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CHAPTER III
TAXATION OF INCOME
ARTICLE 6
INCOME FROM IMMOVABLE PROPERTY
(1) Income derived by a resident of a Contracting State from
immovable property (including income from agriculture of forestry) situated in the other
Contracting State may be taxed in that other State.
(2) The term "immovable property" shall have the meaning which it has under the
law, of the Contracting State in which the property in question is situated. The term
shall in any case 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, boats and aircraft shall not be
regarded as immovable property.
(3) The provisions of paragraph (1) shall also apply to income derived from the direct
use, letting or use in any other form of immovable property.
(4) The provisions of paragraphs (1) and (3) shall also apply to the income from immovable
property of an enterprise and to income from immovable property used for the performance
of independent persona services.
40. Scope
Income from immovable property is taxable in the Contracting State in which such
property is situated. Income from agriculture of forestry is also included. The Article is
elaborate in stating what is or what is not the immovable property, in addition to what
the expression ‘immovable property’ connotes in accordance with the law of the
Contracting State. The nature of income which could be ascribed to immovable property has
also been provided mandatorily as which is derived from the direct use, letting or use in
any form. The Article deals with income which a resident of a Contracting State derives
from immovable property situated in the other Contracting State. It does not apply to
income from the property situated in the Contracting State of which the recipient is
resident within the meaning of Article 4 or situated in a third State; the provisions of
Article 21 apply to such income. This provision (Article 6) is based on the fact that
there is always a very close economic connection between the source of the income from
immovable property and the State of source.
41. Definition of immovable property
All double taxation agreements in force give the right to tax immovable property to
the State in which such property is situated. This Article defines immovable property by
reference to the domestic laws of the state of situs. This
helps in avoiding difficulty to interpret as to whether or not an asset or a right is
to be regarded as immovable property. Paragraph (2) specifically mentions the assets and
rights which must always be regarded as immovable property. Ships, boats and aircraft
have, however, been excluded from the definition of immovable property even if these may
be so regarded under the domestic laws. It includes, in particular, livestock and
equipment of agricultural and forestry enterprise, and property accessory to immovable
property irrespective of whether or not the law and the usage of the Contracting State do
not hold these to be immovable property. Property accessory to immovable property, even if
it is temporarily separated from the property of which it is accessory, is deemed to be
immovable property. Livestock and equipment are taken to be immovable property for their
intended use in agricultural or forestry even if these are nto so taken under the domestic
laws on their intrinsic qualities. No distinction is necessary according to whether or not
the person is the owner of the immovable property in the exploitation of which the
livestock or equipment he owns is employed by him.
This Article extends to any tangible movable property that has been placed on the
immovable property so that it remains permanently attached thereto, and which thereby
constitutes property accessory or annexed to the immovable property within the meaning of
the domestic law of the Contracting State in which the property is situated. This Article
speaks of immovable property and not the claim or right, save the right to which the
provisions of the general law respecting landed property apply, rights to variable or
fixed payments as consideration for the working of the property, or the right to work,
mineral deposits, sources and other natural resources. For the purpose of determining
whether a movable property attached to an immovable property is an immovable property the
enquiry should be not whether the attachment is direct or indirect but what is the nature
of the attachment and what is the object and purpose. The degree and nature of attachment
no doubt should be a consideration, but the more important consideration should be the
object of annexation which is a question of fact to be determined by the circumstances of
each case. If a thing is embedded in the earth or attached to what is embedded for the
permanent beneficial enjoyment of that to which it is attached, then it is a part of
immovable property and if the attachment is merely for the beneficial enjoyment of the
chattel itself, then it remains chattel, even though fixed for the time being so that it
may be enjoyed and, therefore, the question in each case must depend upon the intention of
annexation and that such intention may be either express or implied from the
circumstances. In the absence of proof one way or the other, the intention to be
attributed is that of a person acting from motives of self-interest.
41.1 test for holding movable as immovable property - The
following tests will determine as to when a movable property fixed to the earth becomes an
immovable property:
- Intention of the parties
- Mode of affixation and whether the affixation is intended to be permanent
- Onus of proof that even after annexation the Article continues to be movable is on the
person who alleges it.
In Mohammed Ibrahim v. Northern Circars Fibre Trading Co., a machinery was fixed to cement platform and attached to iron pillars
fixed in the ground to a depth to nearly 6 or 7 feet. It was held that as there was no
reason to think that the owner of the factory intended to keep the machinery of the mill
and the land to which it was affixed apart and that his object was to become the owner of
both for the purpose of carrying on the business for his own individual benefit, the
machinery which stood annexed to the floor should be treated as immovable property.
In J. Kuppanna Chetty, Ambati Ramayya Chetty & Co. v. Collector of Anantapur,4 a boiler engine and decorticator were
fixed and embedded in the factory building for the beneficial use of building as a factory
was held to be immovable property in addition to land and building. In Perumal Naicker v.
Ramaswami Kone, the Madras High Court has held that
engine mounted on cement base and fastened to it by bolts and nuts was not immovable
property as the intention of fixing the engine to the earth is not to make it permanent
part of the earth and that the nature of the engine and the purpose of its annexure both
show that it cannot be regarded as an immovable property, that though the engine stood
affixed to the earth the purpose of such affixture is necessary for the user of the engine
and such an affixture cannot be viewed as a permanent one. The view taken by the court was
that for a chattel to become part of immovable property and to be regarded as such
property it must become attached to the immovable property as permanently as a building or
a tree is attached to the earth and if the property is a movable property an for its
beneficial use or enjoyment it is necessary to embed it or fix it on earth though
permanently, that is when it is in use, then it cannot be regarded as immovable property
for that reason.
In Hemendra Lal Roy V. Indo-Swiss-Trading Co. Ltd.,6 it was held that until power house is dismantled, the machinery, etc.,
which are fixed to the earth are uprooted, and until buildings are demolished, structures,
plants machineries, transmission lines, etc., cannot be called movable properties.
In Carborandum Universal Ltd. v. CIT, the Madaras
high Court held that the owner of the undertaking has embedded the machinery in the earth
for the purpose of working his factory as a press, it should be taken to come within the
definition of ‘immovable property’.
42. Manner how immovable property is used not relevant
Irrespective of the manner how an immovable property is to be made use of whether by
its exploitation a commercial asset, i.e., by carrying on business by its owner by the
employment of such an asset, or as an investment by letting it or renting it out to
another on lease or on rental or by using it in any other manner directly or otherwise the
income from the immovable property is assessable in the Contracting State in which it is
situated.
Paragraph (4) of Article 6 states that the provisions of paragraphs (1) and (3) would be
applicable to income derived from immovable property used for the performance of
professional services.
If the source of income is the immovable property, it is liable to tax in the country of
the location of the property though under certain circumstances such income is taken to be
business income under domestic laws, as for example, when an assessee derives any income
by exploitation of a commercial assets whether himself or through the agency of another,
such income is normally taken to be business income. According
to this view, the source of income being the business, the Article which controls its
taxability would be first Article 5 and thereafter Article 6. Such income would not be
taxable at all if it arises or accrues from the activity which does not fulfil the
requisite of permanent establishment in terms of Article 5. Even if the enterprise so
fulfils, the whole of the income is not taxable. Only that portion is liable which could
be attributed to the permanent establishment. Taxability or the non-taxability of income
depends on the existence or non-existence of the permanent establishment, and its extent
upon how much of it could be attributed to the permanent establishment, if exist. The
concept of taxability of income on the basis of location of its source would then be
relegated to insignificance. But paragraph (4) makes it clear that the view does not
prevail if the source of income is immovable property Notwithstanding that property
belongs to industrial, commercial enterprise or is used for the performance of independent
personal service or used to non-industrial or non-commercial purposes, the income from
such property is taxable in the State of source. Thus, the right to tax of the State of
source has prevalence over the right of the other State. Though the right of the source
State predominates, this Article does not provide how the income from immovable property
be determined. Its provisions, therefore, do not prejudge the application of the domestic
law as regards the manner in which income is computed and tax determined.
43. Rent realised from employees whether income from immoable
property
A question may arise as to whether when an assessee realises rent from it employees
for its house properties, such income is to be assessed as income from property or as
business income. The answer depends on the facts and circumstances of each case.
Generally, occupation of building by the employees as licensees is the occupation for the
purposes of assessee’ business, especially when such building is close to the place
of work of employees so that they be nearer to the factory. Such occupation also, enhances
their commitment to work. The purpose of allotment is a business purpose; for it
ultimately goes to promote the assessee’s business. Income from such house cannot,
therefore, be treated as income from house property. But in terms of the UN and OECD Convention Models such income is
assessable in the State in which the property is located, as income from immovable
property.
