1. Two questions are involved in this reference under Section 256(1) of the I.T. Act, 1961, and they are as follows :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the order of the Commissioner passed under Section 263 of the Income-tax Act, 1961, on the 7th September, 1967, was barred by limitation
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said order of the Commissioner was also wrong and illegal and could not be upheld ?'
2. The assessee is a company. The reference relates to the assessment year 1947-48. At the time of completing the original assessment no double I.T. relief was allowed on account of income which had suffered tax both in India and in other countries. Subsequently, by an order dated January 31, 1950, double I.T. relief was given for income doubly assessed both in Ceylon and in India. On August 6, 1951, double I.T. relief was given in the U.K. and in India.
3. The assessee's claim for abatement under the Agreement for avoidance of Double Taxation between India and Pakistan was not finalised. The assessee made such a claim in 1950. By an order dated September 15, 1964, the ITO rejected the said claim on the ground that it was barred by limitation. Thereafter, the ITO having found that the said claim was not time-barred rectified his mistake under Section 154 of the I.T. Act, 1961, and granted such relief by his order dated September 9, 1965 and allowed a refund of Rs. 8,08,298.13 being the excess amount of tax paid by the assessee.
4. Thereafter, the Commissioner under Section 263 of the I.T. Act, 1961, set aside the order dated September 9, 1965, of the ITO, and after calculating the doubly taxed income in the U.K. directed the ITO to recover Rs. 5,57,417.83 from the assessee.
5. The appeal filed by the assessee from the Commissioner's order was allowed by the Tribunal and, hence, this reference has come before us at the instance of the Commissioner whose order, inter alia, reads as follows :
'In arriving at this abatement and the resultant refund the Income-tax Officer calculated the quantum of refund by reducing the amount of income on which D.I.T. relief was to be allowed for U.K. income, but did not make any change in the rate of relief applicable....It is evident from the above that while the Income-tax Officer made the consequential changes in the quantum of income entitled to relief, he kept the rate of relief the same whereas in arriving at the 'Indian rate of tax', the reduction in the tax payable by the assessee as a result of the abatement allowed by him should have been taken into account. This reduction would have resulted in reducing the 'Indian rate of tax' and, consequently, the net amount of relief due to the assessee as a result of the comprehensive working of the Pakistan Abatement and Double Income-tax Relief.'
6. Mr. B.L. Pal, learned counsel for the Revenue, argues before us and, in our opinion, rightly, that the main question for our consideration is whether any decision of the ITO on the claim of the assessee regarding the abatement under the above agreement calls for 'a comprehensive working of the Pakistan Abatement and Double Income-tax Relief' as observed by the Commissioner. This question takes us immediately to the relevant provisions of the aforesaid Agreement for Avoidance of Double Taxation with Pakistan.
7. Under Article IV of the Agreement each Dominion shall make assessment in the ordinary way under its own laws. But if in making this assessment one Dominion charges any income from the sources of categories of transactions, specified in column 1 of 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 either Dominion as provided in Article VI.
8. Article VI(b) lays down the conditions for keeping in abeyance for one year or more the collection of a portion of the demand equal to the estimated abatement. If the assessee produces a certificate of assessment in the other Dominion within one year or any longer period allowed by the ITO the uncollected portion of the demand will be adjusted against the abatement allowable under the agreement. If no such certificate is produced the abatement shall cease to be operative and the outstanding demand shall be collected forthwith.
9. The legal position, therefore, is as follows :
(i) The total income as determined by the assessment made in India under Article IV and the rate of tax applicable thereto according to the relevant Finance Act stand, and there is no scope for a modification of the total income or the rate of tax under the terms of the Agreement itself;
(ii) the ITO in India can make a demand on the basis of the assessment made by him without allowing the abatement, and
(iii) all that remains for the ITO in India to do when the assessee produces the certificate of the assessment in Pakistan is (a) to determine the abatement allowable on the basis of the Pakistan assessment, and (b) then to adjust the uncollected portion of the demand against the abatement allowable under the agreement.
10. On a plain reading of Article IV and Article VI(b) of the aforesaid agreement there is no scope for introducing, in the abatement, any matter relating to the allowance of double I.T. relief on the U.K. income, regarding either the amount of income on which the said relief was allowable or the rate of relief applicable thereto.
11. The ITO, therefore, in our opinion, erred in taking into account such matters in his order dated September 9, 1965, by which he allowed a refund of Rs. 8,00,000 more or less to the assessee, but the assessee did not challenge this action of the ITO.
12. The same error, in our opinion, has been committed by the Commissioner while revising the order dated September 9, 1965, of the ITO and,therefore, we answer question No. 2 in the affirmative and in favour ofthe assessee.
13. In the premises question No. 1 has become purely academical and, therefore, we decline to answer it.
14. There will be no order as to costs.
R.N. Pyne, J.
15. I agree.