Taxability Of Immoveable Property Under The Act And The Tax Treaties - A Brief Analysis

1. An Introduction

In the past couple of weeks, I have received numerous queries from NRI on the taxability of income from the immoveable property. The questions relate to whether income earned from the immoveable property in India would be liable to tax in the state of residence of the concerned NRI. In this article, I intend to shed some light on the taxability of income from immoveable property both under the Income-tax Act, 1961 and the concerned tax treaty. The taxability of income from immovable properties is typically covered under Article 6 of the concerned tax treaty. At the outset, it would be relevant to understand the meaning of the term “immoveable property”

1.1 Meaning of the term

“immoveable property”

It deserves to be noted that the term “immovable property” has not been defined in the tax treaty or the Model Convention. Thus, the said term would need to be understood based on its interpretation under the law of the applicable contracting state. From an Indian context, the term “immoveable property” has been defined under a few legislations. The said definition and its related interpretation has been detailed in the ensuing paragraphs.

However, section 2(26) of the General Clause Act, 1897 defines the term ‘immovable property’ in an inclusive manner so as to cover land, benefits arise out land and things attached to the earth or permanently fastened to anything attached to the earth.

Further, Section 2(z) of the Real Estate (Regulation & Development) Act, 2016, states that immovable property includes “land, buildings, rights of ways, lights or any other benefit arising out of land and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, standing crops or grass”.

The term “immoveable property” has also been defined under Section 3 of the Transfer of Property Act, 1882. Further, the term “attached to the earth” has also been defined under Section 3 of the Transfer of Property Act, 1882 to mean:

• Rooted in the earth, as in the case of trees and shrubs;

• Imbedded in the earth, as in the case of walls or building;

• Attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached.

1.2 A few judicial precedents on the interpretation of the term “immoveable property”

• The Hon’ble Supreme Court in the case of Sirpur Paper Mills Ltd v. Collector of Central Excise, Hyderabad 1997 taxmann.com 265 (SC) held that a paper making machine assembled and erected site by embedding in a concrete base would not qualify as an “immoveable property” since the embedding in the base was undertaken to ensure wobblefree operation. The Hon’ble Court held that just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become an immovable property. Further, the Hon’ble Court held machine was capable of being sold after being dismantled from its base.

• The Hon’ble Apex Court, in the case of Commissioner of Central Excise, Indore v. Virdi Brothers [2007] 2007 taxmann.com 1553 (SC) held that if items assembled or erected at site and attached by foundation to earth can be dismantled without substantial damage to its components and thus can be reassembled, then the items would be considered as moveable.

• The Hon’ble Andhra Pradesh High Court in the case of Bamadev Panigrahi Vs Monorama Raj AIR 1974 AP 226 held that a cinema projector and a diesel engine fixed on the earth for the purpose of exhibiting shows in a cinema would qualify as moveable properties. In the said case, the Hon’ble High Court held as under:

“On a careful consideration of the entire facts and circumstances, we are of the firm view that the intendment, object and purpose of installing the cinema equipment in question, was only to have the beneficial enjoyment of the very equipment during the period of the lease or mortgage. That apart, the diesel oil engine and the cinema projector are not rooted in the earth as in the case of trees and shrubs, or imbedded in the earth as in the case of walls or buildings, or attached to what is so imbedded for the permanent beneficial enjoyment of that to which they are attached. In the circumstances, the equipment or machinery must be held to have not been attached to the earth within the meaning of the expression "attached to the earth" under Section 3 of the Transfer of Property Act. The machinery is not only not at- tached to the earth, but also not permanently fastened to anything attached to the earth. Hence, the machinery in question must be held to be movable property but not immovable property.”

• The Hon’ble Supreme Court in the case of Solid and Correct Engineering Works Co and Others (2010) 5 SCC 122 held that where fixing of a plant is meant only to give stability to the plant and its operations wobble free or the setting up of the plant itself is not intended to be permanent at a given place, the apparatus would not qualify as “immoveable property”. A similar was also upheld by the Hon’ble Supreme Court in Mallur Siddeswara Spinning Mills Vs CCE (2004) 166 ELT 154 and Triveni Engineering & Industries Ltd. and Anr. v. Commissioner of Central Excise 2000 (120) ELT 273 (SC).

• In the context of structures erected on leased land, the Hon’ble High Court of Kerala in the case of Delta Communications Vs State of Kerala [2016] 69 taxmann.com 412 (Kerala)/[2016] 90 VST 438 (Kerala) [31-07-2015] held that “Structures erected on property taken on lease and let out to various parties for advertising, these structures are to be treated as tangible and corporeal goods”. In the said judgment, the Hon’ble Kerala High Court held that such “goods” would NOT partake the nature of “immoveable property”.

• The CBEC in Circular No 58/1/2002-CX dated 15.01.2002 has clarified that if goods are capable of being sold without dismantling are actually dismantled into their components for ease of transportation then such goods cannot be held to be immoveable property. The relevant extract of the Circular is provided below:

“If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base…the goods would be considered to be movable and thus excisable. The mere fact that the goods, though being capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be dutiable merely because they are transported in dismantled condition. “

Thus, the term “immoveable property” would also include those items that are permanently affixed to the said property, which cannot be dismantled without destroying the concerned structure. It however be relevant to note that Article 6(2) of the Model Convention has expounded the term to include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.

With this backdrop, we shall in the next paragraphs, evaluate the taxability of income from immoveable properties both under the Act and the related tax convention.

2. Taxability under the Act

Under the Income-tax Act, 1961, income from immoveable properties situated in India is taxable in India. This is based on the provisions of Section 9(1)(i) of the Act. The said provision states as follows:

All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Needless to state, applying the doctrine of treaty-override, an assessee could choose to be governed by the provisions of the Act or the related tax treaty, depending on which is more beneficial. In a landmark judgment, the Hon’ble Supreme Court in the case of PVAL Kulandagan Chettiar [2004] 267 ITR 654 held that income earned by a Malaysian tax resident from a property situated in Malaysia would not be taxable in India, in the absence of a “business connection” in India. The relevant extract of the judgment is captured below:

“The immovable property in question is situate in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income is derived and that finding of fact has been recorded by all the authorities and affirmed by the High Court. We, therefore, do not propose to reexamine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile.”

The above-judgment was preceded by a landmark judgment of the Karnataka High Court in the case of RM Muthiah [1993] 67 Taxman 222, where the Hon’ble Court held as follows after considering the provisions of section 90 of the Act:

Section 90(a) of the Act also refers to the granting of relief in respect of Income on which income-tax have been paid both under the said Act and under the Income-tax Act of the other country. Similarly clause (b) also refers to the avoidance of double taxation. We are not concerned with other clauses of section 90 in the instant case. In other words, the parties to an Agreement to avoid double taxation is to grant relief to the assessee, in case the law of two countries operate on the same income and the assessee may have to pay tax in two countries. The revenue's contention in the instant case is entirely based on sections 4 and 5. But these provisions shall have to be read subject to the provisions of agreement in question. The agreement in question, by necessary implication, takes away the power of the Indian Government to levy tax on the income in respect of certain categories as per articles6, 7, 8, 9. 10, 11, etc., of the agreement.

3. Taxability under the treaty/ convention

Under the convention, it deserves to be noted that the right to tax income from immoveable property is given to the state of source. This is on account of the fact that there is a very close economic connection between the source of income and the state of source. It deserves mention that the situs, i.e., where the immovable property is situated takes precedence over any of the rules governing Permanent Establishment. The UN Model follows a similar view akin to the OECD Model. Under the US Model Convention, Article 6(5), a resident has an option by election to be taxed on a net basis, as in case of permanent establishment on income from real property situated in other State.

It would also be relevant to note that income from agriculture and forestry is also taxed as in- come from immoveable property. The term income agriculture and forestry include not only income that an enterprise engaged in agriculture or forestry activities derives from selling its agricultural produce but also income that is integral to carry out of agriculture or forestry activities – for instance, income from permits associated with rights integral to carrying out of agriculture or forestry activities.

The OECD Model Convention states that the right to tax of the State of source has a priority as contained in Article 6. Consequently, income indirectly derived from immoveable property would also fall within the confines of Article 6. The convention states that where the said income is part of a permanent establishment, the same would be taxed as income of the concerned business enterprise.

The above-principles would be a useful tool in determining whether an NRI, for instance, a person who is gainfully employed in the UK, would be liable to tax in the UK on the rental income that he earns in India or the gains that accrues to him as a result of the alienation of immoveable property

Rajiv Ambat Lifestyle Disorders Coach & Founder - NuvoVivo

About NuvoVivo (www.nuvovivo.com) Rajiv Ambat is the CEO of NuvoVivo, an online health & fitness company that is into medical fitness. He is a well-known speaker and author of the best-selling book - ‘The Midriff Crisis’ and lifestyle expert. Under the guidance of Mr Rajiv, his team at NuvoVivo help their clients manage/reverse lifestyle diseases like diabetes, cholesterol, fatty liver, uric acid, hypertension, PCOS, thyroid disorders, etc.