1986 (7) TMI 83 - SC - Income Tax

Dividend from foreign company included in assessee's net income but deductible against Indian business loss under s.24(1)

The SC allowed the appeals, set aside the HC judgment, and ruled for the Revenue that dividend income from a foreign (Pakistan) company must be included ... Deductibility of dividend income - Business loss in India u/s 24(1) - Whether the assessee's dividend income from a Pakistan company was deductible against its business loss in India? - Held that:- Once it is accepted that the Agreement preserves the right of each Dominion to determine the assessable income in accordance with the operation of its own laws and it is concerned only with the question of the degree of retention of the tax charged by it consequent upon such assessment, it becomes abundantly clear that the dividend income, inasmuch as it is taxable under the Indian Income-tax Act, by virtue of sub-clause (ii) of clause (b) of sub-section (1) of section 4, must be brought into the net of income for assessment under the Indian law. It has not been shown to us by learned counsel for the assessee that it constitutes the subject of exemption under any provision of the Indian Income-tax Act. Sub-section (3) of section 4 sets forth the cases in which income is not includible in the total income of the person receiving it. And sections 14 and 16 detail the cases where the statute grants exemption from tax. No provision in the Act has been pointed out from which we may infer that the dividend income in question is not liable to inclusion in determining the total income of the assessee. A perusal of the assessment orders for the two years shows clearly that the assessee did claim a set-off of the Pakistan dividend against the losses of the Indian business. In the second place, there is a duty cast on the Income-tax Officer to apply the relevant provisions of the Indian Income-tax Act for the purpose of determining the true figure of the assessee's taxable income and the consequential tax liability. Merely because the assessee fails to claim the benefit of a set-off, it cannot relieve the Income-tax Officer of his duty to apply section 24 in an appropriate case. In the result, the appeals are allowed, the judgement of the High Court is set aside and the questions referred by the Income-tax Appellate Tribunal to the High Court are answered in favour of the Revenue and against the assessee in so far that we hold that the dividend income received from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub-section (1) of section 24 of the Indian Income-tax Act, 1922. Issues Involved:1. Deductibility of dividend income from a Pakistan company against business loss in India under section 24(1) of the Indian Income-tax Act, 1922.2. Applicability of the Agreement for the Avoidance of Double Taxation between India and Pakistan on the dividend income.Detailed Analysis:Issue 1: Deductibility of Dividend Income from a Pakistan Company against Business Loss in IndiaThe core issue revolves around whether the assessee's dividend income from a Pakistan company can be set off against its business loss in India. The assessee, a public limited company engaged in the business of manufacturing and selling sugar, received dividend income from its holdings in a Pakistan-based company during the assessment years 1956-57 and 1957-58. The Income-tax Officer deducted this dividend income from the business loss in India, which the assessee contested, arguing that the dividend income was not liable to tax in India as it was wholly taxed in Pakistan.The High Court initially ruled in favor of the assessee, stating that the dividend income derived from the Pakistan company was not assessable under the Indian Income-tax Act and thus could not be set off against the business loss in India. However, the Supreme Court overturned this decision, emphasizing that under sub-section (1) of section 24 of the Indian Income-tax Act, 1922, an assessee who has sustained a loss of profits or gains in any year is entitled to set off the amount of the loss against his income, profits, or gains under any other head in that year, provided the income, profits, or gains are assessable under the Act. The Supreme Court clarified that the statute does not contemplate setting off a loss against income not assessable under the Act.Issue 2: Applicability of the Agreement for the Avoidance of Double Taxation between India and PakistanThe Agreement for the Avoidance of Double Taxation between India and Pakistan plays a crucial role in this case. The agreement, concluded between the Dominions of India and Pakistan, specifies that each Dominion shall make assessments in the ordinary way under its own laws and allows for abatement of tax in cases of double taxation.The Supreme Court noted that the agreement does not modify or supersede the provisions of the Indian Income-tax Act for determining the total income of an assessee. The agreement's purpose is to provide relief against double taxation, not to exempt income from being assessed under the respective tax laws of each Dominion. Article IV of the agreement explicitly states that each Dominion shall make assessments in the ordinary way under its own laws, and the agreement only comes into play for granting abatement on the tax charged.The High Court's interpretation that the dividend income from the Pakistan company should be excluded from the taxable income in India was deemed incorrect by the Supreme Court. The Supreme Court emphasized that the agreement does not affect the process of determining assessable income under Indian law. The dividend income, taxable under the Indian Income-tax Act by virtue of sub-clause (ii) of clause (b) of sub-section (1) of section 4, must be included in the total income for assessment purposes.The Supreme Court concluded that the High Court had erred in treating the setting off of the dividend income against the business loss as an infringement of the agreement. The agreement preserves the right of each Dominion to determine assessable income according to its own laws and is concerned only with the degree of retention of the tax charged. Therefore, the dividend income from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub-section (1) of section 24 of the Indian Income-tax Act, 1922.Conclusion:The Supreme Court allowed the appeals, setting aside the High Court's judgment and ruling in favor of the Revenue. The dividend income received from the Pakistan company is deductible in arriving at the total world loss of the assessee under sub-section (1) of section 24 of the Indian Income-tax Act, 1922. The Revenue is entitled to its costs. Appeals allowed.