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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 ..... ficate issued under section 20 of the Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to us. They are: "(1)Whether 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 supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (2) of section 16 shall be treated as a payment of income-tax...on behalf of the...shareholder..., and credit shall be given 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement with Pakistan or the United Kingdom for the avoidance of double taxation of income, profits and gains under this Act and under the corresponding law in force in Pakistan or the United Kingdom 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in column I of the Schedule to this agreement is in this case Item No. 8 in the Schedule : Source of income or nature of transaction from which income is derived. Percentage 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 actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quantum of the abatement when we come to article VI. Turning 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax payable in Pakistan would only be known if the total income of the assessee in Pakistan and the total tax payable by him has been ascertained. Otherwise, the formula 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 Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. The Tribunal took the view that the words "is not known" mean in this sub-article "which cannot be easily determined or are incapable of being known", while Mr. Palkhivala for the assessee before us has attempted to canvass a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not known". In the context of the provisions of article VI, sub-clause (b), which provides that time should be given for producing a certificate of assessment, one may well say that the normal mode of making an assessment known to the Income-tax Officer would be by production of such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the stage when tax has been paid. If the claim for tax has not been enforced then there is undoubtedly avoidance of double taxation because tax has not been borne and paid twice over in the two Dominions. Then Mr. Palkhivala bases an argument on the words "estimated abatement" which occur in article VI, sub-clause (b). He says that for the purpose 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are material for the purpose of determining what is the "excess" which earns abatement under article IV and not for any other purposes at all; and quite apart from this article IV in terms provides that each Dominion shall make assessments in the ordinary way under its own laws, which clearly shows that no bifurcation of income at the assessment stage was contemplated, but all that was contemplated 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. The remedy for the removal of such a hardship may possibly be in the administrative sphere; and indeed our attention has been drawn by Mr. Joshi to a Circular issued by the Central Board of Revenue (No. 37-NII-10D of 1955) dated the 6th of September, 1955, which in fact directs an Income-tax Officer that where the total income of an assessee in India is only from the source "dividends" and 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 cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot on the question that we have just discussed but on the question of relief in respect of income-tax deemed to have been paid by the shareholder, to which we have referred earlier in our judgment. Now, it is curious that in the Agreement itself, column 4 of the Schedule is nowhere referred to ; and it is difficult to see for what purpose the column was included in the Schedule and what particular effect should 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 proportio ..... 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