Sankar Prasad Mitra, J.
1. In this reference under Section 66(2) of the Indian Income-tax Act, 1922, we have to answer the following question of law:
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that relief should be given to the assessee on its Pakistan business income in accordance with the provisions of the Agreement for Avoidance of Double Taxation between the Government of India and Pakistan without setting off against it the loss in agricultural operations in Pakistan '
2. The assessment year is 1956-57. The financial year is the year ending on June 30, 1955. Messrs. Carew & Co. Ltd., the respondent herein, is resident in India having its registered office in Calcutta, Its sources of income are from : (a) business in India and interest earned in India on securities, (b) manufacturing business in Pakistan and (c) agricultural properties in Pakistan.
3. For the relevant year the respondent's Indian income as computed by the Income-tax Officer was Rs. 2,01,329 from business and Rs. 373 from interest on securities. The total of the two items was Rs. 2,01,702. The Pakistan income was computed by the Income-tax Officer in the assessment year as follows:
(i)Profit from manufacturing business in Pakistan...3,26,368(ii)Loss from agriculture in Pakistan...3,20,839
4. The Income-tax Officer allowed a set-off of agricultural business loss of Rs. 3,20,839 against the manufacturing business profit of Rs. 3,26,368 in Pakistan which gave a net profit of Rs. 5,529. The Income-tax Officer also allowed statutory deduction of Rs. 4,500 from the above net profit of Rs. 5,529 as the entire foreign income which accrued in pakistan had not been remitted to India. Thus, the Income-tax Officer arrived at the income of Rs. 1,029 (Rs. 5,529 minus Rs. 4,500) from Pakistan. He further kept in abeyance a sum of Rs. 439'80 representing tax on account of Pakistan income included in the total income. Initially, the assessee asked for abatement of tax on Rs. 5,529 only being the difference between the profit from business and loss from agriculture arising in Pakistan. Thereafter, the company filed a revised return in which it claimed abatement of tax on Rs. 3,26,368 being the total business income from manufacture in Pakistan and wholly taxed there, together with the statutory deduction of Rs. 4,500 on the unremitted foreign income. The company in this revised return also claimed that out of its Indian business income. the whole of the loss from agriculture in Pakistan amounting to Rs. 3,20,839 should be excluded.
5. The Income-tax Officer was of the view that the return as originally filed gave the correct manner of computation regarding abatement of tax to be allowed in respect of income arising in Pakistan. He, accordingly, took the net profit of Rs. 5,529 to be the income arising in Pakistan on which abatement of tax was to be granted. After deducting Rs. 4,500 as the statutory deduction for unremitted foreign income a sum of Rs. 1,029 was included in the assessee's income and abatement of tax in proportion to the rate under the Indian Income-tax Act granted to it.
6. Before the Appellate Assistant Commissioner the assessee contended that the abatement was to be allowed, source or category-wise, and abatement of tax was available to the assessee on the entire income of Rs. 3,26,368 representing the manufacturing business income which was assessable cent. per cent. in Pakistan and nil in India. The assessee contended that the abatement of tax was allowable in respect of the entire manufacturing business income of Rs. 3,26,368 notwithstanding the fact that in computation of business income from Pakistan, a loss of Rs. 3,20,839 from agriculture in Pakistan was allowed by the Income-tax Officer.
7. The Appellate Assistant Commissioner rejected the assessee's contentions. In the opinion of the Appellate Assistant Commissioner, article IV of the Agreement for Avoidance of Double Taxation in India and Pakistan lays down that the assessment in each Dominion shall be made according to its own laws and the abatement is limited to the income which is actually charged in the Dominion in which it becomes taxable under the Schedule. The Appellate Assistant Commissioner took the view that, as the assessment made by the Income-tax Officer was as per Indian law and Pakistan income which was actually charged under the Indian Income-tax Act was only Rs. 1,029, the Income-tax Officer was justified in allowing abatement on this amount only. The Appellate Assistant Commissioner has also made some comments with regard to requisite certificate necessary to obtain an abatement but in this reference we are not concerned with those comments.
8. The Appellate Tribunal, however, has accepted the assessee's contention that the assessee was entitled to abatement of tax under the said Agreement on the entire manufacturing business income of Rs. 3,26,368 earned in Pakistan during the relevant year. The Appellate Tribunal has observed as follows :
'It must be borne in mind that the question is regarding abatement of tax and not of computation of the total income. Whereas in the latter only the net sum after adjustment of loss is to be taken for taxation purposes, in the former abatement of tax has to be granted on incomes which are taxed in both the countries. So far as the income from business was concerned, abatement is to be granted under the Agreement for Avoidance of Double Taxation and so far as relief in respect of taxed agricultural income is concerned, since that income is to be taxed as business income in India by reason of the definition of 'agricultural income' in Section 2 of the Indian Income-tax Act, 1922, it is allowable under Section 49D(3) of the Indian Income-tax Act, 1922.
Now, therefore, the position is that the assessee has: (1) income from business in Pakistan, which is taxed 100 per cent. there ; (2) loss in agriculture, which is not taxed there. Therefore, whereas relief has to be given on the taxed business income in Pakistan under the aforesaid Agreement for Avoidance of Double Taxation, no question of relief arises on the loss in agricultural income. In this view of the matter, the rebate granted only on the difference between the business profit and agricultural loss in Pakistan amounts to negation of the assessee's right to receive abatement of tax on income taxed in Pakistan.
In our opinion, therefore, income-tax relief has to be given on the Pakistan business income in accordance with the provisions of the aforesaid agreement without setting it off against the agricultural loss.'
9. No direct authority covering the points which arise for our decision in this reference has been placed before us. Learned counsel for the respective parties, however, in support of their respective arguments have relied on various principles discussed in some of the reported decisions. As there is no dispute with regard to those principles we do not propose, in this judgment, to reiterate them unnecessarily. The decisions are reported in Ramesh R. Saraiya v. Commissioner of Income-tax,  55 I.T.R. 699 (S.C.), Income-tax Officer v. State Bank of India,  69 I.T.R. 833 (Cal.), Commissioner of Income-tax v. Indo-Mercantile Bank Ltd.,  36 I.T.R. 1 (S.C.), Commissioner of Income-tax v. Muthuraman Chettiar,  44 I.T.R. 710 (S.C.) and Kumar Jagadish Chandra Sinha v. Commissioner of Income-tax,  28 I.T.R. 732 (Cal.).
10. Let us at the outset set out a few provisions of the Indian Income-tax Act, 1922,and the relevant portions of the Agreement for Avoidance of Double Taxation in India and Pakistan, Section 2(1) of the Act defines an agricultural income. Any income derived from land which is used for agricultural purposes by agriculture comes within the scope of this definition. Section 2(15) defines ' total income '. It means total amount of income, profits and gains (referred to in Section 4(1)) computed in the manner laid down in the Act. The sub-section also indicates what is ' total world income '. It includes, inter alia, all income profits, and gains wherever accruing or arising.
11. Then Section 49D deals with relief in respect of incomes accruing or arising outside the taxable territories. Sub-section (3) of this section is as follows:
' If any person who is resident in the taxable territories in any year proves that in respect of his income which accrues or arises to him during that year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian Income-tax payable by him--
(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or
(b) of a sum calculated on that income at the Indian rate of tax; whichever is less.'
12. Coming now to some of the provisions of the agreement for Avoidance of Double Taxation in India and Pakistan we find that Notification No. 28, dated 10th December, 1947, stated:
' In exercise of the powers conferred by Section 49AA of the Indian Income-tax Act, 1922...... Section 11A of the Excess Profits Tax Act, 1940 ......and Section 18A of the Business Profits Tax Act, 1947....... as adapted by the India (Adaptation of Income-tax, Profits Tax and Revenue Recovery Acts) Order, 1947, the Central Government is pleased to direct that all provisions of the annexed Agreement for the Avoidance of Double Taxation of income, profits and gains under the said Acts which has been concluded between India and Pakistan shall be given effect to in the Dominion of India.'
13. From this Notification it appears that the Central Government was exercising its powers under the Indian Income-tax Act, the Excess Profits Tax Act and the Business Profits Tax Act and no statute involving agricultural income-tax was invoked at all.
14. Article 1 of the Agreement repeats:
' The taxes which are the subject of the present Agreement are the taxes imposed in the Dominions of India and Pakistan by the Indian Income-tax Act, 1922....... the Excess Profits Tax Act, 1940...... and Business Profits Tax Act, 194.7...as adapted in the respective Dominions.'
15. Article IV says :....
' 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 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 either Dominion as provided for in article VI.'
16. In the Schedule referred to above nine sources or categories of transactions have been specified including ' any income derived from a source or category of transactions not mentioned in any of the foregoing items of the Schedule '.
17. Article VI(a) states:
' For the purposes of the abatement to be allowed under article IV ......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.'
18. Now, Mr. B. L. Pal, learned counsel for the department, argues before us that under the Double Taxation Agreement each dominion is left free to make an assessment in the ordinary way under its own laws. This means that the total income has to be computed in the first instance under the Indian law and the tax payable thereon has to be determined. This also implies that before determination of tax payable by the assessee whatever statutory relief is open to the assessee regarding the computation of tax has also to be given. According to the learned counsel, the question of granting abatement arises only after the completion of the assessment under each Dominion's laws. The abatement is equal to the lower amount of tax payable on the income charged actually in excess of the amount calculated according to the percentage specified in the Schedule to the agreement. The quantum of abatement is fixed by article VI. And under article VI the excess income cannot be considered apart from the total income.
19. Counsel for the department has urged further that abatement is not an absolute right of the resident-assessee here. If the tax payable on the total income in Pakistan is not known at the time the assessment is made in India then the Indian tax authorities can demand the tax fully without allowing abatement but will hold in abeyance for one year or a longer period, according to the Income-tax Officer's discretion, the collection of a portion of the demand equivalent to the estimated abatement. If the assessee produces a certificate as required then the uncollected portion of the demand will be adjusted against the abatement allowable under the agreement, but if no certificate is produced the abatement will cease to be operative and the outstanding demand would be collected forthwith. Mr. B. L. Pal says also that the items mentioned in the schedule to the agreement follows the respective heads of income as mentioned in Section 6 of the Act itself, and therefore, if two amounts of income fall undergone head under the Indian laws, these two amounts are to be treated as arising from one source. In this view of the matter, the department's counsel submits, the present assessee's agricultural loss or income has to be taken into consideration under item No. 5 of the. Schedule which speaks of ' income from ' business' or ' other sources''. In the instant case, according to the counsel for the department the Indian Income-tax Officer has calculated the assessee's income under the head ' Business ' as earned by the assessee in Pakistan at Rs. 1,029; so whatever may be the assessed income of an assessee under the head ' Business' in Pakistan the Indian tax authorities can allow abatement only on the basis of calculations made in India of the assessee's business income in Pakistan and on no other basis.
20. We are not inclined to accept the arguments advanced on behalf of the department. We have already set out some of the relevant provisions of the Indian Income-tax Act, 1922, as also of the Agreement for Double Taxation. Before we proceed, however, to express our views on the facts of the present reference we may usefully read Section 4(3)(viii) of the Act. It provides specifically that any income, profits or gains falling within 'agricultural income' shall not be included in the total income of the person receiving them. There is no dispute that at least during the relevant period this was the law both in India and under the relevant provisions of income-tax laws in Pakistan. It follows, therefore, that the assessee's agricultural income was not assessable to income-tax at all in Pakistan and article II of the Agreement for Avoidance of Double Taxation provides, inter alia, that the agreement shall continue to be in force so long as the scope of the charging provisions in the Acts which are referred to in the agreement remain unaltered in both the Dominions. In the instant reference so far as computation of income by the Indian Income-tax Officer is concerned, there is no dispute as to what was the assessee's business income from Pakistan and what was the assessee's agricultural loss in Pakistan. The dispute centres round the question of abatement under the Agreement for Avoidance of Double Taxation particularly under article IV thereof.
21. Now; under the Income-tax Act as adapted in Pakistan, agricultural income arising in Pakistan could not be included in the assessee's income in Pakistan. The taxes which have been envisaged by the Agreement for Avoidance of Double Taxation, as we have seen from the relevant notification as well as article I of the Agreement are those imposed in India and in Pakistan by (a) The Income-tax Act, (b) The Excess Profits Tax Act and (c) The Business Profits Tax Act as adapted in the respective Dominions.
22. It appears, therefore, that only income taxable under both the Dominions under any of the provisions of the said Acts as adapted in the respective Dominions can come within the scope of this Agreement. And since ' agricultural income ' in Pakistan is not assessable in Pakistan under the Income-tax Act as adapted there it could not have been, in our opinion, the subject-matter of this Agreement.
23. We agree that when the total world income of an assessee who is a resident in India is computed, his agricultural income in Pakistan is liable to be assessed here as non-agricultural income under the Indian law (vide Kumar Jagadish Chandra Sinha v. Commissioner of Income-tax). But, that does not mean that agricultural income in Pakistan is to be taken into consideration for purposes of the Agreement for Avoidance of Double Taxation in India and Pakistan. In other words, as we have already stated, agricultural income in Pakistan does not come within the scope of Double Taxation Agreement at all. And it seems to us that in order to give relief to assessees whose agricultural income is taxed in Pakistan under any law in force there and is also taxed in India as non-agricultural income under the Indian Income-tax Act, the provisions of Section 49D(3) were subsequently introduced in 1956.
24. Let us now examine more closely the provisions of Article IV of the Agreement. Under this Agreement each Dominion has to make an assessment under its own laws. And any income from the sources or categories of transactions specified in column 1 of the Schedule to the Agreement in excess of the amount calculated according to the percentage fixed in columns 2 and 3 would qualify for abatement at the rates specified in Article VI. Thus, for purposes of abatement, income from each source or category of transactions specified in the Schedule has to be separately considered and dealt with. If a particular item of income comes from a source or category which is not specified in the Schedule it cannot be the subject-matter of the Agreement and no abatement in respect thereof can be allowed. In our view, the agricultural income in Pakistan is one of such excepted sources or categories.
25. Applying these principles to the present assessee we find that if the assessee's income from agriculture in Pakistan could not be taken into consideration for granting abatement the assessee's loss of income from agriculture has also to be kept out of view in giving effect to the provisions of the Agreement for Avoidance of Double Taxation. From this point of view we agree with the conclusions the Appellate Tribunal has arrived at in the instant case. Our answer to the question is in the affirmative and in favour of the assessee. The department will pay to the assessee the costs of this reference.
A.N. Sen, J.
26. I agree.