Sudhindra Mohan Guha, J.
1. The present reference relates to the assessment year 1949-50, for which the relevant accounting year is R. N. 2005. The assessee is M/s. Soorajmull Nagarmull which is a firm.
2. During the relevant accounting year, the assessee-firm, inter alia, was the managing agent of two sugar mills situated in East Pakistan, namely, North Bengal Sugar Mills Ltd., Sitabgunj Sugar Mills Ltd. and a concern styled as Sitabgunj Agricultural Farm Ltd.
3. Undisputed facts are that the assessee lent money to the managed companies in East Pakistan and that money was lent at Calcutta in their head office and then was brought into East Pakistan for the business of the managed companies of the assessee. The claim of the assessee before the ITO was that a sum of Rs. 2,07,028 was the income of the assessee in Pakistan as interest on borrowed money, as the managed companies of the assessee-firm utilised the assessee's money for which interest had been charged. The account of the assessee's managed companies was debited with the sum of Rs. 2,07,028 and the assessee's account was credited. But after crediting the amount of interest accrued to East Pakistan of lending money to the two sugar mills on interest account of the assessee, there had been a total loss in interest account of the assessee in its books of accounts. Having found a net debit of Rs. 9,01,262 in a single interest account and having found that there were no particular loans which could be identified as the advances made by the assessee to the managed companies, the ITO was of the opinion that the interest account could be considered as a whole and no allocation of income to Pakistan was necessary. Secondly, he also held that as the advances to the managed companies in Pakistan were made by the assessee at Calcutta where these two companies had their head offices at the material time, and as the companies utilised the borrowed capital in Pakistan, the assessee could not be made liable for income-tax on that account (sic).
4. The assessee came before the AAC. He upheld the claim of the assessee that the interest earned by the assessee had accrued due in East Pakistan. In view of art. IV read with item 5(f) of the Schedule to the Agreement for avoidance of double taxation between India and Pakistan, vide notification No. 28 dated 10th December, 1947, the AAC proceeded to calculate the capital of the assessee its total borrowings and the funds employed by the assessee in the shape of loans advanced for the business of the managed companies in Pakistan. He found that on an average the funds employed by way of advances to the managed companies in Pakistan amounted to Rs. 28,96,579 and the average amount of borrowed capital in advances by assessee was Rs. 25,00,000 and the average rate of interest was 4 per cent. per annum. He further found that the interest that was due to the assessee on funds advanced to the managed companies in Pakistan would be Rs. 1,00,000. The AAC, therefore, held that Rs. 1,00,000 was the income derived by the assessee from moneys lent on interest and brought into Pakistan in cash or in kind. TheAAC, therefore, ignored the assessee's claim of interest accrued in Pakistan at Rs. 2,07,028 and also the figure of interest taken by the ITO, Pakistan, which was Rs. 1,37,708.
5. The department being aggrieved filed an appeal before the Tribunal and urged that the Agreement for avoidance of double taxation between India and Pakistan was not enforceable in the assessee's case as there was no income from interest in Pakistan, because the interest account showed a debit balance of Rs. 9,01,262. The Tribunal found as a matter of fact, that both the ITO and the AAC did not rely upon the assessment order of the ITO of Pakistan but they made their own respective calculations. Relying on item No. 5(f) of the Schedule to the Agreement for avoidance of double taxation between India and Pakistan the Tribunal was of opinion that the percentage of income Pakistan is entitled to charge under the agreement is 100 per cent., because moneys had been brought into Pakistan by the managed companies and the assessee derived income from moneys lent on interest and brought into the Pakistan Dominion. According to the Tribunal, merely because there was a debit balance in the interest account it could not be said that the assessee did not have any income from interest accrued in Pakistan of moneys lent to the managed companies in Pakistan. Merely because the assessee had maintained one interest account the credit in the interest account could not be ignored. If the interest credited was kept separately the total debit in the interest account would have exceeded by that amount, and would show that the interest payment in the Indian Dominion was more than the debit balance shown in the books of the assessee.
6. The Tribunal was also of the view that when the assessee's case could be brought directly under item No. 5(f) of the Schedule to Article IV of the Agreement for avoidance of double taxation between India and Pakistan there was no logic in the argument of the department to hold that the assessee's case would fall under the item No. 9 of the Schedule to Article IV of the said agreement as that was a residuary clause. The Tribunal was also of the view that there was no question of construction or meaning of item No. 5(f) because the said item was clear, plain and unambiguous. The Tribunal in conclusion held that the AAC was correct in the view taken by him in holding that the sum of Rs. 1,00,000 was income derived by the assessee from moneys lent on interest and brought into Pakistan in cash or in kind.
7. On the above facts, the following question of law as directed by the High Court was referred in a reference under Section 66(2) of the Indian I.T. Act, 1922, for answer by the High Court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1 lakh was incomederived from money lent at interest and brought into Pakistan in cash or in kind within the meaning of item No. 5(f) to the Schedule to the Agreement for Avoidance of Double Taxation between India and Pakistan ?' In order to appreciate the controversy between the parties, it is better to set out the relevant provisions of the Indo-Pakistan Agreement. The Agreement was entered into between India and Pakistan for avoidance of double taxation between India and Pakistan under powers granted by Section 49AA of the Indian I.T. Act, 1922. Article 1 of the agreement recites as follows : '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 (XI of 1922), the Excess Profits Tax Act, 1940 (XV of 1940) and the Business Profits Tax Act, 1947 (XXI of 1947), as adapted in the respective Dominions.'
8. Article IV of the said Agreement runs as follows :
'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 source 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 their Dominion as provided for in Article VI.'
9. Clause 5(f) and Clause 9 of the Schedule to art. IV of the Indo-Pakistan Agreement are as follows :
' Sources of income or nature of transaction from which income is derivedPercentage of income which each Dominion is entitled to charge under the AgreementRemarks
5(f) Income derived from any money lent at interest and brought into a Dominion in cash or in kind.
100 per cent. by the Dominion into which the money is brought.
Nil by the other.9. Any income derived from a source or category of transactions not mentioned in any of the foregoing items of this Schedule.
100% by the Dominion in which the income actually accrues or arises.Nil by the other.'
10. The contention of the revenue is that the transactions were complete in Calcutta because the head offices of the managed companies, namely, North Bengal Sugar Mills Ltd. and Sitabgunj Sugar Mills Ltd., situated at Calcutta and thereafter, the moneys were brought into East Pakistan for investment in business of the managed companies. According to the assessee, on the other hand, the intention of the assessee was to lend moneys to the managed companies situated in East Pakistan for investment in the business of the said concern. Undisputedly, the transactions, namely, lending of moneys, have taken place in Calcutta. It is to be seen what was the purpose of such loans. It was not the case that the moneys so borrowed would be utilised or applied in the two concerns mentioned above in Calcutta. On the other hand, it was the specified case that the moneys lent would be diverted to East Pakistan for the development of those two mills situated in East Pakistan of which the assessee was the managing agent. Thus, the assessee claims to come within Clause 5(f) of the agreement whereas the revenue argues that it must come within Clause 9. In Clause 5(f) of the Agreement, Pakistan is entitled to the charge of 100 per cent. of the income. The money had been brought to Pakistan by the managed companies and the assessee derived income from money lent on interest and brought into that Dominion. Pakistan in that case would be entitled to claim 100 per cent. of the income. Clause 9 of the agreement is a residuary clause. The assessee could be brought under this clause had there been no intention of application of the money borrowed for the management or development of the companies situated in Pakistan.
11. Thus, from the facts and circumstances of the case, it appears to us that the transaction of moneys, though they had been made in Calcutta, was for a specific purpose, namely, to be diverted to Pakistan for the management of development of their companies situated in East Pakistan and thus entitling the assessee to take the benefit of Clause 5(f) of Article IV of the Indo-Pakistan Agreement.
12. The question is thus answered in the affirmative and in favour of theassessee.
13. No order as to costs.
Sabyasachi Mukharji, J.
14. I agree.