1981 (9) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Competence of the Income Tax Officer (ITO) in India to compute the assessee's income liable to tax in Pakistan and to restrict the rebate in respect of such income.
2. Entitlement of the assessee-company to interest on Rs. 23,08,215 under Section 214(1) and 214(2) of the Income-tax Act, 1961, for specified periods.

Issue-wise Detailed Analysis:

Issue 1: Competence of ITO in India to Compute Income Liable to Tax in Pakistan

The first issue concerns whether the ITO in India was competent to compute the assessee's income liable to tax in Pakistan and to restrict the rebate in respect of such income. This question was referred to the court at the instance of the assessee. The court noted that this issue was already settled by a previous decision in the case of Associated Cement Co. Ltd. v. CIT [1981] 127 ITR 560, which held that the ITO in India was competent to determine the income from sources in Pakistan for the purposes of Indian assessment. Therefore, the court answered this question in the affirmative and against the assessee.

Issue 2: Entitlement to Interest under Section 214(1) and 214(2) of the Income-tax Act, 1961

The second issue, referred at the instance of the Revenue, involved the assessee's entitlement to interest on Rs. 23,08,215 under Section 214(1) and 214(2) of the Income-tax Act, 1961. The relevant assessment years were 1963-64 and 1964-65. The assessee, a cement manufacturing company, had two factories in Pakistan, and the income from these factories was included in its assessment in India for computing its world income.

The ITO computed the assessee's income in Pakistan at Rs. 73,18,580 and estimated the tax payable thereon at Rs. 34,33,227. The ITO, considering the Agreement for Avoidance of Double Taxation between India and Pakistan, stated that the tax on the Pakistan income would be kept in abeyance for one year, pending the submission of necessary claim papers by the company.

The assessee objected to the method of calculation adopted by the ITO, arguing that the tax attributable to the Pakistan income should have been first deducted from the gross demand, and then the advance tax paid should have been credited against the remaining tax payable in India. This method would have resulted in a refundable balance of Rs. 23,08,215.84, on which the assessee claimed it was entitled to interest under Section 214 of the Act.

The ITO rejected the assessee's claim, and the AAC confirmed the ITO's order, interpreting Article VI(b) of the Agreement for Avoidance of Double Taxation to mean that the collection of a portion of the demand equal to the estimated abatement should be kept in abeyance, not the tax attributable to Pakistan income.

The Tribunal, however, accepted the assessee's contentions and set aside the orders of the ITO and AAC. The Tribunal reasoned that Article VI(b) required the ITO to deduct the estimated abatement from the gross demand before adjusting the advance tax paid, thereby entitling the assessee to a refund of the excess amount.

The court agreed with the Tribunal's interpretation, stating that Article VI(b) aimed to place the assessee on the same footing as they would have been under Articles IV and V, had the tax payable on their total income in Pakistan been known at the time of assessment in India. The court held that the ITO should have first deducted the estimated abatement from the gross demand and then adjusted the advance tax, resulting in a refund of Rs. 23,08,215.84 to the assessee.

Regarding the interest on the refund, the court noted that Section 214(1) provides for interest on the excess advance tax from the date of payment to the date of regular assessment. The court, following the decisions of the Madras High Court in Rayon Traders Private Ltd. v. ITO and the Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India, held that the assessee was entitled to interest under Section 214(2) from the date of assessment to the date of refund.

Conclusion:

- Question 1: Answered in the affirmative and in favor of the Revenue.
- Question 2: Answered in the affirmative and in favor of the assessee.

The Commissioner of Income-tax was ordered to pay the costs of the reference to the assessee.