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TMI Blog1973 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... fter referred to as the "Act of 1961") : " 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. 2,30,832 received from a Pakistan company and the capital gains of Rs. 5,120 were not deductible in arriving at the total world loss under section 24(1) ?" In Income-tax Reference No. 52 of 1970, which relates to the assessment year 1957-58, the following question was referred by the Tribunal under section 256(1) of the Act of 1961 : " 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) ? The Mahalaxmi Sugar Mills Co. Ltd., which will be hereinafter referred to as the assessee-company, is a public limited company carrying on business of manufacturing and sale of sugar. The assessee-company also held some shares in the Premier Sugar Mills Distillery Co. Ltd., Mardan, West Pakistan, which will be hereinafter referred to as the Pakistan company. The said Pakistan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee-company filed applications before the Tribunal under section 256(1) of the Act of 1961 requiring the Tribunal to refer certain questions of law said to arise out of the orders of the Tribunal in respect of the two assessment years : For the assessment year 1956-57, the assessee-company required the Tribunal to refer the following four questions : " 1. Whether, on the facts and in the circumstances of the case, in determining the loss to be carried forward for being set off against future profits, the dividend income of Rs. 2,30,832 in respect of shares held by the assessee in the capital of the Premier Sugar Mills Distillery Co. Ltd., Mardan (West Pakistan), of which the profits are wholly taxable in Pakistan and which dividends have been taxed by the Income-tax Officer, Lahore (West Pakistan), at rates higher than the rate applicable in India have been rightly deducted from the business loss of the assessee-company in terms of the provisions of the Indian Income-tax Act, 1922, read with the statutory Agreement for Avoidance of Double Taxation made between India and Pakistan ? 2. Whether the net dividend of Rs. 2,30,832 earned in respect of shares held by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of Double Taxation made between India and Pakistan ? 2. Whether the net dividend of Rs. 2,27,472 earned in respect of shares held by the assessee-company in the capital of the Premier Sugar Mills Distillery Co. Ltd., Mardan (West Pakistan), can be taxed separately in terms of section 3 of the Indian Income-tax Act, 1922, in the hands of the assessee-company and abatement as provided in the Agreement for Avoidance of Double Taxation made between India and Pakistan be allowed to the assessee-company ? 3. Whether, on the facts and in the circumstances of the case, in determining the loss to be carried forward for being set off against future profits the capital gains of Rs.50,829 have been rightly deducted from the business loss of the assessee-company and the same could not be assessed separately in terms of section 3 of the Indian Income-tax Act, 1922, at rates and in the manner prescribed in section 17(7) of the said Act ? " Instead of referring the above three questions as suggested by the assessee-company, the Tribunal only referred one question which has already been set out above as, in its opinion, the real dispute between the parties was brought out precisely and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the capital gains from the business loss of the assessee-company is concerned. The claim of the assessee-company which has been vehemently pressed before us by Shri Desai and equally vehemently opposed by Mr. Dhebar, learned counsel for the revenue, is in respect of the dividend income received by the assessee-company from the Pakistan-company. The contentions advanced by Shri Desai in respect of this claim are as follows : Under section 24(1) of the Act, a business loss can be set off only against assessable income and it cannot be set off against an income which is not assessable under the Act by virtue of section 49A of the Act and the Agreement for Avoidance of Double Taxation between India and Pakistan which was entered into by the Central Government in exercise of its powers conferred by section 49 A of the Act. The dividend income from the Pakistan-company was not assessable to tax under the Act as it was wholly assessable by Pakistan. The dividend income from the Pakistan company was, therefore not an assessable income under the Act and the assessee's business loss cannot be set off against such income. By deducting the dividend income from the business loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dividend income of Rs. 2,27,472, but he should have considered only the net proceeds of such dividends after deduction of tax, i.e., Rs. 1,44,755 (net dividends--Rs. 2,27,472 and super tax levied and paid in Pakistan--Rs. 82,717). (b) It is next contended that this Pakistan income should not go to reduce the Indian business loss for purposes of determining the amount of business loss to be carried forward under section 24(2). " The Appellate Assistant Commissioner has further stated these contentions as follows : " In view of the fact that the appellant has paid tax in Pakistan in respect of the Pakistan dividend income and in view of the Agreement for the Avoidance of Double Taxation in India and Pakistan, the appellant would not be called upon to pay any tax in respect of the same dividend income in India. " Rejecting this contention, the Appellate Assistant Commissioner observed as follows : " In the appellant's case, the capital gain as well as the Pakistan net dividends are not items which are at all exempt from tax. In fact, they are actually included in the total income of the appellant, and are liable to tax, though at rates below the full Indian rates, in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of tax leviable in India is equally untenable. The assessment order of the Income-tax Officer, Lahore, which is annexed to the statement of the case as annexure "A" not only proves that the entire Pakistan income had been taxed in Pakistan but also that it was taxed at a higher rate than the one applicable in India. If there was any dispute on either of these two points, the Income-tax Officer would have been the first person to raise such a dispute and disallowed the assessee's claim on the ground that the Pakistan income had not been wholly taxed in Pakistan or that the rate of tax in Pakistan was lower than that in India. Even if the Income-tax Officer had overlooked these points, the Appellate Assistant Commissioner would certainly have noticed them and would have referred to them while disallowing the assessee's claim. Therefore, we find sufficient material on record to come to the conclusion that the contentions which have now been raised on behalf of the assessee-company had been raised before the Tribunal also and that, therefore, the assessee is entitled to raise these contentions before us. The learned counsel for the revenue has next contended that even if it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliminary objections raised by the learned counsel for the revenue against the contentions urged on behalf of the assessee-company have to be overruled and we have to proceed to consider these contentions on merit. The relevant portion of section 24 of the Act under which the Income-tax Officer has to compute the loss or under which an assessee is entitled to claim a set-off or carry-forward of his losses is under : " 24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year ....... (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year. The corresponding provisions in the Act of 1961 are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst his assessable income of that year. On a parity of reasoning, an assessee is not entitled to set off his loss from a source the income from which is not assessable to tax against his profits which are assessable to tax. In Seth Jamnadas Daga v. Commissioner of Income-tax the assessee was a efpartner in two registered firms and also an unregistered firm. During the relevant period, the registered firms incurred losses and the unregistered firm showed profits which was taxed on the firm in accordance with section 23(5)(b) of the Act. The share of the assessee in the profit of the unregistered firm amounted to Rs. 26,110 and his share of the losses in the registered firms amounted to Rs. 13,167. The assessee contended-- (i) that his share of the profit in the unregistered firm should be ignored entirely in ascertaining the total income ; and (ii) that he was entitled to carry forward the loss of Rs. 13,167 to the succeeding year under section 24(2) of the Act. The Supreme Court while negativing the first contention of the assessee, however, upheld the second contention and held that the loss sustained by the assessee in the registered firms was not liable to be set off a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax In that case, the assessee-company carried on the business of manufacture and sale of textile goods. Its mills were situated in Indore, an Indian State, and sales were made in various places in India within and outside the taxable territories. Up to the assessment year 1949-50 the assessee was treated as a non-resident. In the next two assessment years, Indore became part of the taxable territories, and the assessee claimed in the assessment proceedings for 1950-51 that it was entitled to carry forward and set off the loss of the assessment year 1948-49 against the assessee's business income for the assessment years 1950-51 and 1951-52. The claim was resisted by the income-tax department on the ground that section 24 was applicable only to such loss of profits and gains which if they had been profits and gains would have been assessable in British India or the taxable territories and that, in the case of non-residents, income accruing or arising without British India or without the taxable territories not being liable to be assessed, the loss of such profits and gains could not be set off under section 24(1) and (2) of the Income-tax Act. The High Court u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration is whether the dividend income from the Pakistan company is income which is assessable in India. Section 3 of the Act, which is the charging section, provides for the charging of tax on the total income of an individual company, etc., in accordance with and subject to the provisions of the Act and the total income is defined in section 2(15) of the Act as meaning "total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act". The relevant portion of section 4(1) of the Act provides that : Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-- (a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or (b) if such person is resident in the taxable territories during such year,- (i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or (ii) accrue or arise to him without the taxable territories during such year ......." It would thus be seen that the total income of a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ominion shall make a demand without allowing the abatement, but shall hold in abeyance for a period of one year (or such longer period as may be allowed by the Income-tax Officer in his discretion) the collection of a portion of the demand equal to the estimated abatement. If the assessee produces a certificate of assessment in the other Dominion within the period of one year or any longer period allowed by the Income-tax Officer, the uncollected portion of the demand will be adjusted against the abatement allowable under this agreement; if no such certificate is produced, the abatement shall cease, to be operative and the outstanding demand shall be collected forthwith. Article VII : (a) Nothing in this Agreement shall be construed as modifying or interpreting in any manner the provisions of relevant taxation laws in force in either Dominion. (b) If any question arises as to whether any income falls within any one of the items specified in the Schedule and if so under which item, the question shall be decided without any reference to the treatment of such income in the assessment made by the other Dominion. " The Schedule referred to in Article IV to the Agreement consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harge on 50% of the profits. But the Schedule does not limit the power of each Dominion to assess in the normal way all the income that is liable to taxation under its laws. The Schedule has been inserted only for the Purpose of calculating the abatement to be allowed. Article VI also leads to the same conclusion. For if no assessment could be made on the amount on which abatement is to be allowed, there could be no question of making a demand without allowing the abatement and holding in abeyance for a period the collection of a portion of the demand equal to the estimated abatement. " In Seth Satya Paul Virmani v. Commissioner of Income-tax the Punjab High Court interpreted the Agreement in the following manner : " Now, under this Agreement the object of which, as I have said, is avoidance of double taxation, each Dominion was authorised to make the assessment in the ordinary way under its own laws and where either Dominion under this agreement charges any income from any source in excess of the amount calculated according to the percentage given in columns 2 and 3, that Dominion is to allow abatement equal to the lower tax payable on such excess in their Dominion and accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the partners of the firm under section 24(2) of the Act. The Nagpur High Court upheld the contention of the assessee and observed as follows : " Under section 16(1) of the Act, the exempted sunis are to be included only the purpose of computing the total income of the assessee. The question of set-off under section 24(1) arises only if there is taxable income and not otherwise. That section entitles the assessee and not the department to claim a set-off of loss against profits to determine the marginal taxable income. It does not, therefore, entitle the Income-tax Officer to minimise the loss by setting off the profits. It may be noted at this stage that this income which accrued in the Indian States was exempt from tax under the law in force on the relevant date. In Commissioner of Income-tax v. Trilokchand Kalyanmal, which is the authority relied upon by the Tribunal for disallowing the assessee's claim, the assessee derived income from various sources in Part A and Part B States and the income was taxable under the Indian Income-tax Act read with the Part B States (Taxation Concessions) Order, 1950. Under paragraph 12 of the said Order, it was provided : " Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. This was not a provision granting exemption from tax. By paragraph 12, the dividend income of the type referred to therein was made subject to tax. But partial relief in respect of the tax payable on such dividend income was given by saying that no income-tax shall be payable by the assessee on a certain proportion of the dividend. The object of the paragraph was obviously to give concession in the matter of the amount of tax payable on such dividends included in the total income of the assessee and not to exempt it from total tax. In the view of the High Court, if there was no net income or gain on which income-tax had to be paid and thus no question of payment of income-tax, there could be no question of the assessee being given any relief in the payment of income-tax as provided by paragraph 12 on the dividend income. The High Court then proceeded to consider the scope of section 24(1) of the Act and observed as follows : " Section 24(1) does not relate to set-off of losses against profits under the same head. It applies in terms only to the set-off of losses under one head against income under any other head mentioned in section 6 of the Act ...... The question of sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered firm was Rs. 2,414 and his share in the profits of an unregistered firm was Rs. 11,860. He also derived income from other sources amounting to Rs. 16,729. The Income-tax Officer computed the net business loss at Rs. 37,662 and after set-off against his income from other sources determined the amount of loss to be carried forward at Rs. 20,933. The assessee contended that his loss from the registered firm could not be set off against the profits from the unregistered firm. This contention was rejected by the Income-tax Officer as also by the Appellate Assistant Commissioner and the Tribunal. Following the decision of the Supreme Court in Seth Jamnadas Daga v. Commissioner of Income-tax referred to above, the Bombay High Court held as follows: " It has been held by the Supreme Court that the assessee would be entitled to carry forward his share of the loss in the registered firm to the succeeding year under section 24(2). It is clear from this decision that the said loss is not liable to be diminished by the amount of the profit from the unregistered firm which the assessee might have received in the said year. The profit from the unregistered firm, which is exempt from tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in which a part or whole of any income is not chargeable, should include such income as is not chargeable by it for purposes of rate only. But when the total income or the rate of tax in the other Dominion is not known, the Income-tax Officer should make the full demand without allowing any abatement, but the collection of an amount equal to the estimated abatement should be held in abeyance for one year or such longer period as the Income-tax Officer may in his discretion determine in the circumstances of the case. If the assessee does not produce a certificate of assessment in the other Dominion within that period, the whole demand should be collected." The rest of the circular is not relevant. Coming to the facts of the present case, we find that the entire dividend income from the Pakistan company had accrued in Pakistan and that, according to the Schedule to the Agreement, the whole of this income was liable to be taxed in Pakistan and no part of it was liable to be taxed in India. We further find that as a matter of fact the whole of the dividend income was taxed in Pakistan at a rate which was higher than the rate applicable in India for the assessment of such income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany would have been assessed. In other words, the dividend income from the Pakistan company to the extent of Rs. 2 lakhs would have been assessed without any abatement being allowed in respect thereof, thereby subjecting it to double taxation both in Pakistan and India. The arugment advanced on behalf of the revenue is that this is not taxing the Pakistani dividend income ; it is merely absorbing the Indian loss in the dividend income from Pakistan. This argument is misleading and not quite correct. For, in reality, it is absorbing that Indian loss which, if not so absorbed, would have been carried forward to the following assessment year and set off against the profits and gains, if any, assessable for that assessment year. By adjusting the Indian loss against the Pakistan dividend income, the Indian income of the following year, if equal to or less than the loss of the current year, has been exposed to taxation. In outward appearance, it is the Indian income of the following year, which would be taxed. But, in substance, it would be taxing the Pakistan dividend income, which has prevented the Indian loss to be carried forward. This is clearly contrary to the terms of the Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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