1. This is a reference by the Income-tax Tribunal under s. 256(1) of the I.T. Act, 1961. The assessee is a cement manufacturing company and was resident in India in the relevant accounting periods. Out of its 16 cement factories, two factories we re located in Pakistan. The income accruing or arising to the assessee from its two factories in Pakistan was included in the total income determined as per the Indian assessment as well as the Pakistan assessment for the assessment years 1960-61, 1961-62 and 1962-63. The relevant accounting periods were the years ending on July 31, 1959, July 31, 1960, and July 31, 1961, respectively. The figures of income from the said two factories determined under the Indian laws and under the Pakistan laws for all the said three years were different.
2. Under the Double Taxation Avoidance Agreement between India and Pakistan (hereinafter referred to as 'DTAA') under s. 49A of the Indian I.T. Act, 1922, corresponding to s. 90 of the I.T. Act, 1961, an abatement in tax is to be allowed in terms of arts. IV and VI of the said agreement on the excess calculated on a certain basis. According to item No. 7(b) of the Schedule to the DTAA, in regard to the income derived by the assessee from the said two factories in Pakistan, the following was the position and the modus operandi of relief :
(1) Pakistan was entitled to charge to tax 100% of the said income.
(2) No portion of the said income was chargeable to tax in India.
(3) Hence, under the operation of the Indian laws, India in the first instance would charge to tax income from the above source the whole of which was in excess.
(4) India has thereupon to allow abatement under art. IV, equal to the lower amount of tax payable on such 'excess' in India or Pakistan as provided in art. IV.
(5) As per art. VI, the tax payable in India or Pakistan on the 'excess' shall be such proportion of the tax payable in each country as the 'excess' bears to the total income of the assessee in each country.
3. The ITO as well as the AAC considered the 'excess' for the purpose of abatement in tax in India, in terms of art. IV, at the figure of the Pakistan income as determined and included in the Indian assessment. The contention of the assessee was that the 'excess' with reference to which the abatement in tax in India was to be allowed was the figure of the Pakistan income assessed in Pakistan as per the Pakistan laws. There was no dispute that the 'excess' had to be determined with reference to the Pakistan income derived from the said two factories. The dispute was whether the Pakistan income should be taken as determined and included in the Indian assessment or it should be taken as determined and included in Pakistan as per the Pakistan laws.
4. The difference in the Pakistan income as determined in India according to the Indian laws and that determined in Pakistan according to the Pakistan laws for the relevant assessment years were as follows :
------------------------------------------------------------------Pakistan IncomeAssessment as determined and as assessed in Differenceyears included in Pakistan asIndian assessment per Pakistanlaws--------------------------------------------------------------------(1) (2) (3) (4)--------------------------------------------------------------------1960-61 45,90,348 50,91,398 5,01,0501961-62 47,51,448 52,40,745 4,89,2971962-63 44,34,605 47,05264 2,70,659--------------------------------------------------------------------
5. Both the ITO and the AAC having negatived the assessee's contention and having held that the said income arising in Pakistan was to be determined according to the Indian laws, the assessee went in appeal before the Tribunal. Before the Tribunal, the assessee raised the same contentions. The Tribunal negatived the said contentions in respect of all the three years by its consolidated order dated February 3, 1970. Thereafter, the assessee applied for a reference of the question to this court under s. 265(1) of the I.T. Act, 1961, and hence the Tribunal has referred the following two questions for the opinion of this court :
'1. Whether, on the facts and in the circumstances of the case, for the purposes of abatement in tax to be allowed in India with reference to the 'excess' in terms of article VI(a) of the Double Taxation Avoidance Agreement between India and Pakistan, the Pakistan income derived from the factories in Pakistan is to be taken as determined and included in the Indian assessment under the Indian laws or assessed in Pakistan as per the Pakistan laws for the assessment years 1960-61, 1961-62 and 1962-63 ?
2. Whether the Income-tax Officer in India is competent to determine the income from sources in Pakistan for purposes of the Indian assessment ?'
6. The short question that falls for our consideration is whether the basis for determining the 'excess' adopted by the Tribunal under art. IV of the said agreement, viz., DTAA, is correct. It may be mentioned here that actually the further question with regard to the working out of the figure of abatement or rebate under art. VI of the said agreement does not fall for consideration in the present case.
7. Shri Kolah, the learned counsel for the assessee, relied upon two decisions, one of this court and the other of the Supreme Court in support of his contention that for calculating 'excess' under the said art. IV, what has to be taken into consideration is the income from the said two factories as determined by the Pakistan authorities according to the Pakistan laws and not the said income as determined by the Indian authorities according to the Indian laws. The decision of this court on which he relied is CIT v. Shanti K. Maheshwari : 33ITR313(Bom) . This decision has referred to the history of the said agreement between India and Pakistan and has also stated the purpose for which the said agreement was entered into between India and Pakistan. It has been pointed out in this decision that it was actually entered into under the provisions of s. 49AA of the old Act which was subsequently repealed. That section had, in terms authorised the Central Govt. to enter into an agreement such as the present one, the object of which was to avoid double taxation. Arts. IV and VI(a) of the said agreement which are relevant for our purpose and which have been reproduced in the said decision are as follows :
'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 source or categories of transactions specified in column 1 of the Schedule to this Agreement (hereinafter referred to as the Schedule) in excess of the amount calculated according to the percentage specified in columns 2 and 3 thereof, that Dominion shall allow an abatement equal to the lower amount of tax payable on such excess in their Dominion as provided for in Article VI.'
'Article VI. - (a) For the purposes of the abatement to be allowed under article IV or V, the tax payable in each Dominion on the excess or the doubly taxed income, as the case may be, shall be such proportion of the tax payable in each Dominion as the excess or the doubly taxed income bears to the total income of the assessee in each Dominion.'
8. The decision then proceeds to state the manner in which the modus operandi incorporated in both the said articles has to be worked out. It has been stated therein that the first thing that has to be done under the said art. IV is that there has to be a separate assessment by each Dominion under its own laws and such separtate assessments are the very basis of the abatement that has to be allowed under the said article. The next thing that has to be done under the said article is to look at the source or category of transactions specified in col. 1 of the Schedule to the said agreement, which has been brought to tax in the taxable territories. If there is such a source, one has to look to the Schedule to find out what was the percentage of income from this source which India was entitled to charge under the agreement, and if the income from this source which has been subjected to tax exceeds such percentage, then there is an 'excess' abatement has to be allowed. The quantum of the abatement is then expressed in the concluding words of the said article and those words are 'equal to the lower amount of tax payable on such excess in their Dominion as provided for in article VI'. As has been stated earlier we are really not concerned in the present case with the calculation of the abatement or rebate as per art. VI. It is, therefore, not necessary to discuss the implications of art. VI(a) which has been reproduced hereinabove. There is nothing in this judgment to support the contention advanced on behalf of the assessee that for the purpose of calculation of the 'excess' under art. IV, it is the Pakistan income as determined by the Pakistan authorities according to the Pakistan laws which has to be taken into consideration. In fact, the very opening words of the said art. IV show, as he has been held in the above case, that the first step is to make assessment in each Dominion according to its own laws ignoring the said agreement. Unless this is done it will not be possible to find out 'excess' as mentioned in cols. 2 and 3 of the Schedule to the said agreement for the income so calculated according to the two laws may or may not be the same. As has been rightly held by the Tribunal this decision does not support the assessee's contention that the income to be calculated for the purpose of determining the said 'excess' is the income as determined by the Pakistan authorities according to the Pakistan laws.
9. The same position has been reiterated by the Supreme Court in Ramesh R. Saraiya v. CIT : 55ITR699(SC) , which is the other decision relied upon by Shri Kolah in support of his contention. This was a case of dividend income received by the assessee relating to the profits of the company which accrued in Pakistan and which had formed part of the assessee's total income of the previous year within the meaning of s. 2(15) of the Indian I.T. Act, 1922. The court there held that where dividend is received by a share holder of a company to which profits accrue both in India and in Pakistan, the I.T. authorities in India are entitled to make assessment in the ordinary way under the Indian laws on the entire dividend without apportioning it as between parts referable to India or Pakistan. The said art IV of the DTAA clearly shows that each Dominion can make an assessment in the ordinary way regardless of the agreement. The restriction which is imposed on each Dominion under such agreement is not on the power of assessment but on the liberty to retain the tax assessed. Nor does the Schedule to the agreement 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 appended only for the purposes of calculating the abatement to be allowed by each Dominion. The court has further held that the scheme of the Schedule to the said agreement is to aopportion 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 '. For, if no assessment could be made on the amount on which abatement is to 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. This decision has in terms referred to the aforesaid decision of this court, and in this decision also we do not find anything to suggest that while calculating 'excess' under the said art. IV, it is the Pakistan income determined under the Pakistan laws which has to be taken into consideration and not the said income as determined according to the Indian laws. We are, therefore, unable to understand the reliance placed on this authority by Shri Kolah to support his contention to the contrary.
10. In addition to the said two authorities, there is the decision of the Calcutta High Court in ITO v. State Bank of India : 69ITR833(Cal) which is relied upon by the Tribunal and which, as conceded by Shri Kolah, is against the proposition which he has canvassed. This decision has referred to the aforesaid decision of this court and of the Supreme Court and deriving support from the said two authorities has in clear terms stated that where the Pakistan income as assessed in Pakistan is different from the Pakistan income as assessed in India, it is the latter which must be taken into consideration in India for the purposes of abatement. According to this decision, the tax payable for the purposes of abatement laid down under art. IV is the proportion of the tax payable in each Dominion as the excess bears to the total income of the assessee in each Dominion. The said High Court thereafter considered the situation arising out of the fact of two figures of income in the two Dominions according to their respective laws to be taken into consideration for determining the 'excess' and has stated that if two figures are taken, naturally the result would be different and there cannot be different standards of abatement. The court then observed (pp.840,841 of 69 ITR) :
'In calculating the proportion which the excess bears to the total income, if we take into account the Pakistan income as calculated in India, in calculating the excess as also the total income, and yet give abatement on the footing of the Pakistan income as calculated in Pakistan, then the result cannot be accurate and cannot be properly compared with the 'tax payable' in Pakistan, because that must necessarily be governed by the Pakistan figures. The two figures of income as assessed in India and Pakistan might have tallied immediately at the time of separation but this may not continue to be so, particularly as the law for deductions, etc., in Pakistan may not continue to be the same as in India. Therefore, what has to be done is to calculate one or the other figure for arriving at the amount of abatement that has to be allowed. If the excess is calculated on the Pakistan income as assessed in India, then abatement must be allowed upon the ratio that it bears to the total income assessed on the same footing. If, however, the Pakistan figure is taken into account, then abatement is to be allowed upon the entire calculation being based on that figure. It is only when we come to the comparison that we can and must consult the Pakistan figure to calculate the tax payable on the excess in Pakistan, and then take the lower of the two figures. This exigency, namely, that the Pakistan income as calculated in India and as calculated in Pakistan may be different income as calculated in India and as calculated in Pakistan may be different, was probably not realised when the agreement was arrived at, and the time might have come to re-examine it in a new light. But, until that is done,... the pakistan income as assessed in Pakistan cannot be used for purposes of calculating the abatement...'
11. With respect, we agree with the aforesaid observations made in the said decision, which support the case of the revenue in our present case and negative the case of the assessee, as has been rightly held by the Tribunal.
12. The result, therefore, is that the Tribunal's finding that in calculating the 'excess' in the present case under art. IV of the D TAA, it is the income arising from the said two factories in Pakistan as calculated in India according to the Indian laws which has to be taken into consideration is correct and stands.
13. Our answer, therefore, to the two questions referred to us is as follows :
Question No. 1 :- That for the purposes of abatement in tax to be allowed in India with reference to the 'excess' in terms of the said art. IV of the DTAA, the income derived from the factories in Pakistan as determined and included in the Indian assessment under the Indian laws is to be taken into consideration and not such income as determined in Pakistan as per the Pakistan laws, for the assessment years 1960-61, 1961-62 and 1962-63.
Question No. 2 is answered in the affirmative and against the assessee.
14. The assessee to pay the costs of the reference.