Double taxation relief follows domestic assessment first, with foreign tax relevance affecting abatement under the treaty scheme.

An agreement for avoidance of double taxation does not displace domestic taxing law; income is first assessed under the applicable Indian law, and abatement or relief applies only afterward according to the agreement and its Schedule. In this context, the decisive question was not merely whether capital gains from assets in Pakistan were taxable in India in the abstract, but whether they had been taxed in Pakistan in the manner relevant under the agreement. The Tribunal's view that Pakistan taxation was immaterial was found untenable, and the capital-gains computation was required to be re-examined on that basis.

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Issues: Whether capital gains arising from the sale of capital assets situated in Pakistan were taxable in India irrespective of whether they were taxed in Pakistan, and whether the Tribunal was correct in treating the Pakistan tax position as immaterial.

Analysis: The agreement for avoidance of double taxation did not displace the ordinary power of each dominion to assess income under its own law. Its scheme was to permit assessment in the ordinary way and thereafter grant abatement to the extent specified in the agreement and Schedule. The decisive question, therefore, was not merely whether the gains were taxable in India in the abstract, but also whether they had been subjected to tax in Pakistan in the manner relevant under the agreement. The Tribunal's view that the fact of taxation in Pakistan was irrelevant was held to be untenable.

Conclusion: The question was answered in the negative, in favour of the Revenue and against the assessee. The matter was sent back for fresh determination of the quantum of capital gains in accordance with the legal position stated.

Final Conclusion: The agreement had to be applied consistently with the Indian taxing law, and the authorities were required to re-examine the capital-gains computation on that basis.

Ratio Decidendi: An agreement for avoidance of double taxation does not supersede the domestic law under which income is first assessed in the ordinary way; abatement operates only after that assessment and according to the agreement's apportionment scheme.

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