1. This is a reference under Section 256(2) of the I.T. Act, 1961. The question called for by the court is as follows :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the recalculation of abatement under Articles IV to VI of the Agreement for Avoidance of Double Taxation between India and Pakistan was a mistake apparent from the records within the meaning of Section 154 of the Income-tax Act, 1961 '
2. The learned counsel for both the parties rightly submit that the letters 're' of the word 'recalculation' in the question is a mistake. Therefore, we reframe it by deleting the letters ' re ' from the aforesaid word.
3. The assessment year is 1962-63. The assessee is a company. The assessee earned income both in India and Pakistan. Its Indian income less capital gains was assessed at Rs. 10,13,442 and the capital gains was assessed at Rs. 1,57,747. Its Pakistan income under the Pakistan Income-tax Act was assessed at Rs. 14,72,163 in Pakistan.
4. The ITO in India at the time of the original assessment reduced the Pakistan income to Rs. 11,58,155 and computed the total income of the assessee at Rs. 23,29,344 which included Rs. 11,58,155 as the Pakistan income assessed in India under the provisions of our Act. He also allowed Rs. 2,89,538.75 as double taxation abatement under the aforesaid agreement mentioned in the question.
5. The successor-ITO noticed that the abatement on the Pakistan income was not allowed properly and that the Pakistan income assessed in India was also computed wrongly. He, therefore, after hearing the assessee, rectified the mistake under Section 154 of the Act and enhanced the Pakistan income by Rs. 3 lakhs and computed the total revised income at Rs. 29,19,947. He also computed the double taxation abatement on the basis of the average rate of tax applicable to the excess worked out under the aforesaid agreement.
6. The assessee filed an appeal. The AAC rejected the assessee's plea that the ITO was not free to resort to Section 154 of the Act and dismissed the appeal.
7. The assessee filed a further appeal. It was contended on its behalf before the Tribunal that the ITO was not competent to initiate the proceedings under Section 154 of the Act as both the mistakes sought to be rectified by him were highly debatable and controversial legal issues. Reliance was placed inthis behalf on the decision of the Bombay High Court in the case of CIT v. Shanti K. Maheshwari : 33ITR313(Bom) , and on the decision of our court in the case of ITO v. State Bank of India : 69ITR833(Cal) . It was pointed out to the Tribunal that both the High Courts have observed that the language of the aforesaid agreement is confused, inept and difficult to decipher. It was also argued that the successor-ITO was wrong in applying the average rate of tax for working out the abatement referred to in Article IV and that, in any event, it was a debatable issue. It was further argued that the words ' total income in each Dominion ' in Article VI(a) of the Agreement do not. refer to the total income worked out under the I.T. Acts of India but are referable to the total income comprising only of those elements of income which form the subject-matter of the Schedule to Article IV. It was, therefore, argued that both the issues were debatable and that the ITO was wrong in resorting to the proceeding under Section 154 of the Act.
8. The Tribunal held that a plain reading of Article VI does not admit of any contrary opinion and that it was rightly interpreted by the ITO. The Tribunal further held that the ITO at the time of the original assessment made a clear and patent mistake in calculating the abatement which was rightly and correctly calculated by the successor-ITO in accordance with Article VI of the agreement.
9. With regard to the addition of Rs. 3,00,000, the Tribunal accepted the submission made on behalf of the assessee and held that the proceeding under Section 154 of the Act was not competent relating to this amount. It may be noted here that we are not concerned in this reference with this sum of Rs. 3,00,000.
10. Mr. Bajoria, learned counsel for the assessee, argues before us that the mistake sought to be rectified by the ITO relating to the calculation of abatement is not a glaring and obvious mistake and, therefore, it cannot be rectified under Section 154 of the Act. He submits that in the proceedings under Section 154 it is not necessary to decide finally which of the two views is correct and Section 154 can be invoked only when the view propounded by the ITO is the only view that can be taken and there is no scope for canvassing the other view or for a debate on the issue.
11. According to Mr. Bajoria, under Articles IV and VI of the Agreement the relief has to be worked out with reference to the total income which means the income which is subjected to double taxation and it does not mean that the rate of tax actually levied on the doubly taxed income should be reduced or increased by reference to the non-doubly taxed income at a lower rate. In other words, his argument is that the ITO is to compare the actual amount of tax levied in India and the actual amount of taxlevied in Pakistan and then to compare the two figures and apply the lower figure. He further submits that the ITO cannot reduce or increase the actual tax levied in India for comparison and the term 'total income' in the agreement does not mean the total income as assessed in India but it means the total income comprising of the items specified in the Schedule.
12. Mr. Bajoria further argues that the ITO originally adopted the aforesaid construction in computing the abatement which was sought to be rectified under Section 154 on a different construction and by applying the average rate of relief calculated on the basis of the total income divided by the total tax payable thereon without taking into consideration the Pakistan tax. Therefore, the case is outside the scope of Section 154 of the Act.
13. Mr. Suhas Sen and Mr. Ajit Sengupta, learned counsel for the revenue, divided the work between them for convenience. Mr. Sen does not dispute that Section 154 of the Act can be invoked only when there is a mistake apparent on the record. Mr. Sen does not also dispute the position, namely, that if two views are conceivable on the interpretation of the aforesaid agreement, proceedings under Section 154 of the Act cannot be taken. He, however, argues that although the language of the agreement may be said to be unhappy, there cannot be two meanings of the aforesaid articles of the agreement. According to him, the words ' total income ' are solely referable to the ' total income ' as defined under the I.T. Acts of India and its quantum is not at all affected by the aforesaid agreement. He also submits that the Pakistan portion of the income for the purposes of taxation and the determination of the rate cannot be ignored.
14. Mr. Sengupta argues that the main principle underlying the aforesaid agreement is to give relief against double taxation. The agreement, according to him, does not in any way modify the taxation law of the two countries and both the countries must make the assessment in accordance with their respective laws. He argues that the ITO acting under Section 154 has rightly applied the average rate of tax for working out the abatement of the excess referred to in Article IV of the agreement. He refers to Article VI(a) of the agreement and argues that the words ' total income ' mean the total income as computed under the I.T. Acts of India and the abatement has to be worked out by applying the formula set out in Article VI of the said agreement.
15. A further contention of Mr, Sengupta is that the ITO at the time of the original assessment applied the correct formula so far as the tax computation was concerned but he failed to apply the said formula while computing the corporation tax for the purposes of abatement and, therefore, it was an obvious mistake apparent on the record. He also argues that the question before us is not whether the successor-ITO has correctly computed the abatement under Section 154 in accordance with the agreement butwhether the calculation made originally by the ITO is a mistake as held by the Tribunal and, therefore, although he has to argue that the computation made by the successor-ITO is correct in view of the contention of Mr. Bajoria, it cannot be decided in this reference.
16. Having carefully considered the arguments advanced before us we are unable to accept the arguments made on behalf of the assessee. Articles IV and VI(a) of the Agreement are as follows :
' Article IV.--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 their Dominion as provided for in Article VI......
Article F/(a).--For the purposes of the abatement to be allowed under Article IV or V, 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. '
17. Under Article IV each Dominion must make assessment in the ordinary way under its own laws. The word ' their ' in Article IV is to be read as ' either ' as stated in the aforesaid cases. This article says that where any Dominion has charged any income from the sources or categories of transactions specified in the Schedule in excess of the amount calculated according to the percentage set out 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 art, VI.
18. Article VI(a), so far as it is relevant for our purposes, says that for the purposes of the abatement to be allowed, the tax payable in each Dominion on the doubly taxed income shall be such proportion of the tax payable in each Dominion as the doubly taxed income bears to the total income of the assessee in each Dominion.
19. Therefore, under Article VI, the ITO has, firstly, to ascertain the proportion of the doubly taxed income to the total income and then to apply such proportion to the tax payable on the doubly taxed income.
20. In the instant case before us the ITO at the time of the original assessment applied the aforesaid formula while computing the income-tax, but he omitted to do so while computing the corporation tax. This omission is, therefore, a patent and an obvious mistake and is, thefefere, rectifiable under Section 154 of the Act.
21. Though the language of the agreement is not very happy, there cannot be two conceivable meanings of the term ' total income ' in Article VI(a). It means the total income as defined in the I.T. Act. In this behalf the Circular No. 34(LII-S) dated 27th August, 1954, issued by the Central Board of Revenue may be referred to. It says that the words ' total income ' in Article VI of the Agreement mean the total income as defined in the Indian I.T. Act.
22. The argument, namely, that in the proceeding under Section 154, the ITO haswrongly applied the average rate of tax in working out the abatement onthe doubly taxed income cannot be entertained by us, for it does not fallwithin the scope and ambit of the reframed question and, therefore, we donot express any opinion on the aforesaid argument of Mr. Bajoria or on theopposite submission of Mr. Sengupta.
23. In the premises, we answer the reframed question in the affirmative and in favour of the revenue. There will be no order as to costs.
SUDHINDRA MOHAK Guha, J.
24. I agree.