Chapter I of the OECD and UN Models of Tax Convention defines the scope of the respective conventions. While article 1 in the Chapter deals with 'persons covered', article 2 deals with 'taxes covered' and provides as under:

"1. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages and salaries paid by enterprises, as well as taxes on capital appreciation.

3. ......"

OECD commentary on Article 2 states -

"1. The Article is intended to make the terminology and nomenclature relating to the taxes covered by the Convention more acceptable and precise, to ensure identification of the Contracting States' taxes covered by the Convention, to widen as much as possible the field of application of the Convention by including, as far as possible, and in harmony with the domestic laws of the Contracting States, the taxes imposed by their political subdivisions or local authorities, to avoid the necessity of concluding a new convention wherever the Contracting States' domestic laws are modified, and to ensure for each Contracting States notification of significant changes in the taxation laws of the other State..

3. This paragraph (2) gives a definition of taxes on income and in capital. Such taxes comprise taxes on total income and on elements of income, on total capital and on elements of capital..

7. The paragraph (4) provides, since the list of taxes in paragraph 3 is purely declaratory, that the Convention is also to apply to all identical or substantially similar taxes that are imposed in a Contracting State after the date of signature of the Convention in addition to, or in place of, the existing taxes in that State."

Commentary on article 2 of the UN Model Convention follows on the same lines. In other words, both the Conventions apply to all kinds of incomes on which the sovereign Contracting States levy or may levy in future income-tax under their own tax laws.

While Articles 6 to 20 deals with various specific classes of incomes, Article 21 of both the models deals with other items of incomes not dealt with in the foregoing Articles of the Convention. Article 21 of the OECD and UN Model Tax Conventions provides as under:

"1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid, is effectively connected with such permanent establishment. In such case, the provisions of Article 7 shall apply."

Paragraph 2 of the Article is exactly on the lines of paragraph 4 of articles 10 and 11, and paragraph 3 of article 12 of OECD Model Convention, which deal with the situations where the shareholding, the debt claim or the right or property in respect of which the dividend, interest or royalty is paid is effectively connected with the permanent establishment situated in the other contracting State, through which the resident of a contracting State carries on business in the other contracting State. Paragraph 2 in the article seeks to deal with 'right or property' (other than royalty) in identical situation.

Article 21 of the UN Model Tax Convention adopts verbatim these two paragraphs of OECD Model as first two paragraphs of Article and, thereafter, add a third paragraph as under:-

"3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention and arising in the other Contracting State may also be taxed in the other State."

The object and scope of the above Article appears to be similar to those of section 56 of Indian Income-tax Act, 1961. Sub-section (1) of section 56 provides:-

"Income of every kind, which is not to be excluded from the total income under this Act, shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E."

OECD Commentary on Article 21 of the OECD Model explains -

"1. This Article provides a general rule relating to income not dealt with in the foregoing Articles of the Convention. The income concerned is not only income of a class not expressly dealt with but also income from sources not expressly mentioned..

5.1. For the purposes of this paragraph (2), the right or property in respect of which income is paid will be effectively connected with the permanent establishment, if the economic ownership of that right or property is allocated to that permanent establishment... for the purposes of the application of paragraph 2 of Article 7.."

Commentary on Article 21 of the UN Model Tax Convention adopts almost verbatim the OECD Commentary on the first two paragraphs of the Article including the opening words. With regard to paragraph 3, the commentary states -

"This paragraph constitutes an addition to Article 21 of the OECD Model Convention. It is intended to permit the country in which the income arises to tax such income if its law so provides while the provisions of paragraph 1 would permit taxation in the country of residence. The concurrent application of the provisions of the two paragraphs may result in double taxation. In such a situation, the provisions of article 23A or 23B as appropriate would be applicable, as in other cases of double taxation. In some cases the paragraphs 2 and 3 may overlap; they would then produce the same result...."

Klaus Vogel, the celebrated author on international taxation, in his treatise on "Double Taxation Conventions", however, strikes a somewhat different note. He observes - "..e) Article 21 applies to items of income 'not dealt with in the foregoing Articles'... (It) means nothing more than the distributive rules in articles 6 to 20. Article 21 does not extend the scope of the DTC's application. Consequently, it does not apply to items of income not covered by the DTC as a whole, i.e., to items of income not subjected to the taxes falling within article 2 of the Model Convention.Items of income not dealt with, in articles 6 to 20 are such as cannot be grouped under any one those articles..'Not dealt with' must not, therefore, be taken to mean 'not unmistakably dealt with'... In so far as types of income which are not dealt with in articles 6 to 20 are concerned, the scope of the rule consequently remains very narrow.It applies primarily to annuities based on previous contributions.., maintenance payments to relatives or other closely associated persons, damages other than compensation for loss of income of the kind covered by the foregoing articles, ..., profits from 'new financial instruments' and especially those from so called 'derivatives', as long as they do not fall under article 7 or article 11, and finally gambling winnings and lottery prizes.... In contrast, article 21 does not apply to items of income classifiable as business profits within the meaning of article 7, such as remuneration for technological services, for which there are in fact to some extent special rules, but which in the absence of such special rules come under article 7..."[Para12, 12a and 12b, Vol. II, 3rd Edition, 1996]

Thus there is a controversy between the views adopted in the matter of scope and coverage of article 21, on one side by OECD in its commentary and by Klaus Vogel in his treaties on the other side. While OECD holds the opinion that "...not only income of a class not expressly dealt with but also income from sources not expressly mentioned..." fall within the scope of 'other income' under article 21, Klaus Vogel takes the view that ".. Items of income not dealt with, in articles 6 to 20 are such as cannot be grouped under any one those articles.... 'Not dealt with' must not, therefore, be taken to mean 'not unmistakably dealt with'... In so far as types of income which are not dealt with in articles 6 to 20 are concerned, the scope of the rule consequently remains very narrow.."

Interestingly, exactly similar controversy arose under the Indian Income-tax Act, 1922, in the matter of interpretation of the scope and coverage of the residuary head of income, namely, "Income from other sources" as defined in section 12 of the I.T. Act, 1922 (counterpart of section 56 of I.T. Act, 1961) for the purpose of computation of total income under the provisions of the above Act. The matter came before Apex Court in the year 1966 in the case of Nalini Kant Ambalal Mody (61 ITR 428). Views similar to that of Klaus Vogel was taken by the (2-1) majority decision of the Supreme Court (with Bachawat J. (Of 'Surat art silk' fame, dissenting), while interpreting the scope of the above head of income.

In the above case, the assessee was an advocate practicing before Bombay High Court. He had adopted the calendar year as the previous year for his income from the source 'profits and gains from business or profession'. Like any other legal practitioner, he kept his accounts on cash basis and offered for taxation only the professional fees received in cash during a relevant previous year. He was elevated to the Bench of the Bombay High Court in the beginning of one of the later previous years and ceased to carry on his profession. During next two calendar years, he received some outstanding professional fees from ex-clients, relating to periods prior to the calendar year, when he was elevated to the Bench.

He did not offer for taxation any part of such receipts of outstanding professional fees in the years, when those were received, on the ground that he did not carry on his profession during any part of those later years and for the relevant professional income to be charged to taxed under the corresponding head, it was necessary that he should have carried on his legal profession at least for a day in those years. It was common ground that the relevant income could not be taxed under the head 'profits and gains of business or profession' The question arose whether the said income could be taxed under the residuary head, namely, 'income from other sources'.

The decision of the Judicial Committee in the case of Prabhat Chandra Barua v King Emperor [(1930) L.R. 57 I. A. 228] was relied on by the revenue in support of its contention that an income receipt of a resident assessee, otherwise falling within the scope of 'total income' as defined in section 4 of the 1922 Act, (counter-part of section 5 [clause (1)(a)] of 1961 Act) as 'income received in India during the relevant previous year', would always fall to be taxed under the residuary head even if it cannot be taxed under the head 'profits of business or profession', in view of the true residuary character of the head.

The Apex Court observed in the face of the above contention, as follows - "In Probhat Chandra Barua v. King Emperor (supra), it was no doubt said that section 12, which is the computing section in respect of the residuary head of income, was clear and emphatic and expressly framed so as to make the head of 'other sources' describe a true residuary group embracing within it all sources of income, profits and gains, provided the Act applies to them, that is, provided they are liable to be included in total income under section 4 which deals with income to which the Act applies. We are in full agreement with that observation..."

The Apex Court, however, distinguished the above decision of the Judicial Committee on the following grounds -- "... but we do not think that it affords any support to the contention that all income liable to be included within total income under section 4 must be brought to tax. The observation must be read keeping in mind the undisputed principle that a source of income cannot be brought under the residuary head if it comes under any of the specific heads, for the Judicial Committee could not have overlooked that principle. If we do that, it will be clear that all that the Judicial Committee said was that all sources of income which do not come under any of the other heads of income can be brought under the residuary head. The words used are "embracing ..... all sources of income" and not all income. It did not say that an income liable to be included in the total income is chargeable to tax as income under the residuary head if it is not chargeable under a specific head under which it normally falls. In Prabhat Chandra Barua's case (supra) the Judicial Committee was not concerned with that aspect of the matter; the only question before it was, whether zamindari and certain other income fell under the third head of income from property as the word "property" was understood in the Act....."

The Court further observed -"The heads of income must be decided from the nature of income by applying practical notions and not by reference to an assessee's treatment of income: see Commissioner of Income-tax v. Coconada Radhaswami Bank Ltd (57 ITR 306)(SC)..." (Pages - 433 - 435)

Justice Bachawat, who gave the dissenting judgement, referred to the observations of Justice Chagla In re Kamdar (14 ITR 10, 58)(F.B) - "By section 3 read with sections 2(15) and 4, income-tax is charged for every year..... in respect of total income of any previous year of the assessee.., including all income, profits and gains from whatever source derived, which accrue or arise.... as provided by section 4(1) and which are not exempted under section 4(3). The crucial words in section 4 are "from whatever source derived." The nature of the source does not affect the chargeability of the income. Section 6 sets out the heads of income chargeable to tax...... Income, profits and gains, from whatever source derived included in the total income fall under one head or the other. If any part of the total income does not fall under the specific heads under sections 7, 8, 9 and10, it must fall under the residuary head under section 12..."

Justice Bachawat reiterated the wording of section 12(1) to stress its residuary scope and observed that "Income, profits and gains of every kind are covered by section 12, provided two conditions are satisfied, viz., (1) they are not included under any of the preceding heads, and (2) they may be included in the total income of an assessee. Any income chargeable under a specific head can be charged only under that head and no part of that income can be charged under section 12. But any part of the total income of the assessee, not assessable under a specific head, is assessable under the residuary head covered by section 12. Referring to similar words in section 12(1), as it stood before its amendment in 1939, Lord Russel observed in Probhat Chandra Barua's case, ---'These words appear to their Lordships clear and emphatic , and expressly framed so as to make the sixth head mentioned in section 6 describe a true residuary group embracing within it all the sources of income, profits and gains provided the Act applies to them, i.e., provided that they accrue or arise or be received in British India, as provided in section 4, sub-section (1), and are not exempted by virtue of section 4, sub-section (3).'" (Page 439)

The majority interpretation of the provision was not acceptable to the revenue. The legislature seeking to nullify the decision in the case, introduced a legislative fiction in sub-section (3A) of section 176 of the I.T.Act, 1961, vide T.L.A Act, 1975, deeming such receipt as income taxable in the year of receipt.

In the next part, we shall discuss the implications of the provision of the residuary head with particular reference to the tax treaty with Switzerland.

(Also See Interpretation issues relating to 'other income' )