RAMASWAMI J., - The assessee was a contractor for the supply of hardware and other goods to the Government departments in Ceylon. For the assessment years 1952-53 to 1958-59, he was assessed in the status of 'individual' and 'resident and ordinarily resident' on his income comprising of his total income accruing or arising in Ceylon. Originally these assessments were completed by the Income-tax Officer adopting the income from Ceylon on a provisional basis subject to revision on receipt of certificate of assessments from the Ceylon income-tax authorities. On receipt of those certificates, the Income-tax Officer noticed that the income determined by the Ceylon taxation authorities was more than the income which had been included in the Indian assessments when they were completed earlier. The Income-tax Officer accordingly gave notice to the assessee for rectification and enhancement of the assessments for and from assessment years 1952-53 to 1958-59. In reply to a notice, the assessee put forward a claim for relief under the terms of the Agreement for Avoidance of Double Taxation between India and Ceylon, hereinafter referred to as the Ceylon Agreement. The Income-tax Officer finally determined the amount of abatement due to the assessee under the Ceylon Agreement for all the seven years under consideration, rejecting certain contentions of the assessee relating to the manner in which the abatement should be determined under article III of the Ceylon Agreement.
In order to understand the contentions of the assessee, we feel it would be better to take the year 1955-56 as an illustrative case and consider the same. The assessment order for that year is as follows :
Assessment made in India
Assessment made in Ceylon
Less : Earned income relief ....
Total taxable income
Net tax payable
Add: Tax deducted at source temporary tax ....
Rate of tax ....
Percentage of profits taxable in either country
100% Indian income
Ceylon income included in the above total income
Tax attributable to Ceylon income included in the assessment
Abatement : Tax demanded as per assessment
Balance tax payable
Less: Tax already paid
According to the assessee, the entire income of Rs. 66,278 accrued in Ceylon has to be omitted from the assessment made in India and that amount is liable to be included and taxed only in the Ceylon assessment order. That, according to the learned counsel for the assessee, was the true meaning of the words 'avoidance of double taxation'. The learned counsel for the revenue, on this aspect, contended that as per the Ceylon Agreement each country is entitled to make assessments in the ordinary way under its own laws. Alternatively, the learned counsel for the assessee contended that the entire tax of Rs. 29,836 attributable to the Ceylon income included in the Indian assessment is to be deducted as an abatement from the tax payable under the assessment made in India. The revenue contended that the assessee is entitled to abatement of Rs. 19,578.07 only which was the 100 per cent. of the tax payable under the Ceylon laws in respect of Rs. 66,278, the Ceylon income included in the total income of the assessee in India. The assessees contention was not accepted by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. At the instance of the assessee, the Tribunal has referred the following question :
'Whether, on the facts and in the circumstances of the case, the order of the Appellate Tribunal refusing abatement to the assessee to the extent of the Indian tax on the Ceylon income excluded from the tax in India according to the Schedule to the Agreement for Avoidance of Double Taxation between India and Ceylon is valid in law?'
The question referred involves an interpretation of the Ceylon Agreement and the mode of computation of the abatement. The relevant portions of the Agreement are extracted below :
'Agreement for Relief from or the Avoidance of Double Taxation of income between the Government of India and the Government of Ceylon.
Article III. - Each country shall make assessment in the operation of its laws charges any income from the sources or categories of transactions specified in column I of the Schedule to this Agreement (hereinafter referred to as the Schedule) in excess of the amount calculated according to the percentages specified in columns II and III thereof, that country shall allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country....
Source of income or nature of atransaction from which income is derived
Percentage of income which each country is entitled to charge under the Agreement
8 Any income derived from a source or category of transactions not mentioned in any of the foregoing items of the Schedule.
100% by the country in which the income actually accrues or arises.
Ni by the other.'
The learned counsel for the assessee contended that the effect of article III read with columns 2 and 3 of the Schedule is that the whole of the Ceylon income is to be excluded from the Indian assessment or, at any rate, the rebate will have to be given at the Indian rate and the income is liable only to be assessed in Ceylon at the Ceylon rates. We are unable to accept this contention. Article III specifically provides that each country shall make assessments in the ordinary way under its own laws which means that the income which would accrue or arise in Ceylon is liable to be included and taxed under the provisions of the Indian Income-tax Act, 1922. Similarly, the Ceylon Government also in entitled to tax the same income as having accrued or arisen in that country under the provisions of the Act in force there. Columns II and III of the Schedule deal with the percentage of the income at which each country is entitled to charge under the Agreement. Under these columns, the Ceylon Government is entitled to charge the entire income which means that they are not liable to forgo or give rebate to any portion of the tax payable to that Government under its law. The latter part of article III then provides that the Government of India shall allow an abatement equal to the lower of the amounts of tax attributable to such cases. In other words, if the tax payable on that portion of the income arising or accruing from Ceylon under the Indian Income-tax Act is in excess of the tax payable in Ceylon, an abatement or refund of tax equal to the amount of tax payable under the Ceylon Income-tax Act is to be given to the assessee. This, in our opinion, is mainly the effect of the provisions of the Ceylon Agreement.
Let us now consider some of the decisions which considered the scope and effect of article III and the Schedule of the Ceylon agreement. O. A. P. Andiappan v. Commissioner of Income-tax was one of the earliest cases which considered this question. In that case, the petitioner was assessed as an 'individual' 'resident and ordinarily resident' in India on his only source of income from grocery business carried on by him in Ceylon. The income for the year 1959-60 was determined in both countries at Rs. 39,423 and for the next year at Rs. 39,047. The Ceylon authorities who assessed the petitioner, under the provisions of the Ceylon Income-tax Ordinance, certified the income-tax payable for the first year to be Rs. 5,919 and for the second year to be Rs. 5,249. This was arrived at after deducting reliefs permissible under section 45 (2) of the Ceylon Income-tax Ordinance from the gross taxes of Rs. 9,889 and Rs. 9,718. Identical incomes for the two years which accrued to the petitioner in Ceylon were assessed to tax under the Indian Income-tax Act and for the first year the tax payable was Rs. 10,282 and for the second year, Rs. 9,521. The petitioner was allowed abatement in respect of the two years equivalent to the tax of Rs. 5,919 and Rs. 5,249, respectively, certified by the Ceylon authorities overruling the claim of the petitioner for abatement equivalent to the gross income-tax assessment in Ceylon for each of the years. The argument of the petitioner was that the amount of tax attributable to the excess assessed in either country within the meaning of article III of the Ceylon Agreement relates to the gross tax without taking into account the relief under section 45 (2) of the Ceylon Ordinance. While rejecting this contention, this court held :
'The first part of the article contemplates liberty to each country to make assessment in the ordinary way under its own laws. There is a Schedule attached to article III, the first column of which relates to the source of the income or the nature of the transaction from which income is derived and columns II and III specify the percentage of income which each country is entitled to charge under the Agreement. It is not disputed that the income in question falls under item 8 of the Schedule, which is a residuary one, as to any income derived from a source or category of transactions not mentioned in any of the other items in the Schedule. The second column against this entry allows the entire income to be charged under the Agreement if and where it actually accrues or arises. The third column says that in respect of such income, the other country is not entitled to charge. It is clear, therefore, that for the second part of article III to apply there must be identity of income brought to charge in either country. If that is not there, obviously there is no question of double burden. The identical amount will be assessed in each country by applying its own laws. Then that country which charges income in excess of the amount allowed under column III is required to allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country.'
This court further observed :
'.... under the first part of the article, that each country will make assessment in the ordinary way under its own laws. That means the assessment is made by applying the provisions of the relevant Act, not merely applying the charging section. It would follow, therefore, that tax attributable to the cases in either country in the context of column III in the Schedule will be tax relevant to the income and determined to be payable.'
This decision was affirmed by the Supreme Court on appeal and the judgment of the Supreme Court is O. A. P. Andiappan v. Commissioner of Income-tax. Two contentions were raised before the Supreme Court on behalf of the assessee-appellant. Firstly, in view of the agreement entered into between India and Ceylon, the assessee was not liable to be taxed in India at all in respect of the income accruing in Ceylon, the assessee was not liable to be taxed in India at all in respect of the income accruing in Ceylon. This contention was overruled by the Supreme Court in the following words :
'The first portion of article III says that each country shall make an assessment in the ordinary way under its own laws. This means, to begin with, both India and Ceylon were required to assess the assessee in accordance with the law prevailing in each of these countries. Thus, for it is plain.'
The second contention of the assessee was that while determining the tax payable by him in India the department should have deducted the entire tax that he would have had to pay had he paid tax as a non-resident. This contention was also rejected by the Supreme Court. The Supreme Court observed :
'The language employed in this part of the article is quite confusing. That part of the article has to be read with the Schedule. On a proper reading of that provision along with the Schedule which means, in the present case, item 8 of the Schedule, it appears to us that what it says is :
From out of the amount ascertained under the first part of the article deduct the tax payable by the assessee in the other country in respect of the whole or any portion of the amount brought to tax under the first part of the article. The word attributable in that article merely means payable. Applying the principle mentioned above to the facts of the present case, the following result is reached. The tax payable under the Indian law as seen earlier was Rs. 10,282.62 in the assessment year 1959-60. The tax payable under the Ceylonese law in that year was Rs. 5,919. That has to be deducted from the tax computed under the Indian law. The balance alone is leviable.'
The Supreme Court then referred to the India Pakistan Agreement, article 4 and the Schedule of which correspond to article III and the Schedule to the Ceylon Agreement and held that the Schedule has been appended only for the purpose of calculating the abatement to be allowed and not to limit the power of each country to assess in the normal way all the income which is liable to taxation under its laws. In Commissioner of Income-tax v. S. K. Srinivasan this court again emphasised that on a prima facie reading of the text of article III, it was clear that the country is obliged to allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country. It is useful to note one other decision of the Kerala High Court in M. Abubacker v. Commissioner of Income-tax, which also dealt with the Ceylon Agreement. On an interpretation of article III and item 8 of the Schedule, the court held that the effect could be summed up in the following three parts :
(1) Ascertain the income which has been assessed both under the Ceylon Income-tax Ordinance and the Indian Income-tax Act.
(2) Ascertain the portion of that amount (the common income) which is in excess of the amount calculated according to the percentage prescribed in column III of the Schedule.
(3) Ascertain the tax payable on excess (common income) under the Ceylon Income-tax Ordinance and the Indian Income-tax Act and allow an abatement equal to the lower of the to amounts of tax.
If we give an answer for these questions from the illustrative facts given with reference to the year 1955-56, the answer to the first question is Rs. 66,278, the answer to the second question is also Rs. 66,278 and the answer to the third question is Ceylon tax, Rs. 19,578.07, and the Indian tax Rs. 29,836. The abatement that should be allowed is, therefore, Rs. 19,578.07.
But the learned counsel for the assessee strongly relied on the decision of the Supreme Court in Commissioner of Income-tax v. Bengal River Service Co. Ltd. in support of his contention that the entire income accruing in Ceylon is not liable to be taxed in India. He pointed out that the question for consideration as posed by the Supreme Court in that judgment was :
'Whether the receipt of Rs. 3,43,138 can be brought to tax in this country', and the answer was in the negative. The submission of the assessee is based on a reading of the observations of the Supreme Court out of the context and without reference to the facts and contentions of the parties. The appeal was filed against the decision of the Calcutta High Court in Commissioner of Income-tax v. Bengal River Service Co. Ltd. The facts are fully stated in that judgment and they are as follows : The assessee was carrying on business of plying river boats. At a period of time when there had been no partition of India, certain vessels belonging to the assessee were requisitioned by the then Government of India on charter basis. During the assessment year 1947-48 corresponding to the calendar year 1946 which was the accounting year of the assessee, it earned Rs. 3,43,138 in Calcutta and Rs. 7,296 in Narayan Ganj (Pakistan). At the point of time when the assessment was taking place, partition of British India into India and Pakistan had already taken place. The Income-tax Officer held that the vessel hire rent to the tune of Rs. 3,43,138 was the income exclusively earned in India and Rs. 7,296 was earned in Pakistan and assessed the income accordingly. In so doing, he applied the provisions of article 4 and item 9 of the Schedule to the Agreement for Avoidance of Double Taxation in India and Pakistan, hereinafter referred to as the Pakistan Agreement, with reference to the sum of Rs. 7,296 and the tax payable thereon alone. The assessee disputed that the said sum of Rs. 3,43,138 received in India was an income exclusively earned in India and also claimed that the total income of Rs. 3,43,138 and Rs. 7,296 must be deemed to be covered by item 5 (g) of the Schedule to the Pakistan Agreement and to be taxed accordingly. It was further contended by the assessee that there was no material to hold that the chartered boats were hired exclusively from Indian ports and the income accrued in India alone. The Tribunal and the High Court accepted these contentions and held that the sum of Rs. 3,43,138 was not an income exclusively received in India but it was also an income which would be governed by the Pakistan Agreement and since the income related to freight, the source of income came under the description given in item 5 (g) of the Schedule to the Pakistan Agreement and not in the residuary item in article 9 thereof and directed the Income-tax Officer to revise the assessment in accordance with the directions given in its order. Thus two questions were decided : (1) whether the income of Rs. 3,43,138 was one exclusively received in India in which case the Pakistan Agreement will not be applicable at all; and (2) if it is an income not exclusively received in India, but an income to which the Pakistan Agreement would be applicable, then under what source of income in the Schedule to that Agreement, the abatement will have to be given. The Supreme Court did not deal with the first question and considered only the second question and held that there is no distinction between hire and freight and item 5 (g) includes hire charges received as well. Since the income will fall under the specific item 5 (g), it will not come under item 9 which is a residuary item. Thus, the Supreme Court had not held that the sum of Rs. 3,43,138 was not liable to be taxed in India and the headnote given in the report does not correctly bring out the ratio of the judgment.
It is clear from the foregoing discussion that each country is entitled to make an assessment in the ordinary way under its own laws. The latter portion of article III of the Ceylon Agreement imposes a restriction on each country and the restriction is not on the power of assessment but on the power to retain the tax assessed. A Schedule has been inserted only for the purpose of calculating the abatement to be allowed and not to limit the power of each country to assess what income that is liable to taxation under its laws.
In the result, we answer the question referred in the affirmative and against the assessee. The respondent will be entitled to costs; counsels fee Rs. 250.
Question answered in the affirmative.