In a major judgement, the Supreme Court has held that treaties for avoidance of double taxation between India and other countries will override the Income Tax Act provisions.

The Apex Court said that the income derived by a Non-Resident Indian from his property in Malaysia is exempt from tax in India under the Indo-Malaysian treaty of 1977.

Dismissing appeal by the commissioner of income tax, a bench comprising Chief Justice S Rajendra Babu and Justice G P Mathur said as the immovable property, from which the gain was derived, was situated in Malaysia, the tax laws of India would not apply to the said income.

"Taxation policy is within the power of the government and section 90 of the Income Tax Act enables the government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one or the other and thus prevails over the provisions of the IT Act," Justice Babu, writing for the bench, said.

Section 90 says: "Where the central government has entered into an agreement with the government of any other country for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are beneficial to that assessee."

The ruling could have a bearing on certain pending petitions challenging the Indo-Mauritius Double Taxation Avoidance Treaty. It has been alleged in those petitions that the government was losing huge amounts in tax as many companies were operating in India after registering in Mauritius just for the purpose of avoiding payment of tax.