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TMI Blog1986 (7) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... received from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub-section (1) of section 24 of the Indian Income-tax Act, 1922 - - - - - Dated:- 15-7-1986 - Judge(s) : R. S. PATHAK., SABYASACHI MUKHERJEE JUDGMENT The judgment of the court was delivered by R. S. PATHAK J.-These appeals by certificate granted by the Delhi High Court are directed against a common judgment of that High Court disposing of two income-tax references relating to the assessment years 1956-57 and 1957-58 on the question whether the assessee's dividend income from a Pakistan company was deductible against its business loss in India. The assessee is a public limited company carrying on the business of manufacturing and selling sugar. During the relevant period, it also held some shares in the Premier Sugar Mills Distillery Co. Ltd., Mardan, West Pakistan. The Pakistan company also carried on the business of manufacturing and selling sugar. In the previous year relevant to the assessment year 1956-57, the assessee earned a dividend income of Rs. 2,30,832 from its holdings in the Pakistan company. It sustained loss of Rs. 20,30,006 from the business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of capital gains against the total world loss for the year, learned counsel for the parties jointly state that it is not the subject-matter of these appeals. It is necessary to mention at the outset that the Dominion of India and the Dominion of Pakistan concluded an agreement for the Avoidance of Double Taxation of Income chargeable in the two Dominions in accordance with their respective laws, and in exercise of the powers conferred section 49AA of the Indian Income-tax Act, 1922, and the corresponding provisions of the Excess Profits Tax Act, 1940, and the Business Profits Tax Act, 1947, the Government of India directed by Notification No. 28 dated December 10, 1947, that the provisions of the agreement would be given effect to in the Dominion of India. As the scope and effect of the agreement is intimately involved in the resolution of the controversy between the parties, the material provisions may be set forth immediately: " Article IV: Each Dominion shall make assessment in the ordinary way under its own laws; and, where either Dominion under the operation of its laws charges any income from the sources or categories of transactions specified in column I o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the agreement derived (1) (2) (3) (4) 8. Dividends By each Dominion (As in preceding Relief in respect of in proportion to column) any excess income the profits of the tax deemed to be company charge- paid by the shareable by each holder shall be Dominion under allowed by each this agreement. Dominion in proportion to the profits of the company chargeable by each under this agreement. It is apparent that in the case of dividend income, the percentage of income which each Dominion is entitled to charge under the agreement is in proportion to the profits of the company chargeable by each Dominion under that agreement. The relevant entry in the Schedule indicates that as the factory is situated in Pakistan, the Dominion of Pakistan is entitled to charge 100 per cent. of the income and that the Dominion of India is not entitled to charge any percentage of the income. Therefore, the dividend income derived from the Pakistan company by the assessee is, by virtue of the agreement, liable to charge wholly by the Dominion of Pakistan, and the Dominion of India is not entitled to charge the dividend income at all. But this, it must be noted, is the position obtaining p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to the lower amount of tax payable on such excess in the Dominion as provided for in article VI. The agreement was considered by this court in Ramesh R. Saraiya v. CIT [1965] 55 ITR 699 (SC) and the position was summed up clearly as follows : " It seems to us that the opening sentence of article IV of the Agreement that each Dominion is entitled to make assessment in the ordinary way under its own laws clearly shows that each Dominion can make an assessment regardless of the Agreement. But a restriction is imposed on each Dominion and the restriction is not on the power of assessment but on the liberty to retain the tax assessed. Article IV directs each Dominion to allow abatement on the amount in excess of the amount mentioned in the Schedule. The scheme of the Schedule is to apportion income from various sources among the two Dominions. In the case of dividends, each Dominion is entitled to charge 'in proportion to the profits of the company chargeable by each Dominion under this agreement.' This refers us back to the other items. For instance, in respect of goods manufactured by the assessee partly in one Dominion and partly in the other, each Dominion is entitled to cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demand can be collected forthwith. Clause (a) of article VII makes absolutely clear that nothing in the Agreement can be considered as modifying or incorporating in any manner the provisions of the relevant tax laws in force in either Dominion. Therefore, having regard to what is expressly stated in article IV of the Agreement, and re-emphasised in clause (a) of article VII, there can be no escape from the conclusion that for the purposes of assessment under the Indian Income-tax Act, 1922, the income of the assessee must be determined in the ordinary way under the Indian law, and in no way can the Agreement be construed as modifying or superseding in any manner the provisions of the Indian law in that regard. The High Court has proceeded on the basis that for the purpose of giving abatement of tax in India, the dividend income from the Pakistan company can be excluded from the taxable income of the assessee. It has reasoned that by requiring the dividend profits accruing or arising in Pakistan to be set off against the business loss of the assessee in India, there is, in the result, a taxing of the dividend income from the Pakistan company. The High Court has fallen into the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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