1. This is a reference under s. 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Bombay Bench 'D', Bombay, referring to us for our opinion the following questions :
'(1) Whether the ITO in India was competent to compute the assessee's income liable to tax in Pakistan and to restrict the rebate in respect of such income only ?
(2) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to interest on Rs. 23,08,215 u/s. 214(1) of the Income-tax Act, 1961, for the period April 1, 1964, to October 17, 1967, and to interest thereon u/s. 214(2) for the period October 18, 1967, to December 15, 1967 ?'
2. The first question has been referred to us at the instance of the assessee while the second question was at the instance of the Revenue.
3. We are concerned in this case with the assessment years 1963-64 and 1964-65. The assessee, which is a cement manufacturing company, had, during the relevant assessment years, two of its 16 cement factories in Pakistan, which were ultimately closed down and sold off in 1965. However, for the concerned assessment years the assessee's income from the said factories in Pakistan was required to be included in its assessment in India for computing its world income. The ITO computed such income of the assessee in Pakistan at Rs. 73,18,580 and estimated the income-tax at Rs. 34,33,227 as payable thereon. The ITO, in view of the provisions of art. VI(b) of the Agreement for Avoidance of Double Taxation between India and Pakistan, observed in his order :
'For collection of taxes, the tax on the above Pakistan income will be kept in abeyance for avoidance of double taxation between two countries for a period of one year, within which necessary claim papers and documents should be filed by the company so that D.T.A. relief could be worked out and allowed to it.'
4. Paragraph 1 of the notice of demand under s. 156 of the Act by the ITO stated :
'This is to give you notice that for the assessment year 1964-65, a sum of Rs. 2,46,89,251, details of which are given on the reverse, has been determined to be payable by you.'
5. The said notice also gave the calculation of tax as under :
Rs.'Gross demand 2,46,89,251.0018A tax paid 2,35,64,239.84-----------------Tax payable 11,25,011.16'-----------------
5. It also provided that the net amount payable will be kept in abeyance for one year.
6. The assessee by its letter dated October 25, 1967, objected to the said method of calculation adopted by the ITO in first deducting from the gross demand, the advance payment made by it and holding the balance of Rs. 11,25,011.16 in abeyance under the D.T.A. and contended that the tax of Rs. 34,33,227 attributable to the assessee's income in Pakistan as computed at Rs. 73,13,550 ought to have been first deducted from the gross demand of Rs. 2,46,89,251 raised by the ITO and from the balance which represented the tax payable in India a credit for the advance tax paid of Rs. 2,35,64,239.84 should have been allowed. The assessee, therefore, claimed that consequently the balance of Rs. 23,08,215.84 was refundable to the assessee-company on which it was entitled to interest under s. 214 of the Act from the date of payment of advance tax till payment of refund. The ITO by his letter dated October 30, 1967, rejected the said claim of the assessee both for refund and interest.
7. Against the said order of the ITO, the assessee appealed to the AAC. Before the AAC the assessee had raised the very same contention as regards the manner of calculation adopted by the ITO. According to the AAC under art. VI(b) of the said Agreement for Avoidance of Double Taxation, what was to be held in abeyance was not the tax attributable to Pakistan income, but the collection of a portion of the demand equal to the estimated abatement and, therefore, if after adjustment of the advance-tax against the demand raised on regular assessment, there was no demand, the question of keeping the collection of the portion of the demand in abeyance would not arise at all if the demand raised was less than the estimated abatement, only the collection of such demand was to be kept in abeyance in terms of the said art. VI(b). He further observed that under s. 219 of the I.T. Act and the proviso Act and the proviso thereto, the advance tax paid by an assessee was to be adjusted against the total demand raised on the regular assessment and not against a portion of such demand. According to the AAC's interpretation of the said art. VI(b) where, at the time of assessment of the assessee's income in India, the tax payable on the assessee's total income in Pakistan was not known, the ITO in India where the assessment had first taken place, shall make a demand on the assessee without allowing abatement, in this case the gross demand being Rs. 2,46,89,251, and, after giving credit for tax deducted at source, under s. 199 and/or advance tax paid under s. 219 of the Act, if there way any demand left and if such demand were less than the demand for estimated abatement, the collection of estimated demand was to be kept in abeyance, which in this case was Rs. 11,25,012. He, therefore, confirmed the order of the ITO.
8. Against the said order of the AAC an appeal was preferred to the Tribunal. Before the Tribunal the very same contentions were raised by the learned counsel for the assessee. The Tribunal accepted the contentions raised by the learned counsel for the assessee and set aside the order passed by the ITO as confirmed by the AAC. For doing so the following reasoning appears in the Tribunal's order :
'The combined reading of these two provision makes it clear that even in a case where the tax payable on the total income in the other Dominion is not known, the amount of tax which is actually collectable is the net amount of tax left after amount of estimated abatement is deducted. Articles IV entitled an assessee, covered by that provision, to an abatement. The intention and purpose of article VI(b) is not to deprive him of the right of abatement granted to him under article IV but is to require proof regarding the actual amount of abatement. It cannot be denied that even in a case covered by a articles VI(b) the Income amount of abatement. When the Income-tax Officer cannot collect the whole tax without deducting the estimated amount of abatement. When the Income-tax Officer cannot demand the whole tax without deducting such amount of abatement, he cannot retain an amount more than the tax as reduced by the estimated amount of abatement and cannot refuse the excess amount paid to him by way of advance tax.'
9. In this reference mainly the said finding of the Tribunal is sought to be challenged under question No. 2.
10. However, before dealing with the said question, the first question can be conveniently disposed of. The said question related ; to the jurisdiction of the ITO in India to compute the assessee's income liable to tax in Pakistan and to restrict the rebate in respect of such income. The learned counsel for the parties have, however, agreed before us that the said question is squarely covered by the decision of this court in the case of Associated Cement Co. Ltd. v. CIT : 127ITR560(Bom) , where it was held that the ITO in India was competent to determine the income from the sources in Pakistan for the purposes of Indian assessment. In that view of the matter, it would not be necessary to elaborately deal with the said question and the same will have to be answered in the affirmative and against the assessee.
11. Dealing with the second question, certain provisions of the I.T. Act, 1961, and the said Agreement for Avoidance of Double Taxation between Indian and Pakistan, be initially dealt with.
12. Section 214 of the I.T. Act, 1961, provides for payment of simple interest at 12% per annum on the amount by which the aggregate sum of any installments of advance tax paid during any financial year in which they are payable under ss. 207 to 213 exceeds the amount of the tax determined on regular assessment, from the 1st day of April next following the said financial year to the date of the regular assessment for the assessment year immediately following the said financial year. The interest that was claimable by the assessee, therefore, was on the excess of the advance tax over the tax determined on regular assessment.
13. In this case as the order of the ITO shows that on the total world income of the assessee including its income in Pakistan as determined by the ITO at Rs. 73,13,550, the gross demand for tax for the year 1964-65 was determined at Rs. 2,46,89,215, while the tax on Pakistan income was estimated at Rs. 34,33,227, and the advance tax paid by the assessee under s. 18A was Rs. 2,35,64,239.84. However, since the assessee's income in Pakistan was to be taken into consideration for the assessment in India of its world income, the provisions of the Agreement for Avoidance of Double Taxation between Indian and Pakistan were applicable in this case.
14. Articles IV, V and VI(a) and (b) of the said Agreement provided as follows :
'Articles 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 of the Schedule to the Agreement (hereinafter referred to as the Schedule), excess of the amount calculated according to the percentages 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 V. - Where any income accruing or arising without the territories of the Dominions is chargeable to tax in both the Dominions, each Dominion shall allow an abatement equal to one-half of the lower amount of tax payable in either Dominion on such doubly taxed income.
Article VI(a). - For the purposes of the abatement to be allowed under Articles 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.
(b) Where, at the time of assessment in one Dominion, the tax payable on the total income in the other Dominion is not known, the first Dominion 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 produce 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 ; of no such certificate is produced, the abatement shall cease to be operative and the outstanding demand shall be collected forthwith.'
15. Under the said arts. IV and V, in case of double taxation of income both in India and Pakistan, the assessee was entitled to abatement in the tax determined in India to the extent mentioned therein. Under the said article if, at the time of assessment of the assessee's income in India, the tax payable by the assessee on its total income in Pakistan was known, then at the time the assessment of its income in India was completed, the assessee had a right to demand abatement in respect of tax paid by him in Pakistan, before a determination of its tax on regular assessment in India and in such a case the tax determined on the assessment in India was to be such as arrived at after taking into consideration such abatement. In such a case even if the assessee had or had not paid any advance tax, the abatement to which the assessee was entitled, was to be adjusted against the gross demand, i.e., tax determined on regular assessment and not against the tax liability arrived at after first adjusting the advance tax, if any, against the tax determined on assessment.
16. The afore-quoted art. VI(b) appears to have been introduced to meet with a situation, where at the time of completion of the assessee's assessment in India, the tax payable by the assessee on its total income in Pakistan was not known and, therefore, the assessee was not in a position to claim abatement in tax determined in India as he could do under the said arts. IV and V.
17. In the case contemplated under the said art. VI(b), the ITO was required to estimate the abatement to which the assessee was entitled by computing tax payable on the assessee's income in Pakistan but not to allow actual abatement in the demand as was to be done under arts. IV and V. Instead, he was allowed to make a demand by holding in abeyance for one year or for such time as extended by the ITO the collection of the portion of the demand equal to the estimated abatement. The result, therefore, was that it was only on the tax payable by the assessee on the assessment of his income in Pakistan being known, on production by him of the certificate of assessment in Pakistan within the prescribed time, that the assessee's right to abatement in a manner provided under arts. IV and V, which was held in abeyance till the, was to be worked out. What was, therefore, held in abeyance under the said articles was a portion of the demand equal to the estimated abatement, in respect of which the assessee was entitled to claim abatement on production of the requisite certificate within the prescribed time. The assessee's said right of abatement, therefore, could not be worked out at a later date unless and until what was to be held in abeyance was the portion of the demand equal to the estimated abatement. The object of the said art. VI(b) appears to be to place the assessee on the same footing as he would in Pakistan being known at a date later than the completion of his assessment in India. Therefore, art. VI(b) cannot be construed in such a way as to deprive the assessee of the benefit given to him under arts. IV and V, merely because at the time of assessment of his income in India, tax payable by him on his total income in Pakistan was not known. In our view, on a proper reading of the said art. VI(b), it appears that what was held in abeyance was the immediate collection of the portion of the tax demand determined on regular assessment, which was to be equal to the estimated abatement. If the method adopted by the ITO and confirmed by the AAC, viz., the amount to be held against the gross demand, were to be accepted, then the ITO, in fact, would be collecting the demand without first holding in abeyance the estimated abatement and thereby retaining with himself an amount more than the tax as reduced by the estimated amount of abatement. By doing so the ITO in effect would be collecting from the assessee an amount in excess of the abatement which he had no power to do. In our view, therefore, on a proper reading of the said art. VI(b) the view taken by the AAC that under the said art. VI(b) what was held in abeyance was only the collection of the portion of the demand which would be the demand arrived at after adjusting the advance tax by the assessee against the gross demand, would be against the proper interpretation and the main object of the said provision, and the same cannot be accepted.
18. We would, therefore, agree with the reasoning and the view taken by the Tribunal that for the working of art. VI(b), the ITO in making a demand on the assessee ought to have first deducted from the gross demand of Rs. 2,46,89,251 the estimated abatement of Rs. 34,33,227 and thereafter against the balance of Rs. 2,12,56,024 adjusted the advance tax of Rs. 2,35,64,230.84. If that were done then the assessee would have been entitled to a refund of Rs. 23,08,215.87 being the excess.
19. If, therefore, the assessee were entitled to the said refund, then the next question was whether he was entitled to interest on the same under s. 214(1) and (2) of the Act. In this case the assessee had made the advance payment on April 1, 1964. The assessment was made on October 17, 1967, and the amount was actually refunded on December 15, 1969.
20. Section 214(1) of the Act provides for interest being paid on the refund from the date of payment of tax till the order of assessment. Under the said provision therefore, the assessee would be entitled to interest on the refund for the period from April 1, 1964, to October 17, 1967. To this the learned counsel for the Revenue had no serious objection. However, his objection was to the interest claimed by the assessee under s. 214(2) of the Act from October 18, 1967, i.e., dated of assessment to December 15, 1969, date of refund.
21. Section 214(2) of the said Act provides :
'On any portion of such amount which is refunded under this Chapter, interest shall be payable only up to the date on which the refund was made.'
22. The learned counsel for the assessee has for the purpose relied on two decisions, viz., of the High Court of Madras and Delhi, taking a view that under the provisions of s. 214(2), the assessee was entitled to claim interest from the date of assessment till refund was made.
23. The Madras High Court in its decision in the case of Rayon Traders Private Ltd. v. ITO reported in : 126ITR135(Mad) had held (headnote) :
'Section 214(1) would apply to cases where the refund is simultaneous with the regular assessment but if the refund is delayed, the assessee would be entitled to interest up to the date of refund under s. 214(2).
Whenever an assessee paid advance tax in excess of the tax found to be due, he would be entitled to interest under s. 214(2) read with s. 219 up to the date of refund if the refund is made or has to be made after the regular assessment.'
24. Similar view has been taken by the Delhi High Court in its decision in the case of National Agricultural Co-operative Marketing Federation of Indian Ltd. v. Union of India reported in : 130ITR928(Delhi) . There the court held (headnote) :
'After the introduction of sub-s. (2) in s. 214, whatever may be the interpretation that might be placed on the expression 'regular assessment' contained in s. 214, there is no escape from the conclusion that the assessee is entitled to a refund along with interest up to date of refund.'
25. According to us the said s. 214(2) was not happily worded, as although it provides the point of termination of the period for payment of interest, it does not provide for the point from which the same was to start nor does the chapter in which the said section appears contain any provision for refund. However, we propose to follow the view taken in the aforesaid decision as the same appears to us to be reasonable for if the assessee was entitled to refund, Government could not be justified in keeping the money without interest till the actual refund was made though it was liable to pay interest under s. 214(1) till the date of assessment.
26. In the result we would answer the questions as under.
Question No. 1 : In the affirmative and in favour of the Revenue.
Question No. 2 : In the affirmative and in favour of the assessee.
27. The Commissioner of Income-tax to pay the costs of the reference to the assessee.