1971 (7) TMI 41 - HC - Income Tax

Whether Tribunal was right in holding that relief should be given to the assessee on its Pakistan business income in accordance with the provisions of the DTAA between the Government of India and Pakistan without setting off against it the loss in agricultural operations in Pakistan held that if the assessee s income from agriculture in Pakistan could not be taken into consideration for granting abatement the assessee s loss of income from agriculture has also to be kept out of view in giving effect to the provisions of the Agreement for Avoidance of Double Taxation. From this point of view we agree with the conclusions the Appellate Tribunal has arrived at in the instant case. Our answer to the question is in the affirmative and in favour of the assessee

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that relief should be given to the assessee on its Pakistan business income in accordance with the Agreement for Avoidance of Double Taxation without setting off against it the loss in agricultural operations in Pakistan.

Issue-wise Detailed Analysis:

1. Tribunal's Decision on Relief for Pakistan Business Income:
The primary issue was whether the Tribunal correctly held that the assessee should receive relief on its Pakistan business income under the Agreement for Avoidance of Double Taxation between India and Pakistan without offsetting the loss from agricultural operations in Pakistan. The assessment year in question was 1956-57, and the financial year ended on June 30, 1955. The respondent, a resident company in India with its registered office in Calcutta, had income from business in India, interest earned in India on securities, manufacturing business in Pakistan, and agricultural properties in Pakistan.

2. Income Computation by the Income-tax Officer:
The Income-tax Officer computed the respondent's Indian income as Rs. 2,01,329 from business and Rs. 373 from interest on securities, totaling Rs. 2,01,702. The Pakistan income was computed as follows:
- Profit from manufacturing business in Pakistan: Rs. 3,26,368
- Loss from agriculture in Pakistan: Rs. 3,20,839
- Net profit: Rs. 5,529

A statutory deduction of Rs. 4,500 was allowed, resulting in an income of Rs. 1,029 from Pakistan. The Income-tax Officer included this amount in the total income and allowed abatement of tax accordingly.

3. Assessee's Revised Return and Claim for Abatement:
The assessee filed a revised return, claiming abatement of tax on Rs. 3,26,368, the total business income from manufacturing in Pakistan, and sought to exclude the agricultural loss from the Indian business income. The Income-tax Officer rejected this, maintaining the original computation.

4. Appellate Assistant Commissioner's View:
The Appellate Assistant Commissioner upheld the Income-tax Officer's decision, stating that under Article IV of the Agreement for Avoidance of Double Taxation, the assessment should be made according to the laws of each Dominion, and abatement was limited to the income actually charged in the Dominion where it was taxable.

5. Tribunal's Acceptance of Assessee's Contention:
The Tribunal accepted the assessee's contention that abatement of tax should be granted on the entire manufacturing business income of Rs. 3,26,368 earned in Pakistan. The Tribunal emphasized that abatement of tax should be granted on incomes taxed in both countries, and relief should be given on the taxed business income in Pakistan without setting it off against the agricultural loss.

6. Legal Provisions and Agreement for Avoidance of Double Taxation:
The relevant provisions of the Indian Income-tax Act, 1922, and the Agreement for Avoidance of Double Taxation were examined. Section 2(1) defines agricultural income, and Section 2(15) defines total income. Section 49D(3) provides relief for incomes accruing outside the taxable territories. The Agreement for Avoidance of Double Taxation, as notified, applies to taxes imposed by the Indian Income-tax Act, Excess Profits Tax Act, and Business Profits Tax Act.

7. Arguments by Department's Counsel:
The department's counsel argued that the total income must be computed under Indian law before determining the tax payable and that abatement arises only after completing the assessment under each Dominion's laws. The counsel contended that agricultural income in Pakistan should be considered under the head "Business" for abatement purposes.

8. Court's Rejection of Department's Arguments:
The court rejected the department's arguments, stating that agricultural income in Pakistan is not assessable under the Income-tax Act as adapted there and does not come within the scope of the Double Taxation Agreement. The court held that the assessee's agricultural loss should not be considered for abatement purposes.

Conclusion:
The court concluded that the assessee's agricultural income in Pakistan should not be taken into consideration for granting abatement under the Agreement for Avoidance of Double Taxation. The assessee's loss from agriculture in Pakistan should also be excluded. The Tribunal's decision to grant relief on the entire manufacturing business income of Rs. 3,26,368 earned in Pakistan was upheld. The court answered the question in the affirmative, in favor of the assessee, and awarded costs to the assessee.