Double taxation relief on dividend income applies only to the taxable-territory portion, with abatement requiring proof of foreign assessment.

Under the double-taxation agreement, Pakistan-related dividend income remained includible in the resident assessee's total income because relief was granted by abatement rather than exclusion at the assessment stage. Grossing up and corresponding tax credit applied only to the portion of the dividend representing income taxable in the taxable territories, not to the entire dividend. Abatement for the Pakistan-related dividend was available only where the tax payable in Pakistan was shown by a certificate of assessment or other admissible proof when it was not otherwise known. The reference was answered substantially in favour of the Revenue, subject to the existing abatement benefit on the facts.

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Issues: (i) whether the dividend income attributable to Pakistan was liable to be included in the assessee's total income under the agreement for avoidance of double taxation; (ii) whether the entire dividend had to be grossed up and credit allowed for tax deemed to have been paid on the whole dividend; (iii) whether abatement of tax on the Pakistan-related dividend could be granted without production of a certificate of assessment in Pakistan.

Issue (i): Whether the dividend income attributable to Pakistan was liable to be included in the assessee's total income under the agreement for avoidance of double taxation.

Analysis: The agreement contemplated separate assessments in each Dominion under their own laws, with relief operating by way of abatement and not by splitting income at the assessment stage. The schedule percentages were relevant only for identifying the excess that attracted abatement. The Pakistan-related portion of the dividend was therefore not excluded from the total income merely because it was also liable to tax in Pakistan.

Conclusion: The Pakistan-related dividend was liable to be included in the assessee's total income.

Issue (ii): Whether the entire dividend had to be grossed up and credit allowed for tax deemed to have been paid on the whole dividend.

Analysis: Under section 16(2), the grossing-up mechanism applied only to the part of the dividend representing income of the company on which income-tax was payable in the taxable territories. The related credit under section 18(5) was co-extensive with that grossed-up amount. The entire dividend could not be treated as grossed up merely because part of the company's income was also taxed elsewhere.

Conclusion: Only the Indian-taxable portion of the dividend was to be grossed up, and credit was allowable only in respect of that amount.

Issue (iii): Whether abatement of tax on the Pakistan-related dividend could be granted without production of a certificate of assessment in Pakistan.

Analysis: Article VI(b) operated where the tax payable in the other Dominion was not known at the time of assessment. In such a case, the demand could be raised and a portion kept in abeyance, but the assessee had to make the tax payable in the other Dominion known by a certificate of assessment or other admissible proof. The machinery provision was not merely optional and was linked to the prior determination of tax in the other Dominion.

Conclusion: Abatement was not available without proof of assessment in Pakistan where the tax payable there was not otherwise known.

Final Conclusion: The reference was answered substantially in favour of the Revenue on the substantive questions of inclusion, grossing up, and the conditions for abatement, while recognizing that on the particular facts the assessee had already obtained the benefit of the income-tax abatement because no appeal had been filed against it.

Ratio Decidendi: Under the double-taxation agreement, income remains includible in the resident assessee's total income; grossing up and corresponding credit extend only to the taxable-territory portion of the dividend; and abatement under the machinery provision requires proof that the tax payable in the other Dominion has been determined or otherwise made known.

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