1980 (4) TMI 63 - HC - Income Tax

DTAA: Abatement in Tax based on Indian Assessment Rules

The court held that for abatement in tax under Article IV of the DTAA between India and Pakistan, the 'excess' income should be based on the income ... Abatement Issues Involved:1. Basis for determining 'excess' income under Article IV of the DTAA between India and Pakistan.2. Competence of the Income-tax Officer in India to determine income from sources in Pakistan for the purposes of Indian assessment.Detailed Analysis:Issue 1: Basis for Determining 'Excess' Income under Article IV of the DTAAThe central question was whether the 'excess' income for abatement in tax should be calculated based on the income determined by the Indian authorities under Indian laws or the income assessed by the Pakistan authorities under Pakistan laws. The assessee, a cement manufacturing company with factories in both India and Pakistan, contended that the 'excess' should be based on the income assessed in Pakistan.The court examined the Double Taxation Avoidance Agreement (DTAA) between India and Pakistan, specifically Articles IV and VI. Article IV mandates that each Dominion (country) makes an assessment under its own laws and allows abatement equal to the lower amount of tax payable on the 'excess' income in either country. The court noted that the first step under Article IV is to make separate assessments in each Dominion according to their respective laws, which form the basis for abatement.The court referred to the case of CIT v. Shanti K. Maheshwari, which emphasized that separate assessments by each Dominion under its own laws are fundamental for determining the 'excess' income. The court also cited the Supreme Court's decision in Ramesh R. Saraiya v. CIT, which supported the view that each Dominion can assess income in the ordinary way under its laws, and the DTAA does not limit this power but only the liberty to retain the assessed tax.Further, the court considered the decision of the Calcutta High Court in ITO v. State Bank of India, which clarified that the Pakistan income as assessed in India should be used for calculating the 'excess' for abatement purposes. The court agreed with the Calcutta High Court's reasoning that using different figures for income assessed in India and Pakistan would lead to inconsistent results.Therefore, the court concluded that the income arising from the factories in Pakistan, as calculated in India according to Indian laws, should be taken into consideration for determining the 'excess' under Article IV of the DTAA.Issue 2: Competence of the Income-tax Officer in IndiaThe second question addressed whether the Income-tax Officer (ITO) in India is competent to determine the income from sources in Pakistan for the purposes of Indian assessment. The court affirmed that the ITO in India is competent to make such determinations. The DTAA allows each country to make assessments in the ordinary way under its own laws, and the ITO's competence is in line with this provision.ConclusionThe court answered the two questions as follows:1. For the purposes of abatement in tax to be allowed in India with reference to the 'excess' in terms of Article IV of the DTAA, the income derived from the factories in Pakistan as determined and included in the Indian assessment under Indian laws is to be taken into consideration, not the income as determined in Pakistan under Pakistan laws, for the assessment years 1960-61, 1961-62, and 1962-63.2. The Income-tax Officer in India is competent to determine the income from sources in Pakistan for purposes of the Indian assessment.The assessee was ordered to pay the costs of the reference.