ivil Appeal Nos
1350 51 NT of 1974 From the Judgment and order dated 19th October
1973 of the Delhi High Court in Income Tax Reference Nos 46 and 52 of 1970 Dr V Gauri Shankar and Miss A Subhashini for the Appellant
Bishambar Lal RP Gupta SK Gupta and VK Jain for the Respondent
153 The Judgment of the Court was delivered by PATHAK J
These appeals by certificate granted by the Delhi High Court are directed against a common judgment of that High Court disposing of two income tax references relating to the assessment years 1956 57 and 1957 58 on the question whether the assessee s dividend income from a Pakistan company was deductible against its business loss in India
The assessee is a public limited company carrying on the business of manufacturing and selling sugar
During the relevant period it also held some shares in the Premier Sugar Mills  Distillery Co Ltd Mardan West Pakistan
The Pakistan company also carried on the business of manufacturing and selling sugar
In the previous year relevant to the assessment year 1956 57 the assessee earned a dividend income of Rs230832 from its holdings in the Pakistan company
It sustained a loss of Rs2030006 from the business in India
Likewise in the previous year relevant to the assessment year 1957 58 the asses see received a dividend income of Rs330868 from the holdings in the Pakistan company but sustained a loss of Rs911728 from the business in India
The assessee claimed that the entire loss sustained by it in India in each year should be carried forward and set off against its business profits in India in future years
It contended that the dividend income derived by it from the Pakistan company was not liable to tax in India as it was wholly taxed in Pakistan and therefore it could not be set off against the business loss in India
The Income tax officer rejected the contention and deducted the dividend income received from the Pakistan company from the business loss in India disclosed by the assessee and after making certain other adjustments he determined the total loss of the assessee for the assessment year 1956 57 at p Rs1651129 and for the assessment year 1957 58 at Rs378661
The assessee appealed to the Appellate Assistant Commissioner of Income tax in respect of each assessment year but the appeals failed except that in the case for the assessment year 1957 58 the Appellate Assistant Commissioner determined the dividend income from the Pakistan company at Rs227472 and reduced the net loss accordingly
In second appeal the Income tax Appellate Tribunal confirmed the orders of the Appellate Assistant Commissioner
Thereafter at the instance of the assessee the Appellate Tribunal referred the following questions in the two cases to the Delhi High Court for its opinion 154 1
Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the net dividend income of Rs230832 received from a Pakistan Company and the capital gains of Rs5120 were not deductible in arriving at the total world loss under section 241 2
Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the net dividend income of Rs227472 received from a Pakistan company and the capital gains of Rs50829 were not deductible in arriving at the total world loss under section 241 The High Court answered the questions relating to the Pakistan dividend in favour of the assessee and against the revenue
So far as the question in each case refers to the deduction of capital gains against the total world loss for the year learned counsel for the parties jointly state that it is not subject matter of these appeals
It is necessary to mention at the outset that the Dominion of India and the Dominion of Pakistan concluded an Agreement for the Avoidance of Double Taxation of Income chargeable in the two Dominions in accordance with their respective laws and in exercise of the powers conferred by section 49AA of the Indian Income tax Act 1922 and the corresponding provisions of the Excess Profits Tax Act 1940 and the the Government of India directed by Notification No 28 dated December 10 1947 that the provisions of the Agreement would be given effect to in the Dominion of India
As the scope and effect of the Agreement is intimately involved in the resolution of the controversy between the parties the material provisions may be set forth immediately 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 transaction specified in column I of the Schedule of this Agreement hereinafter referred to as the Schedule in excess of the amount calculated according to the percentage specified in columns 2 155 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 V Where any income accruing or arising without the territories of the Dominions is chargeable to tax in both the Dominions each Dominion shall allow an abatement equal to one half of the lower amount of tax payable in either Dominion on such doubly taxed income
Article VIa 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
b Where at the time of assessment in one Dominion the n tax payable on the total income in the other Dominion is not known the first Dominion shall make a demand without allowing the abatement but shall hold in abeyance for a period of one year or such longer period as may be allowed by the Income tax officer in his descretion 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 the period of one year or any longer period allowed by the Income tax officer the uncollected portion of the demand will be adjusted against the abatement allowable under this Agreement if no such certificate is produced the abatement shall cease to be operative and the outstanding demand shall be collected forthwith
Article VIIa Nothing in this Agreement shall be construed as modifying or interpreting in any manner the provisions of relevant taxation laws in force in either Dominion b If any question arises as to whether any income falls within any one of the items specified in the Schedule and if so under which item the question shall be decided without 156 any reference to the treatment of such income in assessment made by the other Dominion
xxx xxx xxx The Schedule See Article IV ____________________________________________________________ Source of Income Percentage of Remarks or nature of Income which each transaction from Dominion is en which income is titled to charge derived
under the Agreement
1 2 3 4 ____________________________________________________________ xxxx xxxx xxxx xxxx section Dividends By each As in Relief in respect of Dominion preceding any excess income tax in pro column deemed to be paid by portion to the shareholder shall the profits be allowed by each of the Dominion in proportion company to the profits of the chargeable company chargeable by by each each under this Dominion Agreement
under this Agreement
xxx xxxx xxx xxx ___________________________________________________________ It is apparent that in the case of dividend income the percentage of income which each Dominion is entitled to charge under Agreement is in proportion to the profits of the company chargeable by each Dominion under that Agreement
The relevant entry in the Schedule indicates that as the factory is situated in Pakistan the Dominion of Pakistan is entitled to charge 100 per cent of the income and that the Dominion of India is not entitled to charge any percentage of the Income
Therefore the dividend income derived from the Pakistan Company by the assessee is by virtue of the Agreement liable to charge wholly by the Dominion of Pakistan and the Dominion of India is not entitled to charge the dividend income at all
But this it must be noted is the position obtaining pursuant to the Agreement
If regard be had to the provisions of the Indian Income tax Act without reference to the Agreement the dividend income even though accruing or arising abroad is liable to tax under the Indian law
157 The High Court held that because of the operation of the aforesaid Agreement dividend income derived by the assessee in Pakistan was not assessable under the Income tax Act in India and therefore could not be set off under sub section 1 of section 24 of the Indian Income tax Act 1922 against the business loss suffered by the assessee
Now there can be no doubt that under sub section
1 of section 24 an assessee who has sustained a loss of profits or gains in any year under any of the heads mentioned in section 6 is entitled to have the amount of the loss set off against his income profits or gains under any other head in that year and that the income profits or gains against which the loss is set off must be such income profits or gains as is assessable under the Indian Income tax Act
The statute does not contemplate a setting off of loss against income which is not assessable at all under the Act
But in order to determine whether the income in question is assessable under the Act regard must be had to the provisions of the Act itself
The High Court erred in taking into consideration the circumstance that the Agreement between the two Dominions prohibited the Dominion of India from charging income tax on dividend income earned in Pakistan and treating it as exempt from the process of assessment to tax under the Act
It will be apparent from Article IV of the Agreement that each Dominion is entitled to make assessments in the ordinary way under its own laws
The process of determining the assessable income of the assessee is not effected by the Agreement
What the Agreement does is to give relief against double taxation and as is clear from Article lV V and VI it is the charge levied by a Dominion on the income of an assessee that is involved in the relief
For Article IV goes on to say that 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 the Agreement 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 the Dominion as provided for in Article VI
The Agreement was considered by this Court in Ramesh R Saraiya vs Commissioner of Income tax Bombay City I 1965 55 lTR 699 and the position was summed up clearly as follows
It seems to us that the opening sentence of Article IV of the Agreement that each Dominion is entitled to make assessment in the ordinary way under its own laws clearly shows that each Dominion can make an assessment regardless of the Agreement
But a restriction is imposed on 158 each Dominion and the restriction is not on the power of assessment but on the liberty to retain the tax assessed Article IV directs each Dominion to allow abatement on the amount in excess of the amount mentioned in the Schedule
The scheme of the Schedule is to apportion income from various sources among the two Dominions In the case of dividends each Dominion is entitled to charge in proportion to the profits of the company charge able by each Dominion under this agreement
 This refers us back to the other items For instance in respect of goods manufactured by the assessee partly in one Dominion and partly in the other each Dominion is entitled to charge on 50 of the profits But the Schedule does not limit the power of each Dominion to assesss in the normal way all the income that is liable to taxation under its laws
The Schedule has been inserted only for the purpose of calculating the abatement to be allowed Article VI also leads to the same conclusion For if no assessment could be made on the amount on which abatement is to be allowed there could be no question of making a demand without allowing the abatement and holding in abeyance for a period the collection of a portion of the demand equal to the estimated abatement
 On the basis of Agreement the High Court came to the conclusion that the dividend income was not liable to charge by the Dominion of India The High Court omitted to note that the Agreement functions on a different plane altogether
It enjoys no role in the application of the Indian law for the purpose of determining the total income of an assessee and the tax liability consequent upon such assessment
On the contrary the provisions of the Agreement clearly envisage that full effect must be given to the operation of the tax law of each Dominion All that the Agreement does is to permit a Dominion to retain the tax recovered by it pursuant to an assessment under its law to the extent that an abatement is not allowed under the provisions of the Agreement Article IV it may be reiterated specifically provides that each Dominion shall make assessment in the ordinary way under its own laws
Such assessment includes the determination of the consequential tax liability
Thereafter the Agreement takes over the Dominion must allow an abatement in the degree mentioned in Article IV
It will also be noticed that clause b of Article VI permits the 159 Dominion to make a demand without allowing the abatement if the tax payable on the total income in the other Dominion is not known but the collection of the tax has to be held in abeyance for a period of one year at least to the extent of the estimated abatement
If the assessee produces the certificate of assessment in the other Dominion within the period of one year or any longer period allowed by the Income tax officer the uncollected portion of the demand has to be adjusted against the abatement allowable under the Agreement
But if no such certificate is produced the abatement ceases to be operative and the outstanding demand can be collected forthwith
Clause a of Article VII makes absolutely clear that nothing in the Agreement can be considered as modifying or incorporating in any manner the provisions of the relevant tax laws in force in either Dominion
Therefore having regard to what is expressly stated in Article IV of the Agreement and re emphasised in cl
a of Article VII there can be no escape from the conclusion that for the purposes of the assessment under the Indian Income tax Act the income of the assessee must be determined in the ordinary way under the Indian law and in no way can the Agreement be construed as modifying or superseding in any manner the provisions of the Indian law in that regard
The High Court has proceeded on the basis that for the purpose of giving abatement of tax in India the dividend income from the Pakistan Company can be excluded from the taxable income of the assessee
It has reasoned that by requiring the dividend profits accruing or arising in Pakistan to be set off against the business loss of the assessee in India there is in the result a taxing of the dividend income from the Pakistan company
The High Court has fallen into the fallacy of treating the setting off of the dividend income against the business loss as an infringement of the Agreement
It has lost sight of the provisions of the Agreement itself which provide that the Indian Income tax Act must be applied without regard to the Agreement for the purpose of determining the total income and the consequential tax liability of the assessee
Once it is accepted that the Agreement preserves the right of each Dominion to determine the assessable income in accordance with the operation of its own laws and it is concerned only with the question of the degree of retention of the tax charged by it consequent upon such assessment it becomes abundantly clear that the dividend income inasmuch as it is taxable under the Indian Income tax Act by virtue of sub cl
ii of d b of sub
section 1 of section 4 must be brought into the net 160 of income for assessment under the Indian law
It has not been shown to us by learned counsel for the assessee that it constitutes the subject of exemption under any provision of the Indian Income tax Act Subs
3 of section 4 sets forth the cases in which income is not includible in the total income of the person receiving it
And sections 14 to 16 detail the cases where the statute grants exemption from tax
No provision in the Act has been pointed out from which we may infer that the dividend income in question is not liable to inclusion in determining the total income of the assessee
Learned counsel for the assessee has placed a number of cases before us which deal with the application of the Indian Income tax Act and where it has been held that for the purpose of sub section
t of section 24 of that Act income which does not fall within the purview of the Act at all cannot be set off against a loss arising under the Act
These are cases which are wholly inapposite and have no bearing at all upon the role played by the Agreement
It is also urged that it is open to the assessee to claim or not to claim the benefit of section 24 of the Act and that if he does not do so no question arises of applying section 24
In the first place a perusal of the assessment orders for the two years shows clearly that the assessee did claim a set off of the Pakistan dividend against the losses of the Indian business
In the second place there is a duty cast on the Income tax officer to apply the relevant provisions of the Indian Income tax Act for the purpose of determining the true figure of the assessee s taxable income and the consequential tax liability
Merely because the assessee fails to claim the benefit of a set off cannot relieve the Income tax officer of his duty to apply section 24 in an appropriate case
In the result the appeals are allowed the judgment of the High Court is set aside and the questions referred by the Income tax Appellate Tribunal to the High Court are answered in favour of the Revenue and against the assessee in so far that we hold that the dividend income received from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub s 1 of section 24 of the Indian Income tax Act 1922
The Revenue is entitled to its costs
SR Appeals allowed


Summary:
The respondent assessee is a public limited company carrying on the business of manufacturing and selling sugar
During the assessment years 1956 57 and 1957 58 the company also held shares in the Premier Sugar Mills and Distillery Co Ltd Mardan West Pakistan
The Pakistan company also carried on the business of manufacturing and selling sugar
The assessee company earned dividend income of Rs230832 and Rs330868 from the holdings in the respective previous years relevant to the assessment years aforesaid while it incurred a business loss of Rs2030006 and Rs911728 respectively from its business in India
The assessee claimed that the entire loss sustained by it in India in each year should be carried forward and set off against its business profits in India in future years in as much as the dividend income derived by it from the Pakistan company was not liable to tax in India by virtue of the Agreement for the Avoidance of Double Taxation between India and Pakistan
The Income Tax Officer rejected the said contention and determined the total loss in the relevant assessment years by making certain adjustments
The appeals before the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal failed
However in the reference made at the instance of the assessee the Delhi High Court answered the questions relating to the Pakistan dividend in favour of the assessee and against the revenue
Hence the appeals by certificate
Allowing the appeals the Court 151  HELD 11 The dividend income received from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub section 1 of section 24 of the Indian Income Tax Act 1922
160F G 12 Under sub section 1 of section 24 of the Indian Income Tax Act 1922 an assessee who has sustained a loss of profits or gains in any year under any of the heads mentioned in section 6 is entitled to have the amount of the loss set off against his income profits or gains under any other head in that year
The income profits or gains against which the loss is set off must be such income profits or gains as is assessable under the Indian Income Tax Act
The statute does not contemplate a setting off of loss against income which is not assessable at all under the Act
157A C 13 For the purposes of the assessment under the Indian Income Tax Act the income of the assessee must be determined in the ordinary way under the Indian law
Having regard to the relevant entry 8 of the Schedule to the Agreement for the Avoidance of Double Taxation between the two Dominions of India and Pakistan the Dominion of India is not entitled to charge the dividend income at all
Article IV of the Agreement makes it clear that each Dominion is entitled to make assessments in the ordinary way under its own laws
The process of determining the assessable income of the assessee is not affected by the Agreement
What the Agreement does is to give relief against double taxations
156F G 157D E Ramesh R Saraiya vs Commissioner of Income Tax Bombay City 1 referred to
14 The agreement for the Avoidance of Double Taxation functions in a different plane altogether
It enjoys no role in the application of the Indian law for the purpose of determining the total income of an assessee and the tax liability consequent upon such assessment
On the contrary the provisions of the Agreement clearly envisage that full effect must be given to the operation of the tax law of each Dominion
All that the Agreement does is to permit a Dominion to retain the tax recovered by it pursuant to an assessment under its law to the extent that an abatement is not allowed under the provisions of the Agreement
Article IV specifically provides that each Dominion shall make assessment in the ordinary way under its own laws
Such assessment includes the determination of the consequential tax liability
Thereafter the Agreement takes over and the Dominion must allow an abatement in the degree mentioned in Article IV
Clause b of Article VI permits the 152 Dominion to make a demand without allowing the abatement if the tax payable on the total income in the other Dominion is not known but the collection of the tax has to be held in abeyance for a period of one year at least to the extent of the estimated abatement
If the assessee produces the certificate of assessment in the other Dominion within the period of one year or any longer period allowed by the Income Tax officer the uncollected portion of the demand has to be adjusted against the abatement allowable under the Agreement
But if no such certificate is produced the abatement ceases to be operative and the outstanding demand can be collected forthwith
Clause a of Article VII makes absolutely clear that nothing in the Agreement can be considered as modifying or incorporating in any manner the provisions of the relevant tax laws in force in either Dominion
Therefore the Agreement cannot be construed as modifying or superseding in any manner the provisions of the Indian law in that regard
158F H159A D 15 So long as it does not constitute the subject of exemption under any of the provisions Sections 14 to 16 of the Indian Income Tax Act the dividend income in as much as it is taxable under the Indian Income Tax Act by virtue of sub clause ii of clause b of sub section I of section 4 must be brought into the net of income for assessment under the Indian law
159G H 160A  16 Merely because the assessee fails to claim the benefit of a set off cannot relieve the Income tax officer of his duty to apply section 24 in an appropriate case for the purpose of determining the true figure of the assessee s taxable income and the consequential tax liability
How ever in the instant case a perusal of the assessment orders for two years shows clearly that the assessee did claim a set off of the Pakistan dividend against the losses of the Indian business
160D E