Treaty abatement under India-Pakistan tax agreement turns on domestic assessment figures, while Indian authorities keep assessment power over Pakistan-source income.

For abatement of tax under article IV of the India-Pakistan Double Taxation Avoidance Agreement, the controlling figure was the income assessed by the taxing Dominion under its own domestic law, not the amount assessed by the other Dominion. The agreement preserved separate ordinary assessments under each law and used the Schedule only to compute the excess on which abatement was granted, so Pakistani factory income remained part of the Indian assessment for that purpose. The Indian Income-tax Officer was also competent to determine income from Pakistan sources for Indian assessment, because the agreement did not curtail domestic assessment power but only regulated retention and abatement of tax. The reference was answered against the assessee.

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Issues: (i) Whether, for abatement of tax under article IV of the India-Pakistan Double Taxation Avoidance Agreement, the Pakistan income from the assessee's factories in Pakistan was to be taken as assessed in India under Indian law or as assessed in Pakistan under Pakistani law; (ii) whether the Income-tax Officer in India was competent to determine income from Pakistan sources for the purposes of the Indian assessment.

Issue (i): Whether, for abatement of tax under article IV of the India-Pakistan Double Taxation Avoidance Agreement, the Pakistan income from the assessee's factories in Pakistan was to be taken as assessed in India under Indian law or as assessed in Pakistan under Pakistani law.

Analysis: Article IV required each Dominion to make assessment in the ordinary way under its own laws, and the Schedule operated only for computing the excess on which abatement was to be granted. The decisive comparison for abatement therefore had to be made on the basis of the income as assessed in India, because the agreement contemplated separate domestic assessments and then a limited abatement on the excess so computed. The cited authorities did not support the proposition that the Pakistan figures determined by Pakistani authorities had to replace the Indian assessment figures for calculating the excess.

Conclusion: The income derived from the Pakistan factories was to be taken as determined and included in the Indian assessment under Indian law, and not as assessed in Pakistan under Pakistani law; this issue was decided against the assessee.

Issue (ii): Whether the Income-tax Officer in India was competent to determine income from Pakistan sources for the purposes of the Indian assessment.

Analysis: The agreement did not curtail the power of Indian authorities to assess income in the ordinary way under Indian law. Its effect was only on the retention of tax and the computation of abatement, not on the competence to determine taxable income for Indian assessment. The assessment machinery in India therefore remained operative even in relation to income arising from Pakistan sources.

Conclusion: The Income-tax Officer in India was competent to determine the income from Pakistan sources for the Indian assessment; this issue was decided against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on the substantive tax computation issue, and the assessee failed on both referred questions.

Ratio Decidendi: For computing abatement under article IV of the agreement, the controlling figure is the income assessed by the taxing Dominion under its own law, because the agreement preserves domestic assessment power and uses the Schedule only to quantify the abatement on the excess so assessed.

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