1957 (9) TMI 77 - HC - Income Tax

Summary

Issues Involved
1. Inclusion of Dividend Income for Tax Purposes
2. Grossing Up of Dividend Income
3. Requirement of Certificate of Assessment for Tax Abatement

Issue-Wise Detailed Analysis

1. Inclusion of Dividend Income for Tax Purposes
The first issue pertains to whether the dividend income of Rs. 7,640 out of a total income of Rs. 8,000 received from Sutlej Cotton Mills Ltd. was liable to be included in the total income of the assessee or only for rate purposes, in accordance with the Agreement for Avoidance of Double Taxation in India and Pakistan. The court concluded that Rs. 7,640 was liable to be included in the total income of the assessee. Article IV of the Agreement for Avoidance of Double Taxation mandates that each Dominion shall make assessments under its own laws. The Schedule to the Agreement specifies that dividends are to be taxed by each Dominion in proportion to the profits of the company chargeable by each Dominion. In this case, 67% of the dividend income was chargeable in India and 93.3% in Pakistan. Since the assessee was resident and ordinarily resident in India, the entire dividend was chargeable to tax in India, while only 67% should be charged according to the agreement. The excess of 93.3% of Rs. 8,000 or Rs. 7,640 attracts abatement.

2. Grossing Up of Dividend Income
The second issue involves whether the entire dividend income of Rs. 8,000 should be grossed up in accordance with section 16(2) of the Indian Income-tax Act, and whether the assessee is entitled to get credit for the income-tax deemed to have been paid on her behalf by the paying company. The court clarified that only the portion of the dividend income which was taxed in the taxable territories (Rs. 360) should be grossed up. Section 16(2) provides for grossing up of any dividend received by an assessee for inclusion in the total income, but only the portion of the dividend on which income-tax was payable in the taxable territories is to be grossed up. Therefore, the Tribunal erred in holding that the entire dividend should be grossed up. The assessee is entitled to credit for the income-tax deemed to have been paid by the company in respect of the grossed-up amount of Rs. 360.

3. Requirement of Certificate of Assessment for Tax Abatement
The third issue is whether the assessee was entitled to the abatement of tax (both income-tax and super-tax) payable on the dividend income of Rs. 7,640 without the production of a certificate of assessment in Pakistan. The court held that the assessee was not entitled to an abatement without producing such a certificate. Article VI(b) of the Agreement for Avoidance of Double Taxation specifies that if the tax payable on the total income in the other Dominion is not known at the time of assessment, the collection of a portion of the demand equal to the estimated abatement should be held in abeyance for a period of one year. If the assessee produces a certificate of assessment in the other Dominion within this period, the uncollected portion of the demand will be adjusted against the abatement allowable under the Agreement. If no such certificate is produced, the abatement ceases to be operative, and the outstanding demand is collected forthwith. The court emphasized that the tax payable in the other Dominion must be known, typically through an assessment order or other admissible evidence, for the abatement to be granted.

Conclusion
1. Inclusion of Dividend Income: Rs. 7,640 was liable to be included in the total income of the assessee.
2. Grossing Up of Dividend Income: Only Rs. 360 was to be grossed up. The assessee is entitled to get a credit for the income-tax deemed to have been paid by the company in respect of this amount only.
3. Requirement of Certificate of Assessment: The assessee was not entitled to an abatement without the production of a certificate of assessment in Pakistan, but in this specific case, the abatement in respect of income-tax had already become effective due to the Department not appealing against the Appellate Assistant Commissioner's order granting such abatement.