanka.

We further hold that if the income arising from capital gains on sale of immovable property situated in Sri Lanka is not subjected to tax as per provisions of the relevant Sri Lanka Inland Revenue Act, No. 28 of 1979 (or the applicable relevant income-tax statute of Sri Lanka bringing to income-tax capital gains arising on sale of immovable property situated in Sri Lanka) as applicable in Sri Lanka as being subjected to ‘zero’ or ‘nil’ rate of taxation in Sri Lanka as per prevailing rates of Income-tax as applicable in Sri Lanka to ITA 3877/Mum/2012 23 the relevant year as is contended by the assessee, then the same cannot be brought to tax in India under the provisions of the Act merely on the grounds that the said income is subjected to ‘Nil’ or ‘zero’ rate of income-tax in Sri Lanka as per applicable statute. This direction of our’s is subject to verification by the learned AO for which necessary material and evidences in support of her contentions shall be brought on record by the assessee before the AO as no such material is placed before the Tribunal to support contentions by the learned counsel for the assessee, before any relief can be granted to the assessee. Needless to say proper and adequate opportunity of being heard shall be granted by the AO to the assessee in accordance with the principles of natural justice and in accordance with law.

Our view about retrospectivity of notification no 91 of 2008, dated 28-08- 2008 to the date of DTAA between India and Sri Lanka relating back to the date of entering of DTAA between India and Sri Lanka is fortified by the explanation 3 to Section 90 of the Act inserted by Finance Act ,2012 w.e.f 01- 10-2009 as under :

“[Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.]”

The objective behind introduction of this amendment is explained in the Memorandum explaining the provisions of the Finance Bill, 2012 as follows:

ITA 3877/Mum/2012 24

“MEANING ASSIGNED TO A TERM USED IN DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) Section 90 of the Act, empowers the Central Government to enter into an agreement with foreign countries or specified territories for the purpose of granting reliefs particularly in respect of double taxation. Under this power, the Central Government has entered into various treaties commonly known as Double Taxation Avoidance Agreements (DTAA's).

Section 90A of the Act similarly empowers the Central Government to adopt and implement an agreement between a specified association in India and any specified association in a specified territory outside India for granting relief from 'double taxation' etc. on the lines of section 90 of the Act.

Sub-section (3) of sections 90 and 90A of the Act empowered the Central Government to assign a meaning, through notification, to any term used in the Agreement, which was neither defined in the Act nor in the agreement.

Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalization of treaty, the notification under section 90(3) gives a legal frame work for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force.

Therefore, the legislative intent of sub-section (3) to section 90 and section 90A that whenever any term is assigned a meaning through a ITA 3877/Mum/2012 25 notification issued under Section 90(3) or section 90A(3), it shall have the effect of clarifying the term from the date of coming in force of the agreement in which such term is used, needs to be clarified.

It is proposed to amend Section 90 of the Act to provide that any meaning assigned through notification to a term used in an agreement but not defined in the Act or agreement, shall be effective from the date of coming into force of the agreement. It is also proposed to make similar amendment in Section 90A of the Act.

The amendment in section 90 will take effect retrospectively from 1st October, 2009 and the amendment in section 90A shall take effect retrospectively from 1st June, 2006”

The Memorandum states that the notification under section 90(3) of the Act merely gives a legal framework for clarifying the intent and objective as understood during the course of negotiations of the treaty and thus in our considered view the same shall be applicable to the DTAA from the date of the entering of the DTAA even if the said DTAA is entered into prior to coming into force of Section 90(3) of the Act on 01-04-2004.

Thus, based on our above discussions and subject to our above directions, we hold that the income of the assessee earned on capital gains on sale of immovable property situated in Sri Lanka during relevant previous year shall be chargeable to tax only in Sri Lanka by Government of the Democratic Socialist Republic of Sri Lanka, while the same income shall be included in the income of the assessee chargeable to tax in India under the provisions of the Act and the relief shall be granted in the manner laid down in the ITA 3877/Mum/2012 26 notification no 91 of 2008 dated 28-08-2008 issued by the Central Government read with DTAA entered into by India and Sri Lanka and provisions of the Act to avoid double taxation and prevention of fiscal evasion of the taxes. We order accordingly.

Order pronounced in the open court on 7th July , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 07-07-2016 को क� गई ।