1973 (10) TMI 4 - HC - Income Tax

The assessee had business loss in India and dividend income from Pakistan company, the dividend income was taxable 100 per cent. in Pakistan - Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the net dividend income of Rs. 2,27,472 received from a Pakistan company and the capital gains of Rs. 50,829 were not deductible in arriving at the total world loss under section 24(1) ?

Summary

Issues Involved:

1. Deductibility of net dividend income from a Pakistan company and capital gains in arriving at the total world loss under section 24(1) of the Indian Income-tax Act, 1922.
2. Whether the dividend income from the Pakistan company can be taxed separately and abatement allowed under the Agreement for Avoidance of Double Taxation between India and Pakistan.
3. Whether capital gains should be deducted from business loss or assessed separately.
4. Applicability of section 154 of the Income-tax Act, 1961 for rectification of carried-forward losses.

Detailed Analysis:

1. Deductibility of Net Dividend Income and Capital Gains:

In both Income-tax Reference No. 46 of 1970 and No. 52 of 1970, the core issue was whether the net dividend income and capital gains should be deducted from the business loss to arrive at the total world loss under section 24(1). The assessee-company contended that its dividend income from the Pakistan company was not liable to tax in India as it was wholly taxed in Pakistan, and hence should not be deducted from its business loss in India. Similarly, the capital gains were argued to be assessable at a lower rate and should not be deducted from the business loss. The Income-tax Officer, however, deducted both the dividend income and capital gains from the business loss.

The court held that capital gains are assessable income, albeit at a different rate, and thus should be deducted from the business loss under section 24(1). The decision of the Madras High Court in Commissioner of Income-tax v. S.R.M.S. Narayanan Chettiar supported this view. Consequently, the court answered in favor of the revenue regarding the deduction of capital gains.

2. Taxation and Abatement of Dividend Income:

The assessee-company argued that the dividend income from the Pakistan company should not be set off against the business loss in India due to the Agreement for Avoidance of Double Taxation between India and Pakistan. The contention was that this income was not assessable in India and setting it off against the business loss would result in double taxation, violating section 49A of the Act and the Agreement.

The revenue's preliminary objection was that these contentions were not raised before the Tribunal. However, the court found sufficient material indicating that these contentions were indeed raised before the Tribunal, thus allowing the assessee to raise them before the court.

The court examined sections 24(1) and 24(2) of the Act and the corresponding provisions in the Act of 1961 (sections 70, 71, and 72). It concluded that losses can only be set off against assessable income, and since the dividend income from the Pakistan company was not assessable in India, the business loss could not be set off against this income. The court cited several precedents, including Seth Jamnadas Daga v. Commissioner of Income-tax and Indore Malwa United Mills Ltd. v. Commissioner of Income-tax, to support this view.

3. Assessment of Capital Gains:

The court addressed the assessee's claim regarding the assessment of capital gains separately. The assessee's argument was not pressed seriously before the court. The court reiterated that capital gains are assessable income and should be deducted from the business loss to determine the net loss liable to be carried forward. This was supported by the Madras High Court decision in Commissioner of Income-tax v. S.R.M.S. Narayanan Chettiar.

4. Rectification under Section 154:

The Tribunal declined to refer the question regarding the rectification order under section 154 of the Income-tax Act, 1961, as it was concluded by the Supreme Court decision in Maharana Mills (Private) Ltd. v. Income-tax Officer. The court did not find it necessary to direct the Tribunal to refer this question or submit any further statement of the case.

Conclusion:

The court concluded that the Income-tax Officer was not right in deducting the dividend income from the Pakistan company from the business loss in India, as this would indirectly subject the dividend income to tax in India, contrary to the Agreement for Avoidance of Double Taxation. The court answered the question relating to the Pakistan dividend income in favor of the assessee and against the department. However, the court upheld the deduction of capital gains from the business loss, answering this part in favor of the revenue. The petitions regarding the rectification under section 154 were dismissed. The court also suggested revising the Agreement for Avoidance of Double Taxation to express its terms more clearly.