DTAA income now included in total income

The CBDT has notified that if a DTAA provides that the income of a resident “may be taxed” in the other country, such income will be considered to be part of the total income of the assessee (CBDT Notification No. 91/2008). The notification is available here. The implication is that such income will be part of total income, although relief can be claimed under the applicable provisions of the DTAA in question. Thus, although it does not alter the end result, the position now is that such income is not outside the scope of total income, but merely a relief granted from the levy of tax on it.

A Business Standard editorial argues that this is both unwise and beyond the power of the CBDT. It does report that the reason for the move, according to a Finance Ministry official, is that such residents tend to either under report or not report such income, and that it provides the Department with a chance to acquaint itself more thoroughly with the details of such transactions. The suggestion that the notification is ultra vires depends on Section 90(3) of the Income Tax Act, 1961. That section reads:

(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

The suggestion is that a directive to make disclosure of exempt income mandatory cannot be justified under this provision, because it is confined to clarifying terms that are not defined in the Act or in the DTAA. While this is true, the CBDT seems to have devised a way around the problem by specifying in its circular that “may be taxed” means that the income is part of total income. That seems to leave it in the clear as far as s. 90(3) is concerned, which means that the rule is here to stay.

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V. Niranjan

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