1. This appeal has been filed by the department against the order dated 21-4-1982 of the AAC. The assessee is an individual. His status is resident and ordinarily resident. The assessment year with which we are concerned is 1976-77. The relevant previous year ended on 31-3-1977.
2. The only ground in this appeal states that the ACC erred in holding that the salary income earned by the assessee in France could not even be included for rate purposes in his total income computed under the Income-tax Act. 1961 ('the Act').
3. There is an agreement dated 26-3-1969 [See Taxmann"s Direct Taxes Circulars, Vol. 1, pp. 460-71] between India and France for the Avoidance of Double Taxation within the meaning of Section 90(b) of the Act. In accordance with article XIV thereof, the salary earned by the assessee in France cannot be taxed in India because he did not render the services in India. The question was as to whether his salary income earned in France could be included in his total income for rate purposes while making his assessment under the Act in India. The case of the assessee was that the income earned in France is not only exempt from tax but also could not be included in his total income for rate purposes. The ITO did not agree. He included the foreign income of Rs. 56,109 in the total income of the assessee, though he did so only for determining the rate at which the other income of the assessee would be subjected to tax.
4. The assessee appealed to the AAC and contended that the action of the ITO was not justified. Reliance was placed on the decision in the case of CIT v. N. M. Raiji  17 ITR 180 (Bom.). The AAC observed that in that case it has been held that amounts which are exempted from payment of tax under the various provisions of the Indian Income-tax Act, 1922 and which were not included in the total income of an assessee by Section 16 of the said Act, should be excluded even for ascertaining the rate of tax. He further referred to article XIV of the agreement dated 26-3-1969, referred to above, which states that salaries earned for services rendered may be taxed only in the Contracting State in which the services are rendered. Relying on the above, the AAC allowed the appeal of the assessee and directed the ITO to ignore the assessee's foreign income even for rate purposes.
5. Aggrieved by the above order of the AAC, the department is in appeal before us. Shri L.N. Joy, the learned representative for the department, urged before us that the AAC erred in his decision. He stated that the case of Raiji (supra) is distinguishable on facts, as that reported case was dealing with a situation under Section 25(4) of the 1922 Act and not with an Agreement for Avoidance of Double Taxation. He referred to Section 5 of the Act, which states that in the case of a resident, income earned even outside India shall be included in the total income. Then, he referred to the agreement dated 26-3-1969 and pointed out that the said agreement only states that under certain circumstances, certain items of income will not be subjected to tax, by one of the contracting parties. He pointed out that the said agreement does not refer to the total exclusion of any item from the total income. On the contrary, article XIX of the agreement states that the laws in force in either of the Contracting States will continue to govern the taxation of income. Again, article XIX(4) states : "Income which, in accordance with the provisions of the present agreement, is not to be subjected to tax in any Contracting State, may be included in the amount of income to be taken into account for calculating the rate of tax to be imposed in that Contracting State." Shri L.N. Joy urged that becatise of the above provision in the aforesaid agreement dated 26-3-1969, the foreign income of the assessee, who is a resident, was rightly included in the total income for rate purposes only and so, the AAC should have confirmed the same.
6. Shri N.A. Dalvi, the learned representative for the assessee, on the other hand, supported the order of the AAC. He stated that article XIX(4) is not mandatory because it uses the word 'may' and not the word 'shall'. According to him, it is not necessary that in every case income which is not taxed under the agreement should be included for rate purposes under article XIX(4) of the agreement. He stated that it is only the cases of registered firms envisaged under Section 86 of the Act that would attract the provisions of article XIX(4). Further, he drew our attention to the decision of the Special Bench of the Tribunal in the case of P.V.AL. Kulandayan Chettiar v. ITO  3 ITD 426 (Mad.) wherein, it was held that under the agreement between India and Malaysia, amounts which are excluded from tax could not be included for rate purposes also. Hence, he urged that the order of the AAC deserved to be upheld.7. We have considered the contentions of both the parties as well as the facts on record. We find force in the contentions raised for the revenue. Section 5 clearly states that in case of a resident, like the assessee, income arising even outside India has to be included in his total income. There are certain items which may be included in total income, but yet be not subjected to tax like those enumerated in Chapter VI[I] of the Act. Section 110 of the Act states that where any item is included in the total income on which no tax is payable, then the tax will be charged on the remaining income at the rate applicable to that income, which is arrived at after including the exempted income in the total income. In other words, unless an income cannot be included in the total income of the assessee, it will have to be reckoned for rate purposes in accordance with Section 110. The agreement dated 26-3-1969 between India and France does not speak of excluding any item from the total income. It merely states that certain items of income will not be subjected to tax. At the same time, article XIX makes it clear that the tax laws of the country where an item will be found to be taxable under the agreement will have to be given full effect. Article XIX(4) is categorical on the issue before us. It states that items of income, which are not subjected to tax in a country under this agreement, may still be included in the income for being taken into account for calculating the rate of tax. In our opinion, article XIX(4) leaves no doubt whatsoever as to the fact that the foreign income of the assessee who is a resident, has to be included in his total income for rate purposes.
8. We have considered the decision in the case of Raiji (supra), but we find that the said case is distinguishable on facts. That case was dealing with a situation under Section 25(4) of the 1922 Act and not with any Agreement for Avoidance of Double Taxation. In particular, that case was not governed with any provisions similar to that contained in article XIX(4) of the aforesaid agreement, dated 26-3-1969. Hence, this case is of no help to the assessee.
9. We have also considered the decision of the Special Bench in the case of Kulandayan Chettiar (supra), but we find that the facts therein are again distinguishable. We have gone through the Avoidance of Double Taxation Agreement between India and Malaysia, but we do not find any provision therein which is similar to article XIX(4) of the agreement dated 26-3-1969 between India and France. In our opinion, the decision in the case of Kulandayan Chettiar (supra) rested on this crucial fact, namely, the absence of a provision similar to article XIX(4) of the agreement dated 26-3-1969 in the agreement between Malaysia and India.
Hence, we do not find anything in the said case to reverse the conclusion we have already arrived at.
10. For the above reasons, we hold that the AAC indeed erred in his decision. Hence, we vacate his order and restore that of the ITO on the point under consideration.