Grossing Up of Dividend limited to portion taxable locally; tax credit follows grossed-up amount; abatement requires assessment evidence.

For cross-border dividends under the India-Pakistan treaty the full dividend may be included in domestic total income, but grossing up is confined to the proportion of the dividend attributable to company profits subject to tax in the taxable territory and deemed-tax credit follows only that grossed-up portion; abatement under the treaty requires that tax payable in the other jurisdiction be made known by assessment or equivalent evidence, with Article VI(b) permitting temporary abeyance and later adjustment where the foreign tax is not yet determined.

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Issues: (i) Whether the portion of dividend Rs.7,640 chargeable to Pakistan was to be excluded from the assessee's total income or included only for rate purposes under the India Pakistan Double Taxation Agreement; (ii) Whether the entire dividend of Rs.8,000 must be grossed up under section 16(2) and whether the assessee is entitled to credit for tax deemed paid on the whole dividend; (iii) Whether the assessee was entitled to abatement of income tax and super tax on the Rs.7,640 without production of a certificate of assessment in Pakistan.

Issue (i): Whether Rs.7,640 was not liable to be included in total income or was includible only for rate purposes under the Agreement.

Analysis: Article IV of the Agreement contemplates separate assessments by each Dominion under its own laws and uses the Schedule percentages to determine any "excess" liable for abatement. The Schedule percentages identify the portion chargeable by each Dominion for the purpose of computing the excess; they do not effect a bifurcation of income at the assessment stage or prevent inclusion of the full dividend in the assessee's total income under domestic law.

Conclusion: Rs.7,640 was liable to be included in the total income of the assessee.

Issue (ii): Whether the entire dividend of Rs.8,000 must be grossed up and whether credit is available for tax deemed paid on the whole amount.

Analysis: The proviso to section 16(2) limits grossing up to that proportion of the dividend attributable to company profits on which income tax was payable in the taxable territory; only that portion is to be increased under section 16(2). Section 18(5) and section 49B permit credit only to the extent of the amount by which the dividend was increased under section 16(2); proportionate relief follows the portion actually grossed up.

Conclusion: Only Rs.360 (the portion attributable to profits chargeable in the taxable territory) was to be grossed up; credit for deemed tax is available only in respect of the amount by which that Rs.360 was increased for grossing up.

Issue (iii): Whether abatement of tax (income tax and super tax) on Rs.7,640 is allowable without production of a certificate of assessment in Pakistan under Article VI(b).

Analysis: Article VI(a) prescribes computation of tax on the income attracting abatement by reference to tax on total income in each Dominion. Article VI(b) contemplates cases where the tax payable in the other Dominion "is not known" at the time of assessment in the first Dominion; the ordinary and intended meaning of "is known" requires that tax in the other Dominion has been determined (normally by assessment) and be made known to the assessing officer by admissible evidence (a certificate of assessment being the normal mode). Where tax in the other Dominion is not known, Article VI(b) provides a machinery: a demand is made without abatement but collection of an amount equal to an estimated abatement is held in abeyance for up to one year (or longer in discretion), to be adjusted on production of evidence of assessment; if no proof is produced the abatement ceases. Administrative dispensation may be possible in hardship cases, but the Agreement does not dispense with the requirement that the tax payable in the other Dominion be made known by evidence of assessment or equivalent proof.

Conclusion: The assessee was not entitled, as a rule, to abatement of income tax and super tax on Rs.7,640 without production of evidence that tax payable in Pakistan had been determined; however, on the facts of this reference the abatement in respect of income tax had already become effective because the domestic authority did not appeal against the earlier grant of abatement.

Final Conclusion: Applying the Agreement and the relevant provisions of domestic law, the full dividend may be included in domestic total income, but grossing up and deemed tax credit are limited to the portion of the dividend attributable to profits chargeable to tax in the taxable territory; abatement under the Agreement requires that the tax payable in the other Dominion be shown by assessment or equivalent evidence, with Article VI(b) providing temporary abeyance and adjustment mechanisms.

Ratio Decidendi: For purposes of the India Pakistan Double Taxation Agreement and sections 16(2) and 18(5) of the Income tax Act, grossing up of dividend is confined to the portion of dividend attributable to company profits on which tax was payable in the taxable territory, credit for deemed tax is limited to the amount by which that portion was increased, and an abatement under Article VI(b) requires that the tax payable in the other Dominion be made known (normally by assessment or certificate) though collection of an estimated abatement may be held in abeyance pending such proof.

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