1997 (1) TMI 8 - SC - Income Tax

Assessee, managing agent of mills situated in Pakistan - it appears to us that the transaction of moneys, though they had been made in Calcutta, was for a specific purpose, namely, to be diverted to Pakistan for the management of development of their companies situated in Pakistan and thus entitling the assessee to take the benefit of cl. 5(f) of art. IV of the Indo-Pakistan DTAA - HC has rightly held that clause 9 was not attracted in this case and clause 5(f) would cover the present matter

Summary

Issues:
Interpretation of clauses 5(f) and 9 of the Schedule to the Agreement for Avoidance of Double Taxation between India and Pakistan.

Analysis:
The case involved a reference made by the Income-tax Appellate Tribunal regarding the classification of a sum of Rs. 1 lakh as income derived from money lent at interest and brought into Pakistan, for the assessment year 1949-50. The High Court had ruled in favor of the assessee, who was the managing agent of two sugar mills in East Pakistan, stating that the amount in question fell under clause 5(f) of the Schedule to the Agreement. The Tribunal and the Appellate Assistant Commissioner had also supported this view. The key issue was whether the income derived from money lent at interest and brought into a Dominion should be taxed under clause 5(f) or clause 9 of the said Schedule.

The High Court's interpretation of the clauses was crucial in this case. It noted that under clause 5(f), Pakistan was entitled to claim 100% of the income if the money was brought into that Dominion and derived from money lent at interest. The court emphasized that the funds were intended for the management and development of companies in East Pakistan, justifying the application of clause 5(f) in this scenario. The court distinguished this from clause 9, which applied to income not covered by specific clauses in the Schedule.

The Supreme Court, after hearing arguments from both parties' counsels, upheld the High Court's decision. It concurred that clause 5(f) was applicable in this case, dismissing the Revenue's claim that clause 9 should be invoked instead. The court found no fault in the High Court's judgment and dismissed the appeal. The judges expressed their gratitude for the assistance provided by a senior counsel who acted as amicus curiae in the matter. The case serves as a significant illustration of the application and interpretation of specific clauses in tax agreements to determine the taxation of income derived from cross-border transactions.