Why DTAA prevails over Income tax act?

 

The provisions of the Income-tax Act, 1961 ('the Act') and the Double Taxation Avoidance Agreement ('DTAA') have been a subject of debate and discussion in the tax community. One of the major issues is whether the provisions of section 90 of the Act are inconsistent with the provisions of sections 4 and 5 of the Act and whether the provisions of the Act will prevail over the provisions of the DTAA in case of any inconsistency.

The chargeability of income and the scope of total income as per sections 4 and 5 of the Act are subject to the provisions of the Act, including section 90. If the intention of the legislature was not to depart from sections 4 and 5 of the Act for the determination of chargeability and ascertainment of total income, they would not have been made 'subject to the provisions of the Act'.

Circular No. 333 dated 02 April 1982 states that in case of any inconsistency between the provisions of the Act and the DTAA, the provisions of the DTAA will prevail over the provisions of the Act. The circular is based on the principles of international law, which provide that a treaty prevails over domestic laws.

Section 90 of the Act provides that the laws in force in either Contracting State will continue to govern the taxation of income in those respective contracting states, except where provisions to the contrary have been made in the DTAA. This section ensures that the provisions of the DTAA are given effect to and the tax liability of taxpayers is determined in accordance with the treaty.

Several judicial precedents have upheld the validity of Circular No. 333 and also upheld that in case of any inconsistency between the provisions of the Act and the DTAA, the provisions of the DTAA will prevail.

Therefore, it can be concluded that in case of any inconsistency between the provisions of the Act and the DTAA, the provisions of the DTAA will prevail over those of the Act. However, if the DTAA does not provide for the taxability of a certain kind of income, recourse has to be taken to the basic law, i.e., the provisions of the Act of the country of source. It is essential for taxpayers to understand the provisions of the Act and the DTAA to determine their tax liability accurately.