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TMI Blog1957 (9) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Income-tax Act read with rule 14 the company's income chargeable to tax in the taxable territory was 67 per cent. and in Pakistan 93.3 per cent. Applying this proportion to the total dividend of ₹ 8,000 the income chargeable in the taxable territory was ₹ 360 and the income chargeable in Pakistan was ₹ 7,640. The Income-tax Officer grossed up the amount of ₹ 360 only for the purpose of inclusion in the total income of the assessee ; and he included the amount of ₹ 7,640 without being grossed up. He also made an order under article VI sub-clause (b) of the Agreement for Avoidance of Double Taxation in India and Pakistan that the tax in respect of the income which is chargeable in Pakistan will be kept in abeyance for a period of one year ; and if the assessee produces a certificate of assessment in Pakistan within that period, the tax will be adjusted against the abatement, allowable under the agreement; but if he fails to do so, the tax kept in abeyance shall be recovered. Upon appeal, the Appellate Assistant Commissioner took the view that since tax on a company's income is paid at the maximum rate and the payment made by the company is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the dividend income of ₹ 7,640 out of a total income of ₹ 8,000 received from Sutlej Cotton Mills Ltd. was not liable to be included in the total income of the assessee at all or for rate purposes only in accordance with the provisions of the agreement contained in Notification No. 28 of 10th December, 1947, issued in accordance with the provisions of section 49AA of the Indian Income-tax Act? (2)Whether on the facts and in the circumstances of this case the entire dividend income of ₹ 8,000 received from Sutlej Cotton Mills Ltd., 93.3 per cent. of which was also liable to be taxed in Pakistan is liable to be included in the total income of the assessee after grossing up, in accordance with the provisions of section 16(2), and the assessee is entitled to get a credit for the income-tax deemed to have been paid on her behalf by the paying company? (3)Whether in view of the provisions of the agreement for avoidance of double taxation contained in Notification No. 28 dated 10th December, 1947, read with Section 49AA of the Indian Income-tax Act the assessee was entitled to the abatement of tax (both income-tax and super-tax) payable on the dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him therefore on the production of the certificate furnished under subsection (9) of section 20...., in the assessment, if any, made for the following year under this Act. Therefore, there is no difficulty in determining the extent of credit that the shareholder is entitled to which is exactly the amount by which the dividend income was increased for the purposes of grossing up and that is the total credit to which the shareholder is entitled. Section 49B in so far as it is relevant provides: Sub-section (1): Where any dividend has been paid, .to any of the persons specified in section 3 who is a shareholder of a company which is assessed to income-tax in the taxable territories or elsewhere, such person shall, if the dividend is included in his total income, be deemed in respect of such dividend himself to have paid income-tax (exclusive of super-tax) on an amount equal to the sum by which the dividend has been increased under sub-section (2) of section 16. That, therefore, is the extent of the credit to which she was entitled, but the Tribunal, having taken the view that the entire dividend had to be grossed up, also took the view that credit had to be given to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingdom and may, by notification in the official gazette, make such provision as may be necessary for implementing the agreement. This section, therefore, in terms authorised the Central Government to enter into an agreement with Pakistan or the United Kingdom, the object of which is to avoid double taxation. That is a stage anterior to the stage contemplated by section 49A where the object is to give relief against tax paid in two different places. Under section 49A, a notification regarding double taxation relief has been issued so far as the United Kingdom is concerned, and of course this notification keeps in mind the statutory requirement that payment of tax in both the places is an essential prerequisite to the granting of any relief against double taxation. Then, we turn to the notification by which the Agreement for Avoidance of Double Taxation in India and Pakistan was published. That agreement was entered into, as the preamble states, in exercise of the powers conferred by section 49AA of the Income-tax Act and corresponding sections of the Excess Profits Tax and the Business Profits Tax Acts, with which we are not concerned for our present purpose; and the relevant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage of income which each Dominion is entitled to charge under the agreement. Remarks. 1 2 3 8. Dividends By each Dominion in proportion to the profits of the company chargeable by each Dominion under this agreement (As in preceding column). Relief in respect of any excess income-tax deemed to be paid by the share-holder shall be allowed by each Dominion in proportion to the profit of the company chargeable by each under this agreement. It is these provisions in the Agreement for Avoidance of Double Taxation which we have got to interpret Now, in the first instance, it appears to us-and counsel at the Bar are also agreed-that the word their which we have underlined * in article IV is obviously a slip or an error and could in its context have only been either ; and it is on the basis of the word being either that we will deal with the meaning to be attached to article IV. Indeed if the word were their , it may make it somewhat more difficult than it actually is to interpret article IV. Now, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g next to article V, it deals with a slightly different case in which also there is a right to an abatement. That case is where any income is chargeable to tax in both the Dominions. Now, it must be realised that all categories of transactions are not enumerated in the Schedule, and, therefore, in respect of every source of income a percentage has not been laid down which is chargeable in either Dominion; and it may well be that under the income-tax laws of both the Dominions the entire income of a person or any portion of that income may attract tax in both the Dominions. To take a very simple case, an assessee may be a resident within the meaning of that expression in the Indian Income-tax Act in both the Dominions if he maintains or has maintained for him a dwelling-house in both the Dominions and in fact resides in the Dominion for howsoever short a time. In such a case his entire income may be liable to tax in both the Dominions. We may equally have a case when a portion of his income from a particular source or falling under a particular category may be liable to tax in both the Dominions; and it is this class of cases that attracts article V and the abatement is earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormula laid down by article VI cannot be worked out. It may be stated that the formula actually provides nothing more than that the tax payable on the income which has earned an abatement, shall be calculated on such income at the average rate of tax on the total income in either Dominion. Keeping this in mind, we next turn to article VI, sub-clause (b ); and it is here that the main difficulty of construction and the main dispute between the parties arises. As we have pointed out earlier, until the tax payable in Pakistan on the income that earns the abatement is known, the amount of abatement cannot be finally determined. There may be cases in which it is known and there may be cases in which it is not known. Where it is known, obviously the abatement that is allowable under article IV or article V can immediately be ascertained; but where it is not known, it was essential that there should be some machinery for securing the benefit of the abatement to the assessee subject to such conditions as parties to the Agreement may have agreed to. This is precisely what sub-clause (b) of article VI provides. The time when it comes into operation is the time of assessment in one Dominio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction which adopts an intermediate position, namely, that the words mean not capable of being determined by reasonable endeavour and without an elaborate enquiry. Taking first the view that appealed to the Tribunal, with respect to the members of the Tribunal, it appears to us that it is a wholly untenable view. In the first instance, the words is not known is merely a negative of is known and when one talks of anything being known, the reference naturally is to a pre-existing fact. You cannot know what does not exist. Therefore, if the tax payable on the total income in the other Dominion is to be known, it appears to us that there must have been a prior determination of such tax, and the same applies to the total income on which the tax is chargeable in the other Dominion. Secondly, if the view that appealed to the Tribunal was the correct view, it completely negatives the specific provisions of sub-clause (b) of article VI, because there can conceivably be no case in which the Income-tax Officer in India cannot determine the tax payable on the total income of the assessee in Pakistan provided he had the requisite authority under the Income-tax Act to obtain informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a certificate, and that is what the Income-tax Officer in this case apparently insisted upon ; but it appears to us that any other mode of proof allowed by law of what the tax payable on the total income in Pakistan was would suffice so long as there has been in fact an assessment in Pakistan. This interpretation of the words is not known has the merit of both simplicity and certainty ; but before we adopt this interpretation, we must of necessity consider the argument advanced by Mr. Palkhivala in support of the interpretation which he has canvassed before us. Now, in the first instance we must state that Mr. Palkhi-vala's interpretation, namely, that the words is not known mean that the tax payable on the total income in the other Dominion is not capable of being determined by reasonable endeavour and without an elaborate enquiry has inherent in it the vice that the income may never be assessed to tax in the other Dominion. This appears to us contrary to the entire scheme of the Agreement for Avoidance of Double Taxation, because as we have pointed out earlier, the very opening words of article IV contemplate that each Dominion shall make assessment under its laws. Mr. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of keeping a portion of the demand in abeyance, there is an obligation on the Income-tax Officer to estimate the abatement, because it is only that portion of the demand which equals the estimated abatement that is to be kept in abeyance. Undoubtedly the words used, namely, estimated abatement , make such an argument possible; but if one realises, as one must, that the abatement, that is actually allowable is incapable of being estimated until the tax payable in Pakistan in respect of the income that earns an abatement is known, it becomes clear that an estimate in the strict sense is not possible. But what is possible undoubtedly is that the tax payable in India on the income that earns the abatement either under article IV or article V worked out in the manner set out in article VI, sub-clause (a), is known to the Income-tax Officer. This for all purposes would be an adequate amount of estimated abatement for the purpose of keeping a portion of the demand in abeyance. If it happens ultimately to be lower than the tax payable on the income that attracts abatement in Pakistan, that will be the amount of the abatement. If it happens to be higher than the tax payable on the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... templated by the agreement was an abatement in respect of excess income. It was on the footing of this argument that a plea had been raised that the amount of ₹ 7,640 should not have been included in the total income of the assessee at all except for rate purposes and that forms the subject matter of question No. 1 in this reference. In our opinion, this argument of Mr. Palkhivala cannot be accepted. Then, Mr. Palkhivala points out that the view that Mr. Joshi has canvassed may deprive an assessee of a right of abatement altogether in certain cases. He says that owing to no fault of the assessee it may not be possible for him to produce a certificate of assessment within one year, in which case the abatement shall cease to be operative under article VI(b). That no doubt is true; but if the right to abatement is conditional upon the production of a certificate of assessment, then obviously the right will be lost if the certificate is not produced. If the Income-tax Officer is satisfied that due to no fault of the assessee the certificate cannot be produced within a period of one year, which is to be normally allowed under article VI(b), we have no doubt that in an appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is below the super-tax limit, the production of proof of assessment in Pakistan should be dispensed with. Then, Mr. Palkhivala also argues that article VI(b) is an exception to article IV and should be interpreted as such, and it should not be interpreted so as to constitute a condition precedent to the right of abatement conferred by article IV. We find no warrant in the language of the agreement for the submission that article VI(b) is an exception to article IV. Article IV undoubtedly confers the right to abatement. Article VI does not create an exception in respect of any income which has earned the right to abatement under article IV. What it does is, it provides machinery for giving effect to the right to abatement. Such machinery undoubtedly makes the production of a certificate of assessment a condition precedent to the obtaining of relief by way of abatement; but that is only in cases where at the time of assessment the tax payable on the total income in the other Dominion is not known. In our opinion, therefore, we cannot look upon article VI(b) as an exception to article IV. We can merely look upon it as a supplementary provision which deals with the machinery for giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be given to it. The Schedule appears to be incorporated in the provisions of the Agreement only by article IV and indeed on the top of the Schedule itself is mentioned See article IV ; but that article refers in terms to columns 1, 2 and 3 and not to 4 at all. Therefore, strictly speaking what is stated in column 4 does not appear to be incorporated in the operative provisions of the Agreement at all. But we will assume for our present purpose that the remarks which we have to interpret and which are to be found in column 4 of the Schedule against the entry dividends are a binding part of the Agreement. These remarks are: Relief in respect of any excess income-tax deemed to be paid by the shareholder shall be allowed by each Dominion in proportion to the profit of the company chargeable by each under this Agreement. Now, we must confess that we are quite unable to understand what is meant by excess income-tax in this particular context. Article IV talks of an excess , but that is not excess income-tax; and it is difficult to see what was meant to be conveyed by the draftsmen of the agreement by the expression excess income-tax . Neither counsel has been able to suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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