1973 (3) TMI 41 - HC - Income Tax

Assessee was a contractor for the supply of hardware and other goods to the Government departments in Ceylon. For the assessment years 1952-53 to 1958-59, he was assessed in the status of individual and resident and ordinarily resident on his income comprising of his total income accruing or arising in Ceylon -Whether relief under agreement for avoidance of double taxation between India and Ceylon extends to Indian tax on entire income arising in Ceylon - It is clear from the foregoing discussion that each country is entitled to make an assessment in the ordinary way under its own laws. The latter portion of article III of the Ceylon Agreement imposes a restriction on each country and the restriction is not on the power of assessment but on the power to retain the tax assessed. A Schedule has been inserted only for the purpose of calculating the abatement to be allowed and not to limit the power of each country to assets what income that is liable to taxation under its laws - held that it cannot be claimed that the entire income accruing in Ceylon is not liable to be taxed in India

Summary

Issues Involved:
1. Interpretation of the Agreement for Avoidance of Double Taxation between India and Ceylon.
2. Mode of computation of abatement under the Agreement.
3. Whether the entire income accruing in Ceylon should be excluded from Indian assessment.
4. Determination of the amount of abatement due to the assessee.

Issue-wise Detailed Analysis:

1. Interpretation of the Agreement for Avoidance of Double Taxation between India and Ceylon:
The core issue revolves around the interpretation of the Ceylon Agreement, specifically Article III and the accompanying Schedule. The Agreement stipulates that "each country shall make assessment in the ordinary way under its own laws." This means that both India and Ceylon are entitled to assess the same income according to their respective tax laws. The Agreement does not restrict either country's power to assess but mandates an abatement to avoid double taxation.

2. Mode of Computation of Abatement under the Agreement:
Article III of the Agreement provides that if the tax payable on income accruing in Ceylon under Indian law exceeds the tax payable in Ceylon, an abatement equal to the lower amount of tax payable in either country should be granted. The Schedule specifies that for income not mentioned in other items, the country where the income actually accrues is entitled to tax 100% of that income. Therefore, the Indian authorities must allow an abatement equal to the Ceylon tax if it is lower than the Indian tax.

3. Whether the Entire Income Accruing in Ceylon Should Be Excluded from Indian Assessment:
The assessee contended that the entire income accruing in Ceylon should be excluded from Indian assessment, arguing that this is the true meaning of "avoidance of double taxation." However, the court rejected this contention, stating that Article III allows both countries to assess the income in the ordinary way under their laws. The Agreement does not mandate the exclusion of Ceylon income from Indian assessment but requires an abatement to mitigate double taxation.

4. Determination of the Amount of Abatement Due to the Assessee:
The court examined the illustrative case of the assessment year 1955-56. The Indian tax on the Ceylon income was Rs. 29,836, while the Ceylon tax was Rs. 19,578.07. According to the Agreement, the abatement should be equal to the lower amount, which is the Ceylon tax of Rs. 19,578.07. This interpretation aligns with previous judgments, including O.A.P. Andiappan v. Commissioner of Income-tax and Commissioner of Income-tax v. S. K. Srinivasan, which affirmed that each country can assess income in the ordinary way but must allow abatement for the lower tax amount.

Conclusion:
The court concluded that each country is entitled to make an assessment in the ordinary way under its own laws. The restriction imposed by Article III of the Ceylon Agreement is on the power to retain the tax assessed, not on the power of assessment itself. The Schedule is intended for calculating the abatement, not limiting the power to assess. Therefore, the question referred was answered in the affirmative, validating the Appellate Tribunal's order refusing abatement to the extent of the Indian tax on the Ceylon income. The respondent was entitled to costs, with counsel's fee set at Rs. 250.